Brennaman’s Four Points for the Week October 27, 2014

Brennaman’s Four Points for the Week

1.       Financial Markets – A Surprising Bounce Back But Will It Hold – The major indices recovered nicely last week and are approaching market levels when the slide began in earnest on October 8^th but still short of the market highs in early September.  The prospect of the Federal Reserve continuing the policy of quantitative easing in the face of a global slowdown and building corporate earnings sufficiently buoyed investors to return to the equity markets and pushed the indices higher on strong volume.  But volatility remains as we are only a single exogenous event away from the possibility of another free-fall.  The Fed meets this week and perhaps will shed some light on their interim thinking on what has transpired in the last three weeks, both domestically and abroad, and the future timing of rising interest rates or perhaps continuing quantitative easing (bond buy-back program is scheduled to end this month).  The European Union (EU) growth issues coupled with the slowing economic situation in Russia and China are all issues that have an impact on our financial markets and only add concern in regards to our tepid recovery. 

2.       Corporate Earnings – Good News So Far At The Halfway Point – Nearly half of the S&P 500 Index companies have reported earnings for the quarter ending September 30.  The results so far are indicating we could see earnings growth in the quarter approach 5.6% versus the 4.5% originally forecasted for the quarter.  Caterpillar and Microsoft reported strong earnings as did UPS indicating that corporate and consumer spending is on the rise.  However, Amazon reported a significant loss in connection to a large write off on the Amazon Fire Smartphone.  Earnings reports this week that may have the markets humming include Merck, Pfizer, ExxonMobil and Chevron.  These stocks represent two sectors going in opposite directions.  The Healthcare sector is the best performing sector year to date while low oil prices have been cutting into the margins of companies in the oil patch.  This week will probably be no different.  But remember Exxon and Chevron are not losing money just making less than they were when oil was $100+ per barrel.

3.       Ukraine – The Vote is In And The Pressure is Back On Putin – Ukraine held the first elections since President Petro Poroshenko assumed office earlier this year.  The elections were held over the weekend and moderates took the majority of the offices sending a strong signal that Ukraine wants closer ties with the west and are backing Poroshenko’s plan for settling the crisis in eastern Ukraine.  The fragile ceasefire in Eastern Ukraine is little more than a slowdown in the fighting with casualties mounting on both sides each day.  NATO has observers on the ground as does Russia but Russian fighting units have pulled back to the border and many have left the country.  However, Russian President Vladimir Putin is not happy and has not ratified the peace agreement.  In a related matter the issue of natural gas for Ukraine and by proxy the EU, is also unsettled.  Russia and Ukraine have agreed on the price for the natural gas for Ukraine and for the gas that will transit to the EU but Russia is demanding a substantial payment up front.  Ukraine does not have the funds and is seeking loans from the EU so the flow of gas can resume.  The EU Central Bank may have to intervene or it could be a cold winter and a slower economy for the EU.  On the other hand, Putin needs the revenues from the natural gas shipments in order to stave off recession as the sanctions imposed by the West are having an effect in Russia with inflation growing and GDP growth approaching zero. 

4.       Economic Growth – Will Our Sluggish Growth Be Enough To Help The EU Hold On? – Despite good news in the U.S. with housing starts up at levels not seen since July 2008, the falling unemployment rate, and corporate earrings are signaling the recovery is continuing; it is obvious that the growth we are experiencing will need to sustain the efforts to revive lagging growth in the European Union as they struggle with deflationary pressures and stagnant growth.  The United Kingdom is but one bright spot in the EU with Germany and France maintaining growth rates approaching zero while the European central bankers apply a tourniquet to the problems even as many of the banks in their system are in trouble – shades of 2008 -2010 in the United States.  Lower oil prices present the EU with a dual edged sword; lower energy prices help lower production cost but the supply is imported priced in U.S. dollars which is hitting new strength versus the Euro thus raising costs.  The problems are easy to see but difficult enough to solve with one homogeneous banking system like the U.S. but the 28 nation EU is a tough arena to develop a single solution that fits all.

"No man is entitled to the blessings of freedom unless he be vigilant in its preservation”, General Douglas MacArthur.

Have a good week and be watchful of the little goblins on Friday night.

Steve

 

Brennaman’s Four Points for the Week October 20, 2014

Brennaman’s Four Points for the Week

1.       Financial Markets – Volatility is Back – Volatility has returned to U.S. and world financial markets after being on the sidelines for the better part of the last 12 months and at levels not seen since May 2012.  Volatility in the equity markets shared the spotlight with the fixed income arena as worried investors (mainly institutional and mutual fund managers) fled the equity markets for the relative “safety” of the U.S. Treasury.  The benchmark 10 year U.S. Treasury bond opened the week at 2.28% and gyrated wildly on Tuesday at the open going as low as 1.9%, a 15.4% move before resuming an upward movement to finish the week at 2.19%.  A 3.81% move for the week.  Great news if you are trader of the 10 year but harrowing if you are trying to avoid the volatility.  Nonetheless, the equity markets recovered a bit on Thursday and Friday on hopes that the Federal Reserve and the European Central Bank will continue to make easy money available to prop up growth in the European Union and to help ward off the effects of a slowing Chinese economy.  There is fear that the structural problems in the EU as well as emerging markets are more problematic than first considered and that the intertwined global economy is in for a prolonged period of uncertainty.

2.       Corporate Earnings – Good News in a Desperate World – Amid the chaos and destruction on Wall Street there were some bright spots to observe.  Housing starts resumed the upswing after faltering earlier this year and new unemployment application requests have hit a fourteen year low going back April 15, 2000.  In earnings while a mixed bag large money center banks are doing well even with the occasional legal bill tossed in the mix with three of the six money centers posting profits and guiding to higher earnings going forward.  UnitedHealth reported storing earnings and sizeable profits from lower medical costs (a continuing trend) and a surge in patients.  HCA, Inc reported similar results and also had encouraging forward looking guidance.  Unfortunately Google reported higher costs associated with taxes and slower growth in advertising sales despite earnings coming in 20% higher than a year ago.  Heavy spending on new businesses also contributed to higher costs at Google.  This coming  week will see the bulk of oil companies reporting so pay attention to what they say about earnings and growth in the future and less attention to the earnings to date.  The lower price of oil per barrel is bound to take a bite out of future guidance (and profits).  Weighing heavily on multinationals is the effect of a slowing global economy.  Many of these companies (Johnson & Johnson for instance) get upwards of 70% of their revenues from sales overseas.  Definitely bears watching.

3.       Ukraine – This Affair is Far From Peaceful and Tranquil – The leaders of the EU, Ukraine and Russia met this past week to discuss the continuing saga in the Ukraine.  The EU led by Angela Merkel, Petro Poroschenko, President of Ukraine and Vladimir Putin met in historic Millan in an attempt to solidify the tentative peace in eastern Ukraine.  As one might expect not much was accomplished in the two day conference.  Russia is still under pressure to ease support for the pro-Russian separatist and to hold back overt and covert support so peace talks between the government in Kiev and the separatists can continue without interference from without the country (i.e. Russia).  Vladimir Putin still refuses to acquiesce to the western demands in the face of continuing economic sanctions that are beginning to have an impact on the economy and citizens of Russia; with Putin reiterating the policy that the ethnic Russians living in Ukraine deserve the support of Russia and they should be allowed to determine their own destiny without interference from the West.  The talks went nowhere fast and included some acrimonious exchanges between Merkel and Putin who prior to the developments in Crimea and eastern Ukraine had been friends.  All of this as the price of oil continues to remain well below the $100 per barrel Russia needs in order to balance the Russian budget as they depend so heavily on revenues from the sale of Russian petro-chemicals.  Russia continues to refuse to flow natural gas and refined products to Ukraine until their price is met.  In addition, the flow of natural gas to the EU is still below seasonal levels, even as the winter heating season approaches.  How much of the Russian economy is Putin willing to sacrifice in order to achieve his global goals in Ukraine?  Or how long will the EU economy subsist before the natural gas issue becomes more pressing than the sanctity of eastern Ukraine?

4.       The Price of Oil – Impact on Fragile Economies – The relief Americans are feeling as they travel to the gasoline stations is palpable as the high gas prices we have endured for the last 3-5 years have slackened as a result of oil prices nearing 27 month lows.  As the national average price paid for gasoline approach $3 consumers are feeling as if a tax has been lifted, even if only temporarily.  The downside, using a more global view, is many countries rely on the revenues from their oil industry to support (prop up) their budgets and subsequent economic growth.  Countries from Iran to Russia to Saudi Arabia then to Venezuela rely on these revenues to balance their budgets (not necessarily capitalism strongholds).  Stability in most of these countries is not an immediate pressing issue, but looking at the regime in Venezuela one sees a regime (albeit democratically “elected”) struggling to stay afloat with a glut of oil that when sold, does not cover the bills in purchasing their imports, which is 70% of all goods needed for their enterprises and citizenry.  How long can Venezuela maintain control of an already pensive and suspicious populace?  Be careful what you ask for as an unsettled country in our hemisphere is sure to draw the attention of the U.S as well as other interested parties (China for one).

"There is an eternal dispute between those who imagine the world to suit their policy and those who correct their policy to suit the realities of the world.” Albert Sorel, French Historian.

Have a good week and enjoy the last vestiges of warm weather.

Steve

Brennaman's Four Points For The Week October 13, 2014

Brennaman’s Four Points for the Week

1.       Equity Markets – Correction? – Volatility was up and stock prices were down this week as the equity markets had the worst week since May 2012.  The S&P 500 closed down 3.5% for the week followed by a decline in the DOW of 3.2%.The DOW is 4.3% off of the record high on September 19^th and the S&P is off 5.2% from the high on September 8^th.  We could be in for the long awaited (anticipated?) correction but the next couple of weeks will tell us a lot since the corporate quarterly earnings season is upon us.  Alco posted strong returns after several years of lagging productivity citing stronger demand for downstream products and more advantageous pricing in raw materials.  Pressure on the markets continued with uncertainty in Iraq, the Ebola situation home and abroad; and the continued slowing of the European Union economy.  Not to mention the ever-slowing Chinese growth rate.  Is it a correction or is it just a lull in the Bull as it gains new momentum to move to new highs? 

2.       Corporate Earnings – The Reporting Season Takes Flight This Week – The coming week may provide us have a glimpse into where the economy is heading as slow growth continues to dominate the picture.  Fifty-three companies in the S&P 500 will report this week across a wide range of industries and sectors.  Alcoa’s results are heartening but waning optimism is only an earnings disappointment away.  Notable names to look for this week include:  Bank of America, Wells Fargo and JP Morgan in the money center arena, and General Electric and Honeywell in conglomerates.  Like it or not the money center banks’ earnings do matter as they are good indicators on where the economy is going as well as the conglomerates who indeed are multi-national in scope.  Earnings in these two areas could shed vital information in terms of consumer demand for loans as well as final demand for goods and services provided by manufacturing companies.  Other areas to watch this week and later in the month will be big oil and transportation.  Oil companies for the obvious reasons that lower oil prices may hurt earnings but transportation stocks will inform us on levels in demand for nearly all goods transported inside the country.  This week look for Baker Hughes in the Oil Patch and CSX Transportation.  Finally, Ebay and Google report this week as well, both will shed some light on consumer appetite for online advertising and sales.

3.       U.S. Economy – Low Interest Rates and Inflation – Well there continues to be good news on this front.  Low interest rates and low inflation are enabling U.S. companies to continue to produce products for domestic and foreign customers.  However, demand is slowing as the European Union approaches stall speed in their growth.  The economy of Germany is faltering and may go into recession and will pull the Union down with it.  A recession in the EU, the fourth largest trading partner of the U.S., coupled with the slowing Chinese growth rate could well spell problems here in the U.S.  An upside to this is raw materials from overseas suppliers are much cheaper than a year ago or even six months ago as the strength of the dollar has helped.  Unfortunately, this same strength in the dollar makes our goods more expensive so demand will falter if the EU slips into a recession or just slows to a very low growth rate.

4.       The Price of Oil – The Keystone Pipeline – The past week the Keystone pipeline controversy took another turn as the Canadian government announced that they are planning to build a new pipeline to the east rather than the west as they had planned.  This project will provide the heavier crude from the Canadian Artic Sands to the East coast refineries in the U.S. circumventing issues with the Obama administration and the opposition with environmentalists.  However, the oil will continue to flow from Canada to various terminal points in the continental U.S. by rail and truck until the pipeline is completed.  The loss of the western passage (mainly due to cost and opposition from Canadian aboriginal tribes) will not help China in their desire for the oil.  This alone will push China to strengthen the ties with Russia and Iran for the oil they can provide China’s economy.  The price of oil is nearing 2013 lows and could go lower as global demand weakens due to sluggish economic growth and the energy renaissance in the U.S.  The low oil prices adversely affect OPEC nations as well as Russia where the economies are so reliant on oil revenues.  While gasoline prices are going lower here in the U.S. the effect of lower oil prices is a dual edged sword.

"Opportunity is missed by most people because it is dressed in overalls and looks like work.” Thomas Edison

Have a good week and enjoy the short work week.

Steve

Brennaman’s Four Points for the Week October 6, 2014

Brennaman’s Four Points for the Week

 

1.       Economic Recovery –What Does The Unemployment Rate Tells US? – We received good news on Friday as the unemployment rate in August fell to 5.9% from 6.1% in July.  But before we celebrate there are underlying issues still to contend with.  The first being underemployment, specifically the labor participation rate which remains at a three + decade low of 62.7. Prior to the recession it was 66%, a fairly stable level.  Wage growth continues to disappoint economists but is not a surprise since manufacturing jobs, lost during the recession, paid higher wages than the service oriented jobs that are being offered and filled in this recovery.  Real wage growth back to pre-recession levels (or even Technology bubble recession) will rely on manufacturing jobs to grow significantly.  Many jobs that workers are finding as the market tightens are at lower salaries than were paid for the same jobs prior to the Great Recession as companies take advantage of the abundant workforce in hiring qualified employees at the lower salary.  Hence slow wage growth.  As the pool of available workers continues to shrink, we will probably see an uptick in wages as a result.  Free enterprise at work

2.       Western Sanctions on Russia – The Law of Unintended Consequences – Or is it poor strategic planning?  As the sanctions imposed on Russia by the Western nations in response to the continuing crisis in Eastern Ukraine begin to take hold, we should look at the far term consequences rather than the short-term struggles and impacts on the economies of nations on both sides of the equation.  Despite the coming hardships that the Russian people (and perhaps the people of the EU) will have to endure as the winter months approach, Putin is enjoying unprecedented popularity and support from the populace, even if the Russian legislature is fairly mum.  The portrait painted in his country is one where Vladimir Putin is much maligned and is only doing what is best for Russia (and Russians living in Ukraine).  Another consequence of the dissolving situation between Russia and the West is the newly forged ties between Russia and China in the areas of free trade and natural gas to satisfy the ever growing thirst for natural resources in China.  While the pipe line system is at least four years away from completion it is a sign that Putin will seek profits and leverage where he can even with a country / region where Russia (Soviets) have had 6 or more conflicts over the past 400 years.  And finally, the collaboration between the two nations to build a super seaport on the eastern shore of the continent should raise eyebrows in the west as well as Japan.  Strange Bedfellows indeed.

3.       Interest Rates– What Really Happens – Okay, I do not know when rates will go up.  However, the market is a barometer or discounter on when it will rise; looking out 6-9 months we see the possibility that the FED will raise rates in the second or third quarter of 2015.  Okay.  So what does that really mean to the equity investor?  For the common person (you and me) we will see higher rates on mortgages and consumer loans as an immediate influence but if you are not buying a new or used car or a house the immediate impact is negligible.  Your equity investment portfolio will suffer a little bit as the rate of increases becomes apparent.  Going back to 1946, the FED has raised interest rates 16 times (Sam Stovall S&P U.S. Equity Strategist).  Of those instances the equity markets (S&P 500 Index) endured a correction 13 times about 6 months prior to the actual rate increase action.  On average the S&P 500 lost 16% of its value and slightly less in the following six months; just shy of a bear market event (-20%).  The current pull back we are observing could be the sell-off but a well-diversified portfolio constructed for the longer-term is a good place to be.  Selling into a “what if” scenario only leads to a guessing game of when to get back into the market after “going to cash”. 

4.       Ukraine, The EU and Vladimir Putin – Again, What Can We Expect This Winter? – Russia is playing cute with the natural gas flowing to Ukraine and the European Union as a whole.  Natural gas deliveries to the EU are well below the levels of a year ago with a 15% drop on a year over year basis, with transit through Ukraine down 54%.  Europe is downplaying the reduction saying that storage levels are sufficient to provide natural gas to heat homes through the winter.  But left unsaid was the impact on EU manufacturing, most notably Germany where natural gas is vital for generating electricity as well as running the largest economy of the Union.  A colder winter than envisioned could will drain the storage and leave the EU in a precarious position.  Their collective economy is showing signs of a recession and this shortage of natural gas could be the final straw.

“Misery acquaints a man with strange bedfellows.” It is spoken by a man who has been shipwrecked and finds himself seeking shelter beside a sleeping monster.”  The Tempest, by William Shakespeare

Have a good week and enjoy the fall foliage as the colors develop.

Steve