In This Issue.

* Existing home sales were up 4% (or were they?)…
* Dollar stays in a fairly tight range…
* ECB borrowings are taking the route of TARP…
* Bernanke successful with his ‘HAPPY DUST’…

And, Now, Today’s Pfennig For Your Thoughts!

Existing home sales were up 4%, but down compared to last month’s numbers…

Good day. I think the grey days are finally over and we could possibly see the sun today. Should be a great day for travel which is good since a number of folks here at work are heading out for the holidays today. The markets will be getting thin today, and will be super light tomorrow as most of the traders take some time off for the holidays. These thin markets can be volatile, as any moves are exaggerated by the lack of volume in the markets. We have lots of data hitting the markets today, which could be the spark for some real action, so it may get interesting.

Mike Meyer and I were discussing the existing home sales numbers shortly after they came out yesterday morning, and noticed the headlines on most of the TVs on the trading floor were proclaiming the positive 4% jump in sales compared to last month. But the actual number of homes sold was below estimates, and also below last month’s number, so obviously something was amiss. A deeper dive into the numbers showed us what was causing the discrepancy. The NAR had ‘adjusted’ last month’s number down by 750,000 (a 15% downward revision) which made this month’s 4.42M sales 4% higher than last month’s. And the adjustment made the YOY numbers look even better with a 12.2% increase.

We had a big discussion on the desk last week when a story came across that the National Association of Realtors announced they were making several adjustments to their past estimates of existing home sales. The adjustments were as follows: 2007 sales were 11% lower than previously reported, 2008 sales were 16% lower, 2009 were also 16% lower, and sales last year were 15% lower than the NAR originally reported. The timing of all of these corrections is awfully convenient, as every YOY number during the election year of 2012 will now be much larger than if these discrepancies weren’t uncovered. It is tough getting a read on the economy when the data being reported is in question, one of the reasons we like to keep an eye on the shadow stats website which gives a much different look at the data than what is being fed to us by the administration.

Today’s data cupboard is pretty full and will include the latest estimate of US GDP for the 3rd quarter. Economists think there won’t be any change to the previous estimate that the US economy grew 2% during last quarter. Personal consumption and the GDP price index for the same quarter are not expected to be changed either. And since it is Thursday we will see the weekly jobs data. The numbers aren’t expected to be as good as they were last week, with 380k workers filing for initial jobless claims last week compared to 366k the week before. Continuing claims are projected to be down slightly at 3600k.

A story on NPR this morning was pointing to the Consumer Confidence numbers which will be released later today. U of Mich confidence numbers are predicted to have risen to 68 in the December reading from 67.7 in November. The reporters on the radio were pointing to higher consumer confidence as a result of the current administration’s efforts to lead the US economy through these troubling times. Not sure a move of .3 is something to hang your hat on, but I guess it is a step in the right direction (if it comes in as expected). And the last two pieces of data out later today will be the Leading indicators and House price index, both of which are expected to be up just slightly.

The dollar drifted lower vs. most of the major currencies yesterday, with the exception of the Euro which is down a tad. The euro had soared higher early yesterday after it was reported that the ECB had injected 489 billion euros into the banking system. But after digesting the news, currency traders quickly reversed these gains. It is a similar situation to the TARP funds which were offered by the Fed during height of the US credit crisis. US banks were encouraged by policy makers to borrow the money at below market rates as a way to ease the credit crunch. Banks fell in line and borrowed the funds as they were instructed to do, after all, the rates being offered were below market! But it was discovered that a number of these banks were desperate for these funds from the treasury, and suddenly the TARP borrowings became a scarlet letter for all banks, both healthy and not. The ECB borrowings have taken a similar path. Banks were encouraged to borrow, and given excellent terms on the three year loans. But the markets were shocked by the amount of funds the banks accepted, and now many are concerned just how desperately the banks needed liquidity. It is a difficult position for the ECB, as they were told by the markets that they needed to take some dramatic measures, but when they do the markets are concerned by just how big a move they made. It almost seems like traders really don’t want the Euro crisis to leave the headlines, as they are making good money with all of the volatility the crisis is causing.

I had a reader encourage me to talk about other currencies beside the Euro, and I do like to try and mix it up, but the Euro has been dominating the news lately, so it is hard not to focus on it. But here is a bit of news on some of the other currencies out there.

The pound sterling matched the moves of the euro yesterday, dropping in the afternoon before rallying back up in overnight trading. UK economic growth accelerated more than previously estimated in the 3rd quarter, helping to push the pound higher. UK GDP rose .6% in the 3rd quarter, which was slightly higher than the previous estimate of .5% growth. But the BOE warned the 3rd quarter growth would not be repeated, as some of the increase was due to an negative adjustment to the 2nd quarter numbers. BOE officials think the UK economy is going to stall during the 4th quarter and don’t look for any growth during the first half of 2012. As I reported yesterday, the BOE is looking for new and exciting ways to stimulate their economy, so expect another round of QE in 2012.

The Swedish krona was one of the best performing non-commodity based currencies yesterday as a report showed Sweden’s producer prices rose .8% last month. The Riksbank cut rates by .25% earlier this week, a move which was well received by currency investors. The slight increase in PPI has many of these investors thinking this week’s cut will be the last. Norway had also cut rates .25% last week, and has also indicated this will be the last rate cut for a while.

At least one country in Europe is actually talking about raising rates. Hungary currently has the EU’s highest benchmark interest rate, and the central bank is indicating they may need to raise rates further. The higher rates haven’t helped the currency though, as the Hungarian forint is the worst performing currency in the world since June 30.

The SNB has done a great job of keeping the Swiss franc from appreciating vs. the Euro, but Swiss officials are still worried. The Swiss Finance Minister Eveline Widmer-Schlumpf said the government is considering additional options to keep a lid on the Swiss franc, including negative interest rates or capital controls. “If the situation deteriorated further in the foreign-exchange markets, we would have the opportunity to take certain accompanying measures,” Widmer-Schlumpf said at a hearing in Bern yesterday. By the way, I met a wonderful young lady from Bern yesterday who is applying for a job with our new Business FX department. She claims to be a Pfennig fan, so hello Agnes. Back to the currencies, the Swiss franc appreciated to record levels vs. the euro last year, but the central bank has been able to keep a lid on it since announcing they would peg it at 1.20 francs per euro in September. But fighting against the currency markets is fighting a losing battle, and I don’t think the SNB is going to be able to keep it from appreciating without instituting some of these ‘additional’ measures. That is unfortunate, as I am hate to see anything which takes the free market away from setting prices.

Maybe the Swiss are looking at the Chinese currency and figure if it works for them maybe we can get it to work for us. The Chinese renminbi’s value is set by the government on a daily basis, and while the Swiss seem to be moving toward a more tightly regulated currency, the Chinese are moving in the opposite direction. The People’s Bank of China (PBOC) says the Chinese economy is cooling which could lead to a further loosening in monetary policy. The PBOC cut bank’s reserve requirements for the first time since 2008 earlier this month as Chinese inflation eased to the lowest in 14 months.

The Canadian dollar climbed a bit yesterday vs. the US$ as crude oil edged higher. A report yesterday showed retail sales in Canada increased, doubling economist’s predictions. Consumer demand, and rising oil prices could force the Bank of Canada to start raising rates in 2012, which would certainly cause the loonie to appreciate vs. the US$ as investors continue to look for currencies with positive interest rate differentials to the US.

New Zealand boasts one of the best interest rate differentials to the US, and a report released today was good news for the kiwi. GDP rose .8% in the third quarter, beating economists estimates of a .6% rise. The central bank is forecasting a steady pickup in growth for 2012 on rebuilding of earthquake devastated Christchurch. Both the NZD and AUD have been trading in a fairly tight range the past two days after seeing a nice move higher at the beginning of the week. The commodity currencies will still end out the week as the best performers vs. the US$ as investors gain confidence and move money back into these higher yielding markets.

Not much to report on the metals this morning, as they continue to trade in a range. Both gold and silver are slightly down this morning. A report yesterday showed holdings in exchange traded funds dropped to the lowest level in more than a year as investors sold bullion to cover losses in other markets.

Then there was this. Chuck sent me a note to take a look at a story on Bloomberg which was titled ‘Bernanke prods savers to become consumers’. It talks about how Bernanke’s zero rate policies are finally having a positive impact on the US economy. One line from the story really caught my eye “When the Fed sprinkles happy dust on the economy, we always respond.” This wasn’t a quote from Bernanke, but it sure is indicative of what the folks on Wall Street want to see; the Fed sprinkling happy dust in the form of easy money on the markets. You can read the full story here.

Recap. US housing data showed a % increase, but the actual numbers were down (figure that one out). The euro was sold after investors worry about the size of the ECB lending. I talked about 7 currencies other than the Euro, though they all are trading in fairly tight ranges in these light markets. Gold and Silver continue to trend higher, but don’t have any dramatic moves. And Bernanke is credited with creating our latest economic recovery with all of the ‘happy dust’ he has been sprinkling on the markets.

Currencies today 12/22/11. American Style: A$ 1.0135, kiwi .7725, C$ .9758, euro 1.3059, sterling 1.5689, Swiss $1.068, European Style: rand 8.1273, krone 5.9474, SEK 6.898, forint 233.68, zloty 3.3914, koruna 19.5983, RUB 31.52, yen 78.08, sing 1.2931, HKD 7.7807, INR 52.725, China 6.3396, pesos 13.8012, BRL 1.8538, Dollar Index 79.885, Oil $99.02, 10-year 1.95%, Silver $29.2838, and Gold. $1,610.19

That’s it for today. Got to see Chuck yesterday afternoon as I had to run something by his home for him to sign. He delivered his traditional ‘Christmas Pfennig’ which I will share with you tomorrow (a little teaser to make sure all of you read the Pfennig tomorrow!). Tonight is the bragging rights game between MIZZOU and the ILLINI. This is always a great basketball game, and with both teams ranked in the top 20 it should be exciting. I can’t attend as I am attending the big charitable ball downtown tonight. Thanks to all of the readers which sent nice notes about Lauren’s surgery, it went great, and yes, she gave me trouble about calling her a ‘little girl’. She is now a ‘young lady’ but will always be my little girl!! I hope everyone has a great day, and thanks for reading the Pfennig.

Chris Gaffney, CFA
Vice President
EverBank World Markets