Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Mr. Market Didn’t Get the Memo: Bad News May Not Be So Good Anymore
Markets managed to maintain their composure this week on the heels of two not-so-perfect US jobs reports and a host of developing troubles overseas. ADP jobs increased 175,000 in January compared to 189,000 expected, and non-farm payrolls (released Friday) added 113,000 vs. 189,000 expected. With some questionable finagling, the unemployment rate managed to improve 0.1% to 6.6%. Likewise, the participation rate increased by 0.2% to 63.0%. ISM manufacturing data was lower by 5.2 to 51.3 in January on a sizeable drop in new orders and a small rise in inventories. And retail sales dropped 9.6% over the same period on a year-over-year basis.
Overseas, cash rates in China were seen rising again, along with some interbank lending rates in Europe, reflecting a sluggish retail and manufacturing environment across both regions. Greece, in an effort to make borrowing affordable, had to extend its maturities by 20 to 50 years in duration. Russia and Venezuela had to postpone financing auctions altogether, while Puerto Rico debt was downgraded by both S&P and Moody’s to junk status (historically a AA). Japan, now struggling with runaway inflation for the first time in decades, has watched real incomes match a 16-year low set in 2009, jeopardizing consumer spending growth and the credibility of Abe’s easy money policies.
However, judging by the sizeable rally witnessed in US and overseas stocks by week’s end, stocks seem to be both assuming and demanding further QE (though Fed governors Plosser and Lockhart vowed this week that tapering will continue). ECB chairman Mario Draghi added fuel to the inflationary fire by pledging to “take further decisive action if needed,” which prompted a legal debate concerning the prospects for ECB bond buying now circulating German high courts. German officials may acquiesce in favor of the idea, despite the glaring negatives for German businesses and consumers, since they have not shown any conviction on the matter thus far. Japan’s Abe may be in the same camp, having yet to sour on QE as a means of curing Japan of its economic ills.
In any case, money printing hasn’t done wonders for interest rates since June of last year, and there’s no reason to think rates won’t rise in tandem with further monetary juicing. In that sense, stock speculators may be exhibiting a strong case of collective amnesia; higher rates have not been helpful to the purchasing power of main street, even as banks have loosened lending standards. All of that is to say that US corporate earnings may be working against the higher prices that money printing might otherwise cause in stocks – which increases the likelihood of a massive dislocation down the pike (perhaps as soon as March).
Gold and silver outperformed most markets to the upside to end the week, perhaps in response to increased volatility and uncertainty now unfolding in stock-land. JPM was seen dumping recently acquired stockpiles of gold, reducing its COMEX inventories by 44% in four days to a relatively less influential remainder. However, that selling was offset to a large degree by hedge fund purchases where net-long positions in gold rose 40.0% to just over 60,000 futures contracts in the same period. This is a radical about-face in attitude by hedge funds compared to 2013, and may indicate that a solid base has been established in the precious metals – but we proceed with caution on that assumption.
Best Regards,
David Burgess
VP Investment Management
MWM LLLP
