Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
1. US Markets – Partying Like It’s 1999: Productive assets in the US continue to defy logic. In what appears to be the 1990s all over again, commodities are down, interest rates are at record lows, stocks remain at healthy levels, and the dollar is in rally mode – despite the ongoing global financial crisis. So it seems that while uncertainty reigns in Europe and parts of Asia, US markets have stood as a prime beneficiary to capital seeking safe haven, lowering our interest rates and boosting our economy. Although we see signs that flight capital into the dollar (and/or Treasuries) may be advancing at a declining rate (more on this below), markets and the mass media are still proud of what appears to be US superiority relative to the fiscally immature around the world.
With the exception of commodities, most markets (globally) were rather stable this week, with very few standouts to mention (please see the box scores at right). The underlying tone still remains negative, with currencies and bond markets of various sorts receiving the lion’s share of buy-side attention (both US and German). Commodities overall (measured by the CCI) were flat for the week, but finished the year with a 9.164% loss, in what was a mixed bag of winners and losers. Crude oil in particular remained strong, finishing up 10.96% for the year mostly on Iranian threats in the Strait of Hormuz and bogus prospects for U.S. growth.
Along those lines, US economic data continued to defy the recovery “spin” presented by the mainstream media this week. Several manufacturers’ indexes released confirmed the chances of an economic contraction materializing early next year. The Richmond Fed, Dallas Fed, and Kansas and Chicago manufacturing data all disappointed. Price paid and received were largely responsible for any strength in these indicators, evidence that inflation remains a real threat to economic progress.
Case-Shiller home price data also surprised to the downside, indicating that home values are still falling, despite repetitive bottom calling in this market. Pending home sales data for November showed some decent growth (up 7.3% MoM), although decelerating from prior months.
Adding to the potential disaster ahead, an unusual number of U.S. Corporations are revising lower their 4th quarter earnings estimates. Be prepared for a long list of earnings “misses” in January. Sears is among the many whose plans include closing stores – nearly 120 in Sears’ case – after failing in the last year to raise revenues. Buyers for the properties (max $170M worth) may be scarce, since very few are growing and able within the retail space today.
In Europe, following a record expansion in the ECB’s balance sheet (now €2.73 trillion, or $3.55 trillion), markets across the continent remained tentative. By our calculations, the ECB has added somewhere near €850 billion to its coffers, mostly in the form of loans made through the EFSF. Reports still show that lending efforts are flawed, with much of the loan facility remaining on deposit with the ECB.
The battle between austerity and debt restructuring was best illustrated in Italian markets this week. Italian 10-year government debt pushed above the 7.00% threshold even after relatively successful bond auctions this week, trumped by one of the worst Christmas shopping seasons in Italy’s history. As a result Italy is already asking for a bigger bailout.
Central Banks in Japan, China, India, South Korea, and other Asian countries have been rather vocal about the need for further stimulus (lowering rates) as industrial production and consumer confidence continue to fall within the region.
2. Better Days Ahead for the Metals: US Dollar and Treasury buying in the wake of the aforementioned global uncertainty continues to be the #1 obstacle for owners of the metals. As we mentioned briefly last week, this dollar trend is losing steam, intrinsically speaking. For one, foreign creditor support for the dollar is falling even as the dollar rises. This is a hard concept to grasp, but it indicates that the US is getting closer to funding its massive deficits internally. We will also point out that several “key” foreign currencies are stable and/or rising (Aussie, Canadian, Swedish, and Swiss) along with the dollar, which is highly unusual. And second, sell-side volume since the highs in the metals has progressively declined to record lows leading into the 65-week moving average, which in the past has served as a launching pad for the next move up.
As an aside, we hope the recent market activity will debunk the notion that investors are selling gold to offset losses in stocks. Although this has some truth to it, there is now a greater case to be made for gold’s link to the dollar. In the dollar’s 10%-plus rally off its lows, gold has seen nearly an 18% correction, while stocks have rallied over the same period. In weeks to come, we will continue to fix our gaze on the dynamics behind the currency as a predictor behind the price action in the metals.
VP Investment Management