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

Melt Up or Melt Down?

There are two important elements of the FOMC minutes released this past Wednesday that should concern stock bulls, and perhaps even bond holders. First, the Fed admitted that QE is losing its ability to impact the economy in a positive fashion. And second, the printers-in-chief noted that any hints about further tapering could risk causing Treasury rates to rise more sharply than they already have. Both statements confirm our long-held suspicions that the Fed, like it or not, is captive to printing – even though the benefits are fading. In its statements the Fed is effectively saying nicely, for those paying attention, that the effects of QE are fast becoming burdens the economy can’t handle.

MWM 14, 1-10 Box ScoresFor now, stock operators seem able to ignore these and other negatives (such as the jobs report today), along with their ultimate consequences – which we believe will be forthcoming sooner rather than later. Stocks bucked these issues to rally again this week, technically giving the impression that a blow-off to the upside is on Wall Street’s wish list before quarter’s end in March (we are hoping our sense of déjà vu is not channeling the year 2000). Defensive undercurrents were also evident, as Treasuries and gold rallied while the dollar fell, erasing a significant portion of its new-year gains. The dollar is once again flirting with bearish territory on the charts (see the box scores).

Outside of warnings emanating from the retail sector regarding fourth-quarter profits, or the lack thereof, corporate America has been rather quiet on the topic of earnings momentum/strength. So far, it’s the occasional share buyback (FedEx), dividend increase (Ford), and/or corporate debt offering ($30 billion in aggregate this last week – a record pace) that makes the news. But these are artificial means of boosting shares, and, when combined with the weakening effects of QE, they reveal that the markets are on thin ice. Next week, we’ll have a better idea of whether or not the defensive posture we’re seeing in Treasuries and gold has any legs. Specifically, the December retail data (U.S. Census Bureau) will be released next Tuesday, and may offer pertinent clues in that regard.

Best regards,

David Burgess
VP Investment Management