Has the dollar fallen too far?
The British Pound is now fetching $1.70, a huge break-out and well above the June highs, now valued higher to the dollar than any time since last October. Britain has aggressively cut rates and expanded their money supply and Britain had banks falling like dominoes before being taken over by the government. The UK's budget deficit as a percent of GDP is forecast to be 11.6% this year, the second worst on the planet, exceeded only by the US's projection of 13.5% but the UK is forecast to catch up in 2010 with 13.3% of their GDP taken up by debt. Why then, you may wonder, is the British Pound up 25% against the dollar this year and almost 10% this past month?
The answer to that is the same as the answer to many irrational market moves – SPECULATION. The dollar in general has been pushed back down to 1-year lows by currency speculators and the Pound is benefiting from their No-Euro policy that makes the UK a relatively safe-looking investment for currency traders who are worried that Eastern Europe will eventually prove to be a weight that drags the rest of the EU down. With a population and economy about the size of California and the independence of a sovereign nation, any small sign of improvement (like the recent uptick in manufacturing data in the UK) can quickly pull money back to the Pound who, just 30 years ago, were the second strongest currency in the world and, for 500 years before that, was the undisputed global leader. The UK, as it was 500 years ago, is still ruled by its powerful banking sector and again the fishbowl-like nature of the island nation tends to magnify small improvements we've seen in the UK banks, which causes Japanese housewives (who are very into FOREX trading) to push more money into British currency.
Today it may become apparent that the Japanese housewives have become a little irrational in their Pound exuberance as nationalized British Bank, Northern Rock, showed a 31% increase in first-half losses to $1.25Bn as bad loan provisions jumped to over $1Bn from under $300M last year. Even worse for the bank – deposits fell 17% despite the bank's 100% government guarantee while mortgage delinquencies rose 10%. This is a pretty clear indication that Britain is not quite out of the woods yet and we'll see today whether the Pound is rejected at the haughty $1.70 level or if they are really back on their way to $2, a level they sat at as the dollar dove in 2007-8, which sparked the global commodity rally that ultimately doomed the global economy. So let's hope the Pound calms down or we may all be in big trouble!
On the continent, UBS also reported a wider net loss for Q2 and is down 5.6% this morning but BNP bucked the bad banking trend with a 6.6% increase – although their $2.3Bn in earnings were due entirely to a $1.7Bn goodwill benefit from the May acquisition of Fortis as well the additional Fortis revenues. The Fortis acquisition neatly covered up a $3.38Bn increase in loan loss provisions – triple last year's amount and a strong indication that all is not so well in the EU economy. Nonetheless, BNP's Tier 1 capital ratio rose to 9.3% from 8.8% and any improvement there is a hopeful sign in the end. Not so hopeful this morning was BMW's conspicuous lack of outlook as they reported earnings that were off 76% as demand for luxury cars fell to new lows. "Despite some tentative positive signals, a lasting and wide-ranging recovery is not yet in sight," BMW Chief Executive Norbert Reithofer said in a statement. Putting BMW's lack of money where his mouth is, the company is taking the drastic step of pulling out of the prestigious Formula 1 motor series at the end of 2009 – how's that for a negative outlook?
Europe is trading down about a point ahead of the US open (8:45) but there's nothing wrong with a little pullback after such a massive run. I said to members yesterday, as we held our slightly bearish stance into the close: "We have June Personal Income and Spending which will both likely be misses, that could be a downer. We have Pending Home Sales for June but those are subject to major shenanigans as builders will consider a used piece of gum to be a firm deposit in order to make Q2 numbers so that’s going to be meaningless." So we expected SOME pullback this morning, we just need to see how far it takes us…
Asia was relatively flat this morning as commodities led the way up but auto makers pulled back as both Yamaha and Suzuki reported poor earnings. “There are early indications that the economy is bottoming out,” said Ivan Tham, Singapore-based head of fund management at state-backed Kuwait Finance House, which has about $24 billion in assets. “I’m a bit more cautious, as valuations have run ahead of fundamentals following the recent rally.” Yamaha had the steepest drop today in the MSCI World, slumping 9.9 percent to 1,096 yen after forecasting a first-half net loss that’s four times wider than its previous projection. Suzuki sank 5 percent to 2,300 yen after saying first- quarter net income dropped 92 percent. Transportation companies had the steepest decline of any industry group in the Topix.
As we expected, US Personal Income numbers are terrible, down 1.3% (the biggest drop in 4 years) and on a pace for a 15% annualized decrease but spending is up 0.4% because the PCE is up 0.5% for June so it's pay up or make due with less for consumers (that's 6% inflation folks!). 75 economists polled by Bloomberg had expected a 1% decline in income so the pros only missed it by 40% – a good day for them! Wages and salaries decreased 0.4 percent in June, the ninth drop in 10 months. The drop in incomes caused the savings rate to fall to 4.6 percent from a 14-year high of 6.2 percent in May so so much for that story that Americans were starting to save more…
Consumer spending fell last quarter at a 1.2 percent pace, and the gain in the first quarter was revised to 0.6 percent, smaller than previously estimated, Commerce figures showed last week. Spending has fallen 2 percent since its peak at the end of 2007, the deepest retrenchment by consumers since 1980. We'll see what levels hold today with all this news. As with yesterday's Member Alert, our watch levels are continuing at Dow 9,297, S&P 1,000, Nas 2,017, NYSE 6,438, Rut 562 and SOX 308. As I pointed out to members near yesterday's close, Last time we had a failure, at the 40% line, EVERYONE BUT the NYSE was over the line and the NYSE kissed off 6,232 to the penny before everything collapsed. This time, only the NYSE is above the line.
So, until we get some solid confirmations – let's just be a little careful out there.
