Brennaman's Four Points For The Week September 29, 2014

Brennaman's Four Points For The Week

1.       Equity Market Turbulence –Fear, Uncertainty and Doubt – The past week saw wild swings not dissimilar from the last days of July and early August.  Many market observers were calling this the beginning of the much vaunted correction.  But upon closer inspection many things have come together to precipitate the early week selloff.  The U.S. led intervention in the struggle against ISIS in Syria and Iraq picked up in intensity and the building coalition was not picking up steam seemingly leaving the U.S. to go it alone.  By the end of the week this was resolved as European nations joined the chorus of moderate Middle East nations in joining the endeavor.  Rumors and threats of war have always had an initial dampening effect on the markets but once the situation is clearer the initial anguish subsides.  Also adding to the furor in the markets continues to be the FED moves to raise interest rates in 2015, with guesses ranging from late 2014 all the way out to 2016.  Like I said last week it is time to focus on actions we can take that have an immediate impact on investment portfolios.  Finally, the issues that impacted the market this week having substance continue to revolve around the European Union and growth rates in China. 

2.       Chinese Growth Rates – Is Their Economy Slowing to a Sustainable Level? – Part of the market volatility this week has a source in the uncertainty and doubt on the direction the Chinese economy is headed.  As a reminder, China is our second largest trading partner behind Canada and holds nearly a third of the U.S. debt.  These are very important considerations to keep in mind.  Just a few short years ago China’s economy was humming along at 10%+ but has steadily slowed to around 7.25-7.5%.  Earlier this week several analysts revealed that the Chinese economy may have been overstated and growth is slipping at a faster rate.  While not in a recession, pressure from a scarcity of natural resources, a slowing EU economy and the slow recovery in the U.S. has put pressure on Chinese manufactures that cannot be fixed in a day.  United States conglomerates doing business in China have witnessed slower sales growth and even negative earnings from doing business in China; McDonalds, Wal-Mart, Microsoft and Yum Brands to name a few.  The ripple effect early in the week carried through to the end of the week and pushed down all major U.S. market indices.  If not for the debacle at PIMCO the equity markets may have fared worse on the week.  As it was the S&P 500 was only down .87% while the DOW Jones Industrial average posted a .88% loss.  The tech heavy NASDAQ was down 1.13%.  The weekly market results were helped by a strong rally across the board on Friday.

3.       The Economy– Disconnect Between the EU and the U.S. – The U.S. economy continues to demonstrate signs that the economic recovery is continuing with little or no inflation.  Unemployment and underemployment remain two thorns in the FED’s side as they struggle with when to raise rates (or more importantly how much and how fast since raising rates is going to happen).  Consumer confidence picked up this week and the final number for the 2d qtr. GDP reiterated that our economy grew at 4.6%.  The situation in Europe is less than sanguine.  Germany has the most robust economy but is facing challenges while the situation in Ukraine threatens the overall economy, development of Russian oil and gas as well as free cross border trading.  The full effects of the sanctions imposed by the West are still in the building stage but Putin is holding his cards close to his vest in terms of oil and natural gas supplies.  Meanwhile the EU is seeking relief in the energy arena from the Middle East and the North Sea; but these sources will not erase the problem, leaving the EU economic growth in doubt.

4.       Ukraine, The EU and Vladimir Putin – Who Will Blink First? -  The Free Trade Pact Ukraine made with the European Union will not be in effect until December 31, 2015, delayed by the EU as a concession (appeasement?) to Vladimir Putin to maintain the illusion of peace in Eastern Ukraine and to help formulate more normal relations with Russia.  As winter approaches Putin is continuing his campaign of rhetoric against the sanctions imposed by the west.  Earlier this month he announced that Russia was to impose a stiff tariff on all goods imported from the EU through Ukraine.  The impact of these tariffs would be in the area of $3 Billion Euros on an annual basis and would stifle trade with Russia in the areas of steel, coal and grain.  The economic impact would likely cripple Ukraine.  However, without these resources the economy in Russia may well grind to a halt where the GDP is currently hovering around 0%.  Will Putin push his country into recession and risk further discord with the EU and help push the entire continent into a deep recession?

 

“To choose doubt as a philosophy of life is akin to choosing immobility as a means of transportation.”  ,  Yann Martel, Life of Pi    

Brennaman's Four Points For The Week September 22, 2014

Brennaman’s Four Points for the Week

1.       The FED Watch Continues – Right Back Where We Started From – The last three or four weeks leading up to the 2-day meeting of the Federal Open Market Committee sold airtime on CNBC, copies of the Wall Street Journal and occupied the time of innumerable analysts in the financial world.  The end result was disappointing to many of the prognosticators.  What we did get was not a disappointment to the financial markets.  Even though the FED is ending the bond buy-back program next month the message was clear – they are not raising interest rates until slack in the labor market is lessened, wage growth becomes apparent and sustainable, and inflation remains below 2%.  The FED went on to say that they expect GDP growth for the year to be 2.1-2.2% down from the earlier estimate of 2.2-2.3%, even with the robust 4%+ number in the 2nd. qtr.  They also stated that they were observing a broad array of economic measures and not focusing on just employment and inflation although those two still stand-out as the primary focus.  Bottom-line, the FED will raise rates and will not tell the investing public because they do not really know.  Higher rates are inevitable and the path to higher rates may well be steeper than previously thought.  The longer they wait the larger the moves but we need to plan with the information we have and drive on.  Second guessing the timing may be good for the FED watchers but as investors we need to focus on our portfolios and what they are doing and how they will react when rates do start the upward move.

2.       Economic News We Can Use – Personal Income Rises – Personal incomes grew in 2013 for the first time since the beginning of the Great Recession.  While the growth of .3% is small it is a move in the right direction.  Median household income is now $51,939 but still 8% below pre-recession levels.  Since the recession ended (2009) the number is a little better at 4% less; but the current level is the lowest since 1996.  Even though the stock market is up 19.5% (annualized) since March 2009 the wealth effect is not having an effect as the average citizen is continuing to focus on lowering debt levels and building savings for retirement and emergencies.  Consumer spending is another area we are not seeing robust moves upward.  With 65-70% of our economy depending upon consumer consumption; growth of GDP, inflation, and eventual interest rate increases are pushed further into 2015.  Good news but it appears to be coming in at an anemic rate.

3.       Ukraine– No Resolution Just A Lull – The situation in Ukraine is quiet in terms of military activity but the impact on the European Union and Ukrainian people is still a cloudy vision.  Ukrainian President Petro Poroshenko is walking a fine line between building stronger relationships with the EU and not further antagonizing Russia.  The Ukrainian Parliament agreed to a broader Free Trade Pact with the European Union, taking Ukraine a step closer to membership in the EU and further away from the Russian sphere of influence.  This move was necessary to help the struggling Ukrainian economy.  At the same time Poroshenko offered a plan for limited autonomy for the eastern portion of Ukraine, but details were not provided.  An apparent consequence of the Ukrainian actions is the disruption of the flow of natural gas to the EU.  While gas flows are still taking place, there have been disruptions and lower volumes delivered to countries like Poland, Romania and Slovakia, all former republics of the Soviet Union.  The gas destined for Slovakia must go through Ukraine while natural gas for other EU nations can circumvent Ukraine by pipelines in the Czech Republic (also an EU member).  It is likely that Russia will increase the use of other pipelines such as the Czech system to increase pressure on Ukraine to come back into the “fold”.  Natural gas is a strong commodity tool as the winter heating season draws near.  However, Russia needs the revenues as much as the EU needs the gas but will Vladimir Putin compromise and allow the course of history in Ukraine proceed on its own?

4.       Market Movers – Alibaba and Scotland – Aside from watching the FED torture analysts. Market participants watched the attempt at the demise of the United Kingdom as Scotland voted on whether to become independent (85% voter turnout – the U.S is lucky to get 50% on a national election) and the mildly curious dreamed of getting in on the Alibaba initial public offering.  Depending upon your point view these could be disappointing or uplifting.  Alibaba was priced at $68 out of the box but never traded there as the market drove it to $99.  The owners of Alibaba shares that were allocated were not disappointed but buyers earlier on in the trading frenzy did not reap any large benefits as the stock traded lower and closed at $93.89.  Scottish voters as well had mixed emotions as the attempt to derive freedom from the UK failed at the ballot box with a 55/45 split in favor of staying with in the United Kingdom.  The Scottish news had an immediate impact as the price of Brent oil stabilized after having declined as the vote drew near.  Evidently the idea of a free Scotland would have put a veil over the easy flow of oil and the imminent contest over who rightfully owned the resources.  Moot point at this point. 

“Hypocrisy is the tribute vice pays to virtue” François de La Rochefoucauld

Brennaman’s Four Points for the Week September 15, 2014

Brennaman’s Four Points for the Week

1.       Ukraine and the European Union – Do Sanctions Equal a Cold Winter for the EU? – The latest round of sanctions indeed have more teeth and will strike to the heart of Russia’s ability to freely trade the number one resource they have that is high demand at least in the European Union –Natural gas.  We saw a hint of things to come as supplies to Poland were curtailed with no explanation forthcoming from Gazprom, the Russian gas conglomerate.  Poland in turn was forced to curtail deliveries to Ukraine for short time.  The delayed deliveries are a harbinger of what is to come as the winter months unfold.  The latest sanctions also hit home in the U.S. as Exxon Mobile and BP Oil are affected directly.  The latest sanctions are aimed at future development of oil production and these two companies are in long-term agreements with Roseneft and Gazprom to expedite this production.  Both stocks were off strongly as the week closed.  The flow of natural gas to the EU is critical and the West is walking a fine line between not affecting current production while trying to nudge Russia “back into line” with the majority of Europe.  Right now Putin has two tools in his tool box:  Military power and natural gas supplies.  Which does he choose to use?  Dare we wonder?

2.       Ukrainian – The Quiet of a Ceasefire Does Not Mean All is Well – The ceasefire signed into effect less than two weeks ago has resulted in a lower level of shooting and the exchange of artillery fire.  While the majority of Russian troops have departed Ukraine proper it is believed that upwards of 1000 are still embedded with Russian separatist units providing aid, support and intelligence back to Mother Russia.  Meanwhile the Russian Separatists maintain gains from five months of fighting with no signs of conceding this control back to the Ukrainian central government.  The government in Kiev is considering concessions (appeasement?) to ease the situation and bring relief to Ukrainians caught in the cross-fire.  But alas, these attempts have been met with contempt and derision by the separatists and outright ridicule from Moscow.  Meanwhile Russia is solidifying gains to yet another seaport on the Black Sea.  How long until annexation is a fait accompli?

3.       The U.S. Economy – Does the EU Really Matter? – There should be no doubt the economic progress the U.S. will make in the future is tied to the fortunes of the European Union.  The EU is our fourth largest trading partner behind, Canada, China and Mexico.  Admittedly, we import from all four than we export to them.  The material and goods we receive are vital to our production of the items our companies in turn export to them, hopefully at a profit.  Without a strong and fruitful economy in the EU we would face the danger of a lower level of supply from their factories, depressed market for our finished goods and a general malaise in the global economy as a the overall purchasing power in the developed world is lessened as a result of a deeper recession in the EU.  If that is not enough to concern the casual observer, the EU as a block is the third largest holder of U.S. Sovereign debt behind China and Japan.  Along with significant cultural, economic and defense connections our historical alignment is strong.  Yes, the EU does matter despite the misgivings we have from time to time.

4.       Market Report – One Down Week Does Not Make for the Beginning of Correction – The market last week failed to rise above its opening numbers as the world of finance attempted to get a handle on a multitude of issues vying for attention.  The news out of the Ukraine and the further slowing of the EU and Chinese economies only added to the daily trauma on the trading floors.  Oil (as measured by West Texas Intermediate) is down to $92 on lower demand and increased stockpiles, here and abroad; the difficulties in Iraq/Syria notwithstanding.  Lower prices on oil is good for consumers as this is translating into lower gasoline prices at the pump but energy companies are taking it on the chin as their near-term profit margins may well be compressed.  Considering the Energy sector is a significant portion of all of the indices, one should not be surprised by the lower market results.  Another factor weighing on the investor’s psyche continues to be the upcoming Federal Reserve Open Market Committee meeting this next week and the enduring anxiety on when the FED will raise short-term interest rates.  With the U.S. economy slowly progressing in the right direction the debate continues to simmer on the timing of the next move by the FED.  FED watchers will look to parse the vague language sure to come out of the two day meeting to garner a hint on the next move.  Ironically, the FED may have some of its work done for it as market trading pushed the yield of the 10 yr. U.S. up to 2.61% up from 2.46% a week earlier, a 6.1% move.  Nonetheless, the FED will move and we will go on, looking for the next wall of worry to climb.

“Worry never robs tomorrow of its sorrow, but only saps today of its strength.” A.J. Cronin

Have a good week and take a walk, smell the roses.

Brennaman's Four Points For The Week September 8, 2014

Brennaman’s Four Points for the Week

1.       Economic Results – Keeping the FED in A Box – Economic numbers this week reflected a mix bag of positive and not so positive developments.  Unemployment for the month of July ticked down to 6.1% from 6.2% in June but this was in part because the participation rate also went down to 62.8%, the lowest level in 36 years.  Hourly incomes for non-managerial positions also increased 2.5% from a year ago, definitely good news but the work force only grew 125,000 for the month whereas the average for the last 6 months has been in the 225,000 arena.  A casual observer would think these numbers would cause market jitters but the DOW Jones and the S&P 500 both posted strong numbers for Friday and eked out another positive week.  This begs the question, Why?  The economic numbers in effect presents the Federal Reserve Open Market Committee (FED) with a situation of a growing economy (4.2% GDP for the 2d Qtr.) and a stagnant job market.  Both representing goals along with keeping inflation in check.  The pressure to raise rates is almost non-existent with inflation at 1.7%.  The Box the FED is in will, more than likely contain their need (or desire) to raise interest rates until well into the 2d half of 2015.

2.       Ukrainian Ceasefire – Who Loses? – The winners are easier to ascertain at first glance.  The European Union (EU) wins, if the cease fire holds and Russia wins as well for it will not be long before all is forgotten and capitalism prevails.  The EU wins because the repercussions from the conflict begin to lessen and Putin wins as a result of the stalemate, sanctions notwithstanding.  The Russian Separatists are still in possession of a large swath of eastern Ukraine and supported by Russian military forces.  The EU (and the U.S.) will be hard pressed to press any additional sanctions since they net effect may well be a further drag on the European economy.  And as we have seen the past sanctions did not seem to have any effect in regards to the current outcome.  So the losers are the people of eastern Ukraine, the 2,600 dead citizens and the country at large.  Four plus months of fighting and Russian troops on their sovereign soil places President Poroschenko in a tight corner with no real help in sight from the West.  President Poroschenko and the EU need to reevaluate the future in the dawning of a revitalized and emboldened Vladimir Putin.

3.       NATO – A Rebirth of An Alliance – The leaders of the North Atlantic Treaty Organization met this past week and the outcome was predictable but the leadership was different.  For the first time since the organization was formed in 1949 the United States was not the leader in the forefront.  Great Britain and France took center stage in pushing for the establishment of a spearhead force to deter potential adversaries or challenges to member nations.  This is not necessarily a bad thing.  For decades the U.S. shouldered the bulk of the cost and responsibility for being the one on line; and Great Britain did their part as well.  The recent events in Ukraine only highlight the state the alliance has devolved into since the fall of the Iron Curtain in 1990.  A strong NATO will go a long way in stabilizing relations in Eastern Europe and ensuring consistent and vital economic growth.

4.       Market Anxiety – To Stay or Not to Stay – The volatility of late has been almost nothing to be concerned about yet the collective anxiety of the investing world would lead one to believe we are losing a fortune every day in the market despite record highs on the S&P 500.  Such is the short time frame of mind investors have developed since the first market bottom in 2002, not to mention the bottom in March of 2009.  The long term investor, whether it be five, seven or ten years’ time frame is better served to be in the market and invested in a portfolio of securities that is aligned with his / her level of accepted risk.  Admittedly we climb a wall of worry (or fear) each Monday morning as the financial announcers outline the latest items of worry for the day or week ahead.  However, careful analysis and planning will help the investor weather these weekly (or daily) storms and keep their boat afloat in a manner that assuages their own demons in regards to the market.

“Never take counsel of your fears” Thomas J. “Stonewall” Jackson

Have a good week and read a good book.

Steve

Brennaman's Four Points For The Week September 1, 2014

Brennaman’s Four Points for the Week

1.       The Power of Oil – Russia and ISIS – Russia provides more than 30% of the natural gas the European nations need to heat their homes, produce electricity and to power the economy.  Energy is also a strong capitalistic tool that has not been used directly by Vladimir Putin in the current situation in Ukraine.  On the other hand, the Islamic State of Syria (ISIS) has gained control of considerable petroleum assets in Iraq and is purported to be raising nearly $1 million a day to support their terrorist activities, selling oil at $25 to $60 per barrel (spot price is @ $95).  Sanctions may have an impact on Putin (no evidence so far) but the international community obviously has ready buyers of cheap oil.  The volume from the sale of oil by ISIS is so low as to have a negligible on the world supply (and prices) but obtaining it at any price from ISIS provides them with assets that Al Qaeda never dreamed of having at their disposal.  Couple these resources along with fanatics from western countries willing to execute the agenda of ISIS, the problem may soon well be on our shores and not in some far distant land.

 

2.       Summer Doldrums are Behind US – Will volatility and Risk Return With The Fall –  This past week we witnessed the S&P 500 break 2000 for the first time and it is indeed a momentous time in the history of the Market.  But what should we take from this event.  That it was inevitable goes without saying considering in the history of the markets we know they been on the upswing for about 66% of the time.  The S&P 500 rally from the bottom in 2009 (March 9) has extended 2,000 days as of Friday.  2,000 days.  This Bull market is the 4^th longest (best?) since 1928 (Morningstar & Shiller) with the average length of 3.8 years.  September and October are historically the most volatile months of the year and many investors become skittish and look for the exits.  This year will probably be no different.  But let’s look at another period that sways the human emotion.  The saying "Sell in May and Go Away” is a favorite of many but if you had sold the market in early May of this year you would have missed 6.5% return from the equity market; 2/3 of the way to an average year (9.5%) on the S&P.  Yes, volatility may return this month and risk is always present but if you are not in the market chances are you are losing as well with interest rates on certificate of deposits well below ½% and the U.S. Treasury no bargain either.  Settle in for the ride; while it may not be the new Batman roller coaster coming in 2015, it always an interesting experience.

 

3.       Ukrainian - The End May be Near –The situation in Ukraine has reached a point where victory by Kiev is beyond the logical possibility.  Russian forces, albeit without identifying flags and unit decals, have facilitated Russian Separatist gains on several fronts and the talks in Belarus are moving in the direction of an outcome not favorable to the Ukrainian government and perhaps the European Union.  If the Separatist achieve any degree of autonomy it will be seen as a victory by Vladimir Putin and may embolden him to take similar actions in other former Soviet satellite nations.  The economic implications are already being realized as the economy of Ukraine is reeling and the value of their currency has plunged against all relevant foreign currencies.  Natural gas will not flow to Ukraine from Russia until they pay their current outstanding bill which has become harder as the currency has fallen.  If Kiev continues to hold a hard line against the Separatists Putin may well increase military (covert as it is) pressure or offer to sell natural gas at a low rate or even forgive the debt if Kiev acquiesces and comes back in the “fold”.  Putin is unlikely to back down any time soon and President Poroshenko will face problems within his own government as the civilian fatalities rise and the overall lack of military success presses him for a resolution.  Time is not on his side and favors Putin; and economic sanctions have failed.

 

4.       The Economy and The Markets – Definitely Positive Developments – The GDP numbers for the 2d quarter were revised upward to 4.2% from 4.1%.  While a revision is not unusual the direction is usually downward.  Further indication that the economy is moving in the right direction.  Inflation remains tame at 1.7% well below the FED’s target of 2%, the housing market continues to advance while capital goods production, with or with aircraft orders, is improving, what’s to worry?  FED will raise rates when they do, so nothing we can do there and the consumer will eventually rise up and spend since work hours have increased even though wage growth is non-existent.  The markets as I mentioned last week will reflect all of these things but real earnings and profit growth will matter more now than at any time in the last 5+ years.  Since buying the shares of companies creating high quality profits (sustainable and transparent) is something we can control we should focus on this area in our investing.  Asset allocation and the selection of stocks (or mutual funds) should be the focus of the investor’s effort since these actions will be the few things they can do and control to grow their wealth.

 

“The only place success comes before work is in the dictionary.”  Vince Lombardi 

 

Have a good week and if you can enjoy an afternoon at the beach or pool before the warm weather is all gone.