Stocks Hit The Reset Button… – Oct. 11, 2013

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

Stocks Hit The Reset Button…

On Thursday, lawmakers agreed to increase the debt ceiling long enough to stave off the risk of default in Treasuries for another six weeks. That alone was enough to satisfy stock operators, who promptly pushed markets back to pre-shutdown levels. They did so in the face of the fact that spiraling costs inherent in the Affordable Care Act and similar entitlement programs have not been addressed. But now that the markets have discounted affairs in Washington to the level of virtual irrelevancy, the focus may turn to 3rd quarter US corporate earnings – the results of which exclude the impact of an idle government starting in early October. Only a handful of companies have reported thus far, but if one were to be honest about the results, they certainly contradict the consensus view that economic conditions are “just fine” or moderately improving.

MWM 13, 10-11 Box ScoresA drop in Alcoa’s operating profit was offset by the recognition of a smaller non-operating loss than taken in previous quarters. JP Morgan and Wells Fargo both deprived their balance sheets of loan loss reserves to paper over the negative impact higher rates had on both mortgage and lending operations. Cost cutting also aided the bottom line for Wells Fargo, which furloughed some 4,000 employees. Shares of both banks saw modest losses on Friday.

Shares of Fastenal (construction equipment and supplies, -5.7% post-release), Lindsay Corp (agricultural equipment, -8.9%) and Micron Technology (chip manufacturer, -9.0%) declined sharply after meeting street expectations reduced their profit outlook for the fourth quarter. Wolverine Worldwide, Safeway, Costco, and GenCorp (aerospace) reported results and forecasts in line with expectations. Shares of each managed modest gains by week’s end.

Away from the earnings scene, US jobless claims rose 66,000 to 374,000 in the latest week. Half the gain was attributed to a computer glitch in California employment offices; another 15,000 were attributed to the government shutdown, leaving 18,000 as genuine. Overseas, Germany (0.3%), France (-2.9%) Italy (-4.6%), and the U.K. (-1.5%) all posted rather dismal production numbers, which have called into question claims of a European “recovery.”

The above news combined with uniformly optimistic remarks released in the Bank of Japan minutes had the US dollar rallying at the expense of the precious metals and the basket of major currencies. This was somewhat expected. But the rally in the dollar turned out to be very shallow and short-lived, with momentum fading fast into the close Friday. Perhaps there was a sense that economic conditions here in the States warrant the opposite of Fed tapering in coming months – a view corroborated by Fed governors Williams, Bullard, and Evans. With that being true, the bearish case for the metals is in jeopardy of hitting a brick wall, and sometime soon. Supporting that assertion, demand from overseas continues to escalate – gold imports for China (the largest US foreign creditor) are on track to reach a record 1,000 tons by year-end.

Best regards,

David Burgess
VP Investment Management