Twisted – June, 2012

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


To the tune of $267 billion, Fed officials extended “Operation Twist” through the remainder of 2012. In doing so, they postponed major QE initiatives for when and if economic conditions worsen. Forecasts for growth were “moderated” on top of previously espoused moderations, and of course the Fed still remains optimistic about the future of employment, prices, and the overall economy. So what was different about this meeting? Two things: The Fed admitted it was wrong about the economy; and the Fed further admitted that QE, though dispersed in variable amounts, is here to stay – at least until inflation overwhelms.

The same can be said about the eurozone, where a permanent bailout fund (via the ESM) of €750 billion has been discussed, or should we say demanded, by those in desperate need (PIIGS and France), yet rejected by those who are not (Germany). Austerity measures are proving to be untenable, especially in Greece, where the economy is still not producing enough to pay the bills. Instead of a third bailout for Greece, the ESM will instead be able to monetize Greek debt along with other impaired debt markets across the eurozone. Merkel has continuously rejected the idea of monetizing bonds, despite several attempts by the MSM to state otherwise. If by chance the fund is approved, the Germans would essentially be funding lower rates (more spending) in PIIGS countries at their own expense via higher inflation (tax) at home.

None of this may matter anyway, as central bank interventions may have run dry in terms of their impact on end consumers. In a nutshell, spending is on the decline, despite record low lending/mortgage rates. Quarterly US corporate earnings are enduring a spate of downward revisions at a pace not seen since Q3 2001. So far, negative preannouncements outpace positive by margin of 3.6 to 1. Bellwether firms, where earnings volatility is normally unheard of, such as Proctor and Gamble, Philip Morris, and Bed Bath and Beyond, are gracing the list of companies that will disappoint this quarter. Bed Bath and Beyond (Ticker: BBBY) in particular will see its same-store sales growth slow by 4 percentage points compared to last year. BBBY’s stock fell nearly 17% on the news.

Somewhere down the line, we suspect weaker corporate earnings will trump efforts to stimulate – at which time stocks could be in for some rough sledding. Until then, stocks seem rather resilient to any and all bad news, as faith in “QE” springs eternal – though things could take a turn for the worse at any time. Adding to the pressure in stocks, commodities in general have already begun to reflect weaker demand-side dynamics. Now deemed to be in a bear market, they have fallen more than 22% from their highs set in April last year.

As for the precious metals, they continue to get slammed here in the States while being accumulated overseas where debt “issues” are at the forefront of fiscal concerns. Perhaps with the advent of bank downgrades this week by Moody’s, stateside creditworthiness will begin to be called into question. The Treasury market responded rather poorly to stock market volatility this week, adding only “ticks” where several points would usually be expected.  One day doesn’t make a trend, but with this type of action, the metals just may find their footing (if they haven’t already) sooner rather than later.

Best regards,

David Burgess
VP Investment Management


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