The Full Court “Printing” Press – July 27, 2012

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

The Full Court “Printing” Press.

With the crisis in Europe intensifying, ECB President Mario Draghi told reporters yesterday that he was prepared to do “anything” to keep the 17-member eurozone and its currency intact. To accomplish that goal, Draghi is vying with EU policy makers for a change in treaty that would allow the ECB to print – and/or monetize debt – at will. Lawmakers in Germany are still vehemently opposed to such measures, even though the mainstream media, Draghi, and French President Francois Hollande were successful at convincing the markets that it’s a virtual “done deal.” World stock markets spiked higher and troubled bond markets stabilized (although on rather light volumes) as a result – see the box scores.

Away from monetary proclivities in Europe, US earnings and economic data failed to impress. In a nutshell, earnings growth is slowing dramatically, and in some cases contracting. Of note, Amazon, McDonald’s, Exxon, and Dow Chemical earned considerably less than last year. Amazon in particular witnessed a 96% drop in net profit, even as revenues gained 29% YoY. Without so much as a word of explanation, the company upped its forecasts for the future – and saw its stock rise nearly 8% in consequence. Boeing, Apple, UPS, Facebook, and Starbucks were among those reporting slower growth. Boeing shares rose, while the latter four saw their shares punished. On the economic front, US durable goods orders shrank 1.1% in June, and the Richmond Fed Manufacturing Index collapsed (-17) in July.

All of this is to say that, for the moment, “bad news” matters not a whit compared to a brand new printing press for the ECB – if in fact it is granted one. What troubles us is that, unlike the dollar, the euro is not blessed with reserve currency status. How, then, will the already non-existent demand for euros be “inflated” in tandem with the hapless currency’s supply? If an increase in euro supply cannot be absorbed by global demand, what’s to stop inflation from ravaging the already weakened region? As to that, we may be soon find out. In the interim, we would like to warn Mr. Draghi: Be careful what you wish for.

The metals enjoyed some relief, given the aforementioned dynamics. Gold seems to have established a decent support level around 1550, and has broken above resistance at 1600. The longer it stays there, the better. And as for the mining shares, the technical oscillators (MACD) have turned higher, indicating that some healing for this sector may be in progress. Still, we would advise caution. We would much rather see strength in the metals away from stocks – a development we expect to see more of in the not-too-distant future.

Best regards,

David Burgess
VP Investment Management
MWM LLLP

2014-10-02T18:36:54+00:00