Here’s the news of the week – and how we see it here at Mcalvany Wealth Management:
Would You Repeat That, Mr. Chairman?
Ben Bernanke is now worried that U.S. markets and the economy are in danger of “overheating.” This comes after just 2½ months’ of expanding its balance sheet by a total of $105 billion. When I saw this, two questions came to mind. First, if overheating occurs after such a short period of time, what will happen when trillions rather than billions are required? (Said another way: What does that say about the effectiveness of Fed policy moving forward?) And second, with nearly 10 million people having yet to find full time work since the crisis of 2008, how can the term “overheating” be a legitimate part of the Fed’s analysis? (Phrasing this question differently as well: How will monetary policy tied to a threshold unemployment rate of 6.5% accelerate when inflation is already an issue at the current rate of 7.8%?) Food for thought…
Whether U.S. 4th quarter earnings are good enough to inspire investors remains to be seen. Aside from fairly decent numbers stemming from Fed-supported banks and brokerage firms, the results have been somewhat mixed. Intel disappointed, Schlumberger and GE beat their numbers. Apple indicated that Chinese iPhone orders may fall short of expectations by as much as 50%. Apple reports next week, and its shares tanked on the news – with the entire NASDAQ in tow. In a show of bravado typical of today’s market, however, they both rallied to finish the week with only minor losses.
Apart from tech, the Dow and S&P held to modest gains, the dollar broke resistance to the upside, and Treasuries rallied for a second week – perhaps sensing danger ahead for stocks. Also of note, commodities out-performed on a broad basis. Oil is making another run at the critical $100 level (now $95.28), while the precious metals rose steadily despite the strength in the dollar (see box scores).
Next week we’ll start to get an idea of how daring central bankers will be in tempting inflation to greater heights. Japan’s Shinzo Abe meets with the Bank of Japan in a two-day meeting starting Monday. He is expected to accomplish a doubling of the inflation target from 1.0% to 2.0%. The week after that, we will hear from the Fed. Markets (stocks) are fully expecting the best, but if officials do not deliver, stocks may be vulnerable to some profit taking.
Have a great weekend.
VP Investment Management