Why Is a Raven Like a Writing Desk? (Recalling Alice in Wonderland.)
As with the famous riddle, one would have difficulty deciphering the markets as of late. Bad news has been ignored, good news has been taken at face value, and possible outcomes to the election – a constant debate – have all been seemingly “spun” to the benefit of the bulls. However, upon the release of the Fed minutes on Tuesday, the aforementioned shenanigans came to a halt. “QE,” according to the text, will not be forthcoming unless the economy “falters.”
We have long surmised that this would be the case, but we wonder why it came as a surprise and why the markets chose to react now instead of back in March when Ben alluded to this line of reasoning in the first place. Nonetheless, stocks and commodities fell while bonds and the dollar managed to grind out small gains. The metals traveled in sympathy with stocks until Thursday’s trade when they rebounded on the news of a failed Spanish bond auction – see the box scores.
US economic data actually looked fair this week, at least on the surface. Regardless, it played second fiddle to the Fed’s reluctance to print. Of note: Domestic Vehicle Sales were up 11.5% year over year, but off from February to March by 5.2%. ADP employment and jobless claims data showed marginally better numbers for March (but is certainly losing the momentum derived from the holidays), while manufacturing and factory order data came in as expected (showing only slight improvements).
On a separate note, everyone should be aware that the discussion to remove the Bush tax cuts is well underway on Capitol Hill. Among the changes: Capital gains may be taxed at 20% rather than 15%. Dividends may be taxed along with income – topping out at 39.6% (the highest proposed individual income tax rate). The good news for MWM investors is that portfolios fall predominantly under the jurisdiction of the capital gains, and not the income tax.
As to the dip in the metals this week, it goes without saying that more than just a little frustration is evident. For the moment, it appears that the metals (miners included) are sold whenever volatility in the headlines materializes. Irrational and unsustainable as that may be, we observe that it remains largely a US phenomenon – where the debt-driven “goldilocks” mentality has whitewashed market expectations. Our friends in Europe are experiencing firsthand the consequences of a longstanding debt binge that, by the way, should soon infect US markets in similar fashion. The metals, we believe, will respond accordingly, rising as they did in response to Spanish insolvency issues in today’s trade. All the metals need is a catalyst.
Have a great weekend, and Happy Easter!
VP Investment Management