Brennaman’s Four Points for the Week

Brennaman’s Four Points for the Week

1.                   FED Watch – Quantitative Easing III (QE III) Ending in October – What is next?  The Fed will likely announce this week that they are going to continue tapering the bond buyback program to $25B in July (from $35B in June) down from the $85B at the start of QEIII in 2012.  Inflation is tame at 1.9%, running below the 2% target for well over 25 months; with unemployment at 6.1% and improving (albeit at a snail’s pace).  Anemic economic growth as measured by the GDP remains the point of interest this week as the preliminary numbers for the 2d quarter should be released Wednesday.  Nonetheless, barring a negative number (not expected) the FED will end QE III in October and the real issue becomes when do they begin raising short term rates.  Our best guess is still 2d quarter 2015 or later. 

 2.                   Ukraine Watch – Appeasement tin the Works? – I hate to delve into politics (not really) but the situation in Ukraine continues to be unsettling on many fronts.  Let’s face it, Putin has done a very good job of positioning Russia in terms of controlling the situation in Ukraine.  He (and Gazprom) supply 40% of the energy (natural gas) consumed by the economies in the European Union (European Commission news release May 2014) with some countries approaching 60%+.  So what can be done?  European Union Energy Commissioner Guenther Oettinger has hinted that restricting technology related to energy development may be in the offing but has stopped well short of saying there will be sanctions on Russian exports to the Continent.  Economic sanctions on Russian exports and imports to Russia are likely to hurt the EU more (and the average Russian citizen) in the short run than hinder the policy of Putin and his foreign policy in Ukraine.  Russia is a major partner with the EU and the loss of trading could well plunge them (EU) into a recession; and a cold winter.  Worst case is the core of the EU, France and Germany, seeks self-service over remedying the situation in Ukraine.  Shades of Europe in the 1930’s.  Likewise can Putin afford failure in Ukraine?

3.                   The Bull Market – Earnings Announcements Are Taking Some Wind Out of the Sails – Apple, Amazon, and Visa were among the many companies announcing 2d quarter earnings this past week.  Apple provided fuel for an upward broader market movement but Amazon disappointed with another quarter of losses even with strong top-line growth.  Visa as well as General Motors and Starbucks missed earnings.  Anecdotally, these results and others could indicate that that the consumer is still reticent to return to pre-recession spending levels as they continue to deleverage and restore savings/investment accounts.  The wealth effect expected after five years of good market returns has not emerged on Main Street.  Despite the disappointing earnings news, the markets were basically flat for the week; trading activity was low maintaining a low level of price volatility, while the yield on the U.S. Treasury 10-year bond remains at 2.47% where it began the week.  So the Bull Market? – The number of days since the last correction of 15% or more stands at 678.  The average since 1929 is 752 days.  Historical trivia at its best.

4.                   Bond Yields – Do They Indicate Lower Confidence in the Direction of the Equity Markets? – We are in 20^th quarter of the economic recovery (National Bureau of Economic Research - NBER) that started in 2010 and the average length of expansions since WW II is 20 quarters.  So, are the low bond yields telling us to beware of investing in the equity markets?  As usual I tell clients to be diversified across the board and to look for risk and be prepared.  But I do not think the bond yields are telling us to head for the exits away from the equity markets.  Yields are where they are for many factors not the smallest of which is that central banks in developed nations continue to feed liquidity into the markets to stimulate economic growth.  Geopolitical risks and strife have put pressure on yields as well as investors seeking safety with available cash (still high levels after the market decline and recession).  Finally, low inflation (domestically and abroad) coupled with anemic economic production (GDP) is also adding to lower yields in nearly all bond markets (Russia is at 8%).  Until the Federal Reserve (among other central banks) sees inflation as a threat and GDP growth is healthier than at present, yields here and abroad will be muted.

“History doesn't repeat itself, but it does rhyme.”   Mark Twain

“Those who cannot remember the past are condemned to repeat it.”  George Santayana