Monday, November 3, 2014

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 3rd 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 1st 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 4th qtr. hits the consensus estimate of 2.7 to 3%.  Obviously a couple of revisions on the 3rd 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 20th ($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

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