In This Issue:

* Stock sell off sends investors back into havens...
* Trichet pushes the ECB back into the bond market...
* One bright spot – Oil prices are lower...
* Margin calls could hurt the precious metals...

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

Stocks see a near record selloff, and many believe more selling is eminent…

Good day. I escaped the testing room a couple of times yesterday and actually got to sit out on the desk to watch some of the fireworks in the markets. Stocks in the US had their worst day in two years as investors ‘suddenly’ realized the US economy is faltering. Selling in the equity markets wasn’t contained to the US, as Asia and Europe also posted large losses. Most analysts predict another round of selling today after the July employment reports will probably show the US labor market just can’t get going.

But readers don’t get the Pfennig for news of the equity markets, and I can just hear many of you saying “What did this mean for the currencies and metals??”. Investors sought refuge from the selling and flooded back into US$, Swiss francs, and the Japanese yen. Pfennig readers know that both the Swiss National Bank and the Bank of Japan had been intervening in the currency markets earlier this week. But the buying yesterday wiped out much of the progress these central banks had made in weakening their currencies.

The Swiss franc is going to end the week as the only currency appreciating vs. the US$ and continues to be the best performing major currency for 2011. The SNB looked like they were going to be successful in their attempts to slow the rise of the franc, but troubles in Europe and a heightened awareness of the problems facing the US economy has caused many investors to take refuge in the solid Swiss currency.

I read where it is estimated the Bank of Japan had spent about 4 trillion yen buying dollars yesterday, but their efforts seem almost futile as the currency markets have erased almost half of the progress made to weaken the yen.

Both the yen and franc saw buyers yesterday, but the majority of the ‘big’ money was coming back into the US$. Yields on US treasuries continued to fall as investors moved back into the dollar. I read where Bank of New York Mellon Corp, which is a major custody firm, is not charging its institutional clients a fee for maintaining high deposits. Money market rates are below zero, but investors obviously feel they just don’t have anywhere to turn. US debt continues to be the choice for large investors who are looking to park money.

I had several readers point out that one of the largest buyers of US debt is the US government. Yes, the circle of debt is alive and well in Washington, with debt created, auctioned, and then purchased, starting the cycle all over again. This is what has been called Quantitative Easing, and many believe another round is on its way here in the US.

The Economist magazine, which most of you probably realize is one of my favorite sources of information, ran a story which suggests the American economy is slipping back into recession. The odds of a double dip, according to the article, are now as high as 50%. No real news to Pfennig readers, and the article goes on to validate another thought Chuck has been sharing for a while now.

The piece in this weeks Economist concludes with this paragraph: “Barack Obama or one of his Republican challengers may yet discover the courage to tell the truth about the American economy in next year’s presidential election. But given the politicians’ current uselessness, the only institution with the power to avert danger is the Federal Reserve. With interest rates so low, that means more quantitative easing. Printing more money is justifiable in the circumstances, but still a tool offering diminishing returns. Fiscal help would have been much better.”

With a stagnating economy, and interest rates near zero, QE-III is all but certain. The weekly jobs numbers showed initial claims remained above 400k for another week, and last weeks 398k was revised back up to 401k. The trend is not good, and the market is anxiously awaiting today’s monthly numbers which are expected to show 85k new jobs were created last month. Even if the report comes in as expected, the unemployment rate will remain above 9%, and is dangerously close to moving back into double digits.

And things aren’t looking too much better in Europe where the bond markets are starting to indicate another round of ‘debt crisis’ is on the way. Yields on both Italian and Spanish government bonds have been soaring, and the falling prices were enough to make ECB President Trichet to push Europe’s central bank back into the bond markets.

Technical indications show the euro may extend its decline to a three week low of $1.39 in the near term. According to Bank of Tokyo-Mitsubishi, the euro completed a ‘death cross pattern’ yesterday and is poised for further weakening in the next few days. The pattern was formed when the five day moving average dropped below its 20 day one, a signal that further declines are likely.

A report released today showed industrial production in Germany unexpectedly decreased in June, led by declining construction output and a drop in investment goods. The report showed production dropped 1.1% from May, but output is still positive for the year, rising 6.7 percent.

In a rare piece of good news this week, S&P kept Ireland’s rating at investment grade and said the outlook is stable. “We believe that Ireland’s creditworthiness is sustained by a strong political consensus in favor of fiscal consolidation,” Standard & Poor’s said.

Investor worries over the global economy, and a selloff in global stocks has forced investors out of the higher yielding emerging market currencies. The Aussie dollar, New Zealand dollar, Swedish Krona, and the South African Rand are the worst performers vs. the US$ on the week. The Aussie and kiwi are both down over 4.5%, and the Swedish and South African currencies are each down approximately 3 percent. Brazil’s attempt to weaken their currency through the institution of new taxes on investments doesn’t seem to be having much of an impact, as the Brazilian real is down just 2% vs. the US$ on the week.

The precious metals have been holding onto their values, and both Gold and Silver are up slightly today. You would expect the precious metals would be rallying big time with all of the questions regarding the direction of the global economy. Both gold and silver are excellent ‘uncertainty’ hedges, and have the distinct advantage of intrinsic value which the fiat currencies just can’t match. However, their ability to maintain value during times of crisis also has a downside. Stock investors will certainly be facing large margin calls on leveraged equity positions, and will be looking for any asset which is liquid and has maintained value in order to meet these calls.

This is why sometimes the metals face large selling pressures after dramatic moves in the equity markets. While they have been holding their value through the volatile markets this week, we could see some selling forced by margin calls over the next few trading days. Another reason our Timeless Metals MarketSafe CD is an excellent way to invest in the metals markets. The longer term of the cd and guarantee of your principal helps alleviate some of the worry which can come from investing directly into the commodity markets.

To recap. Stocks faced one of their worst weeks ever, and more selling is predicted. The safe havens of the Swiss franc and Japanese yen were popular, along with a large flood of US$ buying. US treasuries continued to be purchased, and the largest buyer continues to be our own government. The Economist magazine suggests we will soon see QE-III, and the ECB returned to the bond market. The high yielders were sold with the Aussie and kiwi dropping over 4.5% on the week. Precious metals have been holding on to their gains, but margin calls may force some sales.

Currencies today 8/05/11 American Style: A$ $1.0454, kiwi .8356, C$ $1.0181, euro 1.4166, sterling 1.6294, Swiss $1.3049. European Style: rand 6.9348, krone 5.4328, SEK 6.4205, forint 191.11, zloty 2.8312, koruna 17.039, RUB 27.9413, yen 79.76, sing 1.2139, HKD 7.7999, INR 44.5525, China 6.438, pesos 11.8907, BRL 1.5603, dollar index 74.76, Oil $91.05, 10-year 2.59%, Silver $41.73, and Gold $1,667.05

That's it for today. My extended family started arriving last night and we spent a very pleasant evening over at my mom’s getting to know second cousins and catching up with relatives I haven’t seen in a few years. They are all heading over to my house this evening for a Barbeque and some indoor games. I was reminded by a friend yesterday that I had forgotten her birthday. Ann H. worked with me back at Mark Twain Bank and followed me over here to EverBank (I sometimes feel she was stalking me). Unfortunately she decided to jump ship earlier this year and took a high-flutin job with another bank here in town. We miss Ann’s sense of humor, and especially the cakes and breakfast casseroles she used to bring in to celebrate birthdays. Happy Birthday Ann!! And that will do it for this week. Thanks for reading the Pfennig and I hope everyone has a Fantastic Friday!!

Chris Gaffney, CFA on behalf of Chuck Butler
Vice President
EverBank World Markets