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

Vote for the Best, Expect the Worst

Stocks spiked higher Thursday in the aftermath of Hurricane Sandy.  We’re at a loss as to why.  Perhaps traders thought the repair process would create some stimulus for the economy (financial strains notwithstanding), though we suspect that $20 billion in estimated damages will convey relatively small benefits to $13.5 trillion economy.  Talking heads on bubblevision claimed pent up demand for stocks after the two-day trading hiatus, which better explains the increase in upside trading volumes.  Others pointed to a possible Romney victory, since a close race in the polls has favored the GOP candidate in the past.  Regardless, it was back to reality on Friday when the jobs report was released, and stocks gave up the majority of their post-storm gains. The Dow in particular finished a smidge below its 100-day moving average for the week. Whether significant or not, it suggests that further downside lies ahead for stocks (see box scores).

The majority of jobs created in this latest report were either temporary or created out of thin air.  Of the 171,000 non-farm jobs, 27,000 were temporary and 90,000 were attributed to the birth/death model.  Revisions to the prior month were also favorable (to 148,000 from 114,000), but the quality of the number was obviously low.  We suspect the market was looking for some increased level of conviction among employers at a time when the economic data has been rather strong.  However, employers remain skeptical about the future (as do we).  In particular, UBS laid off some 10,000 employees on Monday – which is the first mass layoff we’ve seen in a while. Unfortunately for many, it may not be the last.

The Chinese, Japanese, and Indian central banks increased their commitments to QE this week.  China injected 395 billion yuan into money markets, Japan increased its bond-buying program by 11 trillion to 91 trillion, and India cut its reserve requirements by 0.25% to 4.25%. In Europe, Spain set up a dummy bank using ECB funding to buy €60 billion worth of toxic assets.  These efforts have had little effect on their respective economies and/or markets thus far, which calls into question the effectiveness of current QE programs – including the Fed’s.

That said, we doubt the Fed will withdraw from its privileged money printing endeavors any time soon, instead choosing to up its bond buying in lock-step with a faltering economy.  The question regarding Fed intervention is therefore likely to change from “How often?” to “How much?”  In fact, the Fed has recently extended the reach of its QE3 purchase program to include Treasury notes and bonds by year-end.

Within that context, we suspect that the ongoing consolidation in the metals – as healthy and normal as we find it to be – may not last the month before sensing desperation on the part of monetary authorities worldwide.

Best regards,

David Burgess
VP Investment Management