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

1. Financial Reform?  The Senate passed legislation on Thursday that, if approved by the House, would touch Wall Street CEOs, first time homebuyers, high-flying traders, and small town lenders.  We have provided a few links below that highlight the proposal, and of course we will learn more as details emerge.

On the surface, the bill seems to tackle several of the symptoms associated with the recent credit crisis.  Whether it was excessive lending, predatory lending, faulty credit analysis, speculative trading, or risk intermediation (passing the buck), just to name a few, the bill takes aim at solving these issues that have disturbed the balance in the markets.

Unfortunately, this bill resembles many we’ve seen in the past, creating more regulation for the private sector and less for the government (and the Fed).  Although this bill will help to delay another mania in the future (and that’s good), it may not prevent it completely.  As long as the government retains the privilege of printing money and taxing and spending at every public outcry or for self serving purposes, we will face these financial exaggerations again.

2. It’s the economy stupid:  Although news of financial reform and sovereign debt concerns here in the States and abroad (the EU) may have had a negative impact on the markets this week, we believe the economy may have something to do with it as well.  Mortgage foreclosures jumped to an all-time record, prices were cut at Wal-Mart to boost sales while other retailers experienced outright sales declines, and those pesky job reports kept letting us down.  Most of the good news in production and retail sales was related to construction activity, which may prove to be a late-stage consequence of the recent stimulus package, in contrast to the Index for Leading Indicators, which declined for the first time since March of 2009.

3. U.S. Bonds – safe haven?  As money rolled out of equities this week in response to the many negatives impacting the market, bonds and cash caught the bid.  We find this ironic, since the government is running a budget deficit that runs in the trillions.  We believe Wall Street is succumbing to the old adage of leaping before you look.  Viewed another way: If a double-dip recession is on the way, as the economic data would suggest, what will happen to debt service as government tax receipts drop from current levels?  We would also ask:  What foreign creditor will be willing to pony up more of their savings to buy another IOU from the U.S. when most of them are in the throes of bankruptcy or deficits themselves?

We would argue that, once the markets connect the dots on U.S. insolvency, the bond market will fall, dragging stocks and cash markets with it.  The traditional safe-havens (since 1980) will, by default, be abandoned for an even older one – the metals – thus rendering the recent negative action in gold to be ephemeral in nature.

Staying the course…

Have a great weekend!

David Burgess
VP Investment Management

David McAlvany
President and CEO