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