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

Markets On Shaky Ground

Once again, the economic data was not flattering. Small business optimism failed to impress. The IBD Economic optimism indicator fell 7 points to 43.0. Wholesale inventories rose by 1.1% in January, faster than economists would have preferred. Jobless claims surprised to the upside – across the board. The trade balance exploded higher (due to oil imports) to a running monthly deficit of $46.3B. Confidence levels (University of Michigan) cratered 9 points, also due to the higher cost of fuel to consumers. And an 8.9 point earthquake hit Japan on Thursday to finish things off. A bright spot, if we can call it that, was retail sales, with a 1.0% increase. Of course, the retail sales figure reports nominal (not inflation-adjusted) figures, which is why we remain skeptical as to its veracity at this juncture.

In response, most markets were off on the week, but not by much. Denial or money printing is still keeping selling pressure at bay. The Dow lost 1.27%; the S&P, 1.48%; and the Nasdaq composite, 2.7% on the week. In the denial department, the Transports gained 1.15%, putting the kibosh on any nascent bearish sentiment. However, Treasury Bonds responded to the weakness by falling .08 basis points, and the dollar was largely flat for the week, stemming a two-month decline.

Debt issuance continued to escalate (for fear of inflation), followed by “warnings” of interest rate hikes issued by EU Chairman Trichet. Sales of Corporate debt rose by 7.9% during the week to $31.4 billion. BP was one of the biggest issuers on the week, with $3.7 billion in new offerings – higher oil prices probably helped push through the sale as well. Cisco systems was also a large issuer, with $4 billion on the week. Mortgage applications also rose 15.5% ending March 4th, and auto sales were strong. We think it important to mention these events since they are all related to the need to “get ahead” of inflation and higher rates (higher cost of doing business). Acquiring more debt in the corporate structure may also boost earnings at a time when they may be on the decline…

We have been saying for quite some time now that inflation has been an issue for most countries around the world. These pressures are now becoming inimical to economic progress. Central Banks around the world are beginning to feel the political pressure to act accordingly by raising rates to soften the price accelerations experienced recently in commodities (such as oil). However, “stimulus” from QE1 and QE2 has been the primary reason for the boom seen in stocks since March of 2009, so an anticipated QE3 is now in serious jeopardy due to inflation concerns – as is also, by extension, the rally.

There appears to be no way out for the Fed and our artificially “manufactured” recovery. If the Fed accelerates its efforts to print, we’ll see the economy suffer from the pinch of higher prices; if it doesn’t, the wealth effect from higher stocks will diminish. It will be interesting to see what Bernanke says during the Fed’s rate decision next Tuesday. Regardless, stock speculators riding on the Fed’s loose-money coattails will be holding their breath before each successive FOMC meeting from here on out.

Have a great weekend.

David McAlvany
President and CEO

David Burgess
VP Investment Management