Fundamentals Return...
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In This Issue..

* Currencies & Gold move together!          
* Fed downgrades economic growth...         
* More on China...                            
* Yen breaks the trading pattern...                                                   

And Now... Today's Pfennig!

Fundamentals Return...          

Good day... And a Tub Thumpin' Thursday to you! It's Tub Thumpin' here, as the warm winds of spring have finally sprung, the Cardinals have won two in a row from the rival Cubs, and I'm headed to Busch Stadium tonight! Oh! And fundamentals, as far as currencies and metals are concerned, seemed to be in place yesterday...

That's right... The rout on the dollar was on (recall yesterday, Wayne and Garth playing street hockey... Game On!) and this time... Not only did the currencies rally VS the dollar, Gold and Silver took part in the proceedings too! It's been a long time since we've seen this happen... For the most part, whenever the currencies (minus yen) rallied, Gold would back off, and vice versa... Not yesterday! For the first time in a long time, the negativity toward the dollar was front and center BIG TIME!

The currency rally began early in the morning, and really gained steam as the day went on, and especially after the minutes of the FOMC meeting printed. You see, the Fed Heads had discussed that the economy is in a weakened condition and the economic projections for 2009 and 2010 were actually revised lower. The thing I took out of the minutes was this statement by the Fed Heads... the housing market "remained depressed but seemed to have leveled off"...

Memo to Fed Heads... Better be careful with those kind of statements... Did you all make a similar statement late in 2007? Look how well that prognostication worked out!

So... This news from the Fed about downgrading the growth outlooks for 2009 and 2010, is the key folks... You see, during the July 2008 - Feb. 2009 timeline, we traded under a different Trading Theme, that was well documented in this letter. But for new readers, the Trading Theme threw fundamentals out of the window, and rewarded the dollar every time data indicated the economy to be deeper, darker, and more dangerous in the recession / depression. This was against all fundamentals...

But yesterday, with the Fed downgrading growth forecasts, the dollar got sold like funnel cakes at a state fair! Finally! A return to fundamentals! Well, at least for one day that is. We certainly need to see more than one day of this to make any kind of final change in the Trading Theme trend... But it sure was nice to see for one day!

The Big Dog, euro, led the way for the other currencies (little dogs) yesterday. The euro finally, traded above its key resistance of 1.3740. A level that had stopped the euro "cold" three previous times. You may recall about a week ago, I told you that this is what happens with currencies, in the time (since 1992) that I've followed currencies. They make a run at a resistance level, and get knocked down. They make another, only to get knocked down, and then another with the same result. Sooner or later, love is gonna get ya', no wait! Sooner or later, traders and market participants either 1. take this as a challenge and push the currency through the resistance level, or 2. they give up, take the ball and go home... And the currency then falls back through previous gained ground.

In this case, the euro finally moved higher and through the 1.3740 level, and traded all the way up to 1.38 on the day... The good news for euro holders is that there has been little to no profit taking overnight, and the Big Dog is still trading with a 1.38 handle this morning!

Long time currency followers would have to admit that this all looks very similar to previous periods where the negativity toward the dollar was very strong, and seemed take on a life of its own. Even your run of the mill dollar bull, begins to see things they way his counterpart the dollar bear sees them...

I think that the markets have come to the realization that the U.S. has taken the road that leads to easy monetary policy... And everyone knows what's at the end of that rainbow! Inflation!

A couple of weeks ago, I participated in an editorial roundtable with my publishers for my "other" newsletter, The Currency Capitalist, (shameless plug!) and in the meeting I was trying to get everyone to agree with me that China was up to something. This was right after the announcement of their currency swap line with Argentina... Someone raised the question, a very astute question I might add, about why would China want to see the dollar lose value, when they own so many Treasuries...

I then pointed out something I had researched... That China had been stealth-like in doing so, but had shortened their maturities to less then 3 years... Which would mean that they could allow these to mature and not sell them pre-maturely... Could this be a "time-line" toward the lines of thought that China wants to replace the dollar as the world's reserve currency?

OK... That was a couple of weeks ago, in a meeting... But yesterday, Chris Gaffney sent me a story that appeared on Reuters... Here's a snippet... "China has engineered a subtle yet significant shift in the investment of its foreign exchange reserves, a sign of how it is willing to act on concerns about financing an explosion of U.S. debt."

And then this... "China's move to the shorter end of the U.S. debt spectrum is a defensive tactic adopted by the wider market as well on the view that the United States will have to raise interest rates down the road to control inflationary pressures when the economy recovers from the financial crisis."

So... Now there are "others" that are sniffing around this trail of tears I think I've discovered, for if there is no "long-term" plan by the Chinese to replace the dollar as the world's reserve currency, then I'll have egg all over my face! Well... The good thing for me, is that this is a very long tailed story... And I'll get to point to it over and over again in the coming years!

Doesn't that just make you get chills of excitement? HA!

A currency that "I like" but had fallen badly last summer, the Brazilian real, has really pushed higher in recent months (since March 1st). Yesterday it looked as though it would trade below the 2 handle for the first time in 8 months! (BRL is a European Style currency, where as the price goes down, it returns more value VS the dollar) For those of you keeping score at home, the real has gained 17% since March 1st... With Brazil being a "high yield" currency, the return grows even more... But, that's in the past... And past performance does not indicate that future performance will duplicate... (that's for the legal beagles!)

Well... Recall earlier this week I talked about pound sterling nearing its 200-day moving average? Well... Forget about it! Yesterday, Standard & Poors (S&P) decided to place the U.K. on negative outlook... And the pound sterling quickly became the G-10's worst performing currency on the day... For those of you wanting to know what's what with these ratings from S&P... When S&P imposes negative outlook they foresee a greater than 50% chance of downgrade within the next two years, this is compared to negative watch which implies a greater than 50% chance of downgrade within the next few months.

I said earlier that the euro (Big Dog) had seen little to no profit taking overnight, and was trading with a 1.38 handle this morning... It has just slipped below that level, as I prepare to go to the Big Finish... Data wise for the Big Dog, Eurozone PMI's (manufacturing indexes) surprised to the upside for this month. Now... It's true that this manufacturing data is still in negative territory, but this data supports the thought that the worst is behind the Eurozone... That remains to be seen... But for now, that's good news!

In Japan overnight... In yet another sign that the Fundamentals may have re-emerged, if for only one night, the yen rallied with the other currencies. Yes, this has not been the case for several months now. When the dollar rallied, yen rallied along with it... But not yesterday and last night... Yen pushed to a 94 handle for the first time in 2 months!

The data cupboard comes back with a plethora of data this morning... The Weekly Initial Jobless Claims prints first, followed by Leading Indicators and the Philly Fed Index (manufacturing for the region)...

And then there was Gold... And Silver! Year-to-date, Silver is outperforming Gold! Silver is up almost 25% this year, while Gold is up 6.6%. Our newest member to the currency and metals desk, Aaron Stevenson, pointed something out to me the other day regarding Silver... "the Gold/Silver ratio has increase to about 64 from 51 this time last year." Hmmm... Very interesting...

Speaking of Gold... I had a long discussion with a long time customer last week in Las Vegas at the Money Show. We were discussing Gold confiscation... Again, I said it before and I'll say it again, I don't believe the Gov't would do this again... But... The customer gave me something to think about. In "his scenario" the Gov't devalues the dollar, and pushes Gold to $10,000 an ounce... Well... Now that's "out there"... But as a Gold holder, I certainly would love to see $10,000 an ounce... My problem is that I don't want to see what the U.S. economy looks like with $10,000 Gold! It may not be worth it folks...

OK... Before I go to the Big Finish, I need to make certain everyone understands that the previous paragraph was just a "discussion" of scenarios... I'm not saying, and neither is my customer saying that we believe Gold is going to $10,000 an ounce! It was just a figure to use to see if I would "bite" at confiscation at that level!

Currencies today 5/21/09: A$ .7715, kiwi .6050, C$ .8765, euro 1.3795, sterling 1.5660, Swiss .9080, rand 8.3950, krone 6.4075, SEK 7.5990, forint 201.20, zloty 3.1850, koruna 19.35, yen 94.97, sing 1.4570, HKD 7.7525, INR 47.33, China 6.8247, pesos 13.03, BRL 2.0330, dollar index 81.18, Oil $60.73, Silver $14.25, and Gold... $940.67

That's it for today... $7 Billion more being injected to GM by the Gov't... The sound of that just doesn't give me a warm and fuzzy! I was sitting in the high school auditorium with my little buddy, Alex, last night at a meeting for football players and parents. Alex's football coach came up to him and told him he needed to "gain weight"... I had a major flashback... When I entered high school I weighed 125 pounds, and the football coach told me I needed to "gain weight", I tried and tried, but to no avail. The coaches even had me tested to see if I had a "tape worm"... But finally, the weight began to cling to me... And... After my football career was over, I had to fight to keep my weight down, now that I'm somewhat immobile, I really have a fight on my hands... And I can't stop thinking about how I needed to "gain weight" in high school! I told Alex, "I was a skinny kid like you at your age, look at me now... You had better be careful... Oh, look at how I've carried on with this story... Shame on me! I hope your Thursday is Thunderin'!

Chuck Butler
EverBank World Markets

Posted 05-21-2009 10:48 AM by Chuck Butler