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

Treasuries Post “Help Wanted” Ad

Markets were a bit soft on the back of some good news emanating from the retail industry. Second quarter results from Best Buy, Urban Outfitters, and TJ Max had traders believing that Fed tapering was just around the corner once again. That notion faded after the Fed minutes, released Wednesday, revealed that the Fed was split on the subject of easing.

Fed officials did manage to agree that tapering should be delayed until year-end instead of September. That news marked the low point for stocks as they proceeded to march higher all the way into the close on Friday. Fueling the rally, new home sales for July reportedly fell by 13.4% – economists expected 487,000, but saw only 394,000. June’s results were also revised down by 42,000 to 455,000. We can only assume that higher mortgage rates are now beginning to take a toll on all things housing. For a while, this should be slightly bullish for stocks (and precious metals) as it defuses ongoing demands for tapering. Away from stocks, bonds finally managed a small bounce; the metals rallied; and the US dollar, though making an admirable attempt, failed to close above its 200-day moving average.

MWM 13, 8-23 Box ScoresEmerging markets India, Indonesia, Turkey, Brazil, Russia, and South Africa intervened (once again) to strengthen their currencies to stave off inflation. As we have mentioned here before, such actions are choking off needed support for our dollar and our bond market. Over the last six months, a vast majority of nations, with the exception of China, have become net sellers of US long-dated assets (mortgages, Treasuries, and stocks). This means the US (the Fed) has now gone begging for buyers to keep our rates low and our consumers spending. And despite the Fed’s efforts to force – or should we say encourage – banks to go “above and beyond” minimum capital requirements, rates have relentlessly moving higher. In sum, the bond market may be broken – able to rally, yes, but not able to set new lows in rates for a very long time to come, we suspect.

The Kansas City Fed-hosted Jackson Hole summit begins tomorrow, and if tapering isn’t mentioned, stocks could enjoy a bit more upside – though the mixed or worsening economic data will likely keep increases modest. All in all, it seems that the precious metals might have the right ingredients for a sizeable move higher. Tapering chatter, along with pleas for a third Greek bailout and the Bank of Japan’s (Kuroda’s) reaffirmed commitment to additional easing if perceived necessary, held the US dollar steady among its peers this week. But with the Fed printing press needed to prevent further softness in the US economy, 80.5 or lower on the dollar index presents itself as a critical area likely to be breached. If that occurs, it would go far toward supporting gold on its way through 1400 to the 1480 level.

Best regards,

David Burgess
VP Investment Management