Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Stock Bull Wake-up Call?

Aside from the FOMC minutes that downplayed a future interest rate hike, not much happened this week that the stock market speculators viewed as bullish.  In fact, it was quite the opposite.  US regulators were busy imposing tougher standards upon the banking sector.  Banks will be required (yet again) to increase capital requirements (by $68 billion) and reserves by as much as 92 times against derivative portfolios, and abide by tougher leverage standards overall.  First-quarter US corporate earnings also began to roll in, with firms “beating the number” in most instances, though in some cases stock prices were punished anyway for forward guidance that disappointed.  That said, however, stocks have been “leaking” for some time now (led by the NASDAQ Composite that sports a 34.8 P/E), with stretched valuations, escalating global risks, and a Fed tapering program proceeding as planned.  Wall Street seemingly made the executive decision to shave a not-so-inconsiderable amount from indexes to lock-in profits (see scores).   As it appears, the NASDAQ composite will most likely visit the 3936.37 level (the 200-day moving average) before stock bulls have a chance to regroup.

MWM 14, 4-11 Box ScoresThe dollar was also under pressure, for no obvious reason. What can be said about its decline (it’s now testing the $79.0 lows set on the dollar index in October of 2013) is that it’s happening while stocks are falling. That’s uncharacteristic, to say the least, and may suggest that the last $1.32 trillion the Fed has printed since January of last year is, for the first time, adversely affecting the dollar as US growth expectations (or the effectiveness of QE) begin to moderate.  As long as the dollar remains weak, it should provide a decent base for the precious metals, thereby insulating them to a degree from systemic pressures brought on by leveraged unwinds elsewhere.

Next week, earnings season will pick up speed, with a larger number of NASDAQ heavy tech firms reporting.  Revenue growth still seems somewhat elusive, as was the case with Alcoa; Bed, Bath & Beyond; JP Morgan; and Wells Fargo (which all experienced revenue declines year over year), though earnings remained in line with expectations.  It’s still early in the reporting season, but if stocks continue to behave like they did this week, the Fed may be forced to withdraw from its tapering policy. That could help stocks recoup some losses in the short run, but, could be a complete game changer for the precious metals down the road.

Best Regards,

David Burgess
VP Investment Management