Effective or Not, QE Stays – July 19, 2013

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

Effective or Not, QE Stays

There were no major surprises from Bernanke at the latest FOMC meeting, although he seemed a bit more perplexed about the state of our union than usual. As far as current policy is concerned, nothing changed. Inflation is below target, though unemployment remains uncomfortably high within the context of a “moderately” improving economy.

The upshot is that there will be no tightening anytime soon – or ever, for that matter. Bernanke made it clear that the US economy is dependent on QE; therefore its removal is highly unlikely. Keep in mind that, just a few weeks ago, many bought into the ill-conceived notion that economic progress was far enough along that “tapering” off of QE was warranted. We acknowledge that somewhere down the line that may be true, and tightening will be justified. For now, though, the benefits of QE still outweigh the costs – even if only by a thin margin.

MWM 13, 7-19 Box ScoresStocks reached another exuberant high this week, scoffing at the higher rates set by the Treasury market. The dollar remains weak, despite a brief Fed-induced rally. Meanwhile gold finished with another round of solid gains, but stopped short of the pivotal 1300 level.

US Earnings season is well upon us. So far, results can’t be what the bulls were expecting. Financials such as JP Morgan, Morgan Stanley, Bank of America, Goldman Sachs, and others are offering some of the best reports this quarter, though gains in this sector were largely expected due to the Fed’s monetizing programs. Away from the financials, the techs were weak, with most falling short of earnings or revenue estimates. Intel, Microsoft, Google, and IBM round out the list of those imparting disappointing news. Amazon and eBay also came up short on the retail front. Elsewhere, GE reported lower year-over-year earnings and revenue growth. The company reported a 45% drop in transportation-related orders during the 2nd quarter – though its stock still popped about 4.6% higher when its earnings “beat the number.”

Given the behavior in stock-land (and in GE shares), there is no doubt that speculators are confident with the Fed at their backs. So it will be interesting to see just how markets will react to the contrasting pressures emanating from higher oil prices, long term interest rates, and dollar weakness. Gas prices rose 6.3% in June, TIC data showed a 4th consecutive decline in foreign purchases of US long-term securities in May, and US retail sales rose only 0.4% in June (0.8% was expected). It’s important to note that these things are happening while the Fed is actively and aggressively pumping money into the system – begging the question as to whether QE might in fact be causing the problem – something stock bulls should consider.

Best regards,

David Burgess
VP Investment Management