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.