A Pfennig For Your Thoughts

In This Issue…

  • Al’s last shot
  • Ben’s turn
  • Rally in the Commodity Currencies
  • Asia’s star performer
  • EverBank Marketing Position

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And Now… Today’s Pfennig!

Al’s last shot…

Good day… Alan Greenspan chaired his last FOMC meeting today and, as expected, raised the main U.S. interest rate to 4.5 percent. This marks the 14th straight quarter-point increase; the longest streak in 25 years. As has been the case recently, the move in rates was widely expected and the markets were more interested in the wording of the accompanying statement.

Fed officials modified their language about where the overnight bank lending rate may be headed by dropping the ‘measured’ pace wording that has been used at each meeting since May 2004. They also substituted ‘may be needed’ instead of ‘is likely to be needed’ in the following sentence: “Some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.”

The currency markets took this to mean there is less of a chance the FOMC will continue to raise rates and the dollar sold off during afternoon trading. With this new wording, a .25% increase at the March 28 meeting is now up in the air. While I still believe the FOMC will move rates up at the first meeting chaired by Bernanke, it now looks like the March move will be the last of 2006. I look for today’s sell-off in the dollar, which was widespread, to be a quick glimpse of what will be in store for the US$ throughout the rest of 2006.

But before moving on to the currency markets, I want to share a quick word on Greenspan, and more importantly his replacement Ben Bernanke. Chairman Greenspan is completing 18 ½ years at the Fed, leaving a legacy of consistent economic growth and lower inflation. Big Al’s economic management skills have been proven over time. The U.S. endured only two recessions during Greenspan’s tenure, both lasting less than a year, and enjoyed the longest economic expansion in U.S. history. Inflation in the last decade was the lowest in 40 years (as measured by the government).

But while Chairman Greenspan’s record looks pretty good at first glimpse, our friend Al has left his replacement quite a mess. The new chairman is inheriting an economy with record amounts of debt, both public and personal. He also inherits a housing bubble that doesn’t seem to want to deflate, no matter what the Fed does with rates. 30-year mortgages are currently at 6.12%, BELOW the 6.25% rate they were being offered at BEFORE the Fed raised rates 14 straight times. Between June of 2003 and June of 2005, average house prices jumped 22 percent and even Greenspan admits the real estate boom is ‘unsustainable’. And while inflation (as measured by our government, which as you know uses questionable methods) is low, rising energy costs, busier factories, and tighter labor markets places even the government-measured figures at risk of a quick rise.

The new chairman is going to have to prove himself pretty quickly. Bernanke will deliver the Fed’s semiannual policy report and economic forecast to Congress in just two weeks. According to my old economics professor, Laurence Meyer, a Fed governor from June 1996 to January 2002, Chairman Bernanke is well suited for this public side of the job. “Bernanke is a much more vigorous and passionate advocate of transparency than Greenspan,” Meyer says, “We will see more frequent publication of Federal Open Market Committee forecasts, clearer testimonies and richer monetary policy reports.”

Chairman Bernanke has a reputation of being an inflation hawk, but I believe he will need to address the more pressing debt issues first. One of our favorite economists, Stephen Roach agrees, “He’s the world’s greatest inflation-targeter, with no inflation to target.” The strategy taking shape within the Fed builds on the ‘risk management’ style to policy. Hopefully, for all our sakes, the new chairman will be able to steer the economy through the huge risks we see looming on the horizon. Time will tell…

Back to the currency markets. The Canadian dollar traded up to a 14-year high as a government report showing sustained economic growth supported speculation that the central bank will raise interest rates further. Strong fundamentals in the land up north continue to make it one of our favorites. Another of our currency picks, the Australian dollar also rose to a three-month high yesterday on speculation that the country’s interest rate advantage over the U.S. will be preserved after the FOMC signaled it is nearly finished raising borrowing costs.

Our pick in Asia, the Thai Baht, also had a good day as investors increased demand for the Southeast Asian nation’s stocks. There has been a continued movement of portfolio inflows back into the Asian region as sentiment has turned on the US$. Those of you worried about the NZD exposure in our Asian Advantage Index CDs should consider placing your bets on Asia into the Thai Baht 3-month CDs, which are currently yielding 2.52%, the best yield available in Asian currencies.

While the prospect of working with Chuck and me on a day-to-day basis here in Saint Louis may not even be your third choice for a fulfilling career, EverBank is seeking a Senior Affinity Group Marketing Manager to do just that. We are looking for someone who loves the markets (currency and otherwise), works extremely effectively with high-level publishing and other affiliate relationships, has deep experience in the technical aspects of marketing, isn’t afraid to roll up their sleeves to get the details done, and can travel. You can look for yourself or direct someone you know to the Career tab on www.everbank.com and type in Sr. Affinity Group Marketing Manager in the keyword search; you’ll find all the details along with formal requirements and appropriate legal disclosures. EverBank is an equal opportunity employer.

Currencies today: A$ .7546 kiwi .6869, CAD$ .8766, euro 1.2125, sterling 1.7766, Swiss .7791, ISK 62.73, rand 6.093, krone 6.6556, forint 207.89, zloty 3.15, koruna 23.45, yen 117.52, baht 39.19, sing 1.6254, China 8.0620, pesos 10.46, dollar index 89.29, silver $9.76, and gold… $566.67

That’s it for today… Off to Florida. Thanks to Chuck for letting me share my opinions with all of you. He will be back in the saddle from sunny Florida in the morning.

Chris Gaffney, CFA
Vice President
EverBank World Markets