The S&P 500 rose for its seventh consecutive week, but by only 0.1%. The Dow came within 1% of its all-time high, and the S&P 500 traded within 3% of its all-time high, but each day's closing in the S&P was remarkably flat - in a narrow range from 1517 on Monday to 1521 on Thursday. Maybe traders are trying to dope out the market's long-term direction before mounting an assault on new highs.
The Fed's Easy Money Policies Fuel More "Merger Mania"
Merger mania is back in the news as Warren Buffett and 3G bought H.J. Heinz in a $28 billion deal on Thursday, following the Virgin Media/Liberty Global deal two weeks ago. With Corporate America now raising about $2 trillion per year at attractive rates (3% or less) in the bond market, many companies are awash with cash, with many are using to either buy back their shares or to buy other companies.
This bond-issuing frenzy will continue as long as the Fed maintains its 0% interest rate policy. Corporate America could raise another $5 trillion in cash by mid-2015. Since the total capitalization of the U.S. stock market is about $18 trillion, corporate buybacks will provide a solid underpinning for stock prices, i.e., if Wall Street does not price a stock right, that company could virtually disappear via a takeover.
A week ago, the Vice Chairman of the Fed, Janet Yellen - who is widely viewed as a leading candidate to succeed Ben Bernanke, should he step down next January - confirmed in a speech that with inflation low and unemployment high, "it is entirely appropriate for progress in attaining maximum employment to take center stage" in Fed policy discussions. In other words, rates will remain near zero and quantitative easing will continue until we see "near-normal" unemployment rates, down around 6.0% to 6.5%. So, if you think the Fed is dovish now, wait 'til you see the easy money policies if Yellen succeeds Bernanke.
Finance Ministers Debate Paper vs. Gold as Meteors Fall
At the G-20 meeting of finance ministers and central bankers held in Moscow last Friday and Saturday, a massive sonic boom from a huge meteorite falling to earth in Russia shattered windows, rocked buildings, and sent hundreds to the hospital. Pundits said that shock must have scared the bankers into a sudden conversion, since they said they would "refrain from competitive currency devaluations. We will not target our exchange rates for competitive purposes." This is central bank doublespeak, of course, since their real intention is to continue to seek trade advantages, essential to keeping their economies growing.
Interestingly, Russia does not seem to have confidence in any currency, since Bloomberg reported last week that Russia purchased 570 metric tons of gold in the past decade. Fortunately, Russia's gold reserves remained safe from the meteorite last Friday, but some of its nuclear stockpile was dangerously close to where the biggest chunk of the meteorite ultimately landed. Meanwhile, the world's central banks bought 535 tons of gold in 2012 alone - the most in any year since 1964. Clearly, these central bankers will talk up their currencies while buying the one "currency" that is impossible to "print," gold bullion.
There is no doubt these finance ministers and central bankers remain worried about the ongoing weakness in the Japanese yen and the U.S. dollar. Some major hedge funds are now reporting very profitable trades from shorting the Japanese yen, but I suspect the U.S. dollar will become the most lucrative short trade going forward, since the U.S. dollar has been exhibiting near-term weakness relative the Japanese yen. One result of a weaker U.S. dollar is that the Labor Department reported that import prices rose 0.6% in January. I expect to see import prices continually rising in the upcoming months.
Stat of the Week: January Retail Sales Slowed to 0.1%
On Wednesday, the Commerce Department announced that retail sales rose by just 0.1% in January, so it appears that the 2% increase in withholding taxes may be pinching consumers a bit. This does not bode well for first quarter GDP growth, since consumer spending accounts for about 70% of GDP growth.
Here's one dramatic example of consumers cutting back on shopping: A leaked e-mail from an executive at giant Wal-Mart hit the newswires on Friday. The executive's candid words came as quite a shock: "In case you haven't seen a sales report these days, February MTD sales are a total disaster…the worst start to a month I have seen in my 7 years with the company." Since Wal-Mart also had disappointing January same-store sales results, it appears that the new, higher tax collections have impacted sales.
This retail reversal could be a one-time event, resulting from the "sticker shock" of seeing smaller take-home pay. We should never underestimate U.S. consumers. They will return to the malls. One hopeful sign is that the University of Michigan/Reuters consumer sentiment index rose to a preliminary 76.3 in February, up from 73.8 in January. This is the highest reading in three months and a hopeful sign that consumers might eventually shrug off higher withholding taxes, which hindered January sales.
Another piece of good economic news is that the Labor Department reported last Thursday that initial jobless claims declined 27,000 in the latest week to 341,000, but the closely-watched four-week moving average rose 1,500 to 352,500. We should see that number dip back below 350,000 in this week's report.
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Disclosure: I am long HNZ, VMED, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.