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

Trading In a Crisis Today for a Bigger One Tomorrow

The Republicans proved at least one thing in this latest budget battle: Even if their cause was noble and just, their jobs and the party’s existence ultimately took precedence. The thought of having the country’s default hung around their necks was just too much to bear. But the value of opting to avoid a difficult yet temporary financial adjustment in exchange for a permanent tax drain brought on by runaway entitlement programs is a different debate altogether. Needless to say, the debt ceiling was raised and the government reopened, while budget cuts or sequestration were postponed yet again (to Feb 7th). Piggybacking on that proud development, the Fed was active in spinning all negatives bullish by pumping a little over $50.0 billion into the markets during the week, just for good measure.

MWM 13, 10-18 Box ScoresStocks rallied, in particular the NASDAQ, where the speculative fervor now rivals that of the late ’90s tech mania. As for the Dow and the S&P, the moves higher were more tempered, perhaps reflecting the lack of organic growth seen in 3rd quarter earnings releases and/or the myriad of reduced corporate profit forecasts for the 4th quarter. The profit margin issue applies even to Google, whose shares spiked over 13.0% following its 3rd quarter release. Google managed growth of 5.3% in revenues as paid “clicks” increased 26.0%. But this was the second quarter in a row that the company’s cost per click (or what Google can charge) declined – this time by 8.0%.

Away from stocks, US Treasuries remained stubbornly weak, despite robust Fed support. The dollar collapsed beyond critical support levels, and the precious metals spiked higher (see box scores). Aside from the Fed’s obvious contributions to the dollar’s decline, China, our largest creditor, delivered its own blow when it downgraded US debt on the basis of our ongoing fiscal quagmire. China must be aware that the downgrade puts the value of its own $1.6 trillion in US securities at risk, but perhaps they’ve weighed that prospect against an all-out collapse/default if Congress refuses to fix its out-sized budgetary deficits post haste.

Next week, we’ll receive the bulk of US economic data not released during the shutdown on Friday. We don’t expect the market to give much credence to the results, which puts the onus on corporate earnings to drive the markets in the meantime. Given the undertow, economically speaking, momentum to the upside will depend on spin. The dollar, on the other hand, seems to be discounting economic, fiscal, and Fed realities quite nicely. Beyond some backfilling, we suspect further declines ahead for the dollar. And contrary to recent views brought on by obsessive technical perspectives, gold does respond to noteworthy dollar weakness – as witnessed in this week’s trade.

Best regards,

David Burgess
VP Investment Management