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

Too Big To Keep Propped Up?

A chorus of reassurances emanated from central bank officials in response to “low-inflation concerns” this week. On Monday, while at a conference in Chicago, Janet Yellen proffered that easy money policy “is still needed and will be for some time.” On Wednesday, the ECB’s decision to stand pat on its target rate was largely ignored when Mario Draghi told reporters he and others were open to adding bond purchases (or QE) to the ECB’s set of tools (to avoid a debt collapse). Incidentally, European banks hold $1.4 trillion in bad loans, up 96% from 2008. And the People’s Bank of China decided to implement some relatively small reforms, including spending on railways, upgrades to low-income housing, and tax-breaks for struggling small businesses.

MWM 14, 4-4 Box ScoresThose developments had world stock markets raging higher during the week. But the momentum didn’t hold into Friday’s close, when US markets took a fairly large hit following release of the much-anticipated US jobs report. The report was in line with expectations (192,000 vs. 200,000 expected), so stocks’ decision to crater Friday may have more to do with what’s happening behind the scenes on Wall Street – or the possibility that Central Bank jawboning has reached a discounted end, becoming as cheap as the paper they’ve printed.

Whatever the case, stocks certainly don’t need much of an excuse to fall, just as they haven’t needed much of an excuse to rise – at least not to the levels we see today. It may be a simple matter of when the leveraged speculators opt to sound retreat that determines when the rout begins. Along those lines, the high-flying and widely held stocks we mentioned last week (e.g., Google) were shellacked once again, even as the S&P 500 marched on to new highs. And hedge funds were seen allocating larger amounts to the volatility index (VIX) for the first time in three years, and cash – which is at 20-month highs. For those who don’t know, the VIX acts as an insurance policy, like short positions. It tends to spike times of crisis.

The precious metals managed a small gain for the week. Gold held at the technically significant level of $1,285, and then rallied above its 200-day moving average of $1,297 to finish the week. What sparked the move for the metals isn’t completely certain. It could have been the 225,000 low-quality part-time jobs factored into the March non-farm payrolls, or the sudden turn in stocks Friday. Nevertheless, it was encouraging market action for those seeking refuge in the metals.

Analyst estimates for US first-quarter earnings have been lowered to -0.4% from +4.4%, year over year, with the entire reduction being ascribed to weather. Seen in that light, gains in March so far have really been bounces out of a weather-beaten trough, and we expect increased stock market sensitivity as April and May economic data variously feeds the storyline for either bulls or bears. News on both earnings and the economy next week will be fairly light (Alcoa kicks off the earnings season on Tuesday after markets close). After that, it could get interesting.

Best Regards,

David Burgess
VP Investment Management