In This Issue.
* Euro rallies, A$ continues to get whacked.
* Yen continues to benefit from repatriation.
* ECB & BOE meet today.
* China braces for weak exports data.
And, Now, Today's Pfennig For Your Thoughts!
Brazil Drops Tax On Foreign Investment.
Good day. And A Tub Thumpin' Thursday to you! It's 6/6! You can get your kicks on route 66! Boy, do I have something for you in the For What It's Worth (FWIW) section of the letter today, but first, a word from our sponsor! No. not really. I wouldn't do that to you! The European Central Bank (ECB) is meeting as I begin to write today, and the Bank of England (BOE) is saying goodbye to their Gov. Mervyn King, who is stepping down, and handing the reins over to former Bank of Canada Gov. Mark Carney. So, we have that going for us today, along with more U.S. data, so let's strap up our boots and get working the garden today!
I wish! The Beach Boys are singing Wouldn't it be nice, right now, and I'm thinking about how wouldn't it be nice to only have to worry about a garden! I used to have a Huge garden, that I planted every spring and fall, and bring grocery bags of fresh vegetables to work. But that was then. Now, I write a letter everyday and bring grocery bags of information to make you think! So, let's quit beating around the bush this morning, Chuck, inquiring minds want to know what's going on!
Well. Front and Center this morning, the euro has finally pushed past 1.31. This level has been a real bear for the euro bulls to get past, but it finally happened yesterday afternoon, and to my surprise this morning, it has remained above 1.31. It is thought by a large majority of economists that the ECB will leave rates unchanged today, and the focus will be on the ECB President, Mario Draghi, and his press statement after the rate announcement. It's here that some movement could come to the euro, as Draghi could be a real Donald Downer and continue his talk about implementing negative deposit rates. I'm going to say that I think that the latest data from the Eurozone has been better, and hopefully he won't resort to negative deposit rates.
If Draghi doesn't go down the negative deposit rates road, then the euro could end up receiving more love today. Oh! Wait!… This just came across the screens. German April Factory Orders erased March's 2.3% gain by falling 2.3%… That's not so good! That means two months of Factory Orders in the Eurozone's largest economy, were a wash. So, that puts the negative deposit rate language back on the possibility table today. UGH!
The Aussie dollar (A$) continues to get whacked, and is now at a level (.9510) that it hasn't seen since October of 2011, and then it was moving the opposite direction! The real mover of the A$ has been the narrowing of its once all-powerful yield advantage. I talked about this a week or so ago, when the Reserve Bank of Australia (RBA) decided to whack away at the A$'s value by lowering their Official Cash Rate (OCR) and thus removing that wide yield advantage. Now the yield advantage is still there especially against the ZIRP countries of the U.S. and Japan, and ZIRP Wannabe, Eurozone. But, this narrowing scares the markets, especially when RBA Gov. Stevens keeps making noisy statements about how he still has the scope to reduce rates.
The A$'s kissing cousin across the Tasman, the New Zealand dollar (kiwi) also gets sold in sympathy trading to the A$… I don't like this type of stuff, because it takes away from each individual country's fundamentals being used as the driver for the currency's value. But it happens, and the markets dictate this, so we must respect what the markets are doing, even though we may disagree. The first person in my life to teach me everything there is about bonds, and bond trading, Ed Bonawitz, taught me early on that the markets are never wrong. That's in relation to you trading against the markets. you will lose. Yes, your fundamental reason for doing what you're doing might be as right as rain, but you will still lose.
One of the things associated to the narrowing of the yield advantage that's weighing heavily on the A$, is the selling of A$ bonds and notes, or just not rolling them when they mature, and repatriating the currency home. In this case Japanese investors. The weekly Japanese Capital Flows showed that Japanese investors sold a net yen 1.2 Trillion of foreign bonds last week. So, those aren't all Aussie bonds, but you can see where that's a real problem for the A$… I would think that a huge chunk of those bonds are Treasuries, and thus the push higher in Treasury yields this past week.
The Japanese investors are drinking from the same kool-aid pitcher that U.S. investors have been drinking from for the past year. The kool-aid pitcher that's full of promises, wishes, hopes, and empty dreams about how everything is going to be just fine. I've told you my thoughts on all this before, but just so we're clear on this. I personally don't see how all this QE, ZIRP, Twist-N-Shouting and other things work out fine for us. Yes, we're in unchartered waters, and no one really knows for sure where this all leads, but. I've put my money down on the idea that in the end, we'll find that this didn't go like the Fed Heads, Gov't and Treasury all thought it would go, and the end results will not be good. But then, that's just little old me talking.. I could be wrong, of course, but I don't think I will be on this.
So, did you see that the Brazilian Gov't has done another mea culpa on running foreign investors out of Brazil. First, they hiked rates 75 Basis Points at their last two meetings, and now they have announced that they removed the tax on foreign fixed income investments that was implemented a couple of years ago. Brazil's Finance Minister, Mantega, tried to get this announcement under the radar, but that wasn't going to happen, and seeing that the press was getting all lathered up with the news, Mantega made quick to announce that he could reintroduce the tax should the markets get out of whack again.
I would have thought that this news would have pushed the Brazilian real back toward 2.05, but that hasn't happened. So, maybe Mantega has the markets scared. Or, better than that, or more likely is that the markets got burned by Brazil with all their moves to weaken the currency, and are now treating the real like “once bitten, twice shy”. I don't blame them! I was once an investor in the real, and held it with nice gains, and interest rate flow, until the Gov't decided to get both hands in the cookie jar.
One currency that has held its ground through all these moves back and forth this past couple of weeks is the Canadian dollar / loonie. The Bank of Canada's (BOC) ne Gov. Poloz will make his first public appearance today as he speaks to the Finance Committee at the House of Commons. He could use this to make a HUGE splash, like the kind that is created when someone my size does a cannonball into a pool. but I don't believe he'll do that. I don't think we'd want to see that, and he probably wears a Speedo! HAHAHAHAHAHA!
The Chinese renminbi / yuan was moved down again last night by the Gov't. This time it was in association with the export report that's due tonight. The experts believe that the demand for China's goods has backed off again. Remember that China made a concerted effort to change the makeup of their economy a few years ago, after the financial crisis of 2007-08. The Chinese decided to not depend 100% on exports, and tried to shift to a more domestic demand driven economy. That effort has gone along just fine, but it is slow to implement and take over an economy that was so driven by exports. So, exports are still a Big Deal for the Chinese economy.
You've got to give the Chinese leaders credit here, they saw how vulnerable their economy was depending 100% on exports, and they decided to change it. The only problem is that the financial meltdown of 2007-08, still is hanging on in the U.S. and Eurozone, and China's plans to be domestic demand driven just haven't had enough time to develop. So. in the end, after all this carrying on by me about China, the renminbi / yuan is weaker today, because of the fears that exports will have been cut in half. YIKES! But what does that tell you about the economies of the U.S. and Eurozone?
Well. When I came in this morning, and turned on the screens, Gold was being spent again to the tune of $5, pulling the shiny metal back below $1,400. But, after I have emptied my wind bags on China, Gold has bounced back above $1,400.. Yesterday, I told you about the Reserve Bank of India (RBI) taking steps to curb imports of Gold, as the imports were causing major problems for the RBI with regards to trade deficits. Well, the RBI increased the tax, since the first edition of the tax was having no effect on Gold imports. The RBI is hoping that this increased tax would 1. Reduce the trade deficit, and 2. Reduce demand. But, you and I know about how all the plans of mice and men or Central Bankers in this case, don't turn out like the authorities had planned.
This $1,400 level in Gold has been a real bear for the shiny metal. I would think that if the Gold bulls want to really make a statement, that they would push as hard as they can to get Gold well into the $1,400 handle and have it remain there for a few days, so that the public can see that Gold is on the rise again, then and only then can the Gold bulls set their sights on moving to the next level of $1,500.
Before I head to the data and the Big Finish. Yesterday, I rolled my chair over to talk to our metals trader, Tim Smith, and I noticed that he had a currency returns screen up and the top three currencies in the past 12 months are in order by rank: Sweden, Norway, euro. WOW! All this talk of dollar strength this past year, and not only were these three in the black VS the dollar for the past 12 months, but you can add in Denmark, New Zealand, and Switzerland with currencies that have returned positive gains VS the dollar in the past 12 months.
I know I talk about diversification all the time, and the need to diversify to reduce the overall risk of an investment portfolio using currencies and metals. So, every now and then, I like to show that the diversification tools can be profitable too!
On the data front. The Non-Manufacturing ISM for May printed yesterday, and you may recall me telling you that it's always good to see the “employment component” of the report. And yesterday was no exception, as the employment component was the only component of the report that declined. That's not a good indicator for the Jobs Jamboree, but then, we can't get too caught up in this data, because the largest portion of the U.S. economy (non-manufacturing) showed that it was doing just fine. That includes business activity, supplier delivery and new orders.
Factory Orders for April only recovered 1% of the nearly -5% loss in March. And the all-important (now that is) ADP Employment Change showed an increase in jobs created in May of 135,000, and April's number was revised downward to 113,000 jobs created. I've told the people on the desk and Pfennig readers for some time that it seems to me that the ADP report would be the most accurate form of reporting job creation, given that they are involved in creating the pay checks for most companies in the U.S. And if that's all true, and I believe it to be, then 135,000 jobs created is OK. not good, not great, not the stuff that recovering economies are made of.
For What It's Worth. When will we ever learn? When will we ever learn? Ahhh. the words of Pete Seeger kept going around in my head when I read this story yesterday. It takes me back to 2007-08, when it seemed the whole world's economies were about to collapse, because of CDO's. For those of you new to class, a CDO is a “collateralized debt obligation” I'll do some explaining as to how they work, and are created here, so it could become tedious, so if you want to skip ahead, no worries.
From the WSJ. “CDOs give investors a chance to bet on the creditworthiness of a basket of companies. Basic CDOs pool bonds and offer investors a slice of the pool. Synthetic CDOs pool, instead of the bonds themselves, insurance-like derivative contracts on the bonds.
Like their crisis-era predecessors, the new CDOs would be sliced up into different levels of risk and returns. Investors who want a chance at the highest returns would have to buy the riskiest slice.
While spreading risk in some ways, synthetic CDOs also can multiply the financial damage if companies fall behind on their debt payments. During the financial crisis, CDOs pegged to soured mortgage loans caused losses to careen around the world. Their catastrophic impact was denounced by many lawmakers and investors, and the market for all kinds of highly engineered financial instruments evaporated.
Chuck again. OK, so why in the world am I carrying on about “When will we ever learn?” Well. as reported by the WSJ. JP Morgan and Morgan Stanley are moving to assemble so-called synthetic collateralized debt obligations.
And here's a tid-bit that every investor should ask about. JP Morgan and Morgan Stanley aren't expected to invest in their own deals because of post crisis rules that require banks to set aside large amounts of capital against possible losses on these types of investments.
The problem here is that these firms wouldn't be creating these new CDO's unless there was demand from investors for “higher yield”. And Wall Street will always create new, more complex, more risky structures to satisfy that demand, folks. be careful out there!
What's needed in the world today is a good MarketSafe investment that has the potential for high returns but insures the principal 100%… You know, like the stuff we used to put together that had the underlying assets of like Gold, Silver, commodities, etc. Well. believe or don't. We're putting together another of these CD's. It will be new and improved, and coming to a store near you soon! Actually, next month. So, there! Who needs a risky old CDO when they can have a MarketSafe CD?
To recap. The euro has finally moved past $1.31, and is waiting for new s from the ECB meeting this morning. Had to stop to sing along with the Drifters. Under the Boardwalk. OK, back to the recap. The A$ continues to get whacked as Japanese investors sell foreign bonds and repatriate yen. China weakens the renminbi / yuan on the fears that exports have plunged, due to the state of the U.S. and Eurozone economies.
Currencies today 6/6/13. American Style: A$ .95, kiwi .7955, C$ .9685, euro 1.3120, sterling 1.5465, Swiss $1.0630, . European Style: rand 9.9380, krone 5.7965, SEK 6.57, forint 226.45, zloty 3.2575, koruna 19.6450, RUB 32.11, yen 98.95, sing 1.2490, HKD 7.7630, INR 56.82, China 6.1737, pesos 12.85, BRL 2.1260, Dollar Index 82.41, Oil $94.19, 10-year 2.08%, Silver $22.65, and Gold.. $1,404.75
That's it for today. What is Life, by George Harrison from his All Things Must Pass album is playing now. George Harrison was always one of my fave musicians, for his music. Everything else was his business not mine.Cardinals got their butts kicked by the Diamondbacks last night, in the rain. So not only did fans have to sit through a rains soaked game, but they also had to endure a butt kicking. UGH! I turned off it was 2-1, but got ugly from there. Another rainy, foggy day here today. The rivers around St. Louis have flooded, which means my little river town is under siege from the Meramec river, which means the creek behind my house that empties into the Meramec is backing up. The coldest, rainiest, spring I can ever remember here in this area of the country. Little Everett was at home with us last night as his parents and sister were gone. He's a different kid when they're gone. We played most of the night, and shared crackers, no screaming or crying when he didn't get his way. A fun night with the little guy. OK. time waits for no one, and it won't wait for me! I've got to get this out the door! I hope you have a Tub Thumpin' Thursday!
EverBank World Markets