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

 To Infinity and Beyond!

Whoops.  “QE to infinity” has not worked to maintain the momentum in stocks.  Rallies are fading and profit-taking has been the order of the day following the Fed’s unprecedented policy statement last week.

Is it possible that the Fed’s blank check wasn’t enough?  Were speculators looking for more? Or could it be that the Fed has finally taken money printing to intolerable excess?  We suspect the latter, though time (and additional data) will tell.  That said, it was interesting to see markets take a snooze this week, even after the Bank of Japan (taking its cue from the Fed) beefed up its asset purchasing program unexpectedly by ¥10 trillion to ¥80 trillion ($126 billion to $1 trillion), and Spain drew closer to a bailout accord with EU lawmakers. (See box scores.)

Away from the QE hype, signs still indicate weakness ahead for the U.S. (and world) economy.  Bank of America intends to sack 16,000 employees by year-end.  Norfolk Southern’s share price plummeted 9% on a drop in coal shipments.  Fed-Ex lowered guidance for its 3rd quarter on lower demand in both Asia and Europe, while maintaining or increasing product prices.  Oracle disappointed on both revenues and earnings with a drop in hardware sales, and Ford Motor will mothball a factory in Europe following a 29% decline in sales YoY.  On the flip side, some discount retailers and food producers (such as General Mills) fared rather well on the earnings front due to accelerating inflation. The U.S. Empire State manufacturing index fell 4.5 to a reading of -10.4 in September – the lowest since November 2010.

In coming weeks, we will continue to look for clues that recent central bank action is perhaps causing more harm (via inflation) than good.  Corporate earnings are in focus, with preannouncements still rolling in for the start of the 3rd quarter releases due by mid-October.  S&P group has predicted that U.S. corporations are three times more likely to miss earnings targets for what may be another quarter of negative earnings growth.

To put a summation sign next to all of this, the markets seem torn between a deteriorating economy and a Fed that promises to bandage all wounds. Stock prices may therefore continue to meander until a catalyst emerges.  That catalyst, in our opinion, will be the negative impact of inflation on consumer spending and subsequently on corporate profits – the nasty side-effect to hyping QE to infinity.  The metals could trade off in sympathy with stocks as oscillators flash “overbought” on a short term basis.  Over the longer run, however, metals fundamentals are strengthening as we draw nearer to a credit crisis here in the States (Eagan Jones downgraded U.S. debt to AA- on the Fed’s move to QE).

Best regards,

David Burgess
VP Investment Management