Brennaman"s Four Points For The Week Auguat 25, 2014

Brennaman”s Four Points for the Week

1.       The Economic Recovery Continues – Housing Starts - A Strong Leading Indicator – As I mentioned last week that market fundamentals lag the progress in the markets, the same can be said for the economy.  This past week we saw the housing markets continue to show signs of increase demand for existing home sales and a willingness of consumers to spend (borrow) to make the purchases.  The average thirty year mortgage rate dropped again to 4.1% and the fifteen year rate to 3.23%, both 52 week lows.  Existing home sales rose to the highest level in ten months but still lower than this same period in 2013.  A big number is the percentage of homes sold that were in a distressed status (foreclosure or under-water).  This number represented only 9% of the total homes sold down from the peak of 50% in 2009, 40% in 2011 and 20% at the beginning of 2014.  New housing starts also registered a good number with new starts climbing to 15.7% from a month earlier.  New home sales come out today at 10:00 AM.  The number of new home starts was greater than any month since November 2013.  A primary reason existing homes (and new home starts) are important is because it is a good barometer of the willingness for home buyers to accept risk and the follow-on spending that occurs as home buyers upgrade the home or appliance after the purchase; further stimulating the economy.  This trickledown effect is vital to the recovery. 

2.       Earnings Season Ends – Good News & Bad News – Nearly 70% of the reporting S&P 500 companies met or exceeded earnings projections for the 2d quarter.  There were some obviously poor results and some high profile names failed to make any progress in their efforts to move forward.  Sears continues to bleed at the seams as they posted another net quarterly loss of $573 million in the quarter.  On the other hand, Hewlett-Packard surprised the market with an increase in income and profit for the quarter citing better demand for personal computers and increased sales in most product categories.  While their earnings per-share was in line with analysts’ expectations ($.89) the “whisper number” was for a loss and disappointment.  Hewlett-Packard, under the leadership of Meg Whitman still has a tough road to slog as competition remains tight in the sector.  But it was definitely good news.  We saw many surprises and disappointments as swell in the earnings season but all in all it was normal as the companies reported earnings and more importantly provided forward looking  guidance that are normal and not indicative of a bubble forming of any kind.  Investing in large cap, dividend paying stocks of United States companies is still a good play.  The U.S. Bull is still running in the street.

3.       Ukrainian Success on the Ground – Does Indeed Spell more Trouble – The situation in Ukraine continues to devolve daily as the war of words between Moscow and Kiev has shifted to verified artillery firing into Ukraine and a forced entry of a convoy into Russian Separatists held territory in Ukraine proper.  Ukrainian armed forces are beginning to tally large losses in the militia and newly formed units as well as rising civilian deaths and refugee migration.  This was all ahead of separate meetings between Angela Merkel of Germany and the leaders in Kiev on Saturday and the scheduled meeting between Vladimir Putin and Ukrainian President Petro Poroshenko and European Union officials in Minsk, Belarus on Tuesday.  It appears that the visit by Merkel was largely symbolic and there is not much hope for anything constructive to come out of Minsk.  Merkel is expected to be in Minsk as well.  Free trade, decentralization of cross border trading and gas deliveries to the European Union are certain to be high on the list of items to be discussed.  Interestingly enough Merkel stated that “she did not want to do anything that would hurt Russia, indeed she wants to have good trading and diplomatic relations with Moscow.” (Reuters 8/24/14). 

4.       Federal Reserve Watch – Move Long Nothing To See Here – The Federal Open Market Committee (FED) Chairwoman Janet Yellen made a speech in Jackson Hole, WY this past week as a part of the FED’s annual policy and strategy retreat.  She disappointed many if not all observers as her speech did not reveal anything new to presage they next move by the FED after the end of the Bond-Buy Back program in October.  The markets were off on the lackluster speech but still ended another week of positive returns.  The FED’s next policy meeting will be the 2 day meeting on Sep 16-17.  Market analysts are hoping for clearer language that will signal the timing of interest rate moves by the FED in 2015.  Let’s not forget that the labor market and GDP are high on the FED’s list to come to grips with in all of these discussions.  On a side note, the yield on the 10-year U.S. Treasury Bond held steady at levels above 2.4% for much of the week after starting the week at 2.36%.  Trading late on Friday pushed the yield back to 2.4% from a weekly high of 2.44%.  A good bit of volatility for an investment sought after for its stability.  On a positive number the low yield on the 10-year directly relates to lower mortgage rates paid by home buyers.

“A woman is like a tea bag; you never know how strong it is until it's in hot water.”

             ― Eleanor Roosevelt

 Have a good week and enjoy last week of Summer.

 Steve

Brennaman's Four Points for the Week August 18, 2014

Brennaman's Four Points for the Week

1.       Market Performance –Not a bad week If We Were in the Late 1990’s – Last week was not a bad week or a good week depending upon your inclinations.  A little volatility because of the Ukraine situation and the continued ISIS situation in Iraq.  But in the grand scheme of the market history it was a normal week. Some have described week’s market returns as tepid.   The broad markets were up 1.29% for the S&P 500 and 2.15% for the NASDAQ.  One percent return in one week is considered tepid?  In the late 90’s and even into the first decade of the century a 1% move was good – for a month!  Now we are crying that the market is failing and the worst is yet to come.  I remember early in my career when we had a 20 point move on the DOW Jones Industrial Index and we were ecstatic (if it was upward).  Now it is tepid and we are morose.  I feel last week is indicative of what we are going to see for the foreseeable future; low volatility, the market moving on real company news and sudden moves as a result of national or global events.  Just like the good ol’ times.  So what are the equity markets telling us?  The markets as a whole are a great prognosticator (or discounter) of the economic future.  The current market conditions reinforce the belief that investments in the equity markets are worth the risk, the FED is going to stay on the sidelines even after the Bond Buy-Back program ends in Oct and that better economic times are closer than they were just six months ago.  An old adage is particularly true in this case in that market prices almost always lead economic fundamentals.

2.       Agriculture – Good News & Bad News – The U. S. Department of Agriculture has repeatedly upgraded the forecast for corn, wheat and soy bean production this year as a result of mild temperatures and more normal rainfall (still low levels in many states).  Corn production alone is likely to break records in 2014 in terms of total production and yield per acre.  Very good news indeed.  Now the bad news.  Speculation on possible bumper crops has circulated for over six months driving down the price of corn per ton by nearly 30%.  The potential loss of earnings has had ripple effects as farmers (large and small) may defer new equipment purchases in the coming year.  Stocks of note that could be affected include John Deere and Caterpillar.  The impact on Deere is the largest with the return year-to-date of -5.8% (whereas the S&P 500 is up 5.8%).  However, if the sanctions remain in place against Russia, the nations of the EU will probably absorb much of the excess and the remaining grain will go a long way to replenish feed stocks for the U.S. beef, pork and poultry industries.  The resulting good news may be lower prices for these areas next year.

3.       Ukraine – Success on the Ground May Spell Further Trouble – The situation in Ukraine appears to be getting a bit more favorable for the government in Kiev as the Russian Separatists strongholds continue to weaken.  While Russia continues to support them it appears that the attempts to resupply them with arms is being interdicted by the Ukrainian Army at the border.  The developments late in the week with Russian military formations crossing or cruising the Ukrainian frontier and being repulsed caused the market jitters all over the world especial in the European and U.S. Markets.  The longer view is this situation needs to be resolved in a manner favorable to the European Union (EU).  Delayed or cancelled natural gas deliveries to the EU will most likely hinder the growth of the collective economy and could push the continent into a recession once again despite the extraordinary measures taken by the EU Central Bank.

4.       Chinese Economy – Growth Continues to Slow – The Chinese economy continues to slow as the central government continues to struggle with large numbers of unemployment, scarce resources and lower demand for their goods in overseas markets.  Many of these markets are experiencing slower growth as well and consumer demand is not on a strong upward curve (U.S. and the EU).  Chinese manufacturing levels are the lowest levels seen in a decade and affect all sectors; leading to layoffs, plant idling and a reallocation of government assets.  This trend is not new and has been evident going back well into 2013.  What does it mean?  While the U.S. is a significant importer of Chinese goods they are also important consumers of our natural resources (steel, coal, wood, etc.).  A slowdown in their economy will definitely impact our economic well-being as well.  Indeed we live in a global, mutually reliant economy.

“I was really too honest a man to be a politician…and live” Socrates

Have a good week and enjoy the waning days of Summer but alas, Autumn too is wonderful.

 Steve

Brennaman’s Four Points for the Week August 11, 2014

1.      Equity Market Correction Did not materialize – Just A Return to Volatility – The market last week opened with a bang then settled into a simmering morass of fear, uncertainty and doubt.  The combined news from the Middle East (Israel, Gaza and Iraq) and the continued threat from Russia / Ukraine threatened to upset the already tepid trading levels in U.S. Markets.  Bottom line is by Friday the market as measured by the S&P 500 was essentially flat for the week and still positive for the year (5.8%).  Earnings this past week were a broad mix of surprises and disappointments.  In the Mega-Cap space Citigroup continues to underperform due to their settlement with the U.S. Justice Department slammed their earnings, resulting in net income per share of only $0.03.  Without the settlement the income would have been $1.24 beating estimates handily.  Therefore the stock was up on the announcement.  It makes you wonder what will make a stock’s price go down if legal troubles and low income does not do it.

2.      Economic Situation – No Big Change But Things Are Moving in the Right Direction – We are still trying to come to grips with the 2d quarter GDP growth of 4% after the dismal showing in the 1^st quarter of (-2.1%).  No doubt we will see a downward revision of the 2d Qtr. number but that is to be expected.  We are seeing improvement in many key leading and lagging indicators that indicate that the slow recovery is gaining momentum.  Unemployment is holding at 6.2%, capacity utilization rate is approaching historical levels and office space utilization is improving in key urban markets.  Not everything is coming up roses as we are still observing employment participation rates moving in the opposite direction as we would expect in a recovery.  We feel part of this movement is a two decade plus improvement in production efficiency through technology and an increased focus on lean operations in all industries.  Also an area of concern is the weak level of wage growth and the high level of long-term unemployed population in the country.  If the economy continues on this course and inflation remains within the FED’s target area (2%), the FED will stay on the sidelines after they stop the bond-buy-back program in October.  I keep saying it:  Do Not Fight the FED!

3.      Agriculture – As If A Continuing Draught Was Not Enough; Putin Decides on a Hunger Strike For Russia –   The simmering situation in Eastern Ukraine took on another look last week as Vladimir Putin decided to strike back at the coalition against Russia’s actions in the eastern half of the Ukraine.  He announced late last week that he was banning for one year all imports from the U.S., The European Union and several other players for their part in placing sanctions on Russian exports and imports.  While this will cause a significant price drop in many agricultural commodity categories, especially in the EU, who does this really hurt?  Russia cannot produce enough food for the population as it is (imports on average 40% of all food categories).  This is one of the reasons that the eastern half of Ukraine sis important to Russia as it is a significant source of agricultural products for export to Russia and other countries (It is important to remember that during the Soviet era Ukraine provided greater than 40% of the agricultural production for the Soviet Union – Putin remembers).  At the beginning of this week Putin may be pulling back from the brink of invading Ukraine but as the Ukrainian Army makes headway in reasserting control will Putin stay on the sidelines?  Not a bet I am willing to take.

4.      HealthCare in America – Law of Unintended Consequences – Every action has an equal and opposite action (Newton’s Third Law of Motion) or as I like to paraphrase it there is always an unintended consequence to an action taken by an individual or in this case the Federal Government.  As time marches by we see different turns in the unfolding of the Affordable Care Act implementation.  The latest installment (too numerous to list) involves unexpected profits.  Yes, profits (and costs to insurers) that were unforeseen.  Namely, hospitals and other providers have seen a dramatic spike in requests for service across the board in terms of demographics and services needed.  Increased surgeries (elective and emergent), the fulfillment of delayed care as previously uninsured / underinsured seek treatment as well as other care (maternity and geriatric).  Who are the beneficiaries?  Hospitals, urgent care providers and local physicians are bearing the “brunt” of the increased activity and reaping gains.  Who is footing the bill?  Insurance accompanies participating in the healthcare exchanges and the U.S. Government (you and me).  I am not complaining, as a renovation in our health care system was and is still needed, but the real unintended consequence will be higher premium rates in 2015 and beyond as the cost structure has to be balanced.  So, will the Affordable Care Act actually produce affordable healthcare?  Capitalism will win out and the heavy hand of the government will intervene.  Hence the law of unintended consequences.

 “It is the highest impertinence and presumption, therefore, in kings and ministers to pretend to watch over the economy of private people, and to restrain their expense. They are themselves, always, and without any exception, the greatest spendthrifts in the society.”  Adam Smith

Have a good week and watch for children as school starts this week everywhere.

Steve

Brennaman’s Four Points for the Week August 4, 2014

Brennaman’s Four Points for the Week

1.      Equity Market Correction? – Does Not Appear So – I had to rewrite this section as the markets opened positive this morning, starting with large cap and spreading to mid and small.  The drop we experienced last week was dramatic in many aspects.  True to form the old adage buy on rumor and sell on fact took hold as the economic numbers came in strong as a surprise to most observers.  Couple the GDP growth number of 4% (annualized for the quarter) with good job numbers along with the average investor looking for reasons not to remain exposed; the market tanked.  It is almost as if it is a self-fulfilling prophesy after all the market Bears have been announcing the end was near.  Is this the beginning of a correction?  I can only say that the conditions are ripe for a correction with market valuations in the high range and bull sentiment rising (until this past Thursday).  But the prospect that easy money from the FED will be here for at least the next 7-8 months and the U.S. economy is not recovering at a faster pace, I still think there are gains to capture in the equity market with the right asset allocation.  How well do you sleep with your risk profile?

 2.      Economic Situation – Nothing Has Really Changed– The 2d quarter GDP growth of 4% is staggering in the light of what we saw in the 1^st quarter of -2.1% (revised upward from   -2.9%.  I believe the 2d qtr. growth rate is an anomaly as was the weather induced 1^st quarter.  Much of the production was deferred until the 2d quarter as demand picked up and inventories built as the 1^st quarter ended.  Pent up demand while still weak across the board, still drove manufacturers to bring on new employees, open dormant lines and continued the move to normalcy.  However, wage growth is still anemic and unemployment edged up as many long-term unemployed reentered the job search.  The FED did not disappoint in that they reduced bond purchases by $10B and reaffirmed that the program will end sometime in the Fall.  In their announcement last week the FED gave no indication or hints as to when they will raise interest rates going forward.  Still, our best guess in late 2d quarter 2015 or later.  Inflation will drive this number with the unemployment rate a definite influencer.  Better to listen to what the FED says they will do rather than prognosticate.  Remember:  Do Not Fight The FED!

3.      The Middle East – Putin Has Got To Love It –   The confrontation between Hamas and Israel in the Gaza strip has diverted much of the media’s attention away from the Ukraine and the economic sanctions imposed on the oligarchs in Russia, as ineffective as the may be at the current time.  Vladimir Putin continues to parlay his influence in the Western hemisphere with yet another trip to South America, meeting with the Brazilian leadership, hoping to build economic relations within the region as he and Russian companies continue to seek out new markets for the goods they produce.  President Obama stating that Russia “doesn’t make anything” (Reuters and the Economist magazine) further illustrates relations between the U.S. and Russia are seeking new lows.  The crises in Ukraine and the Middle East threaten to overshadow our national security and economic interests at home and abroad.  China no doubt is watching.

4.      Earnings Season – Earnings Have Exceeded Expectations – Earnings reports are in from 359 of the 500 companies in the S&P 500 with 236 exceeding analysts’ expectations while 74 firms missing estimates.  Surprisingly, Financials led the charge followed by Industrials and Technology companies.  A dichotomy is the Financials sector had the most companies to disappoint, 13 while Consumer Discretionary followed up with 12 losers.  What does it mean?  Not much really.  Considering that 66% of companies (236) that have reported through July 31 exceeded expectations is a good indication that we are indeed still recovering from the Great Recession.  While only 20% (74) missed expectations the quality of earnings in too many cases is clearly evident that we still have a journey ahead of us in terms of growth and productivity.  Still, there is still light at the end of the tunnel (could be an oncoming train) so the next week of announcements may tell us the next junction ahead for us.  Of course, it can be said that the Earrings per Share (EPS) numbers we are seeing are somewhat inflated due to share-buy-back efforts by many of the large cap names in the index.  Nonetheless, by the measure of quarterly earnings in comparison with year-over-year earnings we are experiencing the results that may embolden the Federal Reserve next year.  Time will tell if this lagging economic indicator will hold sway and be verified by more forward looking data.  Earnings to look for this week are concentrated in the Energy and Utility sectors.  Look for strong earnings from Duke Energy, Transocean and EOG Resources. 

"Success is never final, failure is never fatal.  It is courage that counts.” John Wooden

Have a good week even if the market is not pretty.