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

 

Brennaman’s Four Points For The Week December 1, 2014

Brennaman’s Four Points for the Week

1.            Energy – The Best of Times, The Worst of Times – No surprise the Keystone XL pipeline effort failed in the current political atmosphere but at least it came to a vote.  Perhaps in January.  Meanwhile crude oil prices have reached the lowest price per barrel since September 2009 and it appears that $60 per barrel is just around the corner as the global oil glut continues.  The Organization of the Petroleum Exporting Countries (OPEC) voted last week to maintain current levels of production which in turn sent crude oil prices racing toward the bottom.  Many of the countries need crude to sell well north of $85 to $100 to support their internal; operations but they also do not want to let their market share slip away.  The U.S. is now the 3rd leading producer of oil in the world and could be self-sufficient by 2025 according to U.S. government estimates.  And all of this with little or no help from the U.S. government.  Free enterprise hard at work.  Lower oil prices have translated into lower prices on refined products such as gasoline, diesel and aviation fuel.  Of course lower prices to the consumer means lower profits for the companies in the oil patch.  This in turn has pounded the companies in the energy sector in terms of share prices.  The sector is the poorest performing sector in the S&P 500 as well as other indices.  The upside of the lower oil prices is the savings across the board will help “fuel” the economic recovery from the depths of the 2007-08 recession.  And yes Virginia there is a Santa Claus – he is lower gasoline prices which are like a tax break so consumers can spend – a true upside.

2.            Economic Growth – Global Slowdown Materializing – Signs are currently developing pointing to a global slowdown.  While not a recession, the slower growth and the attendant signals may be harbinger of things to come.  The European Union (EU), Russia, China, Japan and now India are demonstrating signs of slower growth.  In the case of Russia that would be a negative number (Western sanctions and a corrupt economic system).  While the U.S. economy is recovering, demand for goods here and abroad is still stagnant with little upward mobility in consumer prices and thus lower profits for companies; then lower tax revenues for countries, lower salaries; well - you get the picture.  The EU is afraid of deflation but central banks are programed to fight inflation and to stimulate growth.  Fighting deflation is a not a tool in the collective tool kit of central banks.  Japan is seeing slower price growth and dwindling demand mostly because of population issues.  China’s growth, while still in the 7+% range, is in danger of slipping below the PRC government target of 7%.  To them this would be recessionary.  This is all occurring despite the lower cost of energy (natural gas and crude).  The stronger dollar (oil is priced in the U.S. Dollar) takes away some of the benefit of lower oil prices but in reality the biggest problem is slowing demand.  Is the U.S economic recovery strong enough to propel (or pull) the global economic community to better times?

3.            Ukraine – Closer European Ties Needed Now – Domestic events here in the U.S have pushed the Ukraine situation deep into the papers and even further from the personal psyche of Americans.  But the situation remains unsolved and is not going away.  The Kiev government is set to receive another installment loan from the EU to the tune of $625 Million on top of the $1.2 Billion already allocated to the struggling democracy.  The loans are intended to help shore up the economy so Ukraine can get on more solid footing and develop closer ties to the west and away from the Russian sphere of influence.  This is tough order of business considering the country was dependent on Russia for nearly all export revenue prior to the coup d’état earlier this year and the reestablishment of a democratic government.  Also it is important to note that Ukraine has no modern experience in a free market environment.  Their experience is limited to the 20+ years since they were cut free from the Soviet Union after the dismantling began in 1991.  Time will tell but this loan is vital to the future of Ukraine as it will allow Ukraine to develop and strengthen the free market culture necessary to survive and thrive in the global economy.  Ukraine needs the support of the West.

4.            Economic Uncertainty – Political Uncertainty – Strong economies make for strong democracies or at least strong governments.  Hungry and unemployed citizens with nothing but time on their hands are a threat to government and society.  Wars have been fought over the ages for any number of instigating events but a common denominator has been the need for economic stability and the benefits derived from the stability therein gained.  A stable economic process and the results derived from the exercise of free market activities places a high cost on global war for those with viable economies.  But those political entities without the economic strength are ready candidates for seeking resources to facilitate their economic growth through aggressive behavior.  So economically developed nations need to be on the lookout for those nations living on the precipice of economic dysfunction lest they be caught up in a conflict of the haves fighting off the have not’s. 

“Too often in recent history liberal governments have been wrecked on rocks of loose fiscal policy” Franklin D. Roosevelt

Have a good week and recovery from Black Friday activities.

Steve

Brennaman’s Four Points for the Week

1.       The Politics of Oil – The Keystone XL Pipeline – The price of crude oil is below the level last observed over four years ago (Sep 21, 2010 for West Texas Intermediate (WTI)) as persistent slowing global demand and the resurgent U.S. domestic oil production industry contribute the glut of crude oil.  The recent mid-term elections have spurred the U.S. Congress to resurrect the stalled legislation approving the construction of the Keystone Pipeline.  The House passed a bill late on Friday and the Senate is expected to take up the issue with nearly identical language early this week.  The passage of the bill by both houses will put the President in a quandary:  vote with the majority and sign the bill or veto the bill in support of his stance on climate change.  But we should not overlook the political and economic ramifications.  While the Republicans will control the Senate in the next Congress, Sen. Mary Landrieu (D, LA) is in peril of losing her seat as the pipeline has become a pivotal issue in her runoff election (Dec 6) with Republican challenger, Rep. Bill Cassidy, R-La.  Both support the pipeline but Landrieu is at risk.  On the economic side of the equation, passage and subsequent presidential signature could aid in the creation of nearly 42,000 new jobs in the U.S. (admittedly many of these jobs will wither way after the pipeline is completed) and up to another 20,000 in Canada.  A more important impact is the direct contribution to North American independence from foreign oil producers.  Oil has been a major currency in world affairs since the early 19^th century and the prime driver of economic growth globally.  This is true today and will be for some time.

2.       The Economy – “The New Normal?” – Are we seeing a new normal in employment?  While the unemployment rate continues to decline (5.6%) we are continuing to see lower rates of participation, lower wages paid and still fewer full-time jobs than we had prior to the great recession.  A scant ten years ago an unemployment level of 4.6% was considered full employment level and supportive of a robust, growing economy.  This level is well below the long run natural unemployment rate of 5.2%.  So will our economy settle in at the 5.2 – 5.4% range as the economy continues to recover?  The jury is still out but we need to see wage growth better than we are witnessing at present as well as the participation increase from the historic low of 62.5%.  Another issue is the quality of jobs reflecting the shift from a manufacturing / industrial economy to a service oriented environment.  Innovation and creativity are highly prized in the U.S. and we are proud of these but we also need to see a direct correlation between these two items and manufacturing in order to break the gridlock low wages and unemployment has on the U.S at present.

3.       Russia and the Ukraine Situation – Putin Hears The Criticism From Abroad – But does he care?  Vladimir Putin senses weakness in the NATO and EU resolve in dealing with the Ukrainian situation.  So Putin is in no hurry to help reduce tensions in Eastern Ukraine as Russia continues to send in materiel and troops in to the region in support of the Pro-Russian Separatists (NATO – Reuters Nov 13).  Putin is willing to ratchet up the stakes with continued military flights near the borders with the European Union (EU) states and the latest announcement that Russia may position Backfire bombers in Cuba for possible flights near U.S. and Canadians shores more frequently.  He also realizes that his situation at home is precarious with the slipping economy beginning to weigh on the people of Russia.  He feels he needs to appear to be in control and be a major player in the global arena.  Therefore the actions of the Russian military are clearly directed towards the Western nations that levied economic sanctions against Russia for the annexation of the Crimea and the continuing conflict/tensions in Eastern Ukraine.  While the supply of natural gas to the EU has resumed (Russia desperately needs the revenue) it remains a silent blackmail tool as Putin has backed the EU into a corner.  If sanctions are again increased as discussions at the G20 summit will detail on November 17, the Russian economy will be dealt with another blow to an already reeling situation.

4.       Healthcare – Premiums go Down But People May Pay More – As the Affordable Care Act implementation is set to begin its second year, premiums are coming down in many states as new insurers enter these markets.  As planned by the architects of the act competition is fostering lower premium costs.  This is a good thing as costs to the individual will go down, right?  Not so fast.  In order to capture these lower premiums individuals may have to change their plan which is always a challenge.  So yes, if individuals change plans they can capture the lower premiums.  If they choose to stay with their current plan (experience tells us that customers do like to change plans) and keep their current insurance premium; they may in all likelihood pay higher premiums as the subsidy paid to them by the government could well be lower as a result of new methods of determining the subsidy payout level.  So competition is a good thing but for the thousands (if not millions) receiving subsidies the competition comes around to haunt them.

“It is hard to fail, but it is worse never to have tried to succeed” Theodore Roosevelt

Have a good week and be careful as cold weather is upon us.

Steve

 

Brennaman’s Four Points for the Week November 10, 2014

Brennaman’s Four Points for the Week

1.       Economy – New Releases Reflect Improvement– This week was full of positive news on the economic front.  Manufacturing intensity has increased as measured by the ISM manufacturing index which rose to 59.0 in October versus an expected decline from the previous month (September 57.5) telling us that U.S. manufacturers are ramping up production to meet growing and expected demand.  Unemployment numbers for October were also released as the unemployment rate dropped to 5.8 from 5.9% in September continuing the downward trend.  This number was bolstered by additional jobs added to the nation’s rolls for the week and a lower number of new applications for unemployment compensation.  These are signs that our economy is on the right track even though the pace is well below historical experience.  Perhaps the only flies in the ointment so to speak include the types of jobs being created, wage levels and the labor participation rate.  The majority of the jobs created have been in the service sectors followed by manufacturing and production.  Typically the wages paid in service oriented jobs are lower than the other two which translates to lower wage growth.  Wages grew .2% for the month of October and is essentially statically irrelevant; not the kind of numbers we have seen in any economic recovery since WWII.  Finally, the labor participation rate remains steady at 62.5% which is a four decade low going back to the 1960’s.  The troubling part of this statistic is the age cohorts between 24 and 55 are even lower than the overall number.  This number has to reverse itself or the recovery will be a very long one indeed.

2.       Energy – Oil Prices:  The Good, The Bad and The Ugly – The global oil glut as a result of increased production (domestic and foreign) and slow growth in demand has pushed oil prices lower each week since mid-summer.  In the United States the consumer is enjoying lower gasoline prices as the national average has dropped below $3 per gallon.  The dramatic decline of oil in such a short period of time has affected the market in subtle and not so subtle manners ranging from lower cost of goods and services to cheaper transportation costs and food.  The lower cost of gasoline acts like a tax cut freeing up discretionary money the consumer can spend in the economy providing additional stimulus to the expanding economy.  Of course there is a downside to this low oil price scenario.  Companies in the oil patch are having a rough go of it this time around.  While they are still making money, the growth of oil patch earnings has slowed, margins have compressed and forward guidance from the companies is indicating that there may be more trouble ahead if oil continues to decline into the $70 -75 per barrel range.  These factors have weighed mightily on the energy sector causing it to be one of the poorest performing sectors year-to-date.  Another area of real concern is the threat to the U.S. Energy Renaissance.  Current production and exploration in the U.S. is sustainable with oil prices well above the $70-75 range.  Lower profits as a result of lower oil prices may curb domestic exploration until the oil glut is equalized with demand.

3.       Ukraine – Putin is In A Long Game – Vladimir Putin remains actively engaged in the affairs of Ukraine.  While unconfirmed by NATO sources it appears that Putin is reasserting Russian influence in Eastern Ukraine after the Pro-Russian Separatists held elections last week.  Numerous press outlets in the region and in the Far East have reported Russian Army units and equipment have streamed into Eastern Ukraine since the elections.  Violence, which continued despite the ceasefire signed in September, has escalated with artillery and mortar fire increasing daily.  Ukrainian President Poroshenko has called upon the separatists to uphold their side of the accord but the death tally continues to mount.  The situation in Donets’k and Lohansk is nearing the breaking point as the winter weather is now upon the region.  There is a dearth of supplies, fresh water and electric power to provide the basic necessities such as heat and security lighting.  Putin is in this for the long haul and will bide his time until he has the humanitarian justification to formally “provide assistance “to the “Russian Peoples “of Eastern Ukraine since Kiev is unable to do so.  The rest of world can only watch.

4.       FED Watch – In Search of Inflation – With quantitative easing (QE) winding down and the economy slowly recovering, the FED is looking for hints of inflation – and finding almost none with the current level somewhere between 1.6% and 1.8%.  As unemployment continues to improve and the GDP slowly creeps into the normal range, the FED has plenty of time to evaluate and watch for inflation.  The FED has done a good job in keeping inflation in check even when they have flooded the market with historical levels of liquidity through three tranches of QE.  Inflation is nearly non-existent since the QE process began.  Still no inflation, which is one of the reasons we are not seeing appreciable wage growth.  A little bit of inflation is needed so businesses can have some pricing power, increase revenues and provide them the ability to expand their business and pay higher salaries.  The low levels of wages are where we were over a decade ago coming out of the 2001-2002 recession.  This fact alone tells us we still have a journey ahead of us.  A little inflation is good, but be careful what you ask for because with inflation comes the inevitable interest rate hikes from m the FED.

"In times of war and not before,

God and the soldier we adore.

But in times of peace and all things righted,

God is forgotten and the soldier slighted."

Rudyard Kipling

Have a good week and be sure to thank a veteran on Tuesday for her or his service – The Eleventh Month, the Eleventh Day, the Eleventh Hour – Armistice Day 1918 (Now Veterans Day).

Steve

Brennaman’s Four Points for the Week November 3, 2014

Brennaman’s Four Points for the Week

1.       FED Watch – QE III Over; Now What – The Federal Reserve Open Market Committee (FOMC) formally ended Quantitative Easing III (QE III) this week after a year of tapering in the Bond Buy-Back Program.  But the real news is that the FED is not finished with QE.  As you may recall there was Operation Twist which in fact was a form of QE whereby the FED purchased long or short term bonds to force interest rates to a level where the economy could be stimulated with lower loan rates for business.  There is disagreement as to whether this program has worked but historians and economists will debate this in classrooms for at least a generation.  Nonetheless the FED will continue to do this for a period of time albeit not at the level they did in 2011.  Simply put the FED has a huge position in the fixed income market and we really, really do not want them to exit their positions in an expeditious fashion.  Such an action would surely drive bond prices down and interest rates would likely climb in a precipitous manner.  Besides the FED may need that tool to fight inflation if ever it raises it head above 2%.  The wording in the FOMC announcement made it very clear that they would remain in an accommodative position for “sometime” as long as inflation was muted and unemployment continued to be elevated.

2.       Financial Markets – Steadily Marching Upwards – The FOMC announcement on Wednesday and the release of the GDP numbers on Thursday prompted the markets to continue the upward mobility off the October 15 lows.  The DOW and the S&P 500 have both moved nearly 10% off the bottom and are firmly entrenched back in positive territory for the year.  The ebullience felt by investors is a far cry from the depths of despair many were feeling as the markets roiled all portfolios.  The volatility on the way down and the meteoric ride up calls for pause and reflection.  What actions did we take or should have taken during both periods?  Sometimes doing nothing is the best course of action.  Selling into a decline can be like trying to catch a falling knife – not many good options come out of that play.  Likewise selling into a decline and then trying to decide when to get back in can be hazardous as well for opportunities that look good in a declining market are often sand traps waiting to keep you from your real purpose.  Yes, a well thought out portfolio appropriate for the time horizon and risk profile of the investor is almost always the best solution for a market we are observing now.  The financial markets can be a fickle companion.

3.       Economic Growth – Growth Numbers Surprise To The Upside – The U.S. GDP growth rate was 3.5% for the 3^rd Quarter surpassing the expected number of 3 - to 3.1%.  Government spending, personal consumption and inventory build contributed but lower imports, higher exports and lower fuel prices precipitated the surge.  The poor growth rate from the 1^st quarter (-2.1%) has been surpassed by the following resurgence and sets up the economy to possibly reach 2.2 to 2.5% for the year if the 4^th qtr. hits the consensus estimate of 2.7 to 3%.  Obviously a couple of revisions on the 3^rd qtr. number are coming and there is a lot of global uncertainty but the U.S. economy is on the comeback trail.  Lower oil prices, a stronger dollar and an accommodative central bank paint an appealing scenario to continue to propel the nation’s growth.

4.       Corporate Earnings – Good News Continues From The Oil Patch – Corporate earnings continued to come in this past week lead by ExxonMobil and Chevron Corp.  These two energy giants shrugged off the impact of lower crude oil prices and relied heavily on their diversified business portfolios, namely the results of refining operations versus exploration and extraction of resources.  The glut of oil from domestic production as well as from imported oil has to find some where to be refined into petroleum products.  Over the last decade many of the smaller players have exited the refining segment citing the inability to build and maintain necessary levels of scale.  Exxon and Chevron have actively increased their refining efforts through expansion and acquisition.  The Energy Renaissance we are seeing in North America (Canada and the U.S.) has benefitted these two companies allowing them to weather the pressures on margins as oil declined to the low $80’s from the yearly highs on June 20^th ($107).  The Nations of OPEC (Organization of the Petroleum Exporting Countries) meet later this month to discuss the situation of declining oil prices.  They are expected to cut production in order to stabilize oil prices and thus their own revenues.  The U.S. is in a favorable position to withstand this move and while prices may rise, the impact should be minimal.  OPEC needs the revenues and is likely as not to decide to maintain production to protect their interests at home (many of their economies rely on the revenues to fund their governments) and continue to generate revenues with a larger degree of certainty.  The Energy Renaissance will help insulate the U.S. from big oil shocks as they develop.

"The right of voting for representatives is the primary right by which other rights are protected.  To take away this right is to reduce a man to slavery, for slavery consists in being subject to the will of another, and he that has not a vote in the election of representatives is in this case”, Thomas Paine, “Dissertation on First Principles of Government”.

Have a good week and be sure to vote on Tuesday – every vote counts.

Steve

Brennaman’s Four Points for the Week October 27, 2014

Brennaman’s Four Points for the Week

1.       Financial Markets – A Surprising Bounce Back But Will It Hold – The major indices recovered nicely last week and are approaching market levels when the slide began in earnest on October 8^th but still short of the market highs in early September.  The prospect of the Federal Reserve continuing the policy of quantitative easing in the face of a global slowdown and building corporate earnings sufficiently buoyed investors to return to the equity markets and pushed the indices higher on strong volume.  But volatility remains as we are only a single exogenous event away from the possibility of another free-fall.  The Fed meets this week and perhaps will shed some light on their interim thinking on what has transpired in the last three weeks, both domestically and abroad, and the future timing of rising interest rates or perhaps continuing quantitative easing (bond buy-back program is scheduled to end this month).  The European Union (EU) growth issues coupled with the slowing economic situation in Russia and China are all issues that have an impact on our financial markets and only add concern in regards to our tepid recovery. 

2.       Corporate Earnings – Good News So Far At The Halfway Point – Nearly half of the S&P 500 Index companies have reported earnings for the quarter ending September 30.  The results so far are indicating we could see earnings growth in the quarter approach 5.6% versus the 4.5% originally forecasted for the quarter.  Caterpillar and Microsoft reported strong earnings as did UPS indicating that corporate and consumer spending is on the rise.  However, Amazon reported a significant loss in connection to a large write off on the Amazon Fire Smartphone.  Earnings reports this week that may have the markets humming include Merck, Pfizer, ExxonMobil and Chevron.  These stocks represent two sectors going in opposite directions.  The Healthcare sector is the best performing sector year to date while low oil prices have been cutting into the margins of companies in the oil patch.  This week will probably be no different.  But remember Exxon and Chevron are not losing money just making less than they were when oil was $100+ per barrel.

3.       Ukraine – The Vote is In And The Pressure is Back On Putin – Ukraine held the first elections since President Petro Poroshenko assumed office earlier this year.  The elections were held over the weekend and moderates took the majority of the offices sending a strong signal that Ukraine wants closer ties with the west and are backing Poroshenko’s plan for settling the crisis in eastern Ukraine.  The fragile ceasefire in Eastern Ukraine is little more than a slowdown in the fighting with casualties mounting on both sides each day.  NATO has observers on the ground as does Russia but Russian fighting units have pulled back to the border and many have left the country.  However, Russian President Vladimir Putin is not happy and has not ratified the peace agreement.  In a related matter the issue of natural gas for Ukraine and by proxy the EU, is also unsettled.  Russia and Ukraine have agreed on the price for the natural gas for Ukraine and for the gas that will transit to the EU but Russia is demanding a substantial payment up front.  Ukraine does not have the funds and is seeking loans from the EU so the flow of gas can resume.  The EU Central Bank may have to intervene or it could be a cold winter and a slower economy for the EU.  On the other hand, Putin needs the revenues from the natural gas shipments in order to stave off recession as the sanctions imposed by the West are having an effect in Russia with inflation growing and GDP growth approaching zero. 

4.       Economic Growth – Will Our Sluggish Growth Be Enough To Help The EU Hold On? – Despite good news in the U.S. with housing starts up at levels not seen since July 2008, the falling unemployment rate, and corporate earrings are signaling the recovery is continuing; it is obvious that the growth we are experiencing will need to sustain the efforts to revive lagging growth in the European Union as they struggle with deflationary pressures and stagnant growth.  The United Kingdom is but one bright spot in the EU with Germany and France maintaining growth rates approaching zero while the European central bankers apply a tourniquet to the problems even as many of the banks in their system are in trouble – shades of 2008 -2010 in the United States.  Lower oil prices present the EU with a dual edged sword; lower energy prices help lower production cost but the supply is imported priced in U.S. dollars which is hitting new strength versus the Euro thus raising costs.  The problems are easy to see but difficult enough to solve with one homogeneous banking system like the U.S. but the 28 nation EU is a tough arena to develop a single solution that fits all.

"No man is entitled to the blessings of freedom unless he be vigilant in its preservation”, General Douglas MacArthur.

Have a good week and be watchful of the little goblins on Friday night.

Steve

 

Brennaman’s Four Points for the Week October 20, 2014

Brennaman’s Four Points for the Week

1.       Financial Markets – Volatility is Back – Volatility has returned to U.S. and world financial markets after being on the sidelines for the better part of the last 12 months and at levels not seen since May 2012.  Volatility in the equity markets shared the spotlight with the fixed income arena as worried investors (mainly institutional and mutual fund managers) fled the equity markets for the relative “safety” of the U.S. Treasury.  The benchmark 10 year U.S. Treasury bond opened the week at 2.28% and gyrated wildly on Tuesday at the open going as low as 1.9%, a 15.4% move before resuming an upward movement to finish the week at 2.19%.  A 3.81% move for the week.  Great news if you are trader of the 10 year but harrowing if you are trying to avoid the volatility.  Nonetheless, the equity markets recovered a bit on Thursday and Friday on hopes that the Federal Reserve and the European Central Bank will continue to make easy money available to prop up growth in the European Union and to help ward off the effects of a slowing Chinese economy.  There is fear that the structural problems in the EU as well as emerging markets are more problematic than first considered and that the intertwined global economy is in for a prolonged period of uncertainty.

2.       Corporate Earnings – Good News in a Desperate World – Amid the chaos and destruction on Wall Street there were some bright spots to observe.  Housing starts resumed the upswing after faltering earlier this year and new unemployment application requests have hit a fourteen year low going back April 15, 2000.  In earnings while a mixed bag large money center banks are doing well even with the occasional legal bill tossed in the mix with three of the six money centers posting profits and guiding to higher earnings going forward.  UnitedHealth reported storing earnings and sizeable profits from lower medical costs (a continuing trend) and a surge in patients.  HCA, Inc reported similar results and also had encouraging forward looking guidance.  Unfortunately Google reported higher costs associated with taxes and slower growth in advertising sales despite earnings coming in 20% higher than a year ago.  Heavy spending on new businesses also contributed to higher costs at Google.  This coming  week will see the bulk of oil companies reporting so pay attention to what they say about earnings and growth in the future and less attention to the earnings to date.  The lower price of oil per barrel is bound to take a bite out of future guidance (and profits).  Weighing heavily on multinationals is the effect of a slowing global economy.  Many of these companies (Johnson & Johnson for instance) get upwards of 70% of their revenues from sales overseas.  Definitely bears watching.

3.       Ukraine – This Affair is Far From Peaceful and Tranquil – The leaders of the EU, Ukraine and Russia met this past week to discuss the continuing saga in the Ukraine.  The EU led by Angela Merkel, Petro Poroschenko, President of Ukraine and Vladimir Putin met in historic Millan in an attempt to solidify the tentative peace in eastern Ukraine.  As one might expect not much was accomplished in the two day conference.  Russia is still under pressure to ease support for the pro-Russian separatist and to hold back overt and covert support so peace talks between the government in Kiev and the separatists can continue without interference from without the country (i.e. Russia).  Vladimir Putin still refuses to acquiesce to the western demands in the face of continuing economic sanctions that are beginning to have an impact on the economy and citizens of Russia; with Putin reiterating the policy that the ethnic Russians living in Ukraine deserve the support of Russia and they should be allowed to determine their own destiny without interference from the West.  The talks went nowhere fast and included some acrimonious exchanges between Merkel and Putin who prior to the developments in Crimea and eastern Ukraine had been friends.  All of this as the price of oil continues to remain well below the $100 per barrel Russia needs in order to balance the Russian budget as they depend so heavily on revenues from the sale of Russian petro-chemicals.  Russia continues to refuse to flow natural gas and refined products to Ukraine until their price is met.  In addition, the flow of natural gas to the EU is still below seasonal levels, even as the winter heating season approaches.  How much of the Russian economy is Putin willing to sacrifice in order to achieve his global goals in Ukraine?  Or how long will the EU economy subsist before the natural gas issue becomes more pressing than the sanctity of eastern Ukraine?

4.       The Price of Oil – Impact on Fragile Economies – The relief Americans are feeling as they travel to the gasoline stations is palpable as the high gas prices we have endured for the last 3-5 years have slackened as a result of oil prices nearing 27 month lows.  As the national average price paid for gasoline approach $3 consumers are feeling as if a tax has been lifted, even if only temporarily.  The downside, using a more global view, is many countries rely on the revenues from their oil industry to support (prop up) their budgets and subsequent economic growth.  Countries from Iran to Russia to Saudi Arabia then to Venezuela rely on these revenues to balance their budgets (not necessarily capitalism strongholds).  Stability in most of these countries is not an immediate pressing issue, but looking at the regime in Venezuela one sees a regime (albeit democratically “elected”) struggling to stay afloat with a glut of oil that when sold, does not cover the bills in purchasing their imports, which is 70% of all goods needed for their enterprises and citizenry.  How long can Venezuela maintain control of an already pensive and suspicious populace?  Be careful what you ask for as an unsettled country in our hemisphere is sure to draw the attention of the U.S as well as other interested parties (China for one).

"There is an eternal dispute between those who imagine the world to suit their policy and those who correct their policy to suit the realities of the world.” Albert Sorel, French Historian.

Have a good week and enjoy the last vestiges of warm weather.

Steve

Brennaman's Four Points For The Week October 13, 2014

Brennaman’s Four Points for the Week

1.       Equity Markets – Correction? – Volatility was up and stock prices were down this week as the equity markets had the worst week since May 2012.  The S&P 500 closed down 3.5% for the week followed by a decline in the DOW of 3.2%.The DOW is 4.3% off of the record high on September 19^th and the S&P is off 5.2% from the high on September 8^th.  We could be in for the long awaited (anticipated?) correction but the next couple of weeks will tell us a lot since the corporate quarterly earnings season is upon us.  Alco posted strong returns after several years of lagging productivity citing stronger demand for downstream products and more advantageous pricing in raw materials.  Pressure on the markets continued with uncertainty in Iraq, the Ebola situation home and abroad; and the continued slowing of the European Union economy.  Not to mention the ever-slowing Chinese growth rate.  Is it a correction or is it just a lull in the Bull as it gains new momentum to move to new highs? 

2.       Corporate Earnings – The Reporting Season Takes Flight This Week – The coming week may provide us have a glimpse into where the economy is heading as slow growth continues to dominate the picture.  Fifty-three companies in the S&P 500 will report this week across a wide range of industries and sectors.  Alcoa’s results are heartening but waning optimism is only an earnings disappointment away.  Notable names to look for this week include:  Bank of America, Wells Fargo and JP Morgan in the money center arena, and General Electric and Honeywell in conglomerates.  Like it or not the money center banks’ earnings do matter as they are good indicators on where the economy is going as well as the conglomerates who indeed are multi-national in scope.  Earnings in these two areas could shed vital information in terms of consumer demand for loans as well as final demand for goods and services provided by manufacturing companies.  Other areas to watch this week and later in the month will be big oil and transportation.  Oil companies for the obvious reasons that lower oil prices may hurt earnings but transportation stocks will inform us on levels in demand for nearly all goods transported inside the country.  This week look for Baker Hughes in the Oil Patch and CSX Transportation.  Finally, Ebay and Google report this week as well, both will shed some light on consumer appetite for online advertising and sales.

3.       U.S. Economy – Low Interest Rates and Inflation – Well there continues to be good news on this front.  Low interest rates and low inflation are enabling U.S. companies to continue to produce products for domestic and foreign customers.  However, demand is slowing as the European Union approaches stall speed in their growth.  The economy of Germany is faltering and may go into recession and will pull the Union down with it.  A recession in the EU, the fourth largest trading partner of the U.S., coupled with the slowing Chinese growth rate could well spell problems here in the U.S.  An upside to this is raw materials from overseas suppliers are much cheaper than a year ago or even six months ago as the strength of the dollar has helped.  Unfortunately, this same strength in the dollar makes our goods more expensive so demand will falter if the EU slips into a recession or just slows to a very low growth rate.

4.       The Price of Oil – The Keystone Pipeline – The past week the Keystone pipeline controversy took another turn as the Canadian government announced that they are planning to build a new pipeline to the east rather than the west as they had planned.  This project will provide the heavier crude from the Canadian Artic Sands to the East coast refineries in the U.S. circumventing issues with the Obama administration and the opposition with environmentalists.  However, the oil will continue to flow from Canada to various terminal points in the continental U.S. by rail and truck until the pipeline is completed.  The loss of the western passage (mainly due to cost and opposition from Canadian aboriginal tribes) will not help China in their desire for the oil.  This alone will push China to strengthen the ties with Russia and Iran for the oil they can provide China’s economy.  The price of oil is nearing 2013 lows and could go lower as global demand weakens due to sluggish economic growth and the energy renaissance in the U.S.  The low oil prices adversely affect OPEC nations as well as Russia where the economies are so reliant on oil revenues.  While gasoline prices are going lower here in the U.S. the effect of lower oil prices is a dual edged sword.

"Opportunity is missed by most people because it is dressed in overalls and looks like work.” Thomas Edison

Have a good week and enjoy the short work week.

Steve

Brennaman’s Four Points for the Week October 6, 2014

Brennaman’s Four Points for the Week

 

1.       Economic Recovery –What Does The Unemployment Rate Tells US? – We received good news on Friday as the unemployment rate in August fell to 5.9% from 6.1% in July.  But before we celebrate there are underlying issues still to contend with.  The first being underemployment, specifically the labor participation rate which remains at a three + decade low of 62.7. Prior to the recession it was 66%, a fairly stable level.  Wage growth continues to disappoint economists but is not a surprise since manufacturing jobs, lost during the recession, paid higher wages than the service oriented jobs that are being offered and filled in this recovery.  Real wage growth back to pre-recession levels (or even Technology bubble recession) will rely on manufacturing jobs to grow significantly.  Many jobs that workers are finding as the market tightens are at lower salaries than were paid for the same jobs prior to the Great Recession as companies take advantage of the abundant workforce in hiring qualified employees at the lower salary.  Hence slow wage growth.  As the pool of available workers continues to shrink, we will probably see an uptick in wages as a result.  Free enterprise at work

2.       Western Sanctions on Russia – The Law of Unintended Consequences – Or is it poor strategic planning?  As the sanctions imposed on Russia by the Western nations in response to the continuing crisis in Eastern Ukraine begin to take hold, we should look at the far term consequences rather than the short-term struggles and impacts on the economies of nations on both sides of the equation.  Despite the coming hardships that the Russian people (and perhaps the people of the EU) will have to endure as the winter months approach, Putin is enjoying unprecedented popularity and support from the populace, even if the Russian legislature is fairly mum.  The portrait painted in his country is one where Vladimir Putin is much maligned and is only doing what is best for Russia (and Russians living in Ukraine).  Another consequence of the dissolving situation between Russia and the West is the newly forged ties between Russia and China in the areas of free trade and natural gas to satisfy the ever growing thirst for natural resources in China.  While the pipe line system is at least four years away from completion it is a sign that Putin will seek profits and leverage where he can even with a country / region where Russia (Soviets) have had 6 or more conflicts over the past 400 years.  And finally, the collaboration between the two nations to build a super seaport on the eastern shore of the continent should raise eyebrows in the west as well as Japan.  Strange Bedfellows indeed.

3.       Interest Rates– What Really Happens – Okay, I do not know when rates will go up.  However, the market is a barometer or discounter on when it will rise; looking out 6-9 months we see the possibility that the FED will raise rates in the second or third quarter of 2015.  Okay.  So what does that really mean to the equity investor?  For the common person (you and me) we will see higher rates on mortgages and consumer loans as an immediate influence but if you are not buying a new or used car or a house the immediate impact is negligible.  Your equity investment portfolio will suffer a little bit as the rate of increases becomes apparent.  Going back to 1946, the FED has raised interest rates 16 times (Sam Stovall S&P U.S. Equity Strategist).  Of those instances the equity markets (S&P 500 Index) endured a correction 13 times about 6 months prior to the actual rate increase action.  On average the S&P 500 lost 16% of its value and slightly less in the following six months; just shy of a bear market event (-20%).  The current pull back we are observing could be the sell-off but a well-diversified portfolio constructed for the longer-term is a good place to be.  Selling into a “what if” scenario only leads to a guessing game of when to get back into the market after “going to cash”. 

4.       Ukraine, The EU and Vladimir Putin – Again, What Can We Expect This Winter? – Russia is playing cute with the natural gas flowing to Ukraine and the European Union as a whole.  Natural gas deliveries to the EU are well below the levels of a year ago with a 15% drop on a year over year basis, with transit through Ukraine down 54%.  Europe is downplaying the reduction saying that storage levels are sufficient to provide natural gas to heat homes through the winter.  But left unsaid was the impact on EU manufacturing, most notably Germany where natural gas is vital for generating electricity as well as running the largest economy of the Union.  A colder winter than envisioned could will drain the storage and leave the EU in a precarious position.  Their collective economy is showing signs of a recession and this shortage of natural gas could be the final straw.

“Misery acquaints a man with strange bedfellows.” It is spoken by a man who has been shipwrecked and finds himself seeking shelter beside a sleeping monster.”  The Tempest, by William Shakespeare

Have a good week and enjoy the fall foliage as the colors develop.

Steve