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

On Again, Off Again – Stocks Play with Fed Resolve

Stocks continued to build on Bullard’s dovish comments from last Thursday, then gained momentum on the back of the ECB’s progress with respect to QE and a handful of earnings reports from U.S. companies. The ECB announced it was on track to monetize nearly €1 billion worth of asset-backed securities and “covered” bonds this week. The program is expected to continue until it reaches a total of €1 trillion in new purchases, bringing total assets on the ECB balance sheet to approximately €3 trillion.

MWM 14, 10-24 Box ScoresHere at home, we heard from the likes of GE, Caterpillar, IBM, Coke, Apple, Comcast, and Amazon on the subject of 3rd quarter earnings. From a market perspective, the results were mixed. Some shares were punished; others were successful at “beat the number” and were rewarded. If it weren’t for Bullard and the ECB, we suspect that earnings results would have received a bit more scrutiny. It’s no secret that most results have been gamed with the help of leverage and other benefits garnered from creative accounting. For example, Apple’s EPS gains were largely achieved through its share buyback program, while Comcast’s 50% increase in year-over-year earnings was the result of a fairly large tax benefit.

As stocks climbed, Treasuries were clubbed and the dollar managed a small gain that sent the precious metals into a modest retreat. Though nothing bullish for the dollar, and hence nothing bearish for the metals, actually happened this week, I think it’s possible that the markets began thinking we’re “self-sustained” all over again. If that’s the case, we’re right back where we started a few weeks ago – believing the canard that Fed QE isn’t needed, right at the point where stocks need it to maintain their momentum.

It looks as if this game of cat and mouse between the Fed and the markets might go on for a while, until it’s clear that stimulus (or the lack thereof) isn’t doing much to help the average consumer. In testimony thereto, retailing shares have taken it on the chin over the last several months. And if the consumer continues to suffer, so will the gargantuan pile of U.S. debts. Consequently, it’s more likely that credit risk will begin to filter into and support the defensive paradigm – which is to say higher long-term interest rates (inflation) and higher precious metals prices. This would probably happen sooner rather than later, given that the Fed’s financial stress index rose yet again this week – despite the fanfare in stocks.

Best Regards,

David Burgess
VP Investment Management