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

Plenty of News for the Bulls to Ignore

Here’s what the market’s had to digest this week: Overseas, BRIC nations began funding their own central bank with seed money of approximately $100.0 billion – which circumvents the IMF and to some degree the US dollar. Mario Draghi promised banks €1.0 trillion in funds for loans to help keep eurozone economies out of recession. Portugal’s ongoing bankruptcy concern, Banco Espirito Santo, was bailed out by its parent – though no structural changes to the bank’s practices were imposed. China’s second largest builder (Hudatong Road & Bridge Group Co.) will turn into the country’s largest bankruptcy on record if it can’t make its next debt payment, scheduled for July 23rd. And even though lending increased in China (by 40% from May), home prices fell precipitously in 55 of its 70 cities over the same period.

MWM 14, 7-18 Box ScoresStateside, Janet Yellen emphasized a future need for a “high degree” of easing, citing the persistent slack in the jobs market. But speaking with forked tongue, she also held to the Fed’s commitments to tapering and interest rate hikes. Second quarter earnings are rolling in, among which surprises do not seem likely. Companies are generally giving the appearance of growth by beating expectations. In the case of banks, a pivotal sector in any “recovery,” expectations are certainly being beaten, but the action’s inverted. Expectations were negative, and they’re being beaten to the downside. Woes in that sector have been deepened by elusive lending and revenue from fixed-income trading. And speaking of economic anemia, industrial production rose only 0.2% vs. expectations of 0.6%, while housing starts collapsed 9.2%, driven by a 29.0% drop in starts in the southeast.

With all of that happening on this side of the looking glass, bulls stayed to tea with Alice. Stocks managed to stay afloat, even as risks continued to escalate. Underneath the headline numbers, the action favored the more conservative large caps (in the Dow) at the expense of the riskier small caps and tech, which seemed to be breaking down again. That “flight to safety” mentality also helped Treasuries finish the week with a small advance. The dollar also rallied, thanks to Yellen’s double speak and Draghi’s mass lending plans. These developments rendered the metals vulnerable to a short-term but shallow pullback on the week.

In the weeks to come, the rising tide of bad debts, repo market failures, geopolitical risks, and to a lesser degree earnings shortfalls will be in focus. Stock bulls thus far have treated such events as temporary, or curable via the Fed’s magic wand. But with the frequency of adverse events increasing (due to economic and fiscal ills, we believe), it will be difficult for stocks bulls to maintain momentum. In that light, we anticipate the precious metals continuing to inch forward, with minor setbacks along the way.

Best Regards,

David Burgess
VP Investment Management