Brennaman's Four Points For The Week February 16, 2015

1.            Ukraine and Iraq – Pick Your Poison – Parties on both sides have agreed to a ceasefire but not after fierce shelling and firefights for the two days leading up to the start of the accord.  The leadership of the separatist groups has not been part of the discussion, rather Vladimir Putin has been the surrogate negotiator – this is interesting since he has “no soldiers” in the fight.  The U.S. for good or bad cannot decide on a cohesive course of action for aiding the Ukrainians or helping bring the accord into being.  Iraq presents similar problem but more pressing as ISIS appears to have “discovered” the army base that houses U.S. personnel sent there to train Iraqi security forces.  This attack, while unsuccessful, threatens to pose a situation where U.S military personnel are thrust into a direct combat role just to provide for their own security.  This would clearly widen the conflict and bring the U.S. into a more active participant on the ground versus airstrikes.  Iraq or Ukraine poses significant challenges to the U.S. and the administration reluctant to enter into another ground war even as the Afghanistan war effort is coming to a fitful close.  Our position as leader of the free world (which does not necessarily include Russia) may set the decision before us – Do we really have a choice?  The situation in Yemen is a topic for another day.

2.            Economy – Inflation as A Result of Western Port Slowdown – Trade traffic through western U.S. ports halted at midnight on Wednesday as port owners (facility operators actually) stopped all loading/unloading activity for the long holiday weekend (essentially a five day lockout).  Longshoremen and related workers to include truck drivers, crane operators and laborers were told there was no work for them this weekend and that no ships would be offloaded therefore no containers to depart via rail or road modes.  Meanwhile ship commerce to these ports is piling up in the form of laden ships with goods bound for U.S. manufacturers, producers and consumers.  And the dollar counter continues to run as costs to the receivers of these goods are picking up the tab for the goods to sit on these ships.  This additional cost will likely result in a slight pickup in producer prices and hence consumer prices; and that is if the lockout is indeed short-lived and offloading resumes at a normal pace.  The normal pace for the last 7-9 months has been but a fraction of the normal pace before contract negotiations fell apart last summer.  The inflation impact will be temporary but if the lockout continues or the work slowdown resumes the broader impact on the economy could set back the growth rate of the country’s economy just when we appeared to have turned the corner.  You will recall these ships have no choice but to go the western ports since the Panama Canal cannot handle the majority of these ships due to their size and to make the trip around Cape Horn or through the Middle East is prohibitive in cost and dangers.  The true cost of the port closure/slowdown will be in lost production, lack of goods to sell and a reduction in profits.  All drags on the U.S. economy.

3.            Corporate Earnings – Growth is a Good Thing, But Is It Enough? – The earnings season is progressing and for the most part Wall Street is pleased with the results from the fourth quarter.  As of Friday, 378 of the 500 companies of the S&P 500 have reported with 71% of companies beating estimates, 11% matching and 18% below expected earnings.  These results created a blended earnings growth rate (for the Index) of 6.5% for the quarter which is more than respectable.  The growth rate for the entire 2014 season was 10.3%.  This is in line with the consensus earning’s estimates most street analysts had at the beginning of the year.  A recent report (U.S. Census Bureau) stated that retail spending fell .8% in January worse than the consensus of -.5%; this following a decline of .9% in December.  The biggest contributor was a dive in gasoline station sales was and new automotive sales.  Interestingly enough spending at restaurants including casual dining was up in January and in December.  Nonetheless consumer spending in the fourth quarter of 2014 was robust and consumer related stocks had corporate earnings gains of 13.2% for the quarter; third highest recorded in the index behind Healthcare (22.7%) and Technology (17.6%).  Another view of the picture has to do with revenue growth.  Revenue growth to date is 1.9% for the fourth quarter, a significant decline from the third quarter (4%) but the growth for the year stands at 13.7% (also in-line with estimates) with 20% of the companies left to report.  But it is expected these revenue numbers will keep pace with the previous results.  All in all these earnings numbers are about where we would expect them to be in a slow growth economy but they do beg the question are they strong enough to sustain the economy in light of the struggles in the European Union and the emerging markets?

4.            Federal Reserve Watch – The Focus Is On The Growing Economy – The Federal Reserve Open Market Committee’s (FOMC) will not meet again until March 17 so they have time to evaluate the economy as well as the health of our partners in the European Union.  Aside from Germany most of the European Union countries are approaching the edge of recession if they have not already gone into residence in that egregious zone (Greece comes to mind but Italy has been in recession for nearly four years).  While these situations are point s of interest, the FOMC is focused on the trifecta of information they need to study before deciding to raise short term interest rates.  Namely, unemployment (including wage growth), inflation level (target is 2%) and the overall status of the country’s growth (gross domestic product – currently sitting at 2.6% annualized through Dec 2014).  Real inflation simply does not exist.  Excluding energy and food it is at .8%.  There will be some temporary price increases if the port situation in the western cities is not resolved but longer term the impact may be negative on the GDP growth as goods may not be available for production or sale.   The impact of six weeks of brutal cold weather in the eastern half of the country could also impact the growth rate in the GDP (remember 1Q 2014?).  We are also facing a slowdown of exports due to the stronger U.S. dollar and the increase of imports due to higher demand here.  Anecdotally the stronger dollar helps drive imports higher, keeps prices lower but we are witnessing a dramatic reversal of the trade deficit which has declined over the last three quarters, this gap is now widening again.  On top of all this the flow of investment dollars continues to fly into U.S. equity and fixed income markets as we have positive yields on our government bonds, solid corporate earnings, a growing economy and a reliable currency for trade.  All of these are issues for the FOMC to grapple with as they decide when to make the move towards higher interest rates.  Meanwhile the equity markets are seeing significant strength after a disappointing January with the three major indices (DOW, S&P and NASDAQ) hitting all-time highs this week.  Clearly the mantra of do not fight the FED is being adhered to as investors seek solace in the equity markets, seeing them as the only clear alternative in the investing market.

“You recognize but one rule of commerce; that is (to avail myself of your own terms) to allow free passage and freedom of action to all buyers whoever they may be.” François Quesnay.

Have a good week and be aware that the cold weather is haunting us still.

Steve

Brennaman’s Four Points for the Week February 9, 2015

Brennaman’s Four Points for the Week

1.       Ukraine - Putin Rhetoric is intensifying – I have been writing about the Ukrainian Crisis for months and the mainstream media decides it is front page news.  Fighting continues in the eastern provinces of Ukraine as leaders from the European Union (Germany and France) met separately with Russian President Vladimir Putin and Ukrainian President Petro Poroshenko during the week.  The talks with Putin on Friday ended with absolutely no progress save the fact they will meet again this coming week.  Missing at these meetings with Putin was President Poroshenko as well as other leaders of the EU or the United States.  The U.S. Congress and the Administration are beginning debate on providing military arms and direct logistical support to Ukraine.  This possibility has not resounded well with President Putin as he has repeatedly said this sort of action by the U.S. would be an escalation to the situation and a direct threat to the national security of Russia.  German President Merkel is to meet with President Obama on Monday February 9^th to discuss the Ukrainian situation.  In the interim, fighting continues in the Ukraine with the port of Mariupol a key point in the fight.  If Mariupol were to fall into the hands of the Russian Separatists, a land bridge would exist from Russia to the Crimea (annexed by Russia in March 2014).  The fall of Mariupol would also place extreme pressure on the Kiev government in trying to maintain (or regain) sovereign control over eastern Ukraine.  Vladimir Putin’s strong rhetoric is aimed in part to keep the U.S. on the sidelines as the ineffective motions by the EU coniine to allow the crisis in eastern Ukraine to worsen.

2.       Business – Roadblocks to Forward Progress – The continued dock workers slowdown in western ports is in its 7^th month with no signs of ending anytime soon.  The gridlock at 29 ports is increasing and total shutdown is possible in the next 5 to 10 days if operations do not pick up.  The slowdown has created the situation where there is literally no place to put incoming containers as they are offloaded.  Container ships are standing in line, anchored in the harbors or offshore waiting to berth and offload.  A port short down could set back the economy significantly as up to $1 Trillion worth of goods go through these ports annually.  While there is no strike or port lockout at present the result is the same as movement of goods from these ports to other parts of the nation has slowed to a trickle.  The immediate effect is trucks and trains are idled as goods are taking longer to be offloaded and reloaded onto the next conveyance mode.  Time is money and when the goods finally reach their destinations the cost may well be higher.  Local governments are alarmed but as yet the federal government in the form of the National Labor Relations Board (NLRB) has taken no direct action to bring a rapid solution to the situation.

3.       Energy – Tis the Season to See Oil and Gasoline Price Movements Diverge – Oil imports are at the lowest level since 1996 (U.S. Census Bureau) at 280 million barrels for the 12 month period ending December 31, 2014 (peak was 415 Million barrels in 2005).  The price of oil has climbed back into the $50 dollar range making analysts think a bottom has been has been realized.  Oil rig count in the Gulf of Mexico and inland U.S. has stabilized making one wonder if the glut will continue as shale production will continue as well as gulf production.  The dollar price of $53 per barrel of crude is above the presumed breakeven of $45-47 per barrel that the hydrocracking companies need to sustain operations so the rise is good news however, we will soon see the seasonal switch to summer gasoline blends temporarily slows gasoline refining so perhaps gasoline prices will continue to rise as the price of oil remains constant in the upper $40’s to mid-$50’s.  Meanwhile gasoline prices nationwide have climbed precipitously in the last week to 10 days with the national average standing at $2.26 (AAA), an increase of $.20 during the period.  Still better than the $3.04 per gallon of a year ago. 

4.       The Economy –Will The Federal Reserve Take Notice? – The Gross Domestic Product for 2014 came in at 2.4% for the year buoyed by strong consumer spending escalating into the fourth quarter.  The growth was spurred on by lower energy prices and continued strong hiring in nearly every economic sector (except energy).  A problem arose in the 4^th quarter when the strong U.S. dollar dampened the demand for U.S. goods abroad increasing the trade deficit as imports picked up exponentially as a result of stronger domestic demand for products manufactured overseas.  The strong U.S. dollar is likely to continue as investment money continues to move into the U.S. financial markets including real estate in major east and west coast cities.  Unemployment increased fractionally from 5.6 to 5.7% in the month of January but the results for the month shed encouraging news as the labor participation rate improved (up.2% to 62.9% from 62.7% in December) as well as continued progress in hourly wages (hourly wages increased .5%, not robust but not going backwards).  The U.S. economy added jobs in the three months ending in January at a faster rate than at any time since 1997.  Still an obstacle is the creation of key jobs in manufacturing and production.  The tick up in the unemployment rate is attributed to unemployed workers who had previously stopped looking returning to the job search fray.  But this factor is difficult to quantify.  Nonetheless an improving and robust employment cycle could prompt the Federal Reserve (FED) to raise short-term interest rates as soon as June.  However, a critical target is the overall inflation rate which currently stands at 1.6% well below the target of 2%.  The 2% number has been the target for the FED since the recovery began and seems to be an elusive target.  Minus food and energy the CPI stands at .8%.  These low numbers represent a challenge to the FED in considering the level of interest rates.  Prematurely raising rates could threaten price growth and spur deflation.  Currently, low prices help consumers who fuel 66% of GDP (slightly higher in December at 70%).  Deflation could slow consumer spending as buyers would wait for lower prices leading to lower production and corporate profits and the downward spiral begins.  Not a good recipe for an economic recovery that is still tepid in its pace.

“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.” Niccolo Machiavelli, The Prince, 1532.

Have a good week and be unafraid of trying new ideas.

Steve

Vol2 Issue 5

Brennaman’s Four Points for the Week January 5, 2015

Brennaman’s Four Points for the Week

1.       Energy – The windfall Continues For The Consumer – Seven states now have average gasoline prices under $2.00 per gallon and based upon oil futures many more states will join the list as oil breaks the $50 per barrel barrier.  The world-wide glut of oil continues even as the price continues to negatively impact many oil producing countries dependent upon oil revenues to maintain their budgets.  Adding to their misery is the fact that oil on international markets are priced and transacted in U.S. dollars.  The U.S. dollar is at the highest level since 2009 and seems to be gaining momentum as the global economy continues to slow.  The U.S. is seen as a safe haven for investors as they seek yield and growth of assets, hence a demand for U.S. dollars.  Investors are also flocking to the U.S. Treasury market in seeking safety and yield as compared to the falling yield levels in the European Union.  Lower oil prices, slowing economic growth and political uncertainty are definitely helping the U.S. markets but how long until the bloom is off the rose?

2.       Market Outlook – The Bull Market Continues to Charge –The Bull market that began in March 2009 has turned in yet another stellar yet frustrating year.  The S&P 500 turned in a 13.7% return to go with the DOW’s 10.04%.  The NASDAQ also performed well at 13.4%.  This nearly six year run came about despite near anemic growth and high unemployment for most of the period as the markets have been propelled by extremely low interest rates, low valuation rates (until 2014) and a realization that investors did not want to miss the train as it was leaving the station.  Foreign investors have also played their part as they seek the safety and transparency of the U.S. markets as opposed to some overseas markets.  As the new year begins, the momentum is tainted somewhat as the Energy Sector continues to labor under the pressure of falling crude oil prices and the resultant margin compression as the price of finished goods fall in concert due to low demand and natural market pressures.  The Energy Sector has fallen in the S&P 500 in terms of percentage points to the seventh position pout of ten sectors.  Historically, the sector has been in the top five.  This underperformance is holding back the performance in the new year to a certain extent but other issues abound such as lower global demand for U.S. goods due to slowing economies as well as concerns over future corporate earnings.  But these issues should not thwart the market’s progress for too terribly long as the Federal Reserve remains on the sidelines, the U.S. economy continues to recover/expand while the global economy lags behind and the U.S. consumer remains active.  Volatility will creep into the markets so the markets will, as always, present challenges and opportunities to us all.

3.       Economy – Growth at a Sustainable Rate – We like to compare the 1990’s to where we are today in terms of everything pre-Dotcom Bubble as if the Great Recession is comparable to the fall of the technology sector and the subsequent demise in the market (Bear Market 2000-2002).  So let’s go there in in looking at gross domestic product (GDP) of the U.S.   The 1990’s were indeed a heady time in terms of the GDP of the U.S.  The ten year period tuned in a 3.16% annualized growth rate in the GDP, with 4 years turning in rates of growth in excess of 4%.  Ironically, three of these periods were in the immediate years prior to the Dotcom bust in 2000 (GDP for 2000 was 4.17%).  If you take out the years of 4%+ growth and isolate the other 6 years the GDP rate is a modest 2.79%.  Fast forward to the first decade of this century we find the GDP was 1.68% with only two years above 3%.  The growth rate for the current decade so far is 2.09% well below the rate of the 1990’s minus the exceptional years.  In fact the GDP growth rate from 2000 until now is only 1.79%.  So where does this lead us?  Historically, GDP for the U.S. hovers in the mid to high2% Range with the rate since 1970 at 2.76%.  All the numbers aside (U.S. Bureau of Economic Analysis – www.bea.gov) our present growth rate of 2.32% is clearly sustainable and will provide the basis for the continued recovery here in the U.S.  But is it enough to help the struggling economies on a global scale get through the growing global malaise? 

4.       Organized Labor – A Balance With Management is Needed – The Panama Canal Expansion project is back in operation with the labor disputes that threatened the project settled over the holiday period.  The project in a nutshell will allow the larger classes of containerized ships now plying the seas to pass through the canal allowing shipments from the Far East to reach the eastern ports of the U.S. and those of Europe in a much faster transit period.  The ports of Savannah, GA., Charleston, SC and New Orleans, LA are busily upgrading their infrastructure to facilitate these ships to utilize these deep water ports.  Currently these ships are using the deep water facilities in Washington and California where the goods are offloaded and then transported overland by rail and highway.  These additional costs are borne by the receiving companies and ultimately passed down to consumers.  With these ships transiting the Panama Canal time and money are saved.  Not to mention the pressures on the national transportation infrastructure.  The most recent work slowdown in west coast ports only exacerbates a growing problem and contributed to the December manufacturing slowdown as needed materials were not available to manufactures to produce goods (The December Purchasing Managers Index registered 55.5 percent, a decrease of 3.2 percentage points from November).  These slowdowns have persisted since July 2014 and no end appears in sight.  This lack of port efficiency is indeed a drag on the U.S. economy.  There needs to be a broader focus on both sides of the equation in order for the nation to move forward.

“There is no security on this earth; there is only opportunity” Douglas MacArthur

Have a good week and do not get hit by falling oil prices.

Steve

Brennaman’s Four Points for the Week December 29, 2014

Brennaman’s Four Points for the Week

1.       Energy – The Downside of the Decline of Oil Prices – The price of oil continues to slip lower as prices hit a new five year low (May 2009).  The price of Brent Crude and the West Texas Intermediate both have fallen even more since the beginning of the winter heating season.  Everything from diesel to jet fuel and home heating oil is lower creating an economic windfall here in the U.S.  But is continuing to have deleterious effects abroad as oil producing countries have used oil revenues to prop up economic systems that are fragile and weak.  The same can said for smaller exploration and production companies here in the U.S.  The shale boom fueled by the immediate access to oil reserves without the hindrance of government leases has created new companies and partnerships, and salvaging others who were on the precipice of demise.  Early and fairly easy profits led to rapid expansion and the creation of higher than average wages in the oil sector with the trickle effect spreading far and wide into sectors not directly connected to the oil industry.  Consumer services as well as oilfield services have benefitted from the shale experience not to mention the impact of sales tax revenues for local and state governments in the shale areas across the nation.  Business income tax impact has been very good with revenues to the Federal government rising significantly over the last three years.  The decline in oil prices is forcing some of the smaller players (and a few of the big firms) to relook their capital expenditure rate going into 2015.  This relook will include slowing down expansion and new exploration until the current oil glut can be absorbed by the market and prices stabilize.  This could mean an industry-wide slowdown in these areas as well as layoffs.  This when our economy is showing signs of a consistent and strengthening recovery.  The good news is the oil patch only represents seven percent of the national workforce.  The bad news is they are some of the highest paid middle class workers in the country.  Cheap oil and gas has a price.

2.       Market Outlook – The January Effect Follows the Santa Rally – The coming year will bring us many things most of which we have to wait to see.  One thing fairly certain lies with the volatility inherent in a market that has moved so high and with little positive fanfare.  This Bull Market is one that many investors have come to love and or hate.  Love the ride up but hate to get out and miss the next move.  But at the same time would love to exit, take profits and take a deep breath.  The problem is where do you go when you leave?  The fixed income market provides no solace, gold is a boat anchor as inflation does not exist to speak of, and cash pays less than money in the mattress.  An incentive here is that volatility in the coming weeks and months will be normal in that higher than what we have observed in the last 60-90 days or the last 365.  Volatility is currently hovering around ten-year lows but should slowly rise into the New Year as company profit measures are reported and the investors can see clearly the winners and losers of the economic recovery.  This resurgence of volatility is not necessarily a bad thing unless the securities you hold are overvalued, low on potential or just do not have viable earnings.  In that case the mattress may look good.  Volatility may disrupt your nocturnal activity but in the end the activity will clearly help us see the real economic winners and avoid the losers.  As I have said before it will be an exciting but bumpy ride all the way until the Federal Reserve lifts interest rates then all bets are off, on depending upon your risk temperament.

3.       Economy - The Consumer is Awake after a Long Slumber - The long draught of consumer spending appears to be at an end.  They have apparently taken the benefits of lower gasoline prices to heart and their pocketbooks during the Christmas shopping season.  The idea of reducing consumer debt has taken a backseat to filling pent-up demand for consumer goods as retail and on-line stores are seeing record breaking activity (online sales and foot traffic in malls).  High-end and on-line retailers are showing signs that the season is the best in many years while discount stores are doing as well as they have in recent years.  The consumer has been freed from the shackles of employment and economic fears to rejoice in the warmth of the holiday cheer.  The big question is will this activity translate into solid profits for retailers or will price discounting before and after the period take an edge off of the profit margin?  No matter the reasoning, the consumer has returned to the pre-Great Recession habits of spending over saving (or paying down debt).  Is that good or have we missed the lesson to be learned?

4.       Ukraine – The Solution is Slipping Away – Just when we thought the situation in Ukraine was stabilizing and approaching a point of an uneasy standoff Merkel talks, Putin poses and Poroshenko acts as if he has control of the situation.  Over the holiday President Poroshenko of Ukraine attempted to cutoff the Crimea from the Ukrainian infrastructure in an effort to pressure Russia to act on the behest of Ukraine to ease the tensions in eastern Ukraine.  Russia has been doing little in helping the situation but has not been active in degrading the situation any further of late.  Angela Merckel of Germany is pressing Vladimir Putin to act more in concert with world opinion to stem the growth of the conflict but is accomplishing nothing.  Meanwhile Putin is busy making friends with Kim Jong-un of North Korea in an attempt to repair a relationship that soured after the fall of the Soviet Union.  Merkel, Poroshenko and Putin are to meet in Kazakhstan in mid-January along with Hollande of France.  Should be an interesting meeting.  Will the sanctions be a topic of concern?  The pressures of the economic sanctions are certainly having their effects on the economy of Russia (or is it just the oil price decline?) but they are not achieving the desired goals in relation to the Crimea and eastern Ukraine.  Sanctions have a poor historical record.

“If there’s more than one way to do a job and one of those ways will end in disaster, then somebody will do it that way.” Edward A. Murphy, Jr. (author of “Murphy Lives” – Murphy’s Law

 Have a good week and have a safe Happy New year.

Steve

Brennaman’s Four Points for the Week December 22, 2014

Brennaman’s Four Points for the Week

1.       Troubled Asset Relief Program – How Will History Treat this Program – The Troubled Asset Relief Program (TARP) came to a quiet end on Friday after six years.  The massive program has been active is saving over 800 businesses from failing in the aftermath of the Great Recession; many of them banks, large and small.  The U.S. Government invested $426.4 Billion in the program and actually returned a small profit to the American taxpayer - $15.30 Billion or a percentage return of 3.59%.  Many analysts thought that the U.S. Treasury would be stuck with broken businesses, bad investments and a loss of hundreds of billions of dollars.  As most of us remember though, the program kept many key corporations form insolvency and thus spared the U.S. economy from further economic ruin.  The program is still very unpopular and likely will not happen again unless Congress enacts new legislation since the 2010 Dodd-Frank Law essentially outlaws such governmental actions in the future.  Was TARP good for the country?  We may never know but one can only presume that the salvage of Citigroup, Bank of America and General Motors kept over 700,000 citizens employed and contributing to the economic recovery.  There are untold hundreds of thousands positively affected by the unpopular program.  Admittedly the program smacked the concept of free markets, but the program may be seen in the future a necessity such as taking castor oil was for our grandparents.

2.       Economic Growth – The Federal Reserve Believes the Economy is On Track – The Federal Open Market Committee (FOMCC – FED) completed their last meeting of 2014 with little or no drama.  The Fed met expectations announcing they were adopting a “patient” approach on raising the short term interest rates.  They reiterated that the current level of 0-.25% is “appropriate” and sustainable since the economy is making steady improvement while the FED remains focused on the U.S. economy and less on the troubles brewing overseas (Russia, Japan and the emerging market countries).  The FED does have a few concerns with U.S. GDP growth and inflation.  Growth in 2014 is expected to finish at 2 to 2.25% with 2015 growth in the 2.6 to 3% range, essentially unchanged from the September forecast.  Janet Yellen, the FED Chairperson, says the majority of the FED members is comfortable with the current progress of recovery and is watching for evidence of resurgent inflation.  Headline inflation (includes energy and Food) is 1 to 1.1% with core inflation (headline except food and energy) will likely slip below 1%.  She did elaborate in the news conference that the current tepid inflation rate (well below 2%) is a concern as a certain amount of inflation is needed to spur manufacturing and production pricing and eventually encourage wage growth.  However, Inflation remains muted despite higher food costs.  Another area of interest top the Fed is unemployment.  Chairperson Yellen said the number has to break the current logjam of 5.8.  Indications from the FED are they expect unemployment to be 5 to 5.2% by end of 2015.  All in all the news out of the FED drove the Grinch back into his cave as the markets rallied into the close of the week up well over 3% across the board. 

3.       Cuba - The Market of Eleven Million – Eleven million is the rough number of people presently living in Cuba, a majority of which are in poverty.  As consumers starved from U.S. products it is already considered a fertile market once U.S. companies can legally develop and explore business in Cuba.  While this may take a generation and further governmental changes in Cuba the prospects are heady and exciting.  Unfortunately, they are not without opponents and obstacles.  The Cuban-American population (mainly in South Florida) and their representatives in Congress are gearing up for a fight against normalizing relations until the Cuban government becomes more liberal in human rights and personal freedoms.  The American reaction to President Obama’s move appears to be generational with Baby Boomers firmly opposing it with later generations split on the topic.  But vocal and powerful opponents are in the Halls of Congress and are vowing to fight the change in U.S. Policy.  This is important because the economic sanctions (near total boycott) cannot be lifted without Congress passing a law changing the policy.  The policy was codified in U.S. law in part to prevent a sudden change in U.S. policy with the election of a new U.S. president.  It appears this past action will temper future moves and engender a more patient approach in developing a new policy with Cuba.

4.       Ukraine – Is There Light at the End of the Tunnel? – Or is that another on-coming train?  Vladimir Putin appears to be continuing his bellicose ways and perhaps is playing chicken with the West.  Does he blink in order to lessen the economic sanctions on Russia?  The damage to the Russian economy may be irreversible for him unless he does more than say Russia is backing off from the situation in Eastern Ukraine.  If Russia does back down and enter into real negotiations beneficial to the sovereignty of Ukraine, he may well lose support at home as he could be seen as abandoning the ethnic Russians in Ukraine (and elsewhere).  Or Putin could go “all-in and” “encourage” the Pro-Russian Separatists to ratchet up the conflict, solidify gains and force the West to make painful decisions on the next course of action in the support of the Kiev government.  One must remember that Putin still controls 30-40% of the energy the European Union needs for the winter and beyond.  The West has to be careful to not provoke a Bear to take direct action.

“We must remember that any oppression, any injustice, any hatred, is a wedge designed to attack our civilization.” President Franklin D. Roosevelt

Have a good week and have a Merry Christmas.

Steve

Brennaman’s Four Points for the Week December 14, 2014

Brennaman’s Four Points for the Week

1.       The Economy of Oil – The Oil Glut Has Become a Boat anchor on the Markets – Consumer spending is on the upswing, unemployment is creeping into better territory and the Federal government appears to be in business after the new spending bill passed both houses and is headed to the President for signature.  So why is the oil glut acting like the Grinch Who Stole Christmas (Theodor "Dr. Seuss" Geisel, 1957)?  Oil and its by-products are present in nearly every manufacturing, production and service process in the U.S. and the world.  One would think this glut is a good thing (unless you are an investor in the energy sector).  From transportation to raw materials to energy to run factories and stores the lower cost of oil is a boon that has come at great time as the U.S. recovery moves into the next phase – sustainment and base building growth.  So, what is there to cause such consternation in stock market?  Well part of the issue is the slowing economic growth that is spreading through the world leaving few bright spots to focus on.  There is no mistaking the historical phenomenon that prices lead fundamentals and the current reaction in the markets may be not different but there is reason to be optimistic.  We have seen a spike in exports and a reduction in the trade deficit as the demand for U.S. goods is increasing overseas even as the international economy is slowing.  While imports are level the stronger U.S. dollar has made trade more lucrative for U.S. companies and consumers.  And one must remember that exports only make up 12% of the U.S. GDP (as compared to China 26%, Russia 28% and United Kingdom 28%).  Therefore while a slowing global economy will have a detrimental impact, the U.S. economy will continue to expand barring an exogenous event.

2.       Economic Growth – Economists are Now Getting On Board – Renowned economists across the country are calling for refocused growth in the U.S. economy.  They are citing lower gasoline prices, improving job markets and larger wage gains than we saw in the November economic numbers. Of course many of these same economists called for 2014 to be a resurgent year after 4 years of flagging upward movement in the economy.  The progress for the year is better than nothing but the results have not lived up the hype of 12 months ago.  The economy as measured by gross domestic production is forecasted to grow at 2.9% on an annualized basis.  The Federal Reserve has forecasted growth to be in the 2.6 to3.2% in 2015 so the economists are walking the line in their forecast.  The critical factors that affect ordinary Americans remain wage growth, continued improvement in unemployment and benign inflation.  A slow moving GDP will probably accomplish all three leaving interest rate hikes on the back burner for much of 2015.

3.       The Market – Looking into 2015 – This is clearly an exercise in futility but the prognosis season has arrived.  2014 has been a pleasant surprise for many expected it to be a year where the markets gave back a portion of the gains achieved over the past 5 ½ years.  In July and then later in September it appeared this could going to occur.  But investors realized that betting on the U.S. economy was better than betting on a low yielding fixed income market or foreign markets.  So dollars that fled out of the markets rushed right back in mid-October pushing the market to return 7.5% since then.  We saw a divergence between the U.S. markets and foreign markets as well as divergence between small/mid cap stock and large cap stocks here in the U.S.  Several things have contributed to this situation including the weakening economies abroad (Russia, China, Japan and the European Union nations) and the recovering U.S. economy. Hence investors here and abroad see the U.S. market as a safer refuge.  Nonetheless the result is there is no real alternative than to invest in stocks over fixed income and the U.S. stock market over a slew of overseas choices. This divergence is likely to continue well into 2015 and we will likely see periods like July, October and even the current decline as fear, uncertainty and doubt creep into the psyche of investors.  A real short term measure is what will occur as the Federal Reserve Open Market Committee finally decides when to raise short term investment rates.  Perhaps the FED will let us peak under the curtain as they report after their two day meeting this week.  Hang on for an interesting ride

4.       Ukraine – A Clear Signal from Congress – The House and Senate passed a bill authorizing the President to enforce stricter economic sanctions on Russia for their incursion into Crimea and eastern Ukraine in support of the pro-Russia separatists waging a civil warfare in support of autonomy.  The bill also authorizes the President to furnish “lethal” and non-lethal equipment to the government in Kiev in their effort to quell the separatists, bring some resolution to the conflict and to dispel further action by Russia.  The Congressional action goes on to authorize the sanctions presently in place by the U.S. and approves possible future economic moves by the U.S.  President Obama is not obligated to act under the authorization and it is not clear as to whether he will even sign the bill.  Whatever he does, the passage of the bill on a bipartisan basis is a clear signal to Ukraine, the European Union and to Russia that the condemnations of Russia’s actions are not forgotten and will not be tolerated.  The question remains does the U.S. take the lead or follow the EU, and if we act at what cost?  Meanwhile as world leaders look on and deliberate the fighting continues as the cold Ukrainian winter builds with no relief in sight.

"Success is measured by how high you bounce after hitting bottom"  General George S. Patton

Have a good week.

Steve

Brennaman’s Four Points for the Week

1.       Geopolitics of Oil – Is the Middle East Relevant? – As the price of oil continues to drop and the global glut continues to build it is really no surprise that OPEC did not cut production last month in an effort to protect their profit margins.  As the resurgence of oil production in North America continues unabated and Russian oil is flowing despite the Western sanctions, the large producers of oil in the Middle East fear one thing (among many) – not being able to dictate the terms of the production and price of oil.  The disdain for the potential loss of market share drove Saudi Arabia to maintain the pressure on the members of OPEC to keep producing oil even as the price of oil falls below their breakeven point.  The last thing they want to see is the U.S. lifting the ban on the export of domestic oil.  It is important to remember these nations export very little in terms of their economic wellbeing other than oil.  Without the outsized oil revenues, Saudi Arabia has to dig deep into fiscal reserves to make payments to their citizens to maintain the status quo.  Fortunately for them they have the means to do this.  Not so with Venezuela, Iran and the majority of the members of OPEC.  The pain will run deep and will linger far after the time when oil resumes its elevated perch, which is inevitable.

2.       Economic Growth – The U.S. Economy Continues to Improve – The U.S growth is building slowly despite the effects of the global slowdown.  Our growth may well be the solution to the global growth problem at hand but it will take more time than usual (normal?).  The stronger U.S. dollar and the budding recovery here in the U.S. have contributed to the increase in new jobs at a rate greater than at any time since 1999.  We re observing evidence of wage pressures increasing that hopefully will translate in an upward move in nominal wages.  These developments along with lower energy prices could translate into better consumer spending this holiday season and well into the New Year.  Something to reflect on is the positive impact of lower gasoline prices.  For every one cent decline ($.01) in the price of gasoline there is a corresponding increase of money available in the economy.  What does this look like on an annualized basis? – A staggering $1 Billion dollars for every cent in decline of the price of gasoline!  In the last 52 weeks the average price of gasoline has declined $.26 (AAA – 11/10/14) which translates to $26 Billion to stimulate the economy.  This number alone is stimulative to our economy and is helping to fuel the recovery.  Ironically, the lower gasoline prices do not help us in terms of federal and state taxes as they are a fixed rate per gallon.

3.       Russia– Putin No Longer Hiding Involvement in Ukraine – As the Russian economy slowly grinds to a halt, Vladimir Putin is as bellicose as usual; trumpeting the old refrain that the tribulations of Mother Russia are the fault of the U.S. led effort to dominate Russia economically and militarily.  This plays well to the populace at home as they perceive all threats from without as something to solidify national resolve.  This for a people who have endured oppressive governments for well over 500 years.  Hardship to the Russian people is to be expected and deviation from this is suspect. So it is no surprise that the heavy handed approach by Putin is met with a certain degree of acceptance.  Especially when the message is so well orchestrated and controlled by the oligarchs running the country.  The mess in Eastern Ukraine is approaching a critical point as the winter is now clearly settled in and the basic resources and services we take for granted (ample food supplies, electricity, natural gas, running water, and sewage) are nearly nonexistent.  Russian officers are mediating a new ceasefire and a new demarcation line in an effort to quell the virtually constant fighting since the September ceasefire agreement reached in Minsk.  All of this is happening as Ukraine is trying to secure financial guarantees and additional loans from the West (European Union and the G-7) to meet fiscal obligations, provide for growth in the country and keep the lights on.  Meanwhile Putin uses this situation to further position himself and Russia in a favorable light back home where the ideas presented by him have a deep resonance with the people.  The losers in this shell game are foremost the populace in Eastern Ukraine and the beguiled population of Russia.

4.       Economic Uncertainty – A Clearer Picture Emerges – Unemployment remains unchanged at 5.8% but wages have increased a little.  Combined increasing consumer demand (the breadth and depth remains to be seen) has resulted focus in the heretofore quiet topic of the Federal Reserve Open Market Committee (FOMC) and the much anticipated rise in the Fed Funds rate.  The rates have been near zero for nearly six years (February 2009).  The consensus on the street is that the FOMC will raise rates sometime in the second half of 2015.  But the idea of a date certain is not reinforced by the standards that the FOMC has established which consist of inflation greater than 2% and unemployment lower than it is now, perhaps 5.5%.  Still, GDP growth this year will likely be around 2.2% and many economists are forecasting growth next year to be in the 3-3.2% range – close to the historical long run rate of 3.3% (U.S. Bureau of Economic Analysis 1914 – 2014).  But is that rate sustainable?  The FOMC does not want a repeat of the 1937 fiasco when thy raised rates during the nascent recovery only to plunge the economy back into a recession, further prolonging the recovery well into the world war.  Chairperson Yellen, like her predecessor Bernanke, is a student of history and this possibility is not lost her and the Fed board of governors.

“Can any of us even imagine, after Pearl Harbor, President Roosevelt suggesting we negotiate a resolution or that we could simply prosecute those involved?  Of course it is unimaginable. We are right to be in the Middle East, and we are right to treat this as the war it is.”  U.S. Congressperson Marsha Blackburn from Tennessee

Have a good week and seek out a World War II veteran and tell him we remember Pearl Harbor and the subsequent sacrifices.

Steve