Running Out of Excuses – February 28, 2014

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

Running Out of Excuses

This week brought another month-end for stocks, and no matter what news hit the tape, nothing stood in the way of gaming equity markets higher for performance purposes by the close on Friday (see the scores). With shorts on the run, volumes dropping, mergers in motion, bad weather abounding, and central bankers at the ready to cauterize the slightest wound, stock market operators pushed selected markets such as the NASDAQ to 14-year highs – and doubtless acquired a sense of invincibility in the process.

MWM 14, 2-28 Box ScoresNow, after having discounted all the benefits and ignored virtually every risk in the equation, stocks have entered the dangerous territory of becoming their own worst enemy – trading exclusively on market internals. We believe there will be very little from an external perspective, beyond the possibility of a bad weather bounce, to justify higher stock prices. With all that in mind, equities are extremely vulnerable to the proverbial straw that breaks overloaded camels and over-levered markets alike.

At these levels, the markets add about $300.0 billion in market cap for every 1.0% move to the upside. That’s compared to the Fed’s $65 billion to $85 billion contribution in any given month, which assumes a 4-to-1 ratio of leverage to stimulus. The total market capitalization for stocks is now approaching 125.0% of GDP – and for real-estate 150% of GDP – which matches and or exceeds levels seen just before previous bubbles burst in 2000 and 2008.

That aside, recent data suggests the housing market is no longer the liquidity vehicle of old. US new home sales rose 9.6% in January after a revised 3.8% drop in December – when the weather was better (!?). The report cited strength in east coast markets (where the weather was terrible). Yet, in a separate report released the same day, stated foreclosures in the New York and New Jersey area had reached a three-year high. Take that fact, add in the Mortgage Bankers Association Purchase Index (measuring US consumer purchases on a weekly basis) resting at a 17-year low, then blend in the mortgage refi-index muddling along at 13-year lows. Stir, pour, and bake. The resulting concoction suggests no one in middle-America is buying or refinancing homes at today’s interest rates.

The consequence is that, thanks to hedge funds backed indirectly by prestidigitated money from the Fed, we have new, unoccupied homes being bought to maintain the perception that the economy is just fine.  In short, everyone that sits outside the Fed’s circle of trust (Wall Street) is in the process of getting squeezed between asset inflation they can’t capitalize on and dollar inflation they can’t escape. At the very least, this does not bode well for corporate earnings down the road.

Back to the markets, the dollar fell below 80.0 for the first time in months, if not years, on the heels of an unexpected uptick in European inflation. The eurozone’s CPI climbed to 1.0% in February – 0.8% was expected. Even though there’s doubt that the ECB will change policy (tighten) after a “one-off” data point, the euro held its gains against the dollar all day Friday, pushing the dollar index to a close near 79.75. This dollar development would have been better for the precious metals had it not been overshadowed by the ongoing party in stocks early on Friday. That situation may change when stocks sober up, as month-end gaming fades and ahead of the jobs report due out at the end of next week. Indeed, by Friday afternoon, it appeared to have already begun.

Best regards,

David Burgess
VP Investment Management
MWM LLLP

2014-09-26T16:40:09+00:00