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
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