Issue #66: Wednesday, April 22, 2009

Also In Today’s Letter…

• Breaking News or Not… Stress Tests Still Worthless
• Regulators as Whistle Blowers? Yeah Right!
• 3 Easiest Ways to Invest in Foreign Currencies Tomorrow (without a Forex Account)

By Chuck Butler Another bad night for your Blues, which means their season has come to an abrupt halt. They are a young team, so they’ll be back, next year…

Onto currencies…The euro traded in a very tight range yesterday with a bias to sell dollars. But like I said, it was a very tight. The Aussie dollar rallied very strongly during the day, adding over 1-cent to its figure.

Unfortunately, the Aussie sold back some of that 1-cent gain overnight. The upbeat stock session immediately turned sour after the close. As I said yesterday, there was a lack of data to help the currencies along, and they had to rely on the earnings season for direction.

Stocks did enjoy a 127-point rise yesterday, so that helped things. But to me, that’s nothing more than a dead-cat bounce for stocks. But then, I’m not even your last choice as a stock jockey!

Breaking News or Not: Bank Stress Tests Still Worthless

The BIG News yesterday was that Turner News and the AP apparently got hold of the stress tests results for banks, ahead of the government’s official release on Friday. According to the AP, the stress tests “revealed” that large regional banks were in bigger trouble than industry titans, because they still have riskier individual loans on their books.

As I’ve said before, I never had high hopes for these stress tests anyway. I’ve maintained that the government wouldn’t “really” tell us the true status of these banks. I believed that the government would tell us what they wanted us to know, and that’s it! I also have maintained that the government will be able to step in and really get their hands in the cookie jar of these large banks.

Geithner Assures Us All is Well With “Too Big to Fail” Banks…

For instance, when asked, U.S. Treasury Sec. Geithner
has said over and over again that he believes the stress tests will show most of the 19 biggest banks have enough capital.

Shoot Rudy, they better! Each and every one of these 19 banks have received TARP funds. And again, the relaxing of the mark-to-market rules should also free up some of their capital. But again, let us take a look under the hood… Shoot, why not? We as taxpayers paid for what’s under the hood!

Sorry, I’ll get down from my soapbox now.

You’re Counting on the Regulators to Be the Whistle Blowers? Yeah Right!

Yesterday, Geithner told the oversight panel on TARP that each bank, which needs help, would get it in several ways, including more TARP funds. Great… Just great! Throw more good money at a bad situation. Makes perfect sense to me… Not!

Geithner also told the oversight panel that regulators are reviewing the stress tests instead of the Treasury Department. Hmmm… Okay, so now we have to believe that the regulators are going to blow the whistles right? That’s not going to happen folks, it would cause panic in the markets, period!

The currency guys believed these stress tests would be bad, so they have been buying up Japanese yen. Recall, that the Japanese yen has been all the rage especially when the financial meltdown in the U.S. was in its darkest hour to date. It’s been the “safe haven” currency.

More Signs of a Treasury Bubble Popping – This Time in the U.K.

Over in the U.K. this morning, the Chancellor of the Exchequer, Alistair Darling, is going to announce the budget for the next year.

U.K. – One Step Ahead in This Crisis

He’s already heard the news that unemployment in the U.K. has hit 2.1 million in the three months through February. That’s the most in 12 years.

The bond market in the U.K. is feeling the pain as they anticipate Darling will announce the biggest deficit since World War II, which means they’ll need to sell more bonds (GILTS). That outlook has caused gilts to fall in value.

Now, remember what I told you a couple of weeks ago, about how the U.K. seems a bit ahead of the U.S. with regards to the timing of these disastrous events?

Well, if the U.K. government is selling gilts because they need additional funding, then when will we see that shadow cast on U.S. Treasuries? I realize that with the Fed buying debt, and monetizing the debt, that Treasury prices have received a boost.

But, you’ve got to wonder with the U.S. deficits, and the amount of debt being issued, can the Fed support the price forever? I don’t believe they can. And the Treasury bubble will eventually pop, causing prices of Treasuries to spiral downward.

What does that have to do with currencies I hear you asking? Ahhh grasshopper… The dollar’s strength since July of last year has been predicated strictly on safe haven Treasury buying. Unwind those purchases because of spiraling downward prices, and you have the dollar selling once again. It’s that simple…

“No I Didn’t Forget About Gold”

Gold gave back some of the ground it gained the previous day, as the stocks rallied and Geithner calmed the markets’ nerves about banks.

It’s interesting that gold moved down given the IMF’s report that said the losses from the financial meltdown will reach US$4.1 Trillion. This gloomy IMF outlook could take some time to work its way toward a gold rally. But it should!

Speaking of gold… A reader sent me a note the other day, when I said, “doesn’t anyone want to have a strong currency any more?” He, the reader, said, you forgot about gold!

Well, no, I didn’t forget about gold. Long-time readers of this letter know that I truly feel that gold is a currency, that’s why I talk about it in my currency newsletter. The difference is simply that no country issues gold as their currency.

Bank of Canada Pulled a Fast One Yesterday…

The Bank of Canada (BOC) surprised me yesterday by announcing a rate cut of 25 BPS.

This was an interesting cut, in that the BOC cut the target rate, but not the deposit rate. Under normal circumstances, the deposit rate would also be cut by 25 BPS to avoid distortions in short-term money markets.

Not sure what the BOC hopes to achieve with this move, except that they could at a later date come back and cut the
deposit rate as a symbolic rate cut. You see the BOC made a statement that they will hold their target rate at the current level of 25 BPS until the end of 2010.

Again, that’s a very curious announcement by the BOC. The loonie, however, wasn’t fazed, and rallied on the day.

That’s it for today… I’m finally feeling almost human again. That pneumonia was a real pain. Not that it’s completely gone, but I’m no longer coughing my head off, etc. The miracle of drugs and a lot of sleep!

Nice comeback win by my beloved Cardinals last night. When I went to bed both the Cardinals and the Blues games were tied. One bad outcome, one good outcome. I finished up my three presentations for Bermuda yesterday, so I’m almost ready to go. Now, I just have to find my passport!

Got to get going here, I have a long meeting to start the day… I hope your Wednesday is Wonderful!
Chuck Butler

P.S. I have a new colleague here in FX University: Cornelius Luca. I gotta tell you: You’d be hard-pressed to find a more experienced currency analyst (besides yours truly that is!). Cornelius has been in the currency game for the last quarter century. He’s written four different books on currency trading and spoken at financial seminars in over 30 countries around the world. (Plus, he’ll be with me in Bermuda next week for The Sovereign Society’s Total Wealth Symposium!) Cornelius is a hard-nosed trader, so he generally has his eyes on his trading screens, but you can look for quick cameos coming from Cornelius here in FX University each day. He’ll be bringing you one key fact each day that you should know about the markets. Enjoy!