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
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