Issue #57: Wednesday, April 8, 2009

Also In Today’s Letter…

• Stocks & Currencies: Now Tied at the Waist
• Quick-Fixes and More Wasteful Spending
• Which Currency Comes First Again in Forex Pairs?

By Chuck Butler I have to tell you I’m draggin’ the line after being out late on a school night last night. More on that later…

Front and center this morning, foreign currencies made an effort to rally all day yesterday, only to find themselves weaker at the day’s end. Reason: We saw a drop in stocks (risk assets) yesterday.

I’ve been hoping for a while now that currencies would break their recent tie with stocks. This just isn’t the normal way these two asset classes are priced.

Since When Does Trading Cash Have Anything to Do with Stocks?

I wrote to you a few months ago expressing this wish. At the time, I was convinced stocks were simply going through the motions of a bear market rally, and would turn south at sometime.

Of course, that time could be now, as U.S. Corporations begin announcing earnings for the first quarter 2009. In fact, if the first corporation to announce its earnings is any indication of this year’s earnings season, then you had better run for the hills! Alcoa reported a 59-cent per share loss, which was worse than the projected 56-cent loss.

So, for now, the majority of foreign currencies are still trading lock step in tune with stocks. As I said, this isn’t the norm. But, then again, what is “normal” about the markets these days, right?

In fact, the only thing you can count on these days is that even while the majority of foreign currencies drop along with stocks, you’ll still be able to find at least ONE major currency that’s rising no matter what.

Central-Bank Speak Decoded: Why the Aussie Dollar Is on the Mend

Yesterday, I told you that the Reserve Bank of Australia (RBA) cut rates 25 BPS, and the Aussie dollar was recovering from the blow of the rate cut (which wasn’t as deep as traders were expecting by the way).

Well, there was more news from the RBA. The RBA’s Gov. Mr. Stevens said “the recession in Australia is much milder than those in Europe and the U.S.” Hmmm, I think he was preparing to leave the rate cut table, don’t you? To me, that’s Central Bank parlance for “This is it, no more rate cuts!”

If it’s the case, the Aussie dollar should begin to see some real activity soon.

How China Ties Into All this Mess

Meanwhile, the news from China continues to point to their stimulus working and that economy pulling out of the doldrums faster than the rest of the world. (See what happens when you deal from a position of strength?)

Of course that remains to be seen. But like I said, I read at least one story a day about how China’s economic activity is stirring, so let’s just play along with that idea for a moment.

Assuming China’s economy is on the mend, what does that mean for Australia? It would mean that happy days are here again, the skies above are clear again. Or least something like that… Why you may ask? It’s because China needs raw materials, and they have historically received the majority of those raw materials from Australia.

So, now you can see the tie-in, eh?

One stumbling block: If currencies don’t break this trading pattern with stocks, we won’t have any Happy Days in Australia or most other countries for that matter, except Japan, which continues to act as the counter trade these days. (Remember I said above, not all currencies can drop at once – right now the Japanese yen is on top.)

Speaking of Japan, the nation posted a very interesting number last night. Japan’s Current Account Surplus shrunk 56% in February.

In January of this year, Japan posted their first deficit in 13 years… Interesting, eh? Exports have plunged. But, with the weakness in the Japanese domestic economy, I would suspect that imports too will plunge soon, thus leveling this out. We’ll have to wait and see what this does to the yen.

Quick Fixes and More Wasteful Spending

This morning there’s a story about Ireland in the news. This beat-down country is attempting to cut its recession problems off at the pass. Finance Minister, Lenihan is mirroring the tactics Sweden took in the 1990’s when their financial system teetered on the cliff of disaster. That’s a good thing in my book…

I talked about the “Nordic way to deal with financial disaster” months ago. I’ve never cared for the way we are going about dealing with this here in the U.S. and prefer the Nordic way of dealing with “bad banks.”

If you would allow me to go off on a tangent here… But, why did Paulson, and now Geithner, along with Bernanke believe that throwing billions/trillions of dollars at this problem was the correct thing to do?

I mean, we got into this mess because there was too much unregulated money in the system. So, the answer is to throw even more money at this problem? I just don’t get it, folks!

They’re Determined to Spend Every Penny of TARP…
Even On Random Unnecessary Things

I saw this in the WSJ this morning, “The Treasury Department plans to extend the Troubled Asset Relief Program to certain eligible life insurers. Several life insurers have been burdened lately by capital constraints amid ailing markets.”

Oh great! The Treasury Dept. is bound and determined to spend all the TARP money even if this money pays for things / companies that it wasn’t created for! Records show that there is about US$130 Billion left to spend. Come on Mr. Treasury Sec. this isn’t a re-run of the movie Brewster’s Millions!

Gold held onto those gains I talked about yesterday morning, and has added another US$5.25 this morning. The shiny metal is back to US$887.

A reader asked me yesterday about gold dipping below US$900. Hmmm…it’s my feeling that buying gold on the dips is a good practice. But then, who’s to say that gold doesn’t fall even further before turning around?

I don’t think anyone would bet against that happening… My point is, if you can buy it cheaper today than you could yesterday or last week it’s a bargain! If it falls further… It’s an even better bargain!

That’s it for today… Well, my beloved Cardinals got it right in the second game of the season. I was able to go to the game with good friend, Rick, my darling daughter Dawn’s husband, Jerry, and my little buddy Alex. It was a beautiful evening, not freezing like the day before, and the Cardinals’ bats came alive! Big win for our Blues last night, as they scrape and claw their way toward the playoffs.

I go back to the eye doctor this afternoon. I don’t look forward to that at all! There has been no change in my vision or lack of vision I should say, in my left eye. I’m wondering what the doctor will have up his sleeve this time!

We had a local election in the little river town I live in yesterday. As I walked up to the polling place, I had a flashback to when I ran for alderman in 1995 and again in 1997. A lot of work, and very little appreciation from anyone for what you did. I got out of that line in 1998, and haven’t looked back, until yesterday! And NO! I’m not feeling the urge to do it again! No way!

OK… Time to get going, hope your Wednesday is Wonderful!
Chuck