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

Stocks Weather the Battle, but the War Continues

For a while now, the weather has been tossed around as the sole reason for any weakness in the U.S. economy, such as the 5.1% decline in existing home sales in January or the nearly 15 point drop (to -6.3) in the Philadelphia Fed business outlook for February – among other things. This fantasy has provided speculators with an excuse to game stocks higher based on the notion that beneath the bad news the economy is still in the process of growing.

MWM 14, 2-21 Box ScoresWhile we have no doubt that there will be a series of “post-weather” upticks in near-term economic data, as seen in the Markit PMI data released this week (up to 56.7 from 53.7 last month), these upticks may occur within the context of an ongoing secular decline in economic activity. As an example, Walmart’s 4th quarter results, falling short of last year’s profits, cited bad weather (and government cuts in food-stamps) as a primary cause. However, it also disclosed that its same-store sales have now slumped four quarters in a row.

Maintaining revenue growth of the organic kind, as many of our readers know, is an aged and widespread challenge that pre-dates the weather. In any case, stocks managed to rally this week, despite FOMC minutes that leaned toward further tapering to pre-weather levels. Treasuries, the precious metals, and the US dollar remained stable to finish the week, which brings to mind a recurring argument…

Since defensive areas of the market have been slow to decline as stocks rally near old highs, a top in stocks may be in the making. This is reinforced by the fact that the volatility index (VIX) and put/call ratios have been either rising or standing firm in tandem with the approaching highs in equities. This at the very least demonstrates a lack of conviction behind recent price advances.

Away from the markets, the Fed was busy bringing foreign banks up to speed with U.S. regulations. Recall that last year the Fed increased reserve requirements (over and above Basel III standards), just after rates were found rising in the face of their unprecedented bond-buying efforts. Now it seems the Fed is still concerned (maybe terrified) that rates aren’t low enough, even though we’ve been told that rates have moved higher because the economy has improved. But it’s precisely this kind of mad scrambling behind the scenes that makes us believe the Fed really believes otherwise. It may fear that it has lost control of the bond market – and may in fact be witnessing early indications of runaway inflation.

Best Regards,

David Burgess
VP Investment Management