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

U.S. Retail Sales Collapse – It’s Time to Buy Stocks?

Stock volatility caused by last Friday’s US jobs report continued into the early stages of this week. If not for the distractive hype surrounding the launch of the new Apple Watch, the selling could have been worse – at least on Monday. As shares of chip makers Intel and Taiwan Semiconductor slipped quietly in the background on some surprise issues with end-demand for PCs, Intel lowered its first-quarter sales forecasts by 6.5%, citing lower demand for its chips in the U.S., and more notably in Europe. Keep in mind that Intel produces approximately 80% of the chips that go into PCs worldwide, including those in Apple’s MacBook. It’s therefore reasonable to assume that Intel’s news may have some systemic consequences for the rest of the tech industry. Whether that materializes this quarter (and/or the next) as a problem for the sector or only for select chip makers is still uncertain. But if history is any indication, sizeable trends in one area of tech have a tendency to spill over into others.

On the subject of U.S. earnings, S&P 500 estimates for this quarter have been ratcheted down by about 4.9%, mainly due to the effect a stronger dollar has had on exports. The opposite could be said of most companies from Asia (excluding China, which pegs to the dollar) and Europe, where positive revisions to earnings have been seen due to the weaker euro, etc. When you net both sides, I don’t believe you’ll come up with anything more than a zero-sum game of currency translation, implying no growth on either side of the Atlantic. U.S. retail sales were down 0.6% in February for the third consecutive month. It’s highly doubtful that Europe, Japan, or China for that matter has seen any meaningful increase in export volumes to the U.S. Parenthetically, the retail sales data is what made stocks spike higher on Thursday – on the overplayed notion that the Fed would not tighten rates later this year. In any case, it’s the lack of real growth in a highly leveraged environment that should concern investors – though judging by the way markets behaved this week, Europe may be oblivious to these developing risks.

It’s estimated that at least $138.0 billion has been spent on share buybacks by corporations in the first quarter of this year – though it may turn out to be much more. It will be interesting to see if the reduction in earnings estimates will be offset by these efforts or not. It will also be interesting to see whether energy related debt issues are wearying the financial sector in a way that might reduce speculative abilities. That, combined with the fact that the Fed is still not printing and may not do so by next week’s FOMC meeting, could set the stage for more downside in stocks. As for the metals, it’s not a given that gold will share the same downside risk, even though gold and stocks traveled in sympathy following last week’s jobs report. Gold is holding in the $1,150 range with some degree of comfort, and looks as if it wants to rebound back above $1,200. I say this because overseas demand for gold has been building along with the price in most major currency terms – given that 17 central banks (notably excluding the Fed) have leaned heavily into the dovish side of policy – with ineffectual (in promoting real growth) consequences. I believe the market understands that the Fed will soon follow its peers into looser monetary policy.

Best Regards,

David Burgess
VP Investment Management