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

Kicking the Fed Habit?

To start the week, Alcoa was successful at “beat the number,” claiming strength in China (more on this below) as the principal cause. Aside from the headline number, there wasn’t much to get excited about. Profits at the company remain depressed at levels less than half what they were two years ago. Alcoa’s shares slid just over 2% by week’s end, even though Alcoa’s optimism helped to push world markets higher. By midweek, Mario Draghi drove stocks higher still, claiming victory over European financial turmoil (referring to the PIIGS and the dramatic rebound in respective bond markets over the last few months). Draghi spoke out of both sides of his mouth, however. He left future policy matters wide open, citing a slowly improving EU economy in tandem with “risks” to the downside that might delay possible rate cuts later this year.

1-11-13Stocks peaked Thursday, not only because of Draghi’s comments, but also due to a report showing that China’s exports had swelled 14.1% in December on stronger world demand. That demand should be kept in perspective considering the massive amounts of credit being extended by central banks – in the absence, mind you, of meaningful job creation. China’s total “social” lending grew 20.0% over the same period covered by the exports report, while the demand side of the equation has been met with a record expansion in U.S. consumer credit ($16.04 billion in November, $4 billion above estimates) and Fed mortgage purchases ($72 billion for November and December). Fed mortgage purchases coincidentally are the sole reason bank stocks have outperformed in recent months.

Apart from stocks, not much transpired. Treasuries were flat; the dollar fell against the euro, and the metals managed to find support at their 200 day moving averages. The metals were tested Friday after China’s inflation rate came in high at 2.5%, adding to speculation that central banks would cool their efforts to stimulate in coming months. It’s a notion that, given the market’s complacency, has merit for now. But we’ll go out on a limb in saying that if the music stops for lack of desperately needed credit, all hawkish bets are off.

Best regards,

David Burgess
VP Investment Management