From McAlvany Wealth Management, here are some of the key events of the week, along with our comments on them.
1. Market Indigestion.
2. Gold Shines
1. Market Indigestion? – U.S. and Chinese stock markets experienced tremendous volatility, finishing almost flat for the week as markets were bombarded with a host of economic and political issues. To save some time, we’ve listed them below:
a. Sales vs. Earnings – Earnings for Q1 2010 came in 7% above consensus and Revenues came in 1.5% above consensus – emphasizing cost cuts as the primary driver of earnings growth – NOT consumer spending.
b. “Bullish” seasonal factor for stocks is now over (Nov- April). Going back to 1921, roughly 2/3 of those years favored the November through April period for percentage gains, with the April through October periods consistentlyunderperforming or worse.
c. The Fed continues to panic, juicing the MBS market before expiration with another $7.093 billion of net purchases, as of the week ended Wednesday.
d. Weak jobs data – again.
i. Higher than expected jobless claims and continuing claims
ii. IBM said to reduce global workforce to 100,000 from 399,000 by 2017
e. S&P downgrades Greece to junk bond status – to BB+
f. U.K. facing Greek-like issues if they don’t curtail borrowing, says Vince Cable, the Liberal Democrat finance spokesman.
g. Housing prices stagnate according to Case Shiller Indexes.
h. Volumes surge on Tuesday’s stock market collapse. Down volume continues to exceed up volume, a bearish signal for the hopes of a continued rally.
i. Federal Financial Sector overhaul – Senators Kaufman, Casey, Merkley, and the White House propose limiting allU.S. banks’ balance sheet size to 2% of GDP or $280 billion, including off-balance-sheet “assets.” Bank of America, Citigroup, and JPM would need to reduce market exposure by 40% each.
j. Greek Catch 22 – In return for a multibillion-euro loan, Greece must adhere to policy reform that will cripple their economy anyway – EU negotiating for large tax increases and wage freezes in the public sector. Germans balk at aid in public poll.
k. Congress quietly draws the line at 99 weeks on welfare – cutting off nearly 1 million people in the program. This is after extending it three times before. This may be a hint that the U.S. government is reaching its limits on stimulus – and solvency?
l. GDP growth of 3.2% falls on deaf ears as Dow retreats 158.71 in same day.
m. European Union fears Greek debt crisis will spread. 90 billion euros for Greece, 40 billion euros for Portugal and 350 billion euros for Spain.
n. FOMC – worried about labor markets and household spending – which are “limiting the committee’s flexibility to raise rates”
MWM Comment: Buckle up folks…these types of developments and market behavior are indicative of tops. It may still be a while until the true “break” in the markets occurs, as Fed intervention continues to hold some sway.
2. Gold Shines: While markets couldn’t decide what to do with the data this week, Gold edged higher on the confusion and hints of economic weakness – a good sign in our view. Gold edged up nearly 2% on the week, breaking above some near-term technical hurdles. Other commodities, like copper and oil, didn’t fare as well. Oil retreated 1% and Copper 4.1% on the week, suggesting that resource plays may suffer as the economy cools from the deluge of stimulus.
Below, Dave McAlvany provides us with a technical view of gold prospects using the Dow/Gold ratio….
Dow Gold ratio has consolidated between 9:1 and 10:1 for 12 months. Is the consolidation over? We think so. The relationship is likely to shift, favoring gold, by 30-50% before the end of the year. This assumes a 150-250 dollar move in gold from current prices and 1500 to 2000 point drop in the Dow. Our long-term projections of 1:1 may begin to see more activity now as Gold remains strong, and the “bullish” seasonal factor for stocks is now over (Nov- April).
Thanks all, and have a great weekend!
David H. Burgess Jr.
VP Investment Management