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

Critical Short-term Memory Loss…

The Fed is back, and in reckless form. In the last week, the Fed plowed just over $45 billion into mortgages and Treasuries, expanding its balance sheet to a record high of $3 trillion. Though the intention behind the purchases is to manipulate rates lower for the benefit of the consumer, the opposite has occurred. Rates across all markets have risen noticeably (bond prices have fallen), while the new money entering the system has made its way into stocks, sending indexes to interim highs (see box scores). But as the cost of debt has increased, in part due to heightened inflation expectations, risks to the economy have increased exponentially.

For the month of December, existing home sales softened, from 4.99 million to 4.94 million, while new home sales fell 7.3% from 398,000 to 369,000. January data is no better, with the Richmond Fed manufacturing index contracting by 17 points, from 5 to -12 – one of the lowest levels seen in a year. At the same time, the Kansas City Fed manufacturing index declined (-2) for a second time. Jobless claims for the week ending January 19 fell to 330,000. However, continuing claims remain stubbornly high.

1-25-13U.S. Corporate earnings were once again successful at the game of Beat the Number, though concurrent earnings and revenue growth remain elusive. IBM, in particular, showed earnings growth of 14%, though its revenue and book value fell. The same could be said of several tech companies reporting, including Microsoft and Apple, though the attitude among bulls is that these issues are company-specific. Consumer staples (P&G and Starbucks) are the only real standouts, showing both revenue and earnings growth.

Much of the same can be said about overseas markets, where money printing, or the threat of it, has also helped promote speculation in stocks without any real follow-through or growth from underlying economies. The dynamic has created a bifurcated relationship that, if allowed to continue unabated, could mean that markets are headed for a rather abrupt dislocation in the not-too-distant future – unless of course authorities refrain from juicing the markets higher. We have little faith that such restraint will be shown, even after the Fed’s warnings of “overheating.”

Best regards,

David Burgess
VP Investment Management