Monday, May 11, 2009

The “Big Money” Believes the Dollar Will Fall

Also In Today’s Letter…

• The Media Wants You to Believe…
• How I Would Have Reported Friday’s Job Data
• Safely Hone Your Forex Skills…Absolutely FREE

By Chuck Butler Friday was absolutely crazy in the markets. The currency screens lit up, oil was on the rise, and Treasury yields were also rising, which pushed down the value of existing bonds.

An absolutely crazy day that scared the bejeebers out of the Chinese…So, today, we’ll go to the tape to see what’s going on here.

Of course, Friday was also the Jobs Jamboree. I touched on this a little on Friday, but I didn’t have time to give you my full report once the numbers were released. Allow me to expand on that now…

Media Wants You to Believe “Recession Has Ended.”
Not Hardly.

So after Friday, the mass media would have you believe that the recession is over, the credit market somehow solved all its problems, liquidity is back, and there’s no need to worry about the sorry state of financial institutions…

Why? Because according to the media, the April job figures came in at, “just” 539,000… YAHOO! Let’s have a party, according to what I keep seeing on the TV! (Never mind that the previous month’s job losses were revised up from 663,000 to 699,000…nobody cared about that!)

My Look Beyond What They Told You on CNBC…

Well, before we go and buy the party favors and balloons, let’s take a closer look at the number, to see where the jobs were created…

This is something an old-time journalist would do, before claiming it’s party time! If you do take a closer look…

Well, what to my wondering eyes should appear? The government created 72,000 jobs last month. That’s right… Now to be fair, once you subtract the government positions, you’ll see the civilian job market did add / create some jobs. But it’s not the lofty number of jobs the media would have you believe.

How I Would Have Reported Friday’s Job Data…

It’s not that I want to see jobs lost, folks… I just want things to be reported correctly, so you can make wise investment decisions based on facts, not fiction.

So, here’s how I would have reported it… “April’s job losses finally put a tourniquet around the labor market and created jobs for the first time in six months. The “absolute” number of jobs lost remained above 600,000, but, April’s figures do give hope that we will see further gains in future months.”

Okay, enough of that! The hoopla over the labor data kick-started the risk assets, as I said the labor data would on Friday. Currencies led the way, with commodities in second, and stocks finally getting a clue later in the day.

The Big Dog, euro, led the little dogs (the rest of the currencies) off the porch and really chased the dollar down the street. This chase lasted all day, and by late afternoon, I yelled across the desk that the dollar index has moved to the downside of its 200-day moving average!

This move really lit a fire under the dollar bears, and they came out to play for the first time in a month of Sundays.

Paltry Yields + Falling Dollar = VERY Unhappy Treasury Investors (Hint: Particularly the Chinese)

So, the risk assets were kicking some tail and taking names…What was hurting? U.S. Treasuries!

As I’ve said over and over again in the past, Treasury holders are growing tired of the paltry yields. There’s also the problem that Treasuries are dominated in dollars. So once the dollar got hammered on Friday, investors started dumping their dollar-dominated Treasuries. The move out of Treasuries drove down the price, and pushed the yield higher.

I doubt the Fed and Treasury are happy about that! The Fed will have to start buying more Treasuries to get the yield under control…

Someone else wasn’t happy about watching their US$750 Billion or so, of Treasuries get double whacked like that in one day… The Chinese! How would you like to take on losses like that?

But really folks, yes, the price action in the currencies and Treasuries was violent on Friday, but this has been happening for about two months now. Yes, we’ve seen the back and forth of these assets, but when you put a line on the two-month performances, you’ll see this wasn’t just a one-and-done!

So as you can imagine, the Chinese must have felt they were watching a horror picture show on Friday! I saw one Chinese official try to wipe out China’s harping about “the need for a replacement reserve currency”… Shoot Rudy, wouldn’t you do the same thing?

In other words, the Chinese just backed off slightly. And that has everyone re-thinking Friday’s price action. If the Chinese are going to balk, the rest of the world needs to stop and take a breather. Again, folks, this is one of the very bad things that I’ve tried to explain to you over the years regarding the imbalances between the U.S. and China.

Surprise, Surprise: The Fed Used a “Creative” Way to Stress-Test Banks

With China doing the “rope-a-dope” regarding their call on the dollar, the euro and other currencies have backed off the lofty figures they hit on Friday. The Big Dog euro climbed near 1.37 on Friday afternoon, when I left for home. It’s back down to 1.36 this morning…

The move on Friday proved to be just too fast. And the currencies are coming back to fill the gaps they passed up on Friday.

Did you hear that the Fed used a “different” method of valuing the banks?

The Fed’s “yardstick” Tier 1 Capital surprised quite a few observers. Many analysts thought that the Fed would use what’s called “tangible common equity,” which would look at the assets and make them accountable for unrealized losses.

But NOOOOOOOOO! Had the Fed used “tangible common equity” the total hole the banks would be in would be US$68 billion deeper!

My dad used to tell me… Chuck, figures lie, and liars figure. This is a classic example. Not that I’m accusing the Fed and Treasury of just going through the motions on this… Oh wait, I guess I am doing that!

Music to a Dollar Bear’s Ears…

Let’s go back to the mention above regarding the dollar index moving downward through its 200-day moving average.

The dollar index is a measure of the dollar’s value relative to a basket of foreign currencies. It is a weighted geometric mean of the dollar’s value compared to the euro (EUR), Japanese yen (JPY), Pound sterling (GBP), Canadian dollar (CAD), Swedish krona (SEK) and Swiss franc (CHF).

It was started in March 1973, soon after the dismantling of the Bretton Woods system. At that time, the value of the Dollar Index was 100.000 and has since traded as high as the mid-160s but also into the low 70s. It currently stands at 82.63…

The dollar index is heavily weighted toward euros..

Big Flashing Sign: Dollar Just Fell Below the 200-Day Moving Average

Many institutional investors use the dollar index as their means of trading the dollar. And to see it fall through its 200-day moving average, was enough proof for those big institutional investors to believe that the dollar is heading south.

The 200-day moving average, for those of you unfamiliar with this term, is a long-term moving average that helps determine an asset’s overall health. It is for all practical purposes a dividing line, if you will, between as asset being healthy or not. In this case, we’re talking about the dollar’s health.

Several “Risky” Currencies Soar in the Double-Digits

Okay, enough of the lessons! I mentioned at the top that the price of oil was on the rise Friday. Although oil has backed off now, with Friday’s Chinese comments, you could see the bubbling crude, black gold, Texas Tea, spouting off toward US$100 again.

Yes, oil saw a US$60 handle briefly on Friday. It’s back down to US$57.42 this morning. Now, that’s one thing we DON’T need is a rising oil price!

On the other hand, the Canadian dollar / loonie loves a rising oil price! Recall, I told you a few times in the past that the loonie needs a stronger oil price to really climb higher. But even with oil’s recent move, the loonie has been moving steadily higher vs. the dollar.

When I say recently for oil’s move, I’m talking about the last two months. In the last two months crude oil is up +31% (since March 1st). Wow! No wonder the loonie has gained almost 12% since that same March 1st date.

In fact, I just ran a currency scorecard using March 1, 2009 as my beginning date, and the currency moves since that date have been phenomenal! (With the exception of the yen, which which has been flat recently.)

How do these sound? Kiwi +22%, Norway +12%, and so on…

Consumers ARE Finally Learning How to Save…

The U.S. data cupboard is empty today, but gets restocked tomorrow with the latest Trade Deficit report. The way the Trade Deficit has been falling in the past six months, I might have to say Trade Balance, and not assume it will be a deficit some day!

Well, the fall in the Trade Deficit is a direct result of the U.S. recession. U.S. consumers are “finally” taking a breather on spending. The reduction in the Trade Deficit however, has NOT been a result of improving exports, which would be the preferable method of reducing the Trade Deficit.

If exports were leading the way, it would mean that U.S. manufacturing was hitting on at least six of eight cylinders, and that would be good for the economy! But, instead, we get a reduction from a lack of consumer spending… A combo of both would be great! But that’s pie in the sky stuff!

At least all the rate cuts are over for this month. The Bank Stress Tests are a thing of the past, and we can maybe… Just maybe, return to the fundamentals!

That’s it for today… I’m headed to Las Vegas today for the Money Show. So I’ll be writing to you from a different time zone all week. Cards get one of three from the Reds… Tough weekend for my beloved Cardinals!

Also I hope you had a nice Mother’s Day. It was great seeing all the kids yesterday. My granddaughter – little Delaney Grace entertained us, singing songs and just being a toddler.

I’m running a bit late today, as I had to finish packing for my trip this morning. I must say – I don’t enjoy Las Vegas, so, this is one of those trips where you can’t wait to get there, so you can start counting down when it’s time to leave!

On that note… I hope your Monday is Marvelous…And you have a wonderful week!
Chuck Butler

EDITOR’S NOTE: Concerned about your dollar’s value? Find out how to shield your portfolio from whatever may hit the dollar next, here.