A Pfennig For Your Thoughts

In This Issue…

  • Geithner rescues the stock market…
  • Commercial real estate, the next big drag…
  • Norway: the new safe haven…
  • China pushes for a new reserve currency…

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And Now… Today’s Pfennig!

The Treasury Secretary Rides to the Rescue…

Good day… It was a dramatic day on Wall Street yesterday, with the major stock indexes surging as much as 6 percent, including the Dow Jones, which jumped more than 400 points. The reason for all of this euphoria on Wall Street? A combination of Geithner’s plan to rescue the banks from the toxic debt in which many are mired, and a surprisingly large uptick in existing home sales. I touched briefly on the Geithner plan in yesterday’s Pfennig, and readers know I am more than a little skeptical about its possible success.

But the housing numbers really caught me off guard. Existing home sales jumped a tremendous 5.1% in February, clearly above all expectations. But Chuck pointed out that almost 1/2 of the sales were either foreclosures or short sales, hardly what you would call a “rebound” in home sales! And these additional existing home sales came at deep discounts. The median price for an existing home fell 15.5% in February 2009 to $165,400 as compared to $195,800 in February of 2008.

Investors are desperate for any sign the housing crisis may be coming to an end, so the housing report was greeted with enthusiasm in the markets. This is the second positive report for housing in the past two weeks, as Mike reported housing starts for February came in much better than expected last week. I don’t mean to rain on everybody’s parade, but this is looking a lot like a sucker’s rally to me. Traders had become overly pessimistic, and traders who don’t want to miss out on the next big rally jump back into the market on the smallest kernel of good news. Unfortunately, I don’t think the good news will continue.

I don’t expect today’s housing data to surprise the markets, as we will see the House Price Index, which is expected to have fallen by almost 1% MoM. We will also get the ABC Consumer Confidence number, which will likely show a another drop. Tomorrow will bring more negative data with the release of Durable Goods orders here in the U.S., which is expected to show a drop of 2.5% in February after a 5.2% fall in January. More housing numbers will be released on Wednesday, which could confirm yesterday’s surprise uptick in the housing market. Thursday will bring us the big kahuna for the week, with the release of 4th quarter GDP along with the weekly jobless claims.

I got a call mid-morning from another WSJ reporter by the name of David Gaffen who wanted to know what the new TARP plan meant for the dollar. In particular, he wanted to know why the dollar was rallying at the same time we were seeing a major rally in stocks and a sell-off in bonds. I explained to him that today’s movements just didn’t fit the “normal” trading pattern that had established for the dollar. The equity markets looked like investors were confident that the Geithner plan would finally thaw the credit markets. But if investors’ confidence was returning, why was the dollar strong? Well, the explanation was pretty simple: investors were taking profits from last week’s dollar weakness and moving these profits back into the stock market. I explained that this move wouldn’t have legs, and the dollar will likely see more selling over the next few days. You can read the entire article by David Gaffen at http://blogs.wsj.com/marketbeat/2009/03/23/the-new-tarp-good-or-bad-for-the-dollar/.

Yesterday afternoon, I spoke to a gentleman who is a “workout” expert for commercial real estate. Banks seek out his expertise in turning around failed or near failing commercial properties. Needless to say, business is booming, and in his opinion it will only get better. He says banks have been knocking down his door to try and help them “work out” of some major commercial projects. He predicts that during the next several months, we will begin to hear about some major commercial projects going belly up. I know commercial real estate is already starting down in the St. Louis area, but he claims this is only the beginning. Many of these projects have been just hanging on, hoping consumers will return with Obama’s second stimulus. But the newest stimulus doesn’t put money in consumers’ hands, so these commercial projects will have to fold.

While the housing market is showing some indications that a bottom could be near (not in my opinion, but some data does look positive), the commercial real estate market is just beginning its dive. Banks that are finally ridding themselves of toxic home mortgages will now have to deal with even more toxic commercial loans.

So what did all of this new-found excitement on Wall Street do to the currency markets? As I mentioned earlier, the dollar began the day weaker; probably due to profit taking. As the day wore on, investors started to return to the higher-yielding currencies, with Australia topping the return charts again. This was the 10th day in a row for gains in the AUD$ vs. the US$, its longest winning streak since October 2007. The relatively high yields available in Australia combined with improved commodity markets are the major reasons for the continued strength of the Aussie dollar.

Both the New Zealand dollar and Swedish krona were also stronger, rising over 2% in the past 24 hours. The Canadian dollar extended its two week advance vs. the US$ jumping up an additional 1.5%. Even the Brazilian real, which had been slipping lately enjoyed a day in the sun. Much of this recent strength is related to the beginning of a commodity rebound. Precious metals and oil have both rebounded recently with the prospect that global demand will begin to pick up later this year. Continued investment into infrastructure improvements should help revive demand, as the U.S. and China have announced plans to spend $1.4 trillion on roads, bridges, schools, and hospitals. Crude oil has rose to the highest level in almost four months, another good sign for commodity-based currencies.

But commodity prices are the only thing stoking this latest commodity currency rally. With the Fed turning toward additional stimulus in the form of quantitative easing, currency traders are looking toward countries that are maintaining current interest rate levels. With deflation seemingly taking a back seat and inflation coming back into the picture, countries that have resisted dropping rates to near zero have much better prospects. These include some of our favorites including the Australian dollar, Swedish krona, and Norwegian krone.

An associate of mine, Keith Rigdon, sent me an article that appeared in the online version of Time magazine yesterday. The article’s title says it all: “Why the Norwegian Krone Is the World’s Safest Currency.” The article, written by Adam Smith, draws heavily on research done by HSBC. The main reasons given by HSBC are well known to Pfennig readers. “Norway’s budget and current-account surpluses are the biggest among nations with the 10 most traded currencies. Factor in the country’s $350 billion sovereign wealth fund pumped full of the country’s oil revenues, and the cost of insuring against government default in Norway – a key measure of a currency’s safety – is the lowest of those countries” writes Smith.

According to the article, the series of interest rate cuts over the past several months have started to work. This “makes it unlikely Norway’s central bank will need to revert to quantitative easing, the modern day equivalent of printing money that’s currently in fashion from the US to the UK.” According to HSBC, “the Norwegian krone is probably the best currency in the world.”

You can read the full article at the following URL: http://www.time.com/time/business/article/0,8599,1887090,00.html

China’s central bank Governor Zhou Xiaochuan was in the news again yesterday. He suggested the IMF should look to create a “super sovereign reserve currency” that is not connected to any individual nation. Sounds like China is continuing to look for alternatives for their $1.95 trillion of reserves. They will present their proposals to reform the IMF at next month’s Group of 20 meeting. While a super sovereign reserve currency is probably a ways away, it is obvious that China is wanting to find alternatives to their huge investments in the US$. Not a good sign for the green/peachback.

Going a little long this morning, so I’ll get to the currency wrap up now:

Currencies today 3/23/2009: A$ .6994, kiwi .5654, C$ .8160, euro 1.3535, sterling 1.4666, Swiss .8878, rand 9.4611, krone 6.3442, SEK 8.0223, forint 222.38, zloty 3.3544, koruna 19.8690, yen 98.07, sing 1.5097, HKD 7.75, INR 50.66, China 6.8295, pesos 14.247, BRL 2.2449, dollar index 83.84, oil $53.40, silver $13.51, and gold… 930.43

That’s it for today… We had another beautiful spring day here yesterday. Got home and actually had to cut the grass for the first time. I also began my annual battle with the moles that seem to multiply each winter! Those little guys can sure tear up a lawn in a hurry. Today we are supposed to get a batch of spring thunderstorms, and the weatherman is actually saying we may see a light dusting of snow by the weekend. Crazy spring weather! Hope everyone has a Terrific Tuesday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets