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

Inflation Expectations Creep Higher.

Bond markets were seen sliding again to start the week as yields in the U.S., Europe and Asia climbed to new interim highs for the year. German bund yields in particular rose to about 98 basis points, up from a level of 8 basis points just over a month ago. Equity markets looked as if they were ready to trade in sympathy, but that sentiment was placed on the backburner, albeit temporarily, by rumors of another “deal” between German officials and Greece. At last read, Germany was conceding to Greece the implementation of at least one budgetary reform in exchange for what’s called a “staggered” aid package. Stocks as a result erupted higher–and for no other reason that I could see–in which both the 100 and the 50 day moving average were cleared by both the Dow and the S&P 500. Where stocks finish the week is anyone’s guess, but it should be noted that the action today was still absent real buyers as trading volumes were relatively low. During the frenzy PIIGS debt also caught a bid, which could potentially last the week, but debt markets in general remained unenthused. Since this deal (provided there is one) more than likely won’t be the last: as austerity and/or debt extensions are mere symptoms of greater structural issues within the Euro system.

Gold, oil and other commodities firmed up against the Dollar in what’s become a burgeoning inflation concern. Belief has it that the economy is doing so well (demand-pull) that it must be the cause, but in reality, markets are having a hard time dealing with the mismatch between large sellers (i.e. hedge funds) and small groups of buyers (i.e. regular investors) in what’s being labeled a “liquidity” crunch. What it means is, when there is reason to sell (and there are many), there is no-one to sell to. This was the key issue leading to the collapse of Long Term Capital Management back in the late nineties. Keep in mind, back then we were dealing with a few billions, whereas today we’re faced with trillions (across the globe).

U.S. Retail sales are out tomorrow, and the expectations are low, given that Johnson’s Redbook sales (released yesterday) has already reported a rather mediocre 1.2% increase for May – attributable to discounters. Also we have an FOMC meeting next Wednesday, which may turn out to be a non-event considering quite a few Fed heads have brayed dovish over the last few weeks. That said; it is uncertain that stocks, after having bounced for rather dubious reasons into no-man’s land technically, can proceed higher from these levels. Bond markets will be instrumental to that end, if they continue to roll as they have in response to additional amounts of QE, ensuing inflation should keep any rallies in check.

Best Regards,

David Burgess
VP Investment Management