Brennaman’s Four Points for the Week December 22, 2014

Brennaman’s Four Points for the Week

1.       Troubled Asset Relief Program – How Will History Treat this Program – The Troubled Asset Relief Program (TARP) came to a quiet end on Friday after six years.  The massive program has been active is saving over 800 businesses from failing in the aftermath of the Great Recession; many of them banks, large and small.  The U.S. Government invested $426.4 Billion in the program and actually returned a small profit to the American taxpayer - $15.30 Billion or a percentage return of 3.59%.  Many analysts thought that the U.S. Treasury would be stuck with broken businesses, bad investments and a loss of hundreds of billions of dollars.  As most of us remember though, the program kept many key corporations form insolvency and thus spared the U.S. economy from further economic ruin.  The program is still very unpopular and likely will not happen again unless Congress enacts new legislation since the 2010 Dodd-Frank Law essentially outlaws such governmental actions in the future.  Was TARP good for the country?  We may never know but one can only presume that the salvage of Citigroup, Bank of America and General Motors kept over 700,000 citizens employed and contributing to the economic recovery.  There are untold hundreds of thousands positively affected by the unpopular program.  Admittedly the program smacked the concept of free markets, but the program may be seen in the future a necessity such as taking castor oil was for our grandparents.

2.       Economic Growth – The Federal Reserve Believes the Economy is On Track – The Federal Open Market Committee (FOMCC – FED) completed their last meeting of 2014 with little or no drama.  The Fed met expectations announcing they were adopting a “patient” approach on raising the short term interest rates.  They reiterated that the current level of 0-.25% is “appropriate” and sustainable since the economy is making steady improvement while the FED remains focused on the U.S. economy and less on the troubles brewing overseas (Russia, Japan and the emerging market countries).  The FED does have a few concerns with U.S. GDP growth and inflation.  Growth in 2014 is expected to finish at 2 to 2.25% with 2015 growth in the 2.6 to 3% range, essentially unchanged from the September forecast.  Janet Yellen, the FED Chairperson, says the majority of the FED members is comfortable with the current progress of recovery and is watching for evidence of resurgent inflation.  Headline inflation (includes energy and Food) is 1 to 1.1% with core inflation (headline except food and energy) will likely slip below 1%.  She did elaborate in the news conference that the current tepid inflation rate (well below 2%) is a concern as a certain amount of inflation is needed to spur manufacturing and production pricing and eventually encourage wage growth.  However, Inflation remains muted despite higher food costs.  Another area of interest top the Fed is unemployment.  Chairperson Yellen said the number has to break the current logjam of 5.8.  Indications from the FED are they expect unemployment to be 5 to 5.2% by end of 2015.  All in all the news out of the FED drove the Grinch back into his cave as the markets rallied into the close of the week up well over 3% across the board. 

3.       Cuba - The Market of Eleven Million – Eleven million is the rough number of people presently living in Cuba, a majority of which are in poverty.  As consumers starved from U.S. products it is already considered a fertile market once U.S. companies can legally develop and explore business in Cuba.  While this may take a generation and further governmental changes in Cuba the prospects are heady and exciting.  Unfortunately, they are not without opponents and obstacles.  The Cuban-American population (mainly in South Florida) and their representatives in Congress are gearing up for a fight against normalizing relations until the Cuban government becomes more liberal in human rights and personal freedoms.  The American reaction to President Obama’s move appears to be generational with Baby Boomers firmly opposing it with later generations split on the topic.  But vocal and powerful opponents are in the Halls of Congress and are vowing to fight the change in U.S. Policy.  This is important because the economic sanctions (near total boycott) cannot be lifted without Congress passing a law changing the policy.  The policy was codified in U.S. law in part to prevent a sudden change in U.S. policy with the election of a new U.S. president.  It appears this past action will temper future moves and engender a more patient approach in developing a new policy with Cuba.

4.       Ukraine – Is There Light at the End of the Tunnel? – Or is that another on-coming train?  Vladimir Putin appears to be continuing his bellicose ways and perhaps is playing chicken with the West.  Does he blink in order to lessen the economic sanctions on Russia?  The damage to the Russian economy may be irreversible for him unless he does more than say Russia is backing off from the situation in Eastern Ukraine.  If Russia does back down and enter into real negotiations beneficial to the sovereignty of Ukraine, he may well lose support at home as he could be seen as abandoning the ethnic Russians in Ukraine (and elsewhere).  Or Putin could go “all-in and” “encourage” the Pro-Russian Separatists to ratchet up the conflict, solidify gains and force the West to make painful decisions on the next course of action in the support of the Kiev government.  One must remember that Putin still controls 30-40% of the energy the European Union needs for the winter and beyond.  The West has to be careful to not provoke a Bear to take direct action.

“We must remember that any oppression, any injustice, any hatred, is a wedge designed to attack our civilization.” President Franklin D. Roosevelt

Have a good week and have a Merry Christmas.

Steve

Brennaman’s Four Points for the Week December 14, 2014

Brennaman’s Four Points for the Week

1.       The Economy of Oil – The Oil Glut Has Become a Boat anchor on the Markets – Consumer spending is on the upswing, unemployment is creeping into better territory and the Federal government appears to be in business after the new spending bill passed both houses and is headed to the President for signature.  So why is the oil glut acting like the Grinch Who Stole Christmas (Theodor "Dr. Seuss" Geisel, 1957)?  Oil and its by-products are present in nearly every manufacturing, production and service process in the U.S. and the world.  One would think this glut is a good thing (unless you are an investor in the energy sector).  From transportation to raw materials to energy to run factories and stores the lower cost of oil is a boon that has come at great time as the U.S. recovery moves into the next phase – sustainment and base building growth.  So, what is there to cause such consternation in stock market?  Well part of the issue is the slowing economic growth that is spreading through the world leaving few bright spots to focus on.  There is no mistaking the historical phenomenon that prices lead fundamentals and the current reaction in the markets may be not different but there is reason to be optimistic.  We have seen a spike in exports and a reduction in the trade deficit as the demand for U.S. goods is increasing overseas even as the international economy is slowing.  While imports are level the stronger U.S. dollar has made trade more lucrative for U.S. companies and consumers.  And one must remember that exports only make up 12% of the U.S. GDP (as compared to China 26%, Russia 28% and United Kingdom 28%).  Therefore while a slowing global economy will have a detrimental impact, the U.S. economy will continue to expand barring an exogenous event.

2.       Economic Growth – Economists are Now Getting On Board – Renowned economists across the country are calling for refocused growth in the U.S. economy.  They are citing lower gasoline prices, improving job markets and larger wage gains than we saw in the November economic numbers. Of course many of these same economists called for 2014 to be a resurgent year after 4 years of flagging upward movement in the economy.  The progress for the year is better than nothing but the results have not lived up the hype of 12 months ago.  The economy as measured by gross domestic production is forecasted to grow at 2.9% on an annualized basis.  The Federal Reserve has forecasted growth to be in the 2.6 to3.2% in 2015 so the economists are walking the line in their forecast.  The critical factors that affect ordinary Americans remain wage growth, continued improvement in unemployment and benign inflation.  A slow moving GDP will probably accomplish all three leaving interest rate hikes on the back burner for much of 2015.

3.       The Market – Looking into 2015 – This is clearly an exercise in futility but the prognosis season has arrived.  2014 has been a pleasant surprise for many expected it to be a year where the markets gave back a portion of the gains achieved over the past 5 ½ years.  In July and then later in September it appeared this could going to occur.  But investors realized that betting on the U.S. economy was better than betting on a low yielding fixed income market or foreign markets.  So dollars that fled out of the markets rushed right back in mid-October pushing the market to return 7.5% since then.  We saw a divergence between the U.S. markets and foreign markets as well as divergence between small/mid cap stock and large cap stocks here in the U.S.  Several things have contributed to this situation including the weakening economies abroad (Russia, China, Japan and the European Union nations) and the recovering U.S. economy. Hence investors here and abroad see the U.S. market as a safer refuge.  Nonetheless the result is there is no real alternative than to invest in stocks over fixed income and the U.S. stock market over a slew of overseas choices. This divergence is likely to continue well into 2015 and we will likely see periods like July, October and even the current decline as fear, uncertainty and doubt creep into the psyche of investors.  A real short term measure is what will occur as the Federal Reserve Open Market Committee finally decides when to raise short term investment rates.  Perhaps the FED will let us peak under the curtain as they report after their two day meeting this week.  Hang on for an interesting ride

4.       Ukraine – A Clear Signal from Congress – The House and Senate passed a bill authorizing the President to enforce stricter economic sanctions on Russia for their incursion into Crimea and eastern Ukraine in support of the pro-Russia separatists waging a civil warfare in support of autonomy.  The bill also authorizes the President to furnish “lethal” and non-lethal equipment to the government in Kiev in their effort to quell the separatists, bring some resolution to the conflict and to dispel further action by Russia.  The Congressional action goes on to authorize the sanctions presently in place by the U.S. and approves possible future economic moves by the U.S.  President Obama is not obligated to act under the authorization and it is not clear as to whether he will even sign the bill.  Whatever he does, the passage of the bill on a bipartisan basis is a clear signal to Ukraine, the European Union and to Russia that the condemnations of Russia’s actions are not forgotten and will not be tolerated.  The question remains does the U.S. take the lead or follow the EU, and if we act at what cost?  Meanwhile as world leaders look on and deliberate the fighting continues as the cold Ukrainian winter builds with no relief in sight.

"Success is measured by how high you bounce after hitting bottom"  General George S. Patton

Have a good week.

Steve

Brennaman’s Four Points for the Week

1.       Geopolitics of Oil – Is the Middle East Relevant? – As the price of oil continues to drop and the global glut continues to build it is really no surprise that OPEC did not cut production last month in an effort to protect their profit margins.  As the resurgence of oil production in North America continues unabated and Russian oil is flowing despite the Western sanctions, the large producers of oil in the Middle East fear one thing (among many) – not being able to dictate the terms of the production and price of oil.  The disdain for the potential loss of market share drove Saudi Arabia to maintain the pressure on the members of OPEC to keep producing oil even as the price of oil falls below their breakeven point.  The last thing they want to see is the U.S. lifting the ban on the export of domestic oil.  It is important to remember these nations export very little in terms of their economic wellbeing other than oil.  Without the outsized oil revenues, Saudi Arabia has to dig deep into fiscal reserves to make payments to their citizens to maintain the status quo.  Fortunately for them they have the means to do this.  Not so with Venezuela, Iran and the majority of the members of OPEC.  The pain will run deep and will linger far after the time when oil resumes its elevated perch, which is inevitable.

2.       Economic Growth – The U.S. Economy Continues to Improve – The U.S growth is building slowly despite the effects of the global slowdown.  Our growth may well be the solution to the global growth problem at hand but it will take more time than usual (normal?).  The stronger U.S. dollar and the budding recovery here in the U.S. have contributed to the increase in new jobs at a rate greater than at any time since 1999.  We re observing evidence of wage pressures increasing that hopefully will translate in an upward move in nominal wages.  These developments along with lower energy prices could translate into better consumer spending this holiday season and well into the New Year.  Something to reflect on is the positive impact of lower gasoline prices.  For every one cent decline ($.01) in the price of gasoline there is a corresponding increase of money available in the economy.  What does this look like on an annualized basis? – A staggering $1 Billion dollars for every cent in decline of the price of gasoline!  In the last 52 weeks the average price of gasoline has declined $.26 (AAA – 11/10/14) which translates to $26 Billion to stimulate the economy.  This number alone is stimulative to our economy and is helping to fuel the recovery.  Ironically, the lower gasoline prices do not help us in terms of federal and state taxes as they are a fixed rate per gallon.

3.       Russia– Putin No Longer Hiding Involvement in Ukraine – As the Russian economy slowly grinds to a halt, Vladimir Putin is as bellicose as usual; trumpeting the old refrain that the tribulations of Mother Russia are the fault of the U.S. led effort to dominate Russia economically and militarily.  This plays well to the populace at home as they perceive all threats from without as something to solidify national resolve.  This for a people who have endured oppressive governments for well over 500 years.  Hardship to the Russian people is to be expected and deviation from this is suspect. So it is no surprise that the heavy handed approach by Putin is met with a certain degree of acceptance.  Especially when the message is so well orchestrated and controlled by the oligarchs running the country.  The mess in Eastern Ukraine is approaching a critical point as the winter is now clearly settled in and the basic resources and services we take for granted (ample food supplies, electricity, natural gas, running water, and sewage) are nearly nonexistent.  Russian officers are mediating a new ceasefire and a new demarcation line in an effort to quell the virtually constant fighting since the September ceasefire agreement reached in Minsk.  All of this is happening as Ukraine is trying to secure financial guarantees and additional loans from the West (European Union and the G-7) to meet fiscal obligations, provide for growth in the country and keep the lights on.  Meanwhile Putin uses this situation to further position himself and Russia in a favorable light back home where the ideas presented by him have a deep resonance with the people.  The losers in this shell game are foremost the populace in Eastern Ukraine and the beguiled population of Russia.

4.       Economic Uncertainty – A Clearer Picture Emerges – Unemployment remains unchanged at 5.8% but wages have increased a little.  Combined increasing consumer demand (the breadth and depth remains to be seen) has resulted focus in the heretofore quiet topic of the Federal Reserve Open Market Committee (FOMC) and the much anticipated rise in the Fed Funds rate.  The rates have been near zero for nearly six years (February 2009).  The consensus on the street is that the FOMC will raise rates sometime in the second half of 2015.  But the idea of a date certain is not reinforced by the standards that the FOMC has established which consist of inflation greater than 2% and unemployment lower than it is now, perhaps 5.5%.  Still, GDP growth this year will likely be around 2.2% and many economists are forecasting growth next year to be in the 3-3.2% range – close to the historical long run rate of 3.3% (U.S. Bureau of Economic Analysis 1914 – 2014).  But is that rate sustainable?  The FOMC does not want a repeat of the 1937 fiasco when thy raised rates during the nascent recovery only to plunge the economy back into a recession, further prolonging the recovery well into the world war.  Chairperson Yellen, like her predecessor Bernanke, is a student of history and this possibility is not lost her and the Fed board of governors.

“Can any of us even imagine, after Pearl Harbor, President Roosevelt suggesting we negotiate a resolution or that we could simply prosecute those involved?  Of course it is unimaginable. We are right to be in the Middle East, and we are right to treat this as the war it is.”  U.S. Congressperson Marsha Blackburn from Tennessee

Have a good week and seek out a World War II veteran and tell him we remember Pearl Harbor and the subsequent sacrifices.

Steve

 

Brennaman’s Four Points For The Week December 1, 2014

Brennaman’s Four Points for the Week

1.            Energy – The Best of Times, The Worst of Times – No surprise the Keystone XL pipeline effort failed in the current political atmosphere but at least it came to a vote.  Perhaps in January.  Meanwhile crude oil prices have reached the lowest price per barrel since September 2009 and it appears that $60 per barrel is just around the corner as the global oil glut continues.  The Organization of the Petroleum Exporting Countries (OPEC) voted last week to maintain current levels of production which in turn sent crude oil prices racing toward the bottom.  Many of the countries need crude to sell well north of $85 to $100 to support their internal; operations but they also do not want to let their market share slip away.  The U.S. is now the 3rd leading producer of oil in the world and could be self-sufficient by 2025 according to U.S. government estimates.  And all of this with little or no help from the U.S. government.  Free enterprise hard at work.  Lower oil prices have translated into lower prices on refined products such as gasoline, diesel and aviation fuel.  Of course lower prices to the consumer means lower profits for the companies in the oil patch.  This in turn has pounded the companies in the energy sector in terms of share prices.  The sector is the poorest performing sector in the S&P 500 as well as other indices.  The upside of the lower oil prices is the savings across the board will help “fuel” the economic recovery from the depths of the 2007-08 recession.  And yes Virginia there is a Santa Claus – he is lower gasoline prices which are like a tax break so consumers can spend – a true upside.

2.            Economic Growth – Global Slowdown Materializing – Signs are currently developing pointing to a global slowdown.  While not a recession, the slower growth and the attendant signals may be harbinger of things to come.  The European Union (EU), Russia, China, Japan and now India are demonstrating signs of slower growth.  In the case of Russia that would be a negative number (Western sanctions and a corrupt economic system).  While the U.S. economy is recovering, demand for goods here and abroad is still stagnant with little upward mobility in consumer prices and thus lower profits for companies; then lower tax revenues for countries, lower salaries; well - you get the picture.  The EU is afraid of deflation but central banks are programed to fight inflation and to stimulate growth.  Fighting deflation is a not a tool in the collective tool kit of central banks.  Japan is seeing slower price growth and dwindling demand mostly because of population issues.  China’s growth, while still in the 7+% range, is in danger of slipping below the PRC government target of 7%.  To them this would be recessionary.  This is all occurring despite the lower cost of energy (natural gas and crude).  The stronger dollar (oil is priced in the U.S. Dollar) takes away some of the benefit of lower oil prices but in reality the biggest problem is slowing demand.  Is the U.S economic recovery strong enough to propel (or pull) the global economic community to better times?

3.            Ukraine – Closer European Ties Needed Now – Domestic events here in the U.S have pushed the Ukraine situation deep into the papers and even further from the personal psyche of Americans.  But the situation remains unsolved and is not going away.  The Kiev government is set to receive another installment loan from the EU to the tune of $625 Million on top of the $1.2 Billion already allocated to the struggling democracy.  The loans are intended to help shore up the economy so Ukraine can get on more solid footing and develop closer ties to the west and away from the Russian sphere of influence.  This is tough order of business considering the country was dependent on Russia for nearly all export revenue prior to the coup d’état earlier this year and the reestablishment of a democratic government.  Also it is important to note that Ukraine has no modern experience in a free market environment.  Their experience is limited to the 20+ years since they were cut free from the Soviet Union after the dismantling began in 1991.  Time will tell but this loan is vital to the future of Ukraine as it will allow Ukraine to develop and strengthen the free market culture necessary to survive and thrive in the global economy.  Ukraine needs the support of the West.

4.            Economic Uncertainty – Political Uncertainty – Strong economies make for strong democracies or at least strong governments.  Hungry and unemployed citizens with nothing but time on their hands are a threat to government and society.  Wars have been fought over the ages for any number of instigating events but a common denominator has been the need for economic stability and the benefits derived from the stability therein gained.  A stable economic process and the results derived from the exercise of free market activities places a high cost on global war for those with viable economies.  But those political entities without the economic strength are ready candidates for seeking resources to facilitate their economic growth through aggressive behavior.  So economically developed nations need to be on the lookout for those nations living on the precipice of economic dysfunction lest they be caught up in a conflict of the haves fighting off the have not’s. 

“Too often in recent history liberal governments have been wrecked on rocks of loose fiscal policy” Franklin D. Roosevelt

Have a good week and recovery from Black Friday activities.

Steve