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

Looking Beyond a Discounted Fed Meeting

As mentioned in previous weekly recaps, holiday sales this season have struggled. Large inventory build-ups combined with diminishing consumer purchasing power have led to sizeable discounts for most goods. Sales over the Thanksgiving holiday alone were estimated to have dropped by about 3.0% compared to last year, a figure that takes into account gains generated from online retailers. It’s a mystery, then, how the BLS can report a 0.7%, or 4.7% year-over-year, increase in retail sales for the same month. Despite such hopeful math, retailers (among others) have already dampened their forecasts for the 4th quarter. At a 10.4-to-1 ratio, Q4 earnings pre-announcements are the most negative on record – by a long shot. The previous record stood at 6.8-to-1.

MWM 13, 12-13 Box ScoresIt appears that the BLS’s new math is likewise embraced in Congress, where revenue growth is always taken as a constant when calculating the budget. The current deal on the table, which has yet to pass the Senate, calls for fixed cuts of $85.0 billion (achieved by cutting federal pensions and raising airline fees) and increases of $63.0 billion (mostly in defense spending) over the next two years, but the variable side of the budget will continue to grow. Overall spending will increase from an estimated $1.012 trillion in 2014 to $1.014 trillion in 2015. To paraphrase: Government spending will decrease as a percentage of future revenue – if that revenue materializes. But since the government is providing a generous portion of revenue to itself these days, the sustainability of these measures depends on massive amounts of borrowing. Even so, discussion of the debt ceiling was omitted from this latest budget debate. Given the loopholes exercised by the Treasury in the recent past, expanding the debt limit in the absence of official approval, that may have been deliberate.

As for the markets, they (stocks in particular) softened a bit this week both here and overseas ahead of the next week’s FOMC meeting and what has become an obsession over tapering – a topic that many expect to be addressed in detail. However, considering that this is Ben’s last stand, so to speak (he has two meetings left – the last on Jan 29th – before handing over the baton to Janet Yellen), we doubt there will be any significantly hawkish dialogue in Ben’s remarks. That fact combined with the markets’ already having modestly discounted the tapering issue may render these next few meetings virtually irrelevant. Instead, in the near term, the markets are more likely dance to the beat of the econ data, corporate earnings prospects, and/or the approaching tax-selling season. As for the metals, our sentiments have not changed since last week’s recap.

Best regards,

David Burgess
VP Investment Management