Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
1. QE Will Have To Wait: Global markets were hit by an overwhelming amount of noise and/or data this week. Making heads or tails of it all may prove to be a futile effort, as there were several contributing factors to the volatility. That said, if we were to identify the largest elephant in the room, it would probably be the postponement (or perceived termination) of QE by both the ECB and the Fed. In Tuesday’s FOMC meeting, Bernanke withheld QE plans, saying the US economy was running at a moderate pace with inflation in check. Then, during Wednesday’s trade, Jens Weidmann of the Bundesbank went on record claiming German lawmakers will not endorse ECB powers to monetize. After considerable damage to the markets, various powers that be were engaged in moderating these comments or promising more fiscal solutions, which helped to buoy markets by week’s end (See the box scores).
As we have been saying, Bernanke still has some wind at his back here in the US due to the flight-to-safety rally in Treasuries, making QE somewhat irrelevant for now. But US data continues to slide, indicating that the boost from interest rates is still fading. This was best illustrated by US Advanced Retail Sales for November, which were dismal. Sales grew only 0.2%, vs. expectations of 0.6%, indicating this holiday shopping season was a one-time event brought on by heavy discounting during “Black Friday.” Jobless claims improved, falling beneath the 400,000 threshold. How much of this is due to temporary hiring will be revealed in the data following the holidays.
November Industrial Production growth was negative (-0.2%) for the month of November, and the Philadelphia Fed Index for December popped to 10.3 from last month’s 3.6, primarily due to large swings to the upside in prices paid and/or received. PPI and CPI figures also contradict the belief that inflation is tame. PPI rose 0.3% MoM and 5.7% YoY, while the CPI was flat MoM and rose 3.4% YoY in November. Even though CPI figures were flat month on month, ex food and energy, prices still rose more than expected. The fall in economic activity combined with rather stubborn inflation still presents a conundrum for the Fed down the pike.
Overseas, efforts made to extol the success of the EFSF bond auction, and the mild improvements in Italian and Spanish bond markets, trumped the shallow prospects for QE. News that Russia will offer $20 billion to help shore up the euro, in addition to a pledge made by the EU summit to reach an accord by Dec 15th, breathed some life back into the markets on Friday, but this served only to stem the losses – as promises are beginning to ring hollow.
2. A Word on the Metals and the Markets: The precious metals were hammered during the week, with gold and silver trading off 7.00% and 7.96% respectively. Several reasons have been offered up as to why they endured a greater pounding than stocks. Central bank re-hypothecation, or leasing, computer driven “momentum” trading, and gold’s seemingly perilous correlation with stocks (just to name a few) have all been offered up once again as reasons for the sharp selloff in the metals.
We have to admit that, in some way, shape, or form, there may be some validity to these claims (though they are short on supporting facts). However, the 800-pound gorillas continue to be Treasuries and the dollar. When stocks have fallen, Treasuries and the dollar have garnered the safe haven bid. Gold’s correlation with the dollar has always been sharply negative, so as the dollar rises, gold falls.
When will the metals turn for the better? We cannot be certain, as there has been considerable technical and psychological damage done to these markets. However, fundamentally, we have two factors working in the metals’ favor. First, the metals continue to be accumulated overseas on the heels of the spreading debt crisis. Metals prices in overnight trading have gone either sideways or up every single day this week (ETF ounces under management remain steady).
Second, the Fed should respond to the now weakening US economy (and or stock market) with more talk of QE. Both factors should provide a reasonable backstop to the metals in coming weeks and months.
That said, the markets can still do anything they desire in the short run. The widely held notion that gold will revert to the 1450 level, though unlikely in our view, is still not out of the question. Beyond this series of events, we would expect the metals to respond more favorably, as they have overseas, when the debt crisis begins to affect US markets in the not-so-distant future.
VP Investment Management