New Year, New Order

Although we were off the mark in predicting lower GDP growth (we said 3.3% while the reality for Q4 was 2.6% growth), the trend is what counts and clearly Wall Street didn’t like what it read in the latest report. U.S. and all major world averages, except the Nikkei, were off today. U.S. equities were hit the hardest; the big three all were off more than 1%.

It is striking though that crude oil’s incendiary rise of 8% on the day didn’t seem to soothe Wall Streeters. The bellyaching about how low prices are bad for energy companies and therefore for stock prices, seems to have gotten lost today. If low prices are bad for the two main composits, shouldn’t joltingly higher prices be good for the averages?

The dent in equities was excellent for gold and silver bulls today, although please… we are in for more volatility, more anxious moments.

Yet, in our book, the volatility is not classic volatility. We believe we are seeing a push and pull scenario in which investors and analysts are still reading the FOMC tea leaves and the ECB QE tea leaves as they continue to come to grips with what the true growth figure is in China, and determining what exactly is wrong with Japan and can it be fixed.

But let’s focus on the FOMC. All news is yesterday’s news. As soon as it’s made, it’s somewhat useless. So, conditions that the Fed reacted to this week in its Federal Open Market Committee meeting are now old. Today’s news, which we’re sure the Fed had knowledge of, would seem to reinforce the notion that the economy has weak spots and, as always, it has a weak quarter, the 4^th, which is typically a “draw down” quarter when inventories are bought off, fewer new cars are manufactured, etc.

We don’t think there’s much wrong with the American economy that the next few months won’t smooth over. Lower gas prices, even after today’s surprise jump, mean more money in the pockets of consumers, the ability to pay down debt, and a general feeling that we are finally gaining some momentum. The Big Mo’ should not be underestimated.

So, we believe Fed interest rates are going to stay put well into the middle of the year. (We have elaborated on this in many past fundamentals letters posted on site.)

What we did see today in gold and silver is especially heartening, though. There was a flight to quality. We saw it not just in precious metals but in the continued rise of the U.S. dollar, the yen, and a decline in bond yields.

Oil is the outlier today. The surge, while greater than expected, has been a long time coming. Prices have been hovering for weeks now, moving up and down in a narrow range. News came that with current off lining of U.S. and Canadian rigs, the number of operating wells worldwide has fallen by 24%. Thus, the slowdown in production is really right around the corner. Fundamentals and technicals are finding that truth now and the two analytics sets are merging. In some senses, we can include oil as part of today’s flight to quality.

Volatility is still hanging about, but what we are witnessing is the resolution of a new order for the still-new year. Wishing you as always, good trading,