An Uptick a Day May Keep the Fed Away – June 15, 2012

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

An Uptick a Day May Keep the Fed Away

The bad-news-is-good-news construct lives on. After the proposed $100 billion bailout of Spain proved to be a mere headline rather than a solution, both Spanish and Italian debt markets entered into a freefall, with their 10-year yields breaching the dreaded 6% level.

Aiding and abetting the negative sentiment irecent weeks has been a host of credit downgrades issued by Moody’s, Eagan Jones, and Fitch. In the crosshairs: sovereign and banking entities across Europe, including six German banks, three Austrian banks, and 18 Spanish banks. UK, Spanish, and French debt were, for the most part, adjusted by one notch. The notable exception was Spain, whose rating fell three notches to BBB (according to Fitch) – one level above junk.

In case anyone is wondering, US banks are also a concern, several of which would fail to measure up to Basel III standards – with which the Fed has agreed to comply.

Economic data released during the week supported the validity of the downgrades. For the month of April, eurozone industrial production fell 0.8% in April (down 2.3% YoY; German and Spanish industrial production fell by 2.2% and 8.3% respectively). Here at home, US retail sales fell 0.2% in conjunction with a 0.4% (larger than expected) increase in inventories for the month of May. The good news, if you can call it that, was that inflation gauges declined (US CPI and PPI, and worldwide), reflective of the 15.28% drop in commodity prices from the interim highs set in February.

This relentless stream of bad tidings produced the usual response in the markets. Globally, stocks reverted to “melting up” in anticipation of further QE from any and all central banks within the developed world (BoJ, ECB, BoE, CNB, and the FOMC). Earlier losses quickly turned to gains by week’s end, with momentum to spare – perhaps for next week. Bank stocks were the star performers – Greek banks in particular, some of which rallied over 10% during Thursday’s trade. US Treasuries rallied, as well, with the thought in mind that QE was really good for bonds, too. In any case, I think it’s safe to say there was plenty of motion/commotion during the week that could be attributed to the mindless world of computer-generated trading.

By next week, we should have a clearer picture of two important developments: the outcome of Greek elections; and changes, if any, to Fed policy. Regarding the former, voters in favor of Greece’s union are backing the “New Democracy” party, but recent polls show them trailing the “Syriza” opposition by two percentage points. And regarding the latter, the next FOMC meeting will occur on Wednesday. Bernanke has already denied plans for further QE, even though stocks have been busy demanding otherwise. On the one hand, if the Fed changes its mind, a compromise may be the order of the day – in which perhaps a more moderate form of stimulus such as Operation Twist would be extended. On the other hand, if the Fed withholds intervention altogether, markets could resume their descent – in unison with the economic contraction well underway – a little sooner than expected.

As for the metals, we continue to see strong buying in the physical markets. Four hundred metric tons were added to central bank coffers by quarter’s end in March. This compares to 156 metric tons acquired by the same time last year – or a 156% increase! Is it any wonder that central banks are ready (soon) to debase their currencies once again? The insurance has been purchased ahead of time. Unfortunately, this comes at a time when the public eye remains fixed upon the productive asset markets. What’s new?

Best regards,

David Burgess
VP Investment Management


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