Stocks Continue Post Fed Advance

Charles Schwab: On the Market

Posted: 9/22/2016 4:15 PM ET

Stocks Continue Post Fed Advance

U.S. stocks joined in a broad-based global equity advance as the markets continued to react positively to yesterday's Fed decision to hold off on raising rates, though it hinted at a year-end rate hike the central bank also lowered its projection for the pace of future increases. Treasuries and gold were higher, while the U.S. dollar was under pressure and crude oil prices extended an advance. In economic news, weekly jobless claims surprisingly fell, existing home sales dropped and the Leading Index declined.

The Dow Jones Industrial Average (DJIA) rose 99 points (0.5%) to 18,392, the S&P 500 Index gained 14 points (0.7%) to 2,177, and the Nasdaq Composite increased 44 points (0.8%) to 5,340. In moderate volume, 839 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.98 to $46.32 per barrel, wholesale gasoline was unchanged at $1.40 per gallon and the Bloomberg gold spot gained $2.11 to $1,337.28 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 95.41.

Bed Bath & Beyond Inc. (BBBY $43) reported 2Q earnings-per-share (EPS) of $1.11, below the $1.16 FactSet estimate, as revenues declined 0.2% year-over-year (y/y) to $3.0 billion, compared to the projected $3.1 billion. 2Q same-store sales declined 1.2% y/y, versus the expected 0.5% gain. BBBY reaffirmed its full-year EPS outlook. Shares finished nicely higher.

Red Hat Inc. (RHT $80) posted 2Q earnings ex-items of $0.55 per share, one penny north of estimates, as revenues grew 19.0% y/y to $600 million, compared to the projected $590 million. RHT issued stronger-than-expected 3Q guidance and raised its full-year outlook. Shares rallied.

AutoZone Inc. (AZO $748) announced fiscal 4Q EPS $14.30, versus the expected $14.25, as revenues rose 3.3% y/y to $3.4 billion, roughly in line with estimates. 4Q same-store sales increased 1.0% y/y, below the forecasted 2.1% rise. AZO announced an additional $750 million to its share repurchase program. Shares lost modest ground.

Dow member Cisco Systems Inc. (CSCO $32) and Salesforce.com Inc. (CRM $75) announced a global strategic alliance. The two companies will jointly develop and market solutions that join Cisco's collaboration, IoT and contact center platforms with Salesforce Sales Cloud, IoT Cloud and Service Cloud. Shares of both companies closed higher.

Existing home sales decline, jobless claims surprisingly drop

Existing-home sales in August decreased 0.9% month-over-month (m/m) to a 5.33 million annual rate compared to the Bloomberg forecast of a rise to a 5.45 million pace. July's figure was downwardly revised to a 5.38 million annual rate. Compared to last year, sales were 0.8% higher. The median existing-home price was up 5.1% y/y at $240,200. Housing supply came in at a 4.6-month pace at the current sales rate. Sales were solidly higher in the Northeast, while declining in all other regions, as single-family home sales declined, while condominium and co-op sales jumped. National Association of Realtors (NAR) Chief Economist Lawrence Yun said recent job growth is not yielding higher home sales as inventory is not picking up to tame price growth and replace what is being quickly sold.

As noted in the Schwab Market Perspective: Round and Round We Go…, economic data appeared to be perking up in June and July, aided by better housing reports, but the recent round of data has thrown some cold water on the hopes for a sustainable uptick in growth. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his article, Real Estate Sector: Marketperform, positives of low interest rates, an improving economy, and favorable apartment trends are counterbalanced by the potential for rising rates, a changing consumer, and a potential inflection point for the favorable apartment trends, leading to our marketperform rating. Read these articles at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Weekly initial jobless claims (chart) decreased by 8,000 to 252,000 last week, versus estimates of an increase to 261,000, with the prior week's figure unrevised at 260,000. The four-week moving average declined by 2,250 to 258,500, while continuing claims dropped 36,000 to 2,113,000, south of the estimated level of 2,140,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) declined 0.2% m/m in August, versus projections calling a flat reading. Support came from the components pertaining to stock prices and the yield curve, while the index was bogged down by average workweek and ISM new orders.

The Kansas City Fed Manufacturing Activity Index for September rose to 6 from August's -4 level, compared to forecasts of a gain to -3, with a reading north of zero depicting expansion.

Treasuries were higher, with the yield on the 2-year note flat at 0.77%, while the yields on the 10-year note and the 30-year bond decreased 3 basis points to 1.62% and 2.34%, respectively. Bond yields extended yesterday's declines as the Fed held its monetary policy steady, noting that "the case for an increase in the federal funds rate has strengthened, but decided, for the time being, to wait for further evidence of continued progress toward its objectives." For more on this topic, see our latest article, Fed Stands Pat, but Hints at Future Rate Hike at www.schwab.com/insights, and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar will cool down, with the lone major release expected to be Markit's preliminary Manufacturing PMI Index for September, which is forecasted to remain at the 52.0 level posted in August, with a reading above 50 denoting expansion in activity.

Europe and Asia higher following Fed decision

European equities traded nicely higher, amid a broad-based rally across the sectors, while the global markets digested the decision by the U.S. Federal Reserve to hold off on raising rates, but hint at a possible rate hike this year. However, the Fed lowered its projections to a more gradual pace of hikes down the road, which is weighing on the U.S. dollar and the nation's bond yields. The euro and British pound moved higher versus the greenback, while bond yields in the region lost ground. Amid the likely continued volatility surrounding the timing of the next Fed rate hike, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read these articles at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop. In economic news, French business confidence unexpectedly improved for September.

Stocks in Asia finished higher on the heels of yesterday's decision in the U.S. to not hike rates, which followed the Bank of Japan's decision to change its monetary policy focus to targeting the yield curve and committing to overshooting its inflation target, boosting the global financial sector. However, volume was light as Japanese markets were closed for a holiday. Stocks in China and Australia increased, with basic materials stocks rallying and oil & gas issues showing some strength. South Korean and Indian equities also rallied in the wake of the U.S. monetary policy decision. For a look at the global economic front, Schwab's Jeffrey Kleintop, CFA, offers his article, World Tour: An Around The World Look At the Economic Landscape at www.schwab.com/oninternational.

The international economic docket for tomorrow will be limited, offering the All Industry Activity Index from Japan and Markit's preliminary Manufacturing PMIs for Germany, France and the Eurozone.

Divided Fed Ups Ante on Uncertainty

Charles Schwab: On the Market

Posted: 8/17/2016 4:15 PM ET

Divided Fed Ups Ante on Uncertainty

U.S. equities were able to recover from early losses to finish near the flat line, after the Fed's afternoon release of its July meeting minutes showed a split Committee with regards to the timing of a rate increase. Treasuries rose following the report, while crude oil prices were able to finish higher after the government's oil report showed an unexpected drop in inventories. Earnings results from the retail sector continued to fill the economic docket, while gold and the U.S. dollar were nearly unchanged.

The Dow Jones Industrial Average (DJIA) increased 22 points (0.1%) to 18,574, the S&P 500 Index gained 4 points (0.2%) to 2,182 and the Nasdaq Composite added nearly 2 points to close at 5,229. In moderate volume, 777 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.21 higher to $46.79 per barrel, wholesale gasoline added $0.03 to $1.45 per gallon and the Bloomberg gold spot price ticked $0.21 higher to $1,346.56 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 94.79.

Target Corp. (TGT $71) reported 2Q earnings-per-share (EPS) ex-items of $1.23, above the $1.13 FactSet estimate, as revenues dropped 7.2% year-over-year (y/y) to $16.2 billion, roughly in line with forecasts. 2Q same-store sales declined 1.1% y/y, versus the projected 0.7% decrease. TGT issued softer-than-expected 3Q EPS guidance and lowered its full-year profit and same-store sales outlooks. Shares were solidly lower.

Lowe's Companies Inc. (LOW $77) posted 2Q profits ex-items of $1.37 per share, compared to the expected $1.42, with revenues growing 5.3% y/y to $18.3 billion, below the forecasted $18.4 billion. Quarterly same-store sales increased 2.0% y/y, compared to the projected 4.2% gain. LOW lowered its full-year EPS outlook and announced stronger-than-expected revenue guidance, while reaffirming its same-store sales forecast. Shares finished noticeably lower.

Urban Outfitters Inc. (URBN $36) announced 2Q earnings of $0.66 per share, topping the expected $0.55, as revenues rose 3.0% y/y to $891 million, versus the estimated $886 million. Same-store sales increased 1.0% y/y, compared to the projected flat reading. Shares were nicely higher.

Shares of Cree Inc. (CREE $23) were sharply lower after the LED lighting company issued softer-than-expected 1Q guidance after its fiscal 4Q EPS ex-items of $0.19 came in a penny shy of expectations.

Fed minutes show split Fed

The Federal Open Market Committee's (FOMC) July meeting minutes, released in afternoon action, showed a somewhat divided Fed, with two members of the Committee wanting a rate hike sooner. Most members noted uncertainty in the aftermath of Brexit, while also being unsure of the inflation outlook, needing more confidence in the pace of price increases. However, the overriding consensus was that the Committee saw little risk in a sharp increase in inflation, and that it was prudent to accumulate more data before taking any further steps to remove policy accommodation. With uncertainty regarding Fed policy festering to cause some volatility outside the stock markets, Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her latest commentary, With a Little Help From My Friends: On Africa, Economy and Earnings we continue to believe a rate hike is on the table for this year. The combination of Fed policy uncertainty and the contentious election season could mean the recent lull in volatility will not persist into the fall. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The MBA Mortgage Application Index fell 4.0% last week, after rising 7.1% in the previous week. The fall came as a 4.2% decrease for the Refinance Index was accompanied by a 3.9% decline for the Purchase Index. The average 30-year mortgage rate dipped 1 basis point (bp) to 3.64%.

Treasuries moved higher following the Fed minutes, as the yield on the 2-year note fell 2 bps to 0.74%, while the yields on the 10-year note and the 30-year bond declined 3 bps to 1.55% and 2.26%, respectively. For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Collin Martin, CFA, titled  Tempered Expectations for Bond Returns: Why Hold Bonds?, at www.schwab.com/insights. Also, Schwab's Chief Fixed Income Strategist, Kathy Jones addresses in her latest article, What Does Strong Job Growth Mean for Bond Investors?, at www.schwab.com/marketinsight. Follow Randy, Kathy and Schwab on Twitter: @randyafrederick, @kathyjones and @schwabresearch.

Tomorrow's economic calendar will begin with weekly initial jobless claims, forecasted to tick lower to 265,000 from the prior week's 266,000, followed by the Philly Fed Manufacturing Index, with economists expecting the gauge of activity to move back into expansion territory, as denoted by a reading above zero, by posting a level of 2.0 for August, following July's -2.9 figure. Rounding out the day will be July's Index of Leading Economic Indicators, expected to match June's 0.3% rise.

Europe lower, Asia mixed ahead of Fed report

European equities moved lower, with technology stocks leading the way along with a pullback in the mining sector, while caution likely prevailed as the global markets eyed today's release of the July policy meeting minutes in the U.S. The euro dipped versus the U.S. dollar after yesterday's rally, and bond yields in the region were mostly lower. The British pound lost some ground compared to the greenback, despite an unexpected drop in July jobless claims. The pound advanced yesterday following a hotter-than-expected rise in consumer price inflation, with data out of the nation post the vote in late June to leave the European Union, known as a Brexit, being highly scrutinized for implications of the economic impact of the Brexit vote. Reads on U.K. retail sales and public sector net borrowing are due out later this week. For more on the potential impact of the Brexit vote, read Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Brexit's Impact on Sectors, Part Two at www.schwab.com/marketinsight.

Stocks in Asia finished mixed amid some likely caution ahead of today's release of the U.S. FOMC's July meeting minutes, amid the backdrop of heightened Fed policy uncertainty, which has contributed to volatility in the currency and bond markets. Amid the elevated uncertainty in the markets, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. Japanese equities rose, trimming yesterday's loss, with the yen giving back some of its rally that has come courtesy of the Fed policy uncertainty and lingering disappointment regarding monetary policy actions from the Bank of Japan. Moreover, yesterday's extension of the rebound in crude oil prices boosted the global energy sector, which helped Australia's markets eke out a slight gain. Mainland Chinese securities finished flat and those trading in Hong Kong declined slightly, following the approval of the long-planned stock-trading link between Hong Kong and Shenzhen, which expectations of have bolstered the Chinese markets. Per Bloomberg, this is another step toward opening China's $6.5 trillion equity market to international investors, and may start in about four months. Elsewhere, stocks in both India and South Korea moved to the downside.

Items on tomorrow's international economic calendar include: trade figures from Japan, employment data from Australia and France, the aforementioned retail sales out of the U.K., and CPI from the Eurozone.

Investing through the summer fog of 2012

The economy continued to throw off mixed signals for the month of July, whipsawing traders and making investors even more squeamish and paranoid about where to tuck their wealth.

Added to this seesaw of economic data from everything from July's consumer confidence of 65.9, up from a revised 62.7; the July Chicago PMI of 53.7 up from 52.9.

The May S&P Case-Shiller HPI 20-city M/M rose 0.9%, however, the Yr/Yr fell 0.7%. The June New Home Sales figure fell to 350k from a revised up 382,000. The M/M Pending Home Sales Index for June dropped -1.4% from a revised downward 5.4% increase.

The Richmond Fed Manufacturing Index for July fell from -3 to -17. Conversely, the Empire State Manufacturing Survey, Kansas City Fed Manufacturing Index, Philadelphia Fed Survey all improved from the previous month.

The Dallas Fed Manufacturing Survey, consisting of a Business Activity Index and Production Index, found both indexes falling.

The knowledge that short-term markets are driven first by news headlines and central bank policies rather than primarily macro and macroeconomic data forces a perverse reaction onto the market in this unfamiliar climate we find our capital in.

Deteriorating economic statistics brings hope, by some, of additional stimulus measures from the Feds. Today, August 1, the Feds may shed some light onto their contingency plans, if there are any plans, for supporting a decaying economy between now and the November elections.

If Quantitative Easing III (QE III) or some variation of yield repression doesn't materialize from the Feds, markets will have an excuse to move lower, decaying as well.

Secondly, European Central Bank President, Mario Draghi, kicked off last Thursday's stock market rally by stating that he will do whatever it takes to save the Euro. A quick recap; in theory, generally, saving the Euro and the EU requires capping rising Spanish and Italian debt yields by the ECB agreeing to purchase their sovereign debt.

Because of inflationary fears, many German politicians, including Chancellor Angela Merkel's coalition government, vigorously oppose this action and similar bailout schemes. Two days ago, Monday, Treasury Secretary Timothy Geithner met with German Finance Minister Wolfgang Schaeuble and Mario Draghi, reaffirming their commitment in solving this crisis.

On Thursday, the European Central Bank will hold another policy meeting to find common ground. If the meeting fails to produce the proper response in the eyes of the market, this too will reverse last week's rally and send the market lower.

A third item that will send stocks lower in August, extending the S&P 500 incarceration in the current trading range between 1,099 and 1,419, if the realization sinks in of the draconian effects of federal budget automatic sequestration.

When austerity begins appearing in budgeting decisions in government, and workers begin preparing for possible layoffs and downsizing by reducing personal spending, and when businesses relying on government contracts to purchase their goods and services recalculate their cash flow and revenue, GDP will decline.

The May 2012, G.19 Federal Reserve Statistical Release, dated July 9th, shows "consumer credit increased at an annual rate of 8 percent in May. Revolving credit increased at an annual rate of 11-1/4 percent, while non-revolving credit increased at an annual rate of 6-1/2 percent." It's hard to imagine this type of credit activity continuing in the third and fourth quarters of 2012.

Our anemic economy grew 1.5% in the second quarter, down from 2.0% in the first quarter, with major help from consumer credit. Subtracting significant credit in the third and fourth quarters will exacerbate any weakness.

Individual savings rates were reported up 4.3%, annualized, in the first three months of this year, starving an already malnourished economy of vital disposable income. The minuscule interest currently being paid on savings is also problematic for an economy in need of greater money supply velocity.

An economically weakened Europe and a weakening China will inadvertently push the US economy over the edge unless smaller emerging markets can somehow re-accelerate the global economy while avoiding the developed nations' debt contagion.

The final culprit with the motive and opportunity to assassinate the economy is stagflation. As 2012 futures' prices on corn, oats, soy beans, and wheat reached multiyear highs, 1,300 counties spread over 29 Midwest states have been declared natural disaster areas by the USDA.

In the 1970's, President Richard M. Nixon imposed wage and price controls in an attempt to snuff out stagflation and inflation. President Gerald Ford attempted to talk down inflation with a Whip Inflation Now (WIN) campaign, complete with WIN buttons. Inflation ran rampant throughout the 1970's until a new Sheriff rode into town in 1979.

The newly appointed Federal Reserve Board Chairman, "Tall" Paul Volcker, ended inflation by jacking up short-term interest rates to 22%. Although, lifting interest rates to nosebleed levels induced at the time the deepest recession since the Great Depression, inflation did not return.

Another smart decision made by the government at the time was issuing callable long-dated treasury bonds and zero coupon bonds to minimize interest expense. This morning, Treasury announced it is investigating issuing floating rate notes; while interest rates are lower than they have been in the past 100 years. I'm puzzled by such a decision.

This earnings' season, restaurants such as McDonalds (MCD), Chipotle (CMG), Buffalo Wild Wings (BWLD), have admitted to struggles with cost inputs, missing earnings estimates, and are now lowering guidance for upcoming quarters. Food suppliers like Hormel Foods Corporation (HRL), Tyson Foods, Inc. (TSN), and Smithfield Foods, Inc. (SFD) are experiencing these headwinds, as well.

Brent Crude oil is priced north of $100 dollars a barrel. Members of OPEC require the price of oil to stay north on $80 dollars a barrel to maintain political stability at home. That price level is in conflict with jump-starting the global economy that is continuing to deleverage from the previous decade.

Regardless, if the price of oil should rise or fall short-term, the global economy will be petroleum-based for decades to come. Therefore, an essential building block for any inflation defensive portfolio requires an integrated oil company such as Exxon Mobile (XOM) or Chevron (CVX).

One final thought; although, we have experienced deflation in many things since 2008, technology, of course, real estate and virtually any asset requiring financing, and the cost of capital itself, this economic period will end, too. And once more, we will again face and fight inflation.

Unappreciated is the two-stage intermediate step between deflation and inflation – stagflation. Ben Bernanke has spent years and trillions of dollars attempting to re-inflate asset prices. One day he will succeed. At that point, Stage One, the rising cost of living, or cost-push inflation kicks in, whereby, too few dollars are available for rising prices.

Stage two of the stagflation equation is flat wages and personal income. Whether one draws a paycheck from a job or clip coupons from investments, purchasing power begins contracting, not growing.

This reality of less disposable income relative to prices, combined with an aging population and extended life expectancy is a recipe for structural economic arrested development until we surrender to full-blown inflation in future years.

Politicians will feel obligated to rectify the former condition and then, the more radical and dangerous phase of inflation occurs, demand-pull, leading to too many cheapened dollars chasing too few goods.

Confidence or the lack thereof, in a nation's currency, is the thin line straddling inflation and hyperinflation.

And, it is here, that your portfolio of hard assets such as gold and silver, agricultural commodities providing food security, natural resources such as land, timber, water, energy, selective adjustable rate debt, and very selective stocks, will pay off for the patient, long-term, investor during inflationary times.

10 Reasons to Buy Gold at $1,300.00 an Ounce

1. Technical Breakout

From a technical analysis perspective, there has never been a better time to own or purchase gold. Every tradable asset has what is known as support and resistance. Support is the value by which any asset is assumed safe for buying. This is determined by previous price levels.

When prices reach this level more buyers than sellers step into the market. In the latest leg of the gold bull market, $1,000 has been established as the new floor.

Resistance is the price by which assets cannot move beyond because of an overhang of existing supply in the market. After gold reached $850 an oz. in 1980, those unfortunate buyers at that price level waited 30 years, watching the price of gold fall below $300 an oz. before $850 eventually was taken out.

The price of gold traded briefly in 2008 and 2009 in a range between $725 and $1,025 before rising short-term and long-term trend lines confirmed that the path of least resistance of the price of gold was upward.

2. Undervalued on an Inflation-adjusted Basis

If you calculate the cost of gold from it 1980 high of $850 an oz., on an inflation-adjusted basis, the price of gold today would be $2,250 an oz. At today’s price around $1,318 an oz., gold can increase $900 before it would equal its 1980 high. From there, its price can expand from increase demand.

All assets trade in cycles. Before the end of a cycle an asset becomes overvalued. Likewise, at the beginning of a cycle, an asset has been neglected by its market and is undervalued. Gold, having cleared overhead resistance, is now free to seek its 21st century value; including overshooting that fair value before the cycle ends.

3. A Store of Value

The major stock averages 10-year average annual return is virtually zero. Over the last three years, residential real estate has lost 25% to 50% of its value, depending on the market you’re referencing, yet gold has been up nine of the last ten years. This should continue.

The market meltdown of 2008 nearly destroyed the credit market. Real estate is the most credit dependent asset there is. The Mortgage-Backed Securities market, which provided the liquidity for the mortgage industry has not been repaired. Therefore, a structural cap has been placed on the future value of real estate.

U.S. stocks rose in value in the 1980s and 1990s because of deregulation, loose credit, and undervaluation. The inflationary 1970s made stocks poor investments relative to hard assets. By the beginning of the 1982 secular bull market in stocks, the average market multiple for stocks, the number of times over earnings stocks are bought for was between five and ten. Currently, the P/E (price x earnings) ratio for the S & P 500 Index is 17.08.

4. A Rising Asset in a Rising Asset Class

The soft and hard commodity complexes are on a roll. There are various recessionary and depression levels for many assets here in the U.S. towards home ownership, unemployment, commercial real estate vacancy rates, etc. But demand in Asia (the 21st century center of the universe) and South America is strong and getting stronger, monthly.

Foxconn in China, Apple (AAPL) Computer’s primary supplier recently gave its employees a 66% wage increase following 10 work-related suicides. Average U.S. wages have been flat for 10 years. Russia’s heat wave this summer severely reduced its wheat crop. Palladium, silver, coffee, cotton, wheat, pork bellies, and lean hogs are all up significantly for the year. The emerging market countries were not as leveraged as the west; therefore, their economies rebounded faster from the global recession. Their demands for commodities are driving up prices.

5. Upcoming Currency Devaluation

Last week, the Financial Times reported that Brazilian finance minister Guido Mantega said central banks are locked in an “international currency war”. The U.S. Treasury Secretary Tim Geithner is currently pressuring the Chinese to adjust the Yuan against the dollar. Japan is manipulating the Yen to increase exports. Other exporting countries are deliberately attempting to drive their currency lower to expand their respective domestic exports. Unfortunately, this race to the bottom cannot be won by all.

Europeans fled the Euro this spring after Greece debt problems appeared to be growing. Now, the Euro is surging because Ben Bernanke has all but signaled the availability of QE II or QE Lite after the November elections. The U.S. dollar became the least bad currency in the world and a safe haven. That is changing.

The U.S. economic recovery, which is now forecasted to struggle until 2015, will compel currency debasement by the Feds and compel countries and investors to reexamine their dollar holdings. This will add significant downward pressure on the dollar and upward pressure on the price of Gold.

6. Gold as an Upcoming World Reserve Currency Component

This story ran in Reuters at the end of September:

Dollar to remain world's reserve currency—Lockhart

(Reuters) - The U.S. dollar will remain the world's reserve currency, though some diversification over time is inevitable, Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday.

"It's very far-fetched ... that the dollar will lose much of its position in the near term as a reserve currency," he said in response to an audience question after a speech at the University of the South.

"I do, however, expect a gradual reduction in the dollar's role as the rest of the world diversifies and some new currencies become qualified to be held as a reserve currency," he said.

It’s rumored that discussions are underway by various countries to prepare for when the U.S. dollar is no longer the world's reserve currency. China, Brazil, Russia, and France are in talks, with the aid of the International Monetary Fund (IMF), when the world loses faith in the dollar.

Central banks from around the world have stopped selling their gold. This is a reversal from your normal practice for much of this decade which implies that the value of gold is on the ascent.

Since no single currency has the ability to replace the dollar, a basket of currencies and gold will be created. Until such time, the informal reserve currency has defaulted to gold.

7. A Shift in Supply/Demand

The World Gold Council reported on second-quarter demand rising 36% compared with the second quarter of 2009, to 1,050 metric tons. Investment demand rose 118%, to 534.4 tons, and of that segment, ETF demand represented 291.3 tons, which was a 414% rise over 2009's second quarter.

Worldwide demand for gold is rising. From gold bar dispensing ATM machines at the Frankfort, Germany airport and the Abu Dhabi Emirates Palace Hotel, to Exchange Traded Funds (ETFs) such as GLD, IAU, PHYS, and SGOL. The U.S. Mint 2009 Ultra High Relief Double Eagle Gold Coin has sold out. However, Thursday evening, the U.S. Mint opened the 2010 American Gold Eagle Proof Coins, Rust was discovered forming on the Bank of Russia’s 2009 "St. George the Conqueror" .999 fine coins.

Domestically, baby boomers will live longer and will need more principal in order to sustain their lifestyle. This will necessitate the need to diversify away from paper assets and into hard assets such as silver and gold as inflation returns.

8. A Momentum Play

The return on gold this year is forcing money managers to throw in the towel and adjust their allocation for the yellow metal. Managers will have the remaining 90 days of 2010 to salvage their portfolio’s return for the year.

The year-to-date return for the S&P 500 Index is 3.8%, the DJIA is 4.9%, the NASDAQ 100 is 8.2%, and the Russell 2000 is 9.6%; while gold is up 22.7%, silver is up 37%, and palladium is up 43.8%. True alpha, and the path of least resistance is precious metals.

9. Betting With the House

For the price of gold to collapse from current levels, congress would need to enact legislation to correct the problems of wasteful spending, high unemployment, an expanding federal debt liability, and sensible tax increases.

The November elections of 2010 are completely irrelevant. Whether it is the Republicans or the Democrats who control Washington DC, the government's inability to correct the problems that persist in today's economy will continue. The price of gold will move higher whether it's gridlock or austerity by the GOP or of fiscal stimulus by the Democrats.

Thomas G. Dolnan’s Barron’s editorial dated October 2 observes:

Even a step in the right direction would face huge opposition. A permanent 10% cut in retirement benefits of all kinds, and the same cut applied to health-care spending, including doctors' and hospital fees, would be worth maybe $150 billion a year. A 10% cut in military spending was worth about $60 billion last year. It could occur automatically if the wars wind down. A 10% cut for everything else the government does except pay interest would be worth about $120 billion.

These would be real cuts from last year's spending, not a reduction from the rate of growth, with allowances for inflation and population growth. But they would take us only a quarter of the way to a balanced budget.

The expiration of the Bush income-tax cuts and restoration of the estate tax would raise about $400 billion a year. The tax hike and the 10% cut together would leave another $700 billion a year to be cut or taxed. Fortunately, that happens to be the advertised cost of the anti-recession programs.

Such spending cuts and tax increases are a reasonable program for national renewal—and for political suicide. So don't ask why candidates aren't proposing spending cuts to balance the budget. Borrowing is so much easier—until no one will lend.

10. The US stock and bond markets are predicting no growth in the future.

The yields on bonds and corporate earnings through cost-cutting informs sober investors that between now and 2015, the U.S. economy will struggle and will be unkind to equities.

Stock rallies are no longer a proxy for economic growth. Stocks can just as easily rise because of a drop in the dollar allows foreign buyers to purchase U.S. stocks at a discount.

Corporate culture, the ego to the stock market’s id, no longer cares about long-term goals and results, when the future is always 90 days away. Therefore, long-term, as we now know it is a contemporaneous creature that is shallow but dangerous. This environment debases paper assets and benefit hard assets. 

Discerning Trends and Fluctuations From Direction and Volatility

There is a cornucopia of objective and subjective data flowing into the marketplace 24/7. Once out there, it’s twisted and molded into supporting or rejecting whatever narrative is being presented. It’s this world that we must employ all our analytical skills and investment experience to discern trends and fluctuations from direction and volatility.

On April 6th, it was reported in the New York Times from a story entitled “Upbeat Signs Revive Consumers’ Mood for Spending” the following statement:

The mood has gone from panicked to cautious, and now, as Mark Zandi, chief economist for Moody’s Economy.com put it, some consumers are “almost a bit giddy.”

On April 7th, The Federal Reserve Statistical Release G.19, Consumer Credit reported the following:

Consumer credit decreased at an annual rate of 5-1/2 percent in February 2010. Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

Econoday published this analysis to explain the report:

Highlights

Well the rebound for consumer credit lasted only one month. Consumer credit fell a steep $11.5 billion in February, sinking hopes that January's increase would mark the end of the steepest consumer credit contraction on record. A $5.6 billion upward revision to January, to plus $10.6 billion, does take some of the sting out of February's contraction as do preliminary indications for strong retail sales in March. But February's data are bleak, showing a $9.5 billion contraction for revolving credit and a $2.0 billion contraction for nonrevolving credit. Tight credit standards together with the consumer's mood to save are not helping the economic recovery. Stocks showed little initial reaction to the report.

Market Consensus Before Announcement

Consumer credit outstanding in January rose $5.0 billion, breaking a record of 11 consecutive months of decline. The gain was led by a $6.6 billion rise in non-revolving credit (car loans, mobile homes, education, boats, trailers, vacations). But revolving credit (credit cards) still declined by $1.7 billion.

Finally, add into the mix, auto sales that were reported on April 1st, and again Econoday explains:

Highlights

Vehicle sales in March proved much stronger than February, the first solid indication of what looks to be a strong month for retail sales. Sales of domestic-made cars and light trucks rose to an annual unit rate of 8.8 million, up more than 15 percent vs. February's 7.6 million rate. Improvement was broad based among manufacturers but was centered at Toyota (TM) where aggressive incentives led to a major jump for the troubled manufacturer. New car sales make up about 12 percent of total retail sales. Gasoline sales, which make up about 10 percent, also look to be strong in March given gains for demand, seen in the weekly EIA petroleum inventory data, and gains in price, also posted weekly by the EIA. Chain stores will round out the retail picture for March when they post results next Thursday.

Market Consensus Before Announcement

Sales of domestic-made light motor vehicles in February dipped 2.2 percent to a 7.7 million unit annualized pace, largely on severe snow storms cutting into showroom traffic. Imports, however, fared worse, dropping 7.9 percent to 2.7 million units. The import share was hurt by Toyota's recall-related stoppage of sales on certain models. Combined domestics and imports were down 3.7 percent to 10.4 million units from 10.8 million in January. Deal making by competitors going after Toyota market share could boost overall sales in March.

Question: Why did the market tank at the close Wednesday, after the release of the G.19 report, when it was already known February was a poor month for consumer credit? Between 3:00 pm and 4:00 pm Wednesday, this was the most significant news to come out?

Also, how do you square Ben Bernanke’s testimony before congress explaining the to keep U.S. interest rates low because of a fragile economy when the day before Australia’s central bank increased their benchmark interest rate, by a quarter percent to 4.25%, the fifth time in six months, over fears of inflation, following China’s changing position on inflation and rising commodity prices?

Are the Feds conflating a residential real estate inventory problem with GDP growth? Can we see a further drop in home prices, an expansion in the economy, and miss the beginnings of a cyclical turn in inflation? Will policy and politics interfere with sound but tough economic choices in Washington DC? What warning signal is the debacle in Greece sending to the U.S.? Will Paul Volcker be heard by the administration on banking reform and will Larry Summers be leaving the circus through the revolving door to Wall Street?

Man, and you thought the Duke/Butler NCAA basketball final was a cliffhanger.

The Fed’s Other Discount Window Headline

By now, everyone has heard about the Feds raising the discount window rate from ½ to ¾ percent. There was a second decision revealed in the press release that received scant attention;

“In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.”

The Fed will no longer be a temporary dumping ground for dubious assets. The pawnshop window is closing.