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Daily Pfennig: Cooking with gas

23rd Jul 2013, 3:29 pm by Chuck Butler

In This Issue.

*  Existing home sales fell
*  8 year anniversary
*  Japanese election
*  Gold and silver took off

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

Cooking with gas.

Good day.and welcome to Tuesday Morning. It was another hot one here in the Midwest with the heat and humidity slapping me right in the face as I walked out the door last night. Speaking of heat, the currency and metals markets were both on fire yesterday and were certainly a sight for sore eyes. Both markets were already pointing in the right direction when I left you yesterday morning, but those gains continued to rise as the day progressed and didn't see any significant reversal as we concluded US trading.

The data released yesterday was not very supportive of tapering measures by the Fed as both the Chicago activity index along with the existing home sales figure came in less than expected. The Chicago Fed index remained negative, which still indicates below average growth, but did show some improvement from the previous reading. Most investors and economists looked past that report and primarily focused on the June existing home sales, which did fall 1.2% from May and came in at an annual pace of 5.08 million.

According to the National Association of Realtors, first time home buyers are having difficulty finding properties for less than $100k as a lack of inventory pushes up property values and higher mortgage rates are also starting to cool demand for more expensive homes in the West and Northeast. At the same time, the median price of a previously owned home increased 13.5% to $214,200 from $188,000 a year ago and marked the highest price since June 2008. The NAR also said according to survey results, about 47% of realtors said they had potential sellers who are waiting for prices to rise further before putting their home on the market.

I think some of the blame as to the decrease in units sold can be placed on higher mortgage rates, but the Fed is going to be all over that situation like a cheap suit. Bernanke already said that he's keeping a close eye on rates and if they get to the point of threatening the progress we've seen thus far, he will take action. In other words, he'll make sure bond yields don't take off any time soon. Moving on, it's going to be a quiet day in the data department today as we only have the June home price index, which we already know what to expect, and the Richmond regional manufacturing index.

Chuck was a big help this morning and sent some thoughts on economic data and beyond, so here you go.

Well, after a long day of traveling, and a short nap, I sat down to do some reading, and what to my wondering eye would appear, but a miniature sleigh, no wait! I didn't see St. Nick! I saw traders and observers backing off their calls for tapering. Ahhh yes, grasshopper remember what Big Ben said about how tapering may start depending on the strength of the economy? Well, maybe there are enough Pfennig Readers now! Because more and more traders and analysts are jumping on my "the Fed's being overly optimistic about the economy" bandwagon.

U.S. Treasury yields are dropping again (just in time for the new auctions I might add!) and Gold has gotten off the canvas and has come out punching again! The stock jockeys don't know what to do, because the stock market rally has never been about the economy. it's all about stimulus.  Everything I've said about the Fed being overly optimistic about the economy is holding true so far. Just last week Housing Starts were down 9.9%, yesterday Existing Home Sales dropped. If it weren't for the high gas prices and car sales, Retail Sales would have been negative, and Leading Indicators were flat.That means 6 months down the road, the economy will still be going nowhere according to that data.

It doesn't take a rocket scientist to figure this all out folks. I'm not even your last choice as the guy who gets coffee for the rocket scientist! But.. As my dad used to say, even a blind squirrel can find an acorn.  And the acorn here is the lack of strength, even with gobs and gobs of stimulus, in the economy. I've been telling you that for a few months now, remember when I told you that 65% of the economic data in March missed their targets to the downside? Well, it got worse in April, and May is a mixed bag so far. And don't forget that I was the first person on your block to tell you that 2nd QTR GDP will be closer to 1% than the previous 1.8%...  

So, this is a reoccurring theme with me, I'm not Johnny-come-lately, as is the case with many an economist, observer, analyst, or trader! So. another day has passed us by, and beyond all this taper tantruming and sawdust being left on the floor every time the Fed Heads meet, did I tell you how beautiful a city Vancouver is? I heard that this is the last year of the Agora Investment Symposium here in Vancouver. I will miss the umbrellas blue skies, the crystal clear ocean water, the air that smells, ummmm. clean!  It's a bustling city that never sleeps, I absolutely love it here! But. There are no Cardinals playing here, shoot Rudy, I can't even get ESPN or MLB to check on scores here! Maybe, that's why everyone is out walking around? HA!  Oh well, Vancouver, it was nice to know you!

Back to Mike. That was a huge help this morning, thanks again Chuck.

I did forget to mention that Sunday marked the eight year anniversary of the PBOC allowing the Chinese renminbi to stray away from the peg to the US dollar. In that span of time, the currency has appreciated by nearly 35% but the US and other nations continue banging on Chinese policy makers to allow more appreciation. Just to give you some perspective, there are only two other currencies in the same ballpark as the RMB. The Swiss franc is up just of 35% and the Singapore dollar has risen over 32% in that time. After that, we have a fairly large drop to the next best performers.

The Canadian dollar, Australian dollar, and Swedish krona have between 15% and 19% gains, so there is quite a bit of separation. The worst performing currency is the rand with over a 31% loss. With that said, Chinese officials have said many times they feel the currency is roughly at its fair value as most economists felt it was 30% to 40% undervalued when pegged to the USD. I saw an article in Reuters where a Chinese official justified the slow and calculated currency appreciation as opposed to letting it freely float by saying many low end manufacturers have been forced to take losses as a result of the currency appreciation.

Either way, they keep taking steps to allow the currency more range and maneuverability. Switching gears to the currency market yesterday, the US dollar took a pretty good hit as all but two currencies ended the day in positive territory. The big winner happened to be the Japanese yen with a gain of just over 1%. The wind behind its sails came from the expected win for Prime Minister Shinzo Abe in the parliament's upper house. Economists see this result in two different lights.

First, the short term impact could be positive for the currency as continuation of the pro-growth platform initially gives that warm and fuzzy feeling, but the longer term outlook isn't exactly kind to the yen. We know additional stimulus and QE measures would tend to weigh on the exchange rate, but they also see a carry trade effect. As Japanese investors become more comfortable, we could see money leaving the country in search of higher yield. At the end of the day, I still think the yen is on the downside of the slope so this was merely a current events update.

Most of the other currencies finished the day anywhere between 0.5% and 1% gains. Macroeconomic data globally was sparse so there really isn't much to speak of other than it was a down day for the US dollar in general. We did have some positive news out of Europe as Portugal's president said the current government will stay in office until 2015 and that he doesn't want to call early elections which would allow time to complete bailout and aid packages. Lastly, the Australian dollar ended the day around .9250 as the policy shift in China and a broad based rise in commodities offered the support.

Speaking of commodities, gold and silver stole the show yesterday as silver increased over 5% to $20.55 and gold shot up 3% to $1,335. That definitely put a smile on my face as I left the office last night. In fact, gold saw the biggest daily gain in over a year. It looks like the rise was due to both technical and fundamental trading. I saw a report where hedge funds and other large speculators increased their net long positions by 56%, and at the same time, short contracts fell the most since November after touching a record high a few weeks ago.

Mounting speculation that the Fed won't be as quick to cut stimulus justified by yesterday's housing report acted as the double whammy. Gold took out two resistance levels yesterday which included both $1,300 and $1,322 but the question is whether it can hold at these levels. Most analysts still maintain their bearish stances, but I don't think it would take long to change their tunes if we keep seeing days like this.

As I came in this morning, the dollar is marginally higher and there's not much on the news wires to speak of. I was, however, glad to see that gold and silver were able to hold some of their gains from yesterday. Since it's a barren day with economic data, there doesn't appear to be much of anything to give the markets a push one way or the other. I would expect to see a meandering attitude today unless we see a flare up in the taper tantrum talk.

To recap.We began the day on the right foot as the US dollar was lower across the board. We saw lower than expected economic reports via the Chicago Fed index and June existing home sales, so that fueled speculation the Fed may not be as eager to cut stimulus as they were previously. It's a quiet day in the data department today, but we just celebrated the 8th anniversary of the first Chinese currency revalue. After 8 years, the renminbi is in the driver's seat as one of the best performing currencies. The Japanese yen had a good day since their election yielded the expected result and both gold and silver took off.

Currencies today 7/23/13. American Style: A$ .9240, kiwi .7975, C$ .9677, euro 1.3181, sterling 1.5352, Swiss $1.0646, . European Style: rand 9.8242, krone 5.9282, SEK 6.4818, forint 223.82, zloty 3.2043, koruna 19.7372, RUB 32.4094, yen 99.99, sing 1.2667, HKD 7.7575, INR 59.7613, China 6.1702, pesos 12.5170, BRL 2.2331, Dollar Index 82.29, Oil $105.96, 10-year 2.52%, Silver $20.20, Platinum $1,432.50, Palladium $735.50, and Gold. $1,328.75

That's it for today.Well, I had enough energy to fill the blank screen, albeit a little on the later side, but at least there is something. I also wanted to thank those for the well wishes yesterday as its very much appreciated. The Cardinals had an off night yesterday but I did see where Brewers slugger Ryan Braun got suspended for the rest of the season for being juiced up. You would think these guys would have gotten the memo, but apparently not. With that said, its time for me to get on the juice, orange juice that is, so that's it for me today. I'm running a little behind, so until tomorrow.Have a Great Day.

Mike Meyer
Assistant Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837



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