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

Fed QE Rumors Trump Reality – Again

In FOMC minutes released on Wednesday, the Fed made an off-the-cuff remark that additional QE (if needed) would not increase risks of inflation – at least not exceeding its 2.0% target, which it feels won’t be breached until 2018. But those remarks, as innocuous as they may have been, were interpreted by stock speculators to mean that “tapering” was near its end and that QE efforts would be escalating sometime soon – even though particulars were never mentioned. US stocks sustained a rally through Friday that sent the S&P to a new high and propelled previously battered small cap and NASDAQ composite stocks to more respectable technical levels, while overseas markets stabilized. Treasuries, on the other hand, slipped – or, more precisely, didn’t rally – and that’s the real crux of the matter. They should have, given that the Fed and the mainstream media have convinced the public that falling bond prices (or rising rates) of late are solely the result of QE reductions and/or an improving economy.

MWM 14, 5-23 Box ScoresAlong those lines, we heard from a series of retailers this week, most of whom echoed what Walmart had to say last week about the cautionary state of consumer spending. Staples, Dick’s Sporting Goods, Urban Outfitters, TJ Maxx, Target, American Eagle, Sears, Best Buy, and Aeropostale all disappointed this quarter, and cut estimates for future quarters. We’re sure that bulls will want to blame this on the weather, but many companies on this list didn’t cite the weather as a factor. Incidentally, 72% of companies reporting in the first quarter this year warned that Q2 results would be below estimates.

New home sales came in higher than expected for April (433,000) and March (revised up to 407,000). As good as that post weather bounce may be, new home sales have been losing ground overall since the start of 2013. Also let’s not forget that mortgage and refinance indexes remain near 2008 crisis lows, which implies that hedge funds are the active buyers of new homes and related real estate assets, not the general public. As an example, Blackstone Group was seen scooping up commercial real estate and scouting for apartment complexes this week – all with cash presumably provided by the Fed, albeit indirectly.

As for gold, one can be encouraged by the lengthy consolidation it has undergone. The $1,285 area has been tested and retested without breaking down in the process. As a result, a rather tight pennant formation has formed on the charts, implying a breakout is in the making. With stocks peaking and central banks (the PBoC and the ECB for starters) gearing up to stave off disaster, gold’s prospects are looking up. However, a brief and/or shallow selloff could also be possible, given the completely delusional state markets are in at the moment.

Best Regards,

David Burgess
VP Investment Management