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