Mish's Global Economic Trend Analysis

Mexican Peso Another Casualty of Falling Oil Prices; Mexico Announces Intervention to Halt Decline; Bazooka Theory Revisited
Helping "Qualified" Buyers: Fannie, Freddie Detail 3%-Down Payment Mortgage Program
Off the Menu: McDonald's US Sales Unexpectedly Decline 4.6%
"You Missed Your Chance"

Mexican Peso Another Casualty of Falling Oil Prices; Mexico Announces Intervention to Halt Decline; Bazooka Theory Revisited

Posted: 08 Dec 2014 04:55 PM PST

Currencies of commodity exporter and oil producing countries have been under continual attack. The Mexican peso is the latest to feel the heat.

Mexican Peso vs. US Dollar

Peso at Two-Year Low

The Mexican Peso declined from 9.85-Per-US$ to 15.59-Per-US$ during the great financial crisis (a loss of about 37%) as oil prices plunged. Since then, the peso recovered much of that loss.

Recently, and also in conjunction with declining oil prices, the Mexican Peso declined from 12.02-Per-US$ to 14.39-Per-US$, a decline of roughly 16%.

In response, Mexico Announced Currency Intervention as Peso Weakens to Two-Year Low.

Mexico's central bank revived an intervention program designed to curb foreign-exchange volatility after the peso fell to a two-year low.

Policy makers will auction $200 million on days when the peso weakens at least 1.5 percent from the previous close, the central bank said today in a statement. A similar measure to support the local currency was put in place in November 2011 and was used just three times before ending in April last year.

The peso, which pared today's losses after the announcement, is still down 10 percent over the past six months on concern that a drop in oil prices will damp investment in the country's energy industry. The new program to support the peso surprised investors including Juan Carlos Alderete, a currency strategist at Grupo Financiero Banorte SAB in Mexico City, after Finance Minister Luis Videgaray said last week that he didn't see a need for intervention.

"I don't think it will be necessary to actually use the measure," Alderete said in a telephone interview. "It's more of a preventative one based on high market volatility."

Bazooka Theory Revisited

Apparently Alderete is a believer in the Paulson's Bazooka Theory:

"If you have a bazooka in your pocket and people know it, you probably won't have to use it." Paulson said at a July 15 Senate Banking Committee hearing."

We have seen that theory crumble to dust on numerous occasions in Greece, on Paulson's idea of forcing banks to lend, on Russian currency interventions, etc.

It's only when central banks come out blazing does the market actually take notice. Moreover, results are not guaranteed perpetually even though the Swiss intervention on the Euro has held so far.

Switzerland succeeded at suppressing the Franc vs. the Euro (assuming you really believe that constitutes success) but only because the Swiss National Bank was willing to take on all comers regardless of size. That's not a luxury Mexico has.

Finally, should the Euro collapse, Switzerland will be stuck with a massive pile of useless euro reserves at huge loss. Ironically, that possibility arguably makes the Swiss Franc one of the most overvalued currencies around.

I patiently sit holding gold, knowing full well there is going to be a massive global currency crisis at some not-so distant point. I just cannot say when, or even the country that triggers the mess. I can say the list of potential candidates where such a crisis may start grows every year.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Helping "Qualified" Buyers: Fannie, Freddie Detail 3%-Down Payment Mortgage Program

Posted: 08 Dec 2014 12:43 PM PST

Now that home prices have recovered and homes are not the bargain they were four years ago, it is fitting the parasites once again want to make homes "affordable" to the masses with low-down payment options.

Please consider Fannie Mae, Freddie Mac detail plans for 3% down-payment mortgages.

Housing finance giants Fannie Mae and Freddie Mac on Monday detailed plans to once again back mortgages with down payments as low as 3%, saying the move to make home ownership more accessible contains safeguards to protect against abuses that led to the subprime housing market crash.

"Our goal is to help additional qualified borrowers gain access to mortgages," said Andrew Bon Salle, executive vice president for single family underwriting, pricing and capital markets at Fannie Mae.

Officials said the program was designed to help credit-worthy borrowers, particularly those with low or moderate incomes, who can demonstrate the ability to repay a mortgage but lack the money needed for at least a 5% down payment.

Freddie Mac will limit its program, called Home Possible Advantage, to mortgages for first-time homebuyers. Borrowers must participate in a homebuyer education and counseling program before receiving the loan and will have to pay for private mortgage insurance.

Fannie Mae's program will be available to anyone who has not owned a primary residence for three years. Private mortgage insurance will be required but counseling and education will not.

Helping "Qualified" Buyers

Notice the statements about helping "qualified borrowers".

If you lower the qualifications to zero, everyone qualifies by definition. But is that a "help" or a debt-trap in waiting?

My Take

If you cannot afford to put 10% down on a home, then you can't afford the home.

I side with House Financial Services Committee Chairman Jeb Hensarling (R-Texas) who stated: "Such loans are inherently risky because the borrower has almost no financial cushion against a personal or economic downturn, vastly increasing the likelihood they will walk away from the loan once it gets significantly underwater."

Low down payment loans are "an invitation by government for industry to return to slipshod and dangerous practices that caused the mortgage meltdown in the first place and wrecked our economy."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Off the Menu: McDonald's US Sales Unexpectedly Decline 4.6%

Posted: 08 Dec 2014 11:47 AM PST

Global fast food sales are down 2.2%, their sixth consecutive monthly fall. McDonald's leads the way with a 4.6% sales decline in November, more than double the expected decline.

In its report Off the Menu, the BBC notes that like-for-like sales at McDonald's have not increased since October 2013, as smaller rivals eroded its market share.

Meanwhile, Mexican food chain Chipotle reported a 20% rise in like-for-like sales for the three months to September 30 - the third quarter of double-digit increases.

More to it Than Competition

Some blame it on the strong US dollar, but that only applies to foreign sales. People heading elsewhere? Yes, but it's easy to grow faster when you are much smaller. I blame it primarily on the cost (value if you prefer that term).

McDonald's Prices

A check of Fast Food Menu Prices shows that a Bacon Cheese Quarter Pounder Meal will set you back $6.60 in Illinois. Add in 10% sales tax for some Cook County locations and the cost per person is $7.26.

If there's two of you, the cost hits nearly $15. Care to supersize that? For a family of four?

Then there's the wait.

Build-Your-Own

It's difficult without an extremely long wait to "have it your way" at McDonald's.

My question: How is it that you can get it whatever way you want at Wendy's and Burger King without a wait, but you cannot at McDonald's?

That's long been a mystery to me. At any rate, the Consumerist just reported McDonald's Bringing Build-Your-Own Burger Option To 2,000 Locations.

Here's the catch:

"Don't expect comparable menu prices for your bespoke burger. At one location visited by USA Today, a customized burger with medium fries and a drink cost $8.29, while the pre-made burger meal only comes in at $5 on the regular menu."

Is that supposed to increase sales or drive everyone away?

"One of the common complaints from McDonald's franchisees is that their corporate bosses have been forcing new and expensive menu options on them. If the company decides to keep rolling out the Create Your Taste option at more eateries, you can expect some push-back from franchisees with smaller stores who don't have the space for the additional ingredients or room for ordering kiosks."

Breakfast

The only time I ever eat at McDonald's is for breakfast, and even then, only when I am out of town. Moreover, at 10:00 AM sharp (10:30 in some locations), McDonald's cuts off the breakfast menu. It's not often I am up and about and finished blogging by then.

Enter the Unions

Unions demand $15 an hour. They claim they cannot live on $7.25. I sympathize, but who's to blame for that?

It's not the stores. Sales are already in decline. Make the minimum wage $15 an hour and what is that burger going to cost?

Besides, most McDonald's stores are franchises, semi-independently run (with big brother Ronald making sure franchisees obey the necessary rules).

I suspect many locations are barely profitable, or profitable only because of cheap family labor.

Unions claim higher minimum wages will not cost jobs. The claim defies common sense. If unions want to blame someone, they ought to picket the Fed for inane inflation policy, not McDonalds.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"You Missed Your Chance"

Posted: 08 Dec 2014 12:39 AM PST

Check out this Bloomberg silliness by writers Andrea Wong and Liz Capo McCormick: You Missed the Chance to Buy the Dollar.

Anyone who was waiting until after today's U.S. employment report to get in cheaply on the dollar rally probably blew that chance.

Trading patterns were showing as recently as three days ago that the five-month rally that has taken the greenback to multiyear highs against many of its counterparts was losing momentum and strategists were saying gains would slow with the absence of any additional catalysts before year-end. Those same measures are now suggesting that the dollar's ascension into 2015 is looking unchallenged.

"People had thought we'll get some pullbacks in the dollar and we'd get some better levels to buy," Niall O'Connor, a technical analyst at JPMorgan Chase & Co. in New York, said by phone. "The price actions today have been impressive. We see a higher risk we can extend" through further levels.

"The technical breakdown we saw this week in the euro effectively says the currency has resumed its downtrend," said MacNeil Curry, Bank of America's head of technical strategy. "We expect further weakness in the euro and dollar gains to persist. Another dollar correction may happen down the road or in 2015, but at this state in the game the trend is still pretty sizable" for dollar appreciation.

"You have the interest rate support, there's a lot of underlying foundation in this move," Brad Bechtel, managing director of Faros Trading in Stamford, Connecticut, said in a phone interview Dec. 3.

Goldman Sachs forecast last month the dollar will rally 7.1 percent to 130 yen in 12 months and 6.5 percent to $1.15 per euro, eventually to parity in 2017. Morgan Stanley estimated the U.S. currency will rise to 127 yen and $1.12 per euro by the end of next year.

Too Late!

That article reminds me of the nonsensical announcement "It's Too Late".

Rah Rah Sis Boom Bah

At first glance, the headline is not all that ridiculous. After all, many bears have been pronouncing the death of the dollar for what now seems like forever. I took the other side of the coin.

When hyperinflationists predicted the dollar would go to zero, I took the other side of the debate and said buy the dollar.

Hyperinflation is still preposterous of course, but the time to buy the dollar was long ago, not on some imperceptible dip a few days before the payroll report.

Chance to Sell

Goldman Sachs sees a "7.1% rally". Bank of America sees "pretty sizable dollar appreciation", etc., etc.

Such one-sided bullishness is the overwhelming consensus. I believe the reversal will be spectacular not only in the dollar, but in dollar-related equities.

So, if indeed you "missed your chance to buy", and you did (not a few days ago but months ago), what about the opportunity to sell (short)?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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