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
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