In This Issue.

* Fed talks rate hikes.
* Renminbi down, ruble up!
* Treasury yields reverse downward move.
* Unintended consequences. 

And Now. Today's A Pfennig For Your Thoughts.

The Fed Loses Their Patience!.

Good Day!…  And a Tub Thumpin Thursday to you! A debacle for me at dinner last night, led to an early end to the day, as I really don't know what happened! There I was at a fave dinner spot of mine, the waiter brought the food, and everyone had something different. And suddenly, I felt like I was having an out of body experience, my stomach began to swirl, my head got light, and I had to just get up and walk outside, where I proceeded to sit in a Adirondack Chair waiting for everyone else to finish eating. I never got to eat. UGH!  That was awful, and I hope I never experience that again!

I guess in life, there are tons of things we go through that we hope we never experience again, so I'll just chalk that down to one of those and move on.  Linda Rondstadt is singing her song: Long, Long Time to greet me this morning, talk about a sad song. So, I guess given the peek I made at the currency screens this morning, the sad song is apropos. Yes, it's one of those days, that Mama told me about. The dollar has the conn and is swinging a mighty hammer at any and all currencies and metals.  There was quite a bit of euphoria for the dollar yesterday afternoon when the Fed's Meeting Minutes (FMM) printed, so apparently, the markets were able to use their super spy decoder rings and find the hidden words they were looking for. So, with that being the case, we might as well, take a visit over to Fantasy Land to see what the FMM had to say.

So. That no one is confused here, what I'm about to tell you is the Markets' reaction to the FMM. I certainly don't want that to be mixed up with what I think about them!  First of all, we already knew that the Fed had mentioned that being patient with the timing of rate hikes had highly influenced the markets after the meeting in December.  So, now using their super spy decoder rings, the markets found more evidence that the Fed intends to hike rates by mid-year.  The FMM also noted that the Fed members are concerned about the slowdown in global growth, and how it could carry over to the U.S., and they also noted how the lower energy prices (oil) were a net positive for the U.S.  (apparently, they are only looking at that from the cheaper gas prospective, and not from the Oil producers viewpoint)

It appears to me as though the Fed lost their “patience” they talked about last month.

So. I didn't find anything that would make me want to go out and scream like Chicken Little that the sky was falling for the currencies. Sure, the FMM talked about a rate hike by mid-year, but as I've explained before, we're starting at near zero, is the Fed going to hike rates by 3% in one fell-swoop? No, they aren't! So, why the euphoria of a 25 basis points rate hike on top of near zero? Psychological  I guess.  You see I things for what they are, not what is Psychological!  But that's the deal today. And the euro has now lost the 1.18 handle. and the best currency forecast house of 2014, is calling for the euro to return to parity with the dollar within two years. YIKES! I don't see that happening, but then I only saw the euro falling to 1.18 this time.

And tomorrow is the Jobs Jamboree for December.  The ADP Jobs report yesterday showed that they saw 241,000 jobs added in December. Now this report is supposed to mirror the BLS surveys, but in reality it doesn't, or it hasn't in the past. But I find this interesting in that right now, everything seems to be coming up roses here in the U.S. so why not a gangbusters Jobs Jamboree tomorrow? Now that would really give the dollar a rocket boost, and we had better all run for cover, because the collateral damage is going to be ugly, should that happen!

The Chinese renminbi was moved lower overnight, and that marks every day this week so far that the renminbi / yuan was moved lower. the 1-year forward points on the renminbi / yuan have really dropped too. I've explained this before on the Chinese currency, how it's a “non-deliverable” currency, which means it can only be settled in dollars, and not delivered, and with that being the case, the speculators can play with the forward points, which makes dealing in the renminbi / yuan difficult and expensive. So, when the speculators are not so sure of themselves or the renminbi / yuan they begin to lower the cost of dealing in the currency.  

Obviously, this type of trading in a currency is confined to a handful of currencies that only trade with that “non-deliverable” status. The rest of the currencies trade with forward points, but these points simply represent the interest rate differential and the number of days between spot (2 days) and the forward date. If Traders don't like the prospects of a currency they simply sell It spot, and the price reacts accordingly, and vice versa when they like a currency.

Of course that the simplistic view on currencies there are a lot of other things that go into the price of a currency. Trade, fundamentals and on and on.

So, in the end, here. Traders are not feeling so good about the prospects of the Chinese renminbi going forward. Are they nuts? I think so!  Things in China may be slower right now, but that's business cycles, economic cycles, normal flows! There's no reason to believe that this economy is going to shut down and become a mere shadow of itself a few years ago.  I look at the Peoples Bank of China (PBOC) marking down the renminbi this week, as an opportunity to buy at cheaper levels. But then that's just me. Maybe the speculators know something I don't!

The Russian ruble however, is stronger this morning VS the dollar, so the ruble has that going for it today. The price of Oil has remained pretty steady this week with a $48 handle, and things have quieted down on the border with Ukraine, so it makes sense that the ruble gains a little ground.

The Aussie dollar (A$) and N.Z. dollar /kiwi are both stronger this morning, but this one day up, one day down stuff is for the birds! Where's the beef? In other words, where is the trend? I guess I should be happy that these two aren't like the euro and just posting losses every day. And it keeps everyone guessing what it's going to be today, up or down.. But in reality, what gives this type of trading any reason for an investor to think it's a good idea to buy today?  So, I'm not happy, here, but, like I said, it's better than the euro!  Or as the Big Boss, Frank Trotter, likes to say. It's better than a sharp stick in the eye!  

Gold is down a couple of bucks today, Silver is flat, Platinum is flat and Palladium has joined Gold down a few bucks.  Every time Palladium drops I ask our metals guru, Tim Smith, if he has any Palladium coins, and he says, “no, but I can get you some very easily”.  Nah, I say. You see, I'm the kind of buyer that has an idea to buy, and then goes out and buys, but if it isn't available, I don't buy. spontaneity buying, that's me! And one of these days, Alice!  The point here, is that just because I'm that kind of buyer doesn't mean you should be too! When an asset like Palladium drops in price, it should be turning on all the sirens and blue light specials. in my opinion that is, and I could be wrong.

The U.S. Data Cupboard doesn't have much for us today. the one piece of data that I will be watching though is the Consumer Credit balance for November, which will probably print around $15 Billion.  Not as bad as earlier this year when the numbers got as high as $26 Billion in a month, but still $15 Billion is quite high..

There was another piece of data the other day that caught my eye, and I've been wanting to mention it since, but kept forgetting until now!  On the stocks side, Margin Debt, is at an all-time high. Of course that makes sense when a stock market is moving up, people leverage their buying using margin debt, but when the stock market begins to move back down, these are the accounts that get the most activity, because the “margin calls” begin to come in, and the stocks get sold, pushing the stock market down even more.   the previous two times, since 1998, that margin debt reached an all-time high, it corrected big time, and that doesn't bode well for stocks.

Now don't worry, I'm not turning into a stock jockey, but I wanted to mix this margin debt talk with the Consumer Credit (read debt), and paint the picture of how quickly things can go bad, when you carry that much debt.  My fave Chicago song: Hard Habit to Break, is playing, and it plays nicely in the sandbox with this discussion, as deficit spending for Americans is a Hard Habit to Break.

Since the 10-year U.S. Treasury slipped below 1.90% earlier this week, it has moved back up and is within spittin distance of 2% again..  It should be around 5% given the Fed's upbeat scenario for the economy! And it will be 5% again. not now. of course, but at some point something's got to give. Either the economy is as strong as the Fed believes, or it isn't, as bond buyers believe.

So. I've been one of the few writers out here that believe that this drop in the Oil price, while manufactured by the power that be, is going to cause some major problems for the Oil producers and the banks that lent them money for their equipment. Did you see that U.S. Steel Corp announced that they were going to idle plants in Ohio and Texas? Yes, so what does U.S. Steel Corp have to do with the Oil or lending? Ahhh grasshopper, they make the steel pipes and tubes used for exploration. and with rigs getting shut down, and wells not getting dug, exploration and drilling is down big.   I've got more on this problem in the FWIW section today. So, we might as well just head there, eh?

For What It's Worth.. You know, I've long been a Big Fan of Agora's 5 Minute Forecast. And through the years, I've gotten quite a few snippets from the “5”.  Dave Gonigam has the conn on the “5” these days, and does a great job! So, anyway, this was from yesterday's “5”, and it's Agora's Chris Mayer talking about how the drop in the Oil price is going to cause problems.

“The oil collapse is going to cause far more pain than most people seem to realize,” ventures our Chris Mayer.

“If history is any guide, there will be no quick recovery. And the effects will go well beyond just oil stocks.

“The oil bust will sting banks that lent freely to the oil patch.” That's what happened three decades ago. Oklahoma's Penn Square Bank failed in 1982… which snowballed into the 1984 failure of Continental Illinois, the biggest U.S. bank bust up until the Panic of 2008. (Indeed, the modern bailout got its start with Continental Illinois, as The 5 chronicled last year.)

This time around, “the latest energy boom needed a lot of money to build out infrastructure and drill wells,” Chris explains. “Lenders happily funded these efforts. Such loans were often made assuming $80 oil. Many of these loans were riskier high-yield bonds, or junk bonds. A JPMorgan analyst estimated if oil stayed below $65 a barrel, then 40% of all energy junk bonds could wind up in default.

“Most oil companies have hedges in place for 2015, meaning they've locked in higher oil prices. But even conservative energy companies will see their hedges expire in 2016 and could run into trouble.”

Chuck again. Sure it's great to pull up to a filling station and see the price of gas at $2 or even below, but. there are always unintended consequences. and I believe we are going to begin to see these unintended consequences begin to play out, and it won't be fun.

To recap. Another day, another day of dollar strength.. This time the strength is coming from the Fed's Meeting Minutes that printed yesterday afternoon, and led traders to believe that the Fed is ready to hike rates by mid-year. Most currencies took one to the chin with that print, and most haven't recovered this morning. The euro has lost the 1.18 handle and now the calls are coming out the woodwork for the single unit to return to parity within the next 2 years. What? I don't see that, but then I only saw the euro falling to 1.18.  the ADP report was strong yesterday, thus signaling that tomorrow's Jobs Jamboree could be good, and thus another boost for the dollar.

Currencies today 1/8/14. American Style: A$ .8110, kiwi .7790, C$ .8470, euro 1.1765, sterling 1.5065, Swiss $ .9795,  . European Style: rand 11.6205, krone 7.6695, SEK 8.0020, forint 269.45, zloty 3.6435, koruna 23.6780, RUB 61.17, yen 119.80, sing 1.3390, HKD 7.7555, INR 62.67, China 6.1302, pesos 14.68, BRL 2.6880, Dollar Index 92.42, Oil $48.78, 10-year 1.99%, Silver $16.38, Platinum $1,215.55, Palladium $787.75, and Gold. $1,207.19

That's it for today. The arctic blast of cold air has moved south, and I'm feeling it this morning even as far south as I am right now. of course feeling it here, is not like feeling it back home where it's 9 degrees, and in Chicago where it's -6 and so on. The Big Talk back home in St. Louis is all about the Rams and how the owner, Stan Kroenke, wants to move the Rams to L.A.  I loved it when a sportswriter for the Post went back and found some quotes by Kroenke that he probably regrets saying now. Stuff like: “I'm going to attempt to do everything that I can to keep the Rams in St. Louis. I'm born and raised in Missouri,” Kroenke said. “I've been a Missourian for 60 years. People in our state know me. People know I can be trusted. People know I am an honorable guy.”      Oh brother. Hey! He said those things, and now he wants us to forget he said them!  We've already experienced the loss of a team (Cardinals that moved to Arizona in 1989), I sure don't want to go through that again!  Talk about a blast of arctic air!  Well, things ad time have gotten away from me this morning, so I had better get this out the door.. I hope you have a Tub Thumpin Thursday!

Chuck Butler
President
EverBank World Markets