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
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