Full Steam A-Fed? – Feb 8, 2013

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

Full Steam A-Fed?

Following what turned out to be a bit of a roller coaster ride, stocks were held to very modest gains, while Treasuries and the dollar outperformed for the week. These developments may suggest that a more defensive posture will be desired in coming weeks (see the box scores).

We doubt that the Fed’s lack of involvement was responsible for the soft tone in stocks, even though its injections were limited to $2.6 billion. It is still on course to fulfill its promise of an $85 billion per month run rate for this year. Instead, Mr. Market may be queuing off renewed financial tensions in Europe, where a stronger euro (ironically as a result of recent bond market “fixes”) is putting an unwanted damper on exports – tacking a question mark onto any hoped-for recovery in the region.

2-8-13Away from Europe, however, there was still much to talk about here at home. U.S. consumer credit expanded at a pace of $14.59 billion for the month of December. Car and student loans actually increased by $18.2 billion, but the more important development was the drop in revolving credit of $3.6 billion. The latter suggests that consumers may be cash poor after a record year-long spending binge, and are now becoming more dependent on longer dated and/or cheaper forms of financing – namely those manipulated by the Fed.

Unfortunately for consumers (or homeowners) the Fed’s effectiveness in these markets is also fading. Despite Fed efforts, rates in both Treasuries and mortgages, two prime targets of the Fed, have been on a steady rise – since July 2012 for Treasuries (up 55 bps) and December for long-dated mortgages (up 36 bps). Fed purchases, by the way, have outpaced issuance so far this year. Consequently, the “pinch” on consumer spending will be in full force in coming months, especially considering that gas prices have been climbing – in the off-season, no less.

As for the metals, it has been a slow start to what should be a decent year. Additional weakness in the economy both here and abroad is likely to be met with escalation in central bank intervention. For now, though, silly season is in full force for stocks, and could last well into the first half of the upcoming quarter – possibly at the expense of the metals. Even as we note that possibility, however, we see any meaningful downside action as unlikely so long as the Fed remains diligent in its printing endeavors. It’s also worth mentioning that, notwithstanding the paper markets, physical demand is strong. Gold coin sales for the start of 2013 are at a 14-year high.

Best regards,

David Burgess
VP Investment Management
MWM LLLP

2014-10-01T19:39:24+00:00