* Dollar retreats from 14 yr high.
* SEK has best day in six months.
* Oil moves higher.
* Gold edges up on lower dollar…

And Now, Today’s A Pfennig For Your Thoughts.

Good morning. I’m already running a bit late this morning so we will just get right to Frank’s opening thoughts:

Mound City, MO – Driving into the office Tuesday I looked up at the large lighted sign. It said: “12 Minutes to Downtown via I-64, 8 Minutes to 270 via I-64.” Sometimes these signs say, “Accident at Ladue Road, Left Lane Blocked.” When they do I look for a second at my mobile phone mounted on the dashboard and see that Waze also has this message along with a recommendation for an alternate route. And therein lies the rub. With a little knowledge about the cost of signs in the corporate world I’d have to bet that on a fully allocated basis that highway sign probably cost almost $200k. Alongside billion-dollar highway projects of course this is nothing. It’s also a nice notification. Nice – but as we continue to see a national, state, and most likely county deficit – is it necessary?

In some of my presentations I show a photograph taken somewhere in west Texas. It’s a four-way stop clearly in the middle of nowhere. The vegetation at the intersection clearly does not grow more than knee high – in a good year of rain. At this corner are a combination of 18 slashing stop lights and stop signs. The point is that crony spending continues to dominate our spending patterns. Are these signs really just an extension of the “Broken Window” fallacy from economics? Or does using tax dollars to buy a host of signs, most likely from the city manager’s brother-in-law or next-door neighbor a good way to expand GDP or not? After all if we just left the dollars in the taxpayer’s pocket what good would that do?

A while back in our EverBank Insights I posted an article reviewing a paper that showed that corporate margin expansion – how businesses grow profitability – has been due to two large factors: Capital, and Lobbying / Regulation. Research and Development and innovation are well down the list. As we look at campaign proposals to increase infrastructure and military spending how will these programs spread through the economy? Will it all be on the up-and-up creating a completely new way of doing business from the Federal level? Or will we be covered with the shards of broken glass once again?

Thanks to Frank for getting things rolling on this hump day. As you read in the title, the dollar is a bit softer this morning after reaching a 14 year high yesterday. I guess I should clarify that the dollar index reached a 14 year high, not all currencies are down vs. the dollar but all of the majors were lower yesterday. Since there was not any economic data released in the US, we didn’t have anything of substance driving the US trading session, therefore, the markets were left to their own devices. The circumstantial fallout from data in other countries and continued speculation about the Fed was the wind behind the sails throughout the day. It’s going to be another light data day here in the US as we only have last week’s gauge of mortgage apps and November home sales, which is expected to show a modest slowdown.

Tomorrow is going to be a different story as we will have plenty of information, much of which carries some weight, to pick apart and evaluate. For starters, we have the last revision to 3rd quarter GDP. We aren’t expecting much in the way of surprises, but the consensus is calling for a slightly higher revision at 3.3%. We also have durable goods/capital goods orders, personal income and spending, PCE figures (inflation), the leading index, and the weekly jobs numbers. All in all, the markets will have plenty of ammo tomorrow if they are looking for some justification to move in one direction or the other.

The largest mover in the currency markets overnight has been the Swedish krona which hit a six month high vs. the US$ after their central bank left rates unchanged. The Riksbank left rates just inside negative territory and also voted to extend their bound buying program. It may seem odd that the SEK would rally on the extension of QE which typically is negative for currency prices, but the vote for this easing was much closer than markets expected. Riksbank Governor Stefan Ingves was forced to cast the tie breaking vote in what was a split board – a sign that any future easing is in doubt. So currency investors, who are looking ahead figure that this was the last easing by the Riksbank, and the Swedish currency booked a nice gain of over 1% vs. the US$.

Many other currencies are also booking slight gains vs. the $ with the euro up .4% and Norwegian krone up over .6%. In fact, as I take a look at the screens this morning I don’t see a single currency which is currently lower vs. the US$ so it is a clean sweep. But this pause in the dollar’s rally may prove temporary as we could see the greenback resume its climb if/when we hit 20k on the dow. Yes, the Dow Jones Equity average is only 25 pts away from the 20,000 – a level it has never breached. So investor euphoria over breaking through this big psychological level could encourage foreign investors back into the US markets and push the US$ higher.

A surge in oil prices gave a boost to some of the commodity currencies overnight. Oil prices rose on a surprise fall in US crude inventories, with Brent crude moving back above $55 per barrel. This move by oil is helping the Brazilian real, Russian Rouble, Norwegian krone all book gains this morning.

Commodities are all pushing higher this morning, and the weaker dollar is helping precious metals continue the quiet rally they began last Thursday. The price of gold has fallen more than 11 percent since Donald Trump was elected president as investors increased their confidence in the global economic recovery. The stronger dollar and expectations of higher interest rates have combined to create pretty strong headwinds for precious metals since the election. But the past week we have seen what could prove to be the beginning of a recovery rally for gold as prices have begun to increase ever so slightly.

For What It’s Worth: Chuck forwarded me the following article which appeared on Bloomberg: https://www.bloomberg.com/news/articles/2016-12-15/japan-overtakes-china-as-largest-holder-of-u-s-treasuries . He also added some thoughts of his own which are as follows:

Japan just passed China as the largest holder of U.S. Treasuries. this article plays nicely with the Jan R&F that will be out in a couple of weeks, where I show how China, Saudi Arabia, and Russia have gone to selling Treasuries, and not showing up with bags full of cash at auctions. I make the point in the R&F that this comes at a very bad time for the U.S., which needs to sell Treasuries to finance the deficit spending/ debt. Now only did the U.S. deficit spend more than they said they would in 2016, but given the campaign promises of the president elect, the U.S. is going to be selling even more Treasuries in the near future. Who’s going to pick up that extra amount of Treasuries? Ahhhh, grasshopper. Make sure you tune in to the Review & Focus in the first week of January by going to: www.everbank.com/reviewfocus

Currencies today 12/21/16. American Style: A$ .7266, kiwi .6922, C$ .7479, euro 1.0428, sterling 1.2375, Swiss $.9761 European Style: rand 13.96, krone 8.6575, SEK 9.2543, forint 297.61, zloty 4.2320, koruna 25.88, RUB 61.044 yen 117.23, sing 1.4421, HKD 7.7604, INR 67.829, China 6.9489, pesos 20.451, BRL 3.3299, Dollar Index 102.93, Oil $53.43, 10-year 2.55%, Silver $16.06, Platinum $907.00 Palladium $656.50, and Gold $1,134.86.

That’s it for today. I was remiss in checking the birthday calendar this week so I’ll have to wish Jennifer McLean (17th), Joann Perry (18th) and Ty Keough (19th) a very happy birthday! And what got me thinking about birthdays is the fact that today is my little sister Tracy’s birthday. Tracy is located down in Huntsville AL with her husband and two boys, so I don’t get to see her as often as I would like. I have a close friend coming in town from Chicago today and we will be headed downtown to watch the Illini take on Mizzou in the braggin rights basketball game. These used to be very tough tickets to get, but both programs are going through a ‘rebuilding’ phase so I’m not sure how much of a game we are in for. I’m sure I’ll still have a great time and it will be nice to spend some time with my old buddy Scott. I hope all of you have a Wonderful Wednesday, and thanks for reading the Pfennig.

Chris Gaffney, CFA
President
EverBank World Markets
1-800-926-4922
https://www.everbank.com