Brennaman’s Four Points for the Week

1.       The Politics of Oil – The Keystone XL Pipeline – The price of crude oil is below the level last observed over four years ago (Sep 21, 2010 for West Texas Intermediate (WTI)) as persistent slowing global demand and the resurgent U.S. domestic oil production industry contribute the glut of crude oil.  The recent mid-term elections have spurred the U.S. Congress to resurrect the stalled legislation approving the construction of the Keystone Pipeline.  The House passed a bill late on Friday and the Senate is expected to take up the issue with nearly identical language early this week.  The passage of the bill by both houses will put the President in a quandary:  vote with the majority and sign the bill or veto the bill in support of his stance on climate change.  But we should not overlook the political and economic ramifications.  While the Republicans will control the Senate in the next Congress, Sen. Mary Landrieu (D, LA) is in peril of losing her seat as the pipeline has become a pivotal issue in her runoff election (Dec 6) with Republican challenger, Rep. Bill Cassidy, R-La.  Both support the pipeline but Landrieu is at risk.  On the economic side of the equation, passage and subsequent presidential signature could aid in the creation of nearly 42,000 new jobs in the U.S. (admittedly many of these jobs will wither way after the pipeline is completed) and up to another 20,000 in Canada.  A more important impact is the direct contribution to North American independence from foreign oil producers.  Oil has been a major currency in world affairs since the early 19^th century and the prime driver of economic growth globally.  This is true today and will be for some time.

2.       The Economy – “The New Normal?” – Are we seeing a new normal in employment?  While the unemployment rate continues to decline (5.6%) we are continuing to see lower rates of participation, lower wages paid and still fewer full-time jobs than we had prior to the great recession.  A scant ten years ago an unemployment level of 4.6% was considered full employment level and supportive of a robust, growing economy.  This level is well below the long run natural unemployment rate of 5.2%.  So will our economy settle in at the 5.2 – 5.4% range as the economy continues to recover?  The jury is still out but we need to see wage growth better than we are witnessing at present as well as the participation increase from the historic low of 62.5%.  Another issue is the quality of jobs reflecting the shift from a manufacturing / industrial economy to a service oriented environment.  Innovation and creativity are highly prized in the U.S. and we are proud of these but we also need to see a direct correlation between these two items and manufacturing in order to break the gridlock low wages and unemployment has on the U.S at present.

3.       Russia and the Ukraine Situation – Putin Hears The Criticism From Abroad – But does he care?  Vladimir Putin senses weakness in the NATO and EU resolve in dealing with the Ukrainian situation.  So Putin is in no hurry to help reduce tensions in Eastern Ukraine as Russia continues to send in materiel and troops in to the region in support of the Pro-Russian Separatists (NATO – Reuters Nov 13).  Putin is willing to ratchet up the stakes with continued military flights near the borders with the European Union (EU) states and the latest announcement that Russia may position Backfire bombers in Cuba for possible flights near U.S. and Canadians shores more frequently.  He also realizes that his situation at home is precarious with the slipping economy beginning to weigh on the people of Russia.  He feels he needs to appear to be in control and be a major player in the global arena.  Therefore the actions of the Russian military are clearly directed towards the Western nations that levied economic sanctions against Russia for the annexation of the Crimea and the continuing conflict/tensions in Eastern Ukraine.  While the supply of natural gas to the EU has resumed (Russia desperately needs the revenue) it remains a silent blackmail tool as Putin has backed the EU into a corner.  If sanctions are again increased as discussions at the G20 summit will detail on November 17, the Russian economy will be dealt with another blow to an already reeling situation.

4.       Healthcare – Premiums go Down But People May Pay More – As the Affordable Care Act implementation is set to begin its second year, premiums are coming down in many states as new insurers enter these markets.  As planned by the architects of the act competition is fostering lower premium costs.  This is a good thing as costs to the individual will go down, right?  Not so fast.  In order to capture these lower premiums individuals may have to change their plan which is always a challenge.  So yes, if individuals change plans they can capture the lower premiums.  If they choose to stay with their current plan (experience tells us that customers do like to change plans) and keep their current insurance premium; they may in all likelihood pay higher premiums as the subsidy paid to them by the government could well be lower as a result of new methods of determining the subsidy payout level.  So competition is a good thing but for the thousands (if not millions) receiving subsidies the competition comes around to haunt them.

“It is hard to fail, but it is worse never to have tried to succeed” Theodore Roosevelt

Have a good week and be careful as cold weather is upon us.

Steve

 

Brennaman’s Four Points for the Week November 10, 2014

Brennaman’s Four Points for the Week

1.       Economy – New Releases Reflect Improvement– This week was full of positive news on the economic front.  Manufacturing intensity has increased as measured by the ISM manufacturing index which rose to 59.0 in October versus an expected decline from the previous month (September 57.5) telling us that U.S. manufacturers are ramping up production to meet growing and expected demand.  Unemployment numbers for October were also released as the unemployment rate dropped to 5.8 from 5.9% in September continuing the downward trend.  This number was bolstered by additional jobs added to the nation’s rolls for the week and a lower number of new applications for unemployment compensation.  These are signs that our economy is on the right track even though the pace is well below historical experience.  Perhaps the only flies in the ointment so to speak include the types of jobs being created, wage levels and the labor participation rate.  The majority of the jobs created have been in the service sectors followed by manufacturing and production.  Typically the wages paid in service oriented jobs are lower than the other two which translates to lower wage growth.  Wages grew .2% for the month of October and is essentially statically irrelevant; not the kind of numbers we have seen in any economic recovery since WWII.  Finally, the labor participation rate remains steady at 62.5% which is a four decade low going back to the 1960’s.  The troubling part of this statistic is the age cohorts between 24 and 55 are even lower than the overall number.  This number has to reverse itself or the recovery will be a very long one indeed.

2.       Energy – Oil Prices:  The Good, The Bad and The Ugly – The global oil glut as a result of increased production (domestic and foreign) and slow growth in demand has pushed oil prices lower each week since mid-summer.  In the United States the consumer is enjoying lower gasoline prices as the national average has dropped below $3 per gallon.  The dramatic decline of oil in such a short period of time has affected the market in subtle and not so subtle manners ranging from lower cost of goods and services to cheaper transportation costs and food.  The lower cost of gasoline acts like a tax cut freeing up discretionary money the consumer can spend in the economy providing additional stimulus to the expanding economy.  Of course there is a downside to this low oil price scenario.  Companies in the oil patch are having a rough go of it this time around.  While they are still making money, the growth of oil patch earnings has slowed, margins have compressed and forward guidance from the companies is indicating that there may be more trouble ahead if oil continues to decline into the $70 -75 per barrel range.  These factors have weighed mightily on the energy sector causing it to be one of the poorest performing sectors year-to-date.  Another area of real concern is the threat to the U.S. Energy Renaissance.  Current production and exploration in the U.S. is sustainable with oil prices well above the $70-75 range.  Lower profits as a result of lower oil prices may curb domestic exploration until the oil glut is equalized with demand.

3.       Ukraine – Putin is In A Long Game – Vladimir Putin remains actively engaged in the affairs of Ukraine.  While unconfirmed by NATO sources it appears that Putin is reasserting Russian influence in Eastern Ukraine after the Pro-Russian Separatists held elections last week.  Numerous press outlets in the region and in the Far East have reported Russian Army units and equipment have streamed into Eastern Ukraine since the elections.  Violence, which continued despite the ceasefire signed in September, has escalated with artillery and mortar fire increasing daily.  Ukrainian President Poroshenko has called upon the separatists to uphold their side of the accord but the death tally continues to mount.  The situation in Donets’k and Lohansk is nearing the breaking point as the winter weather is now upon the region.  There is a dearth of supplies, fresh water and electric power to provide the basic necessities such as heat and security lighting.  Putin is in this for the long haul and will bide his time until he has the humanitarian justification to formally “provide assistance “to the “Russian Peoples “of Eastern Ukraine since Kiev is unable to do so.  The rest of world can only watch.

4.       FED Watch – In Search of Inflation – With quantitative easing (QE) winding down and the economy slowly recovering, the FED is looking for hints of inflation – and finding almost none with the current level somewhere between 1.6% and 1.8%.  As unemployment continues to improve and the GDP slowly creeps into the normal range, the FED has plenty of time to evaluate and watch for inflation.  The FED has done a good job in keeping inflation in check even when they have flooded the market with historical levels of liquidity through three tranches of QE.  Inflation is nearly non-existent since the QE process began.  Still no inflation, which is one of the reasons we are not seeing appreciable wage growth.  A little bit of inflation is needed so businesses can have some pricing power, increase revenues and provide them the ability to expand their business and pay higher salaries.  The low levels of wages are where we were over a decade ago coming out of the 2001-2002 recession.  This fact alone tells us we still have a journey ahead of us.  A little inflation is good, but be careful what you ask for because with inflation comes the inevitable interest rate hikes from m the FED.

"In times of war and not before,

God and the soldier we adore.

But in times of peace and all things righted,

God is forgotten and the soldier slighted."

Rudyard Kipling

Have a good week and be sure to thank a veteran on Tuesday for her or his service – The Eleventh Month, the Eleventh Day, the Eleventh Hour – Armistice Day 1918 (Now Veterans Day).

Steve

Brennaman’s Four Points for the Week November 3, 2014

Brennaman’s Four Points for the Week

1.       FED Watch – QE III Over; Now What – The Federal Reserve Open Market Committee (FOMC) formally ended Quantitative Easing III (QE III) this week after a year of tapering in the Bond Buy-Back Program.  But the real news is that the FED is not finished with QE.  As you may recall there was Operation Twist which in fact was a form of QE whereby the FED purchased long or short term bonds to force interest rates to a level where the economy could be stimulated with lower loan rates for business.  There is disagreement as to whether this program has worked but historians and economists will debate this in classrooms for at least a generation.  Nonetheless the FED will continue to do this for a period of time albeit not at the level they did in 2011.  Simply put the FED has a huge position in the fixed income market and we really, really do not want them to exit their positions in an expeditious fashion.  Such an action would surely drive bond prices down and interest rates would likely climb in a precipitous manner.  Besides the FED may need that tool to fight inflation if ever it raises it head above 2%.  The wording in the FOMC announcement made it very clear that they would remain in an accommodative position for “sometime” as long as inflation was muted and unemployment continued to be elevated.

2.       Financial Markets – Steadily Marching Upwards – The FOMC announcement on Wednesday and the release of the GDP numbers on Thursday prompted the markets to continue the upward mobility off the October 15 lows.  The DOW and the S&P 500 have both moved nearly 10% off the bottom and are firmly entrenched back in positive territory for the year.  The ebullience felt by investors is a far cry from the depths of despair many were feeling as the markets roiled all portfolios.  The volatility on the way down and the meteoric ride up calls for pause and reflection.  What actions did we take or should have taken during both periods?  Sometimes doing nothing is the best course of action.  Selling into a decline can be like trying to catch a falling knife – not many good options come out of that play.  Likewise selling into a decline and then trying to decide when to get back in can be hazardous as well for opportunities that look good in a declining market are often sand traps waiting to keep you from your real purpose.  Yes, a well thought out portfolio appropriate for the time horizon and risk profile of the investor is almost always the best solution for a market we are observing now.  The financial markets can be a fickle companion.

3.       Economic Growth – Growth Numbers Surprise To The Upside – The U.S. GDP growth rate was 3.5% for the 3^rd Quarter surpassing the expected number of 3 - to 3.1%.  Government spending, personal consumption and inventory build contributed but lower imports, higher exports and lower fuel prices precipitated the surge.  The poor growth rate from the 1^st quarter (-2.1%) has been surpassed by the following resurgence and sets up the economy to possibly reach 2.2 to 2.5% for the year if the 4^th qtr. hits the consensus estimate of 2.7 to 3%.  Obviously a couple of revisions on the 3^rd qtr. number are coming and there is a lot of global uncertainty but the U.S. economy is on the comeback trail.  Lower oil prices, a stronger dollar and an accommodative central bank paint an appealing scenario to continue to propel the nation’s growth.

4.       Corporate Earnings – Good News Continues From The Oil Patch – Corporate earnings continued to come in this past week lead by ExxonMobil and Chevron Corp.  These two energy giants shrugged off the impact of lower crude oil prices and relied heavily on their diversified business portfolios, namely the results of refining operations versus exploration and extraction of resources.  The glut of oil from domestic production as well as from imported oil has to find some where to be refined into petroleum products.  Over the last decade many of the smaller players have exited the refining segment citing the inability to build and maintain necessary levels of scale.  Exxon and Chevron have actively increased their refining efforts through expansion and acquisition.  The Energy Renaissance we are seeing in North America (Canada and the U.S.) has benefitted these two companies allowing them to weather the pressures on margins as oil declined to the low $80’s from the yearly highs on June 20^th ($107).  The Nations of OPEC (Organization of the Petroleum Exporting Countries) meet later this month to discuss the situation of declining oil prices.  They are expected to cut production in order to stabilize oil prices and thus their own revenues.  The U.S. is in a favorable position to withstand this move and while prices may rise, the impact should be minimal.  OPEC needs the revenues and is likely as not to decide to maintain production to protect their interests at home (many of their economies rely on the revenues to fund their governments) and continue to generate revenues with a larger degree of certainty.  The Energy Renaissance will help insulate the U.S. from big oil shocks as they develop.

"The right of voting for representatives is the primary right by which other rights are protected.  To take away this right is to reduce a man to slavery, for slavery consists in being subject to the will of another, and he that has not a vote in the election of representatives is in this case”, Thomas Paine, “Dissertation on First Principles of Government”.

Have a good week and be sure to vote on Tuesday – every vote counts.

Steve