Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
1. The Year of the Bear? We ended the week with our jaws dropping in shock. We were surprised by the bewilderment on the Street over the jobs number. We were shocked at their shock. For 45 minutes after the jobs report, there was nothing but amazement with the apparent inconsistency between “the recovery” and the disappointing numbers that took U3 to 9.2%. Obama is also upset (is that because it puts the 2012 election out of reach by 2.1%? No standing president has been reelected with unemployment above 7.2%).
Frankly, there is no news here. Without a catalyst for private sector economic growth, and without clarifying the changes to the tax code for 2013, businesses are hesitant to add to roles. State and Federal government employees will see their ranks trimmed for the first time in a decade as the GAO does a sweep for redundant positions and departments, and states choke on past-due bills, finally choosing to pass out a few pink slips. Not to worry, says the Oracle of Omaha, the jobs number is headed to 6%. True enough, we say, but when? 2020?
Last week, we suggested a minor flu may be passing through Asia, with China the carrier of this financial malady. It seems we are not alone in this analysis. Bank of America is feverishly searching for ways to unload a $21 billion ownership stake in the CCB (China Construction Bank – we’d not only sell, but probably sell short until the position was unwound). They have already sold off $7 billion worth, and now want completely out. It seems that the urgency in this matter is either because the firm anticipates a greater need for liquidity at home (what are they reading in the US economic crystal ball?) or doubts are reasonably being raised over the CCB balance sheet.
The story became riveting (okay, we are easily entertained) when the Singaporean sovereign wealth fund Temasek Holdings began a discounted liquidation of its shares in the CCB – and Bank of China, as well – taking as much as 6% below current market values to unload just over $3.2 billion worth of shares in these famous/infamous institutions.
Like the failure of the Bear Stearns hedge funds (400 million) just a few summers ago, there are indications in the financial markets of significant shocks ahead. We are now seeing exciting signs (if you like wrestling grizzly bears) portending what could be late 2011/early 2012 liquidity and solvency shocks.
As a side note, there was brisk IPO issuance in the first half of the year. Global markets did have a newish top contender, with China dominating the IPO market at roughly 38% of the total. Best growth story on the planet? Or a flameout recorded in real time? Time will tell, and as many of you know, my father and I have a steak dinner riding on this one.
A final note on future-tense liquidity and solvency shocks: We found it curious that a variety of central banks have been draining their gold deposits from the BIS (Bank of International Settlements) in Basel Switzerland. This year, 635 tons of gold have been withdrawn from the bank and returned home – the largest withdrawal in a decade. We believe this may signal concerns over counterparty risk and the need to bolster domestic financial stability.
What purpose is served in limiting available collateral at the BIS, the central bankers’ central bank? Is this a concern over the health and stability of other sovereign nations and further contagion in the debt markets? These withdrawals run contrary to previous actions and commitments to global financial stability, and seem to prioritize “at home” interests. Control of assets – and hard assets, no less – is now a priority among banks, as well as individuals. We think we know why.
2. Liquidity Trap Revisited. What a difference a few days can make in a world that is awash in liquidity, or the promise thereof. Since Greek solvency issues were perceived to have been alleviated last week, market participants extrapolated this to mean that all central banks will most likely print to stave off financial disaster – when pushed. Markets in turn performed an about-face, changing almost overnight from an oversold to overbought state.
Anticipation of decent second quarter earnings (which we’ll begin to hear about on Monday, with Alcoa) and light-volume trading preceding the holiday were ancillary in the bravado displayed by stocks over the past two weeks – in our opinion. However, looking at where we are in the grand scheme of things, we are right back to where we were in late April this year: Commodity prices again pose a formidable threat to economic progress – let alone sovereign solvency issues.
In short, commodity prices began to outperform during the week, to the upside this time. The CCI index advanced 2.06%, while the Dow was flat, the S&P 500 down 0.23% and the Nasdaq (the speculative darling) up 1.12%. Bonds gained (and stocks broke their momentum), mostly due to the weak jobs report on Friday, with the 30-year Treasury shedding 11 basis points to 4.286. The Dollar Index was especially volatile, but essentially remained in a trading range around 75, while the metals enjoyed a rebound after their recent pummeling, with gold up 3.63% and silver up 7.4%.
In an abbreviated week, U.S. economic data was sparse, but as usual reflected the challenges we face on the road to normalcy. Factory orders, mortgage applications, challenger job cuts, the ISM non-manufacturing composite, initial jobless claims, continuing claims, and consumer confidence levels all disappointed. The ADP employment report was really the only talking point, increasing a much better than expected 157K jobs in June. The actual U.S. employment report, covered by Dave McAlvany, revealed the exact opposite on Friday – leading us to believe the ADP report was skewed by temporary jobs.
As we said last week, Q2 earnings season begins on Monday. We will be paying close attention to the effects that inflation and accounting profits (loss reversals at banks) are having on corporate profits. Forward guidance may play a more important role this time around. Keep in mind that corporate insider selling has reached record highs once again in recent weeks, indicating a lack of confidence in the future by those in control.
The Eurozone is becoming forcibly bipolar (along with the U.S.) in policy. Struggling with inflation AND credit issues, the ECB raised its benchmark interest rate by 25 basis points to 1.5% (with future tightening likely), and relaxed access to emergency funds to Portugal, who was downgraded again to junk (Ba2, with Italy next) by Moody’s. Essentially the ECB has decided to charge a higher rate to those in default – if that part makes any sense at all. China also raised its benchmark rate a third time, also by 25 basis points, to 6.56%, but will hold back on future hikes, betting that prices will be controllable as the economy cools. (?)
On a side note, it’s a shame that policy makers around the world want to blame short sellers and the rating agencies for the loss in value now transpiring across various markets. In particular, short sellers are blamed for the collapse in Sino-Forest shares and European officials are holding the rating agencies accountable for the losses in debt issued by the PIIGS – when in truth the blame lies squarely on the shoulders of corporate and or government (mis-) management. This of course won’t stop officials from singling out scapegoats.
It’s becoming increasingly clear, whether they say so or not, that central banks understand that inflation is causing weakness across the board economically, and are raising rates – although too slow, in our opinion, to stave off these threats. Unfortunately, this will also force the hand of a funding crisis across most major bond markets, ushering in the next downturn in stocks and real estate both here and abroad. It certainly is a fragile balancing act in motion.
Too, it begs the question as to what will fill the gap as to the “safe haven” asset of choice when things unfold. In 2008, it was the bond market and cash (U.S. dollar) that filled the void. However, solvency issues at the sovereign level were for the most part non-existent in ’08 versus today – leaving assets (like the metals) that have no liabilities attached to them as the likely “go-to” in the next crisis. Technically, though, the metals are still not “out of the woods,” as they say. Silver decisively above its 100-day moving average of 37.37 (now 36.71) and gold above its all time high of 1577 would lend credence to this hypothesis – especially if these marks are earned in times of overall market weakness.
Have a great weekend!
David Burgess
VP Investment Management
MWM LLLP
David McAlvany
President and CEO
MWM LLLP
