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

The First of Many Budget Battles on Capitol Hill

The vote to raise the debt ceiling was delayed, and a partial shutdown of US government operations ensued following a complete Senate rejection of House-proposed amendments to Obamacare legislation. Among the Republican-led House petitions was a one-year delay of, and lawmaker participation in, the Affordable Care Act’s mandates. As you may know, under present terms of the ACA, politicians will subscribe to a separate and private health-care plan from the rest of the population. Now in day three of the shutdown, the stalemate between parties continues. If nothing is resolved by Oct 17th, the Treasury expects cash on hand to be reduced to $30.0 billion, while expenditures are expected to total $60.0 billion.

News of the shutdown infused a streak of volatility into the markets that saw stocks, gold, and bonds gyrating without cause or discernible direction. It may very well be that the Fed was active Tuesday morning, intervening to support markets following news of the shutdown. In any case, at last look, the bears may have gained the upper hand in terms of momentum. The September ADP employment report (166,000; with August now revised to 159,000 from 176,000), the ISM New York manufacturing index (53.6 from 60.5), and domestic auto sales (11.66 million vs. 12.44 million) were released, and all fell short of expectations. The softer auto sales suggest that the interest rate-induced shopping spree may be running out of steam.

Away from stocks, the dollar remained consistently weak regardless of the prevailing winds emanating from Washington or Wall Street on any given day. The dollar index broke below 80.0 (79.77 at last read) Wednesday, subsequently breaking all near-term trends to the upside, and stands to re-enter secular bear territory below 77.50. The precious metals responded positively, even as stocks continued to soften Thursday morning. However, as long as an early government restart looms, a small bounce in the dollar is not out of the question, which could hold gold in steady-state territory in the short term.

Pre-announcements of Q3 US corporate earnings are rolling in at a ratio of 5.2 to 1, negative to positive. Banks in particular have cut their earnings estimates by $1 billion this quarter. This contrasts with Wall Street’s expectations of reported earnings growth as high as 4.6% year over year (down from a forecast of 8.4% in July). Alcoa kicks off the season next Tuesday, Oct 8th. Its earnings are expected to increase slightly, quarter over quarter. In our opinion, however, that is not organic growth – which may be the case for most companies reporting this quarter. If true, this state of affairs may provide yet another excuse for the continuance of QE and its consequent furthering of dollar weakness.

Best regards,

David Burgess
VP Investment Management