So when will this 'end of world' thing happen...
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In This Issue.

* When does this 'end of world' thing happen???

* Budget negotiations hit another snag...

* Return of the Carry Trade???

* Central bank pay shows Bernanke is a bargain...

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

So when will this 'end of world' thing happen...

Good day.

It's the end of the world as we know it.

It's the end of the world as we know it.

It's the end of the world as we know it and I feel fine.

I had to start off this morning's Pfennig with the lyrics of one of my favorite songs by R.E.M. (that song brings back some great college memories!!). Apparently this is the last day on the Mayan calendar, and many felt that meant the world would end today. Unfortunately for all of us who have to work today, the end did not come first thing in the a.m. The highways were even more empty than they typically are on my drive in, and I would think the holiday thinned markets will be even thinner today.

The big news driving the overnight markets was the announcement out of the House of Representatives that there would be no vote on House Speaker Boehner's 'Plan B'. The alternative plan which was presented earlier this week stood absolutely no chance of clearing the Senate, but the news that it wouldn't even get through the House caused many to jump to the realization that a budget deal may not be passed by year end. Perhaps our leaders in Washington were counting on the Mayans to bail them out of having to figure out the budget problems. No votes will occur until after Christmas, which gives Congress and the President just four work days to hammer something out. Global markets didn't like the news, and the dollar saw slight gains.

Both Gold and Silver continued to drop which confirms all of the Pfennig readers thoughts that none of the precious metals gyrations have been due to the budget talks. If the sell off which began earlier in the week was due to positive news on the negotiations in Washington, the negative news overnight should have pushed both gold and silver higher. But the continued slide confirms my thoughts yesterday that year-end profit taking is the reason. From all of the Pfennig comments, I know many of you are still convinced both Silver and Gold is being manipulated, with the government and big banks keeping the prices down. I will leave the conspiracy theories to Chuck, as he is much better at sorting through all of these different thoughts on market manipulations. The desk has seen a dramatic increase in the number of metals trades recently, and yesterday in particular we saw several of our investors swapping their gold into silver.

We had a full day of data here in the US, and much of the data was positive for the US$. GDP estimates for the 3rd quarter came in at 3.1% higher than both the projections and the previous estimates. Initial Jobless claims came in right where they were predicted at 361k, but economists are apparently encouraged by the fact that these initial jobless claims are holding below 400k. The Philadelphia Fed index surprised the markets with an increase in the index to 8.1 in December following a decrease of 10.7 in November. The leading economic indicators came in right where they were expected for November with a loss of .2%. And the last of the data yesterday showed existing home sales increased an impressive 5.9% in November, a 3 year high. Economists were encouraged by the positive housing data, as rising real estate values should help propel the US economy back out of the economic funk we are mired in. Today we will get the durable goods numbers along with the Personal Income and Spending figures for the month of November. The data is expected to show consumers continue to increase their spending more than their income, a worrying trend for everyone except our 'leaders' in Washington. They are encouraging deficit spending as usual.

The euro moved a bit lower but held on to the $1.32 handle and the pound sterling moved lower after a report showed UK retail sales were flat in November. The pound fell the most in a week vs. the US$ on the back of the two other reports. The first showed Britain's economy grew less than previously estimated in the third quarter, and another showed the budget deficit in the UK unexpectedly widened. GDP rose .9% from the second quarter, lower than a previous estimate of 1%. The budget deficit widened to 17.5 billion pounds compared to a deficit of 16.3 billion last year. This is not good news for the pound sterling, but it is still winning the 'ugly contest' vs. the euro, so the pound will likely end the year with a positive return vs. the euro and the US$.

The BOJ yesterday increased its latest round of stimulus with a 10 trillion yen addition to its asset-purchase program. In a bit of a surprise move, the BOJ kept their inflation target at 1% in spite of calls for an increase of the target to 2% by incoming Prime Minister Abe. The Japanese yen continued to fall in value after the announcement, with a selloff in the Asian stock markets adding to the selling pressures. The falling yen has caused many currency strategists to revive the 'Carry Trade' strategy which produced good profits a few years back. This currency investment strategy involves borrowing funds in low yielding currencies (Japanese yen is the most popular funding currency), and then investing these funds into higher yielding currencies. As long as the currencies stay relatively stable, the investors book the additional yield (carry). But the trade can be even more profitable if the funding currency falls vs. the higher yielding investment. With the new Prime Minister pushing for more stimulus spending, the Japanese yen could be headed for further falls and we could see a big push back into this carry strategy.

The benefactors of the carry trade are the higher yielding currencies. So if you believe the trade will become popular in 2013 investments in the South African Rand, Indian Rupee, Brazilian real, and Mexican Peso may be warranted. In the past, Japanese investors have been some of the biggest followers of the carry trade, and these Japanese investors have traditionally favored the New Zealand and Australian dollar investments, so these currencies could also move higher with the return of the Carry strategy.

Australia's dollar touched the lowest level in more than two weeks overnight on the 'fiscal cliff' concerns. The uncertainty emanating out of Washington DC had currency investors reducing 'risk' assets pushing the value of the AUD$ lower. The aussie dollar is headed for over a 1% weekly loss vs. the US$, but will still end 2012 with a gain. Speaking of currency gains on the year, I read a story this morning which indicated Morgan Stanley's currency recommendations had returned 5.72% for their investors in 2012, the best performance since 2008. The currency strategists at Morgan Stanley favored trades funded in yen (carry trades), and still believe these will gain in the coming year. Another story I spotted yesterday suggests currency strategists are the most bullish on the dollar in three months. Worries regarding the 'fiscal cliff' and a possible recession for the US has the big bank's all betting against the dollar. 9 out of 10 economists still expect the US lawmakers to reach a deal, but even with a resolution growth in the US will likely be slowed in the short run by new austerity measures.

And before I wrap things up today, I wanted to share some of the 'cards and letters' I received in the Pfennig replies box yesterday. I had a number of you comment on my 'dinner table economics' story. Most of you confirmed that Lauren should have gotten credit for her answer with many saying the correct answer is as follows: "All debt is bad, though some may be necessary." And one more thing I wanted to share with all of you from yesterday's Pfennig comments. I had a reader send me the following note after reading my TTWT section regarding the FOMC's zero rate policies: "The result was not "unintended consequences". Does steering a car in one direction cause the "unintended consequence" of not going in the other? This was "disregarded consequences". Thanks to Louis for allowing me to reprint his excellent analogy. Many of you send these comments directly to the Pfennig Box, which is fine, but I would love for you to comment instead on the Pfennig Blog so all the readers can benefit from all of your intelligent and sometimes witty banter. You can view and comment on the Pfennig at .

And then there was this. I came across a story last night which detailed the salaries paid by the Fed, ECB, and BOE. There has been a lot written about the big increase in salary that Mark Carney will get with his transfer from the Bank of Canada to the Bank of England, so it was interesting to see just what the other central banks were paying their leaders. BOE Governor Carney will earn annual salary of 480,000 pounds ($780,816) and will also receive a 250,000 pound ($407,000) housing allowance. ECB paid its president EU 371,148 ($493,292) in 2011. Fed Chairman Bernanke's 2012 salary was set at $199,700 in 2011 while NY Fed President Dudley's salary was set at $410,780.

I'm sure many of you will argue with this point, but it sure looks like Bernanke is a bargain when it comes to Central Bank leaders. Or maybe the better way to put it is 'you get what you pay for'!

To recap. The end of the world hasn't happened yet, so the negotiations will have to continue in Washington. Boehner's Plan B won't even come up for a vote, and the global investors are worried this indicates no deal will be able to be worked out by year end. Both Gold and Silver continue to drop - as Chuck would say this is a buying opportunity. The currencies were down a bit as investors moved back into the US$ for shelter. The BOJ increased stimulus, could we see a return of the popular Carry Trade?? And the Aussie dollar fell as the markets moved away from 'risky' assets.

Currencies today 12/21/12. American Style: A$ $1.0435, kiwi .8245, C$ $1.0093, euro 1.3215, sterling 1.622, Swiss $1.0943. European Style: rand 8.5543, krone 5.5708, SEK 6.5160, forint 217.51, zloty 3.0755, koruna 19.0754, RUB 30.7533, JPY 84.10, SGD 1.2204, HKD 7.7501, INR 55.0687, China 6.2302, pesos 12.8461, BRL 2.0711, Dollar Index 79.389, Oil $89.19, 10-year 1.76%, Silver $29.94, Gold $1,648.62, and Platinum $1548.75.

That's it for today. We had a nasty day yesterday, with thunderstorms changing into snow storms accompanied by very high winds. The trade desk is on the 7th floor of our building which has a tendency to shake and shimmer in the high winds. At times yesterday is felt as if we were on a cruise ship, as the light fixtures steadily swayed with every blast of wind. The temps are supposed to increase this weekend, but it was a chilly walk across the bridge this morning! I want to make sure I wish my little sister a happy birthday! My mom is headed down to Alabama to spend the holidays and Tracy's birthday with her, so I'm sure she will have a great day. On that I will finish today's Pfennig and wish everyone a Fantastic Friday and a wonderful Weekend!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 12-21-2012 10:00 AM by Chuck Butler