Brennaman's Four Points For The Week May 12, 2014

Brennaman’s Four Points for the Week

 

1.       Russia and the Ukraine (continued) - The sanctions the West has imposed on Russia (Vladimir Putin) are questionable in their effectiveness and leads me to believe they are symbolic in the short run.  Over the weekend the deepening crisis in the Ukraine punctuated by the elections in eastern Ukraine for independent sovereignty (surprise – they voted 90%+ for independence) has pushed world oil prices back above $108 per barrel on fears that the supply to the EU would be disrupted.  This will have little effect on U.S. oil in the short run but if the supply is disrupted there or in the Middle East then we will see a spike in price in all things petroleum.  Some good news is that we are seeing natural gas inventories increasing at a faster rate than we have seen in the past and we should not have a shortage come the next heating season.  Natural gas prices continue to fall which helps to offset the effects somewhat of the rising crude prices.

2.       GDP Growth – Will it Go South? - The Gross Domestic Product (GDP) growth rate number is already being whispered as having contracted in the first quarter.  As you recall the number we expected was in the 2%+ range but we observed a number of .1%; with economists blaming the ill effects of a brutal winter across much of the United States.  Some economists are now saying the economy actually contracted by as much as ½% or more.  Definitely bears watching as the month progresses and we await the revised numbers.

3.       Shifting Our View to Southeast Asia. - China and her neighbors are still trying to get along in terms of fishing, oil exploration and in general freedom of the seas.  Again I pose the question – “Why do we care?”  It is clear and simple that free movement on the seas anywhere on earth is vital to economic growth and of course our national self-interest and national security.  As you recall, China has essentially claimed the entire South China Sea as their sovereign waters.  This action has been met with condemnation from nearly all the countries in the region since this action by China closes off access to deep sea commercial fishing and navigation routes if unilaterally enforced by the Chinese.  The growing Chinese naval presence in the region threatens to thwart free commerce and create an air of tension that could push the area into deeper conflict.  Any conflict would shut off the free movement of goods to and from China.  Not to mention the impact on Taiwan.  A disruption would impact our economy in a negative way.

4.       Existing Home Sales - The sale of existing homes is increasing in some markets, mostly in homes appealing to affluent buyers (dare we say “sellers’ market”?).  The areas are not located in any one area but seem to be in high growth states that are seeing lower unemployment and population growth.  Historically low mortgage rates are adding to the picture, especially in the price ranges not associated with “starter homes” (varies from “Location to Location to Location”).  Perhaps we are seeing a slow beginning to a better housing market as the spring and summer selling seasons go into full swing. 

Next week I will discuss investment themes we seeing emerge (or sustained) for the next 12-36 months. 

 

Have a good week.

Brennaman’s Four Points for the Week

I started writing these for my friends and clients.  I thought I would share these items each week with a wider audience.  Please let me know what you think.

Brennaman’s Four Points for the Week 

1.       The Gross Domestic Product (GDP) numbers that we observed last week were at first glance quite disappointing.  With the numbers approaching 0 at .1% growth for the 1^st qtr. of the year, many prognosticators were blaming the weather, the crisis in Ukraine and a general malaise that is generally associated with our slow recovery.  I agree that all three are evident in the low numbers but the drop from 2.6 in the 4^th qtr. of 2013 conveys a certain reluctance on businesses to stretch for growth when the overall environment is uncertain as to taxes, market growth both domestically and foreign, and the U.S. consumer still unwilling or unable to resume outsized spending while still deleveraging from high levels of debt.  Perhaps the revised GDP numbers at the end of this month will shed additional light.

2.       As a contrast to the dismal GDP growth rate, we witnessed a dramatic increase in new job creation for the month of April, driving the unemployment rate down to 6.3 from 6.7%.  This is a good directional movement and much a needed boost to consumer sentiment.  The fly in the ointment if you will is that nearly as many people (mostly older, long term unemployed) continue to leave the job market (actively searching for work or take lower paying jobs to fill the breach).  The pie in the sky numbers that we are adding new jobs at a rate not seen since the peak in  2008 (pre-recession) belies the fact that wage levels are still significantly lower than 5 years ago and the labor participation rates continue to decline.  This last is driven in part by the long-term unemployed dropping form the workforce but also by the fact there are not enough new jobs for recent high school and college graduates.  The number of new jobs that need to be created to fill this gap is closer to a number of 425K each month.  The Federal open Market Committee (FOMC) still sees the need for quantitative easing and remains committed to keeping interest rates low through the end of 2015.  We shall see.  Inflation is lurking.

3.       There appears to be an increase in corporate governance emerging.  Berkshire, General Motors and Pfizer are among the companies with shareholders and boards questioning the leadership actions taken by CEO’s in the conduct of their companies’ business.  Surprisingly enough there is still not a widespread discussion of the salaries these individuals are making even though their operational results are faltering.

4.       Ponder now the question as to when we should buy bonds versus staying with dividend paying stocks?  I am still in the camp that we are still waiting for the rising interest rate cycle to begin (“Waiting for Godot?”).  For the client with a time horizon of 5-7 years the S&P dividend yield is 2.06 versus the yield on the 5 year U.S. Treasury bond of 1.68%, stock dividends can be compelling.  The decision is a question of the level of risk the investor is willing to take not just how much yield she/he is getting for the move.  I think it is a discussion worth having with my clients.