Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Fatal Addiction to the Economic Cure:
It was a week filled with not-so-good economic data and the ongoing denial that continues to drive stocks.
During the week, the Empire Manufacturing Index came in a little bit better than expected (15.43 vs. 15.00), but showed a 27% increase in prices paid (up 125% over the last 6 months), and a drop in hiring, with people working longer hours. Advanced Retail Sales decelerated, posting a 0.3% gain vs. 0.5% last month. Factoring out the inflated price for gas, sales rose only 0.2%.
Import prices rose 1.5% vs. the 0.8% expected, and inventories rose a greater-than-expected 0.8%. MBA Mortgage applications dropped again by 9.5%, while Housing Starts and Permits were both better than expected. (As a side note, why the market celebrates such additions to the already saturated real estate industry is beyond me, but it does.)
Producer prices remained steady for the month of January, probably due to stagnant oil prices. Excluding oil and food, prices were up 1.6% vs. expectations of 1.2%, as inflation seeped deeper into various raw materials.
The CPI also came in higher than anticipated at 0.4% (vs. expectations of 0.3%). Jobless claims were on the rise again, although not by much. However, the point is that we are not creating jobs at a rate commensurate with typical expansions. In fact, we remain far from it.
Leading indicators, heralded as a positive by the markets, rose only 0.1% vs 1.0% last month. The growth in the leading indicators has been trending lower since May of 2009, even though Fed money printing has a large influence on this index.
The Philadelphia Fed Index jumped to 35.9 vs. expectations of 21.0, but, once again, the prices-paid component was up 27% for the month – 458% over the past 6 months.
All of this weak consumer and inflationary data didn’t seem to stop stocks from tacking on an additional percentage point this week – though the advance is beginning to slow as some signs of erosion in earnings reports have begun to materialize.
Along those lines, a surprising boost to the markets came from Dell, whose quarterly results showed a 5.3% increase in revenue compared to last year. But under the hood, Dell’s long-term debt increased by 50%, accounts receivable by 11.2%, financing receivables by 34.6%, and stockholders’ equity by 37.6%.
Given all of this, it’s relatively clear that Dell is financing its sales, in the absence of investment (which contracted) in its own operations. Dell has been helping its customers opt for the “lay away plan” (buying on credit). If you recall, this was a tactic used by Lucent Technologies before its troubles began. We believe it’s a tactic being used by many today, as the Fed “put” in the debt markets makes borrowing all the more attractive and relatively risk free.
As a follow up to last week’s commentary regarding the profit squeeze now underway in corporate America, everyone should read the article written by The Wall Street Journal titled “Threat Builds on the Margins,” which posted Monday. Essentially, it states that 25% of the companies reporting in the last quarter experienced pressure in their margin due to escalating prices. We expect this pressure to spread to a greater number of corporations in the coming months.
Turning to the metals, gold and silver awakened this week alongside a continued slide in the bond market. We may be witnessing an inflection point, transitioning from deflation to inflationary concerns.
Silver broke through its high of $31.23, finishing the week at $32.65, and gold rose above its 50-day moving average – which in the past has been indicative of a bullish trend. It is also surprising to see this advance in the metals so soon following what has been a very short consolidation phase. However, if inflation is allowed to feed on itself, it will accelerate exponentially, and the volatility in select commodities will pick up speed as they did back in the ’70s.
The key, which is somewhat evident at this juncture, is that the Fed is committed to (trapped in) its plan for stimulus. The money printing, or “QE,” has become the driver of growth. Without it, the economic expansion, however dysfunctional under the auspices of inflation, would collapse very quickly. This of course would be an unacceptable option, politically speaking. So we may conclude that inflation will be a constant until it forces us to change – a theme the British seem to have embraced.
If I may borrow the words of Richard Russell, we’re now in a situation of “inflate or die.” With that in mind, it may be some time before any true weakness is seen in inflation-protected assets such as the precious metals.
Have a good weekend…
David McAlvany
President and CEO
MWM LLLP
David Burgess
VP Investment Management
MWM LLLP
