Monday, January 5, 2015

Brennaman’s Four Points for the Week December 29, 2014


Brennaman’s Four Points for the Week

1.       Energy – The Downside of the Decline of Oil Prices – The price of oil continues to slip lower as prices hit a new five year low (May 2009).  The price of Brent Crude and the West Texas Intermediate both have fallen even more since the beginning of the winter heating season.  Everything from diesel to jet fuel and home heating oil is lower creating an economic windfall here in the U.S.  But is continuing to have deleterious effects abroad as oil producing countries have used oil revenues to prop up economic systems that are fragile and weak.  The same can said for smaller exploration and production companies here in the U.S.  The shale boom fueled by the immediate access to oil reserves without the hindrance of government leases has created new companies and partnerships, and salvaging others who were on the precipice of demise.  Early and fairly easy profits led to rapid expansion and the creation of higher than average wages in the oil sector with the trickle effect spreading far and wide into sectors not directly connected to the oil industry.  Consumer services as well as oilfield services have benefitted from the shale experience not to mention the impact of sales tax revenues for local and state governments in the shale areas across the nation.  Business income tax impact has been very good with revenues to the Federal government rising significantly over the last three years.  The decline in oil prices is forcing some of the smaller players (and a few of the big firms) to relook their capital expenditure rate going into 2015.  This relook will include slowing down expansion and new exploration until the current oil glut can be absorbed by the market and prices stabilize.  This could mean an industry-wide slowdown in these areas as well as layoffs.  This when our economy is showing signs of a consistent and strengthening recovery.  The good news is the oil patch only represents seven percent of the national workforce.  The bad news is they are some of the highest paid middle class workers in the country.  Cheap oil and gas has a price.

2.       Market Outlook – The January Effect Follows the Santa Rally – The coming year will bring us many things most of which we have to wait to see.  One thing fairly certain lies with the volatility inherent in a market that has moved so high and with little positive fanfare.  This Bull Market is one that many investors have come to love and or hate.  Love the ride up but hate to get out and miss the next move.  But at the same time would love to exit, take profits and take a deep breath.  The problem is where do you go when you leave?  The fixed income market provides no solace, gold is a boat anchor as inflation does not exist to speak of, and cash pays less than money in the mattress.  An incentive here is that volatility in the coming weeks and months will be normal in that higher than what we have observed in the last 60-90 days or the last 365.  Volatility is currently hovering around ten-year lows but should slowly rise into the New Year as company profit measures are reported and the investors can see clearly the winners and losers of the economic recovery.  This resurgence of volatility is not necessarily a bad thing unless the securities you hold are overvalued, low on potential or just do not have viable earnings.  In that case the mattress may look good.  Volatility may disrupt your nocturnal activity but in the end the activity will clearly help us see the real economic winners and avoid the losers.  As I have said before it will be an exciting but bumpy ride all the way until the Federal Reserve lifts interest rates then all bets are off, on depending upon your risk temperament.

3.       Economy - The Consumer is Awake after a Long Slumber - The long draught of consumer spending appears to be at an end.  They have apparently taken the benefits of lower gasoline prices to heart and their pocketbooks during the Christmas shopping season.  The idea of reducing consumer debt has taken a backseat to filling pent-up demand for consumer goods as retail and on-line stores are seeing record breaking activity (online sales and foot traffic in malls).  High-end and on-line retailers are showing signs that the season is the best in many years while discount stores are doing as well as they have in recent years.  The consumer has been freed from the shackles of employment and economic fears to rejoice in the warmth of the holiday cheer.  The big question is will this activity translate into solid profits for retailers or will price discounting before and after the period take an edge off of the profit margin?  No matter the reasoning, the consumer has returned to the pre-Great Recession habits of spending over saving (or paying down debt).  Is that good or have we missed the lesson to be learned?

4.       Ukraine – The Solution is Slipping Away – Just when we thought the situation in Ukraine was stabilizing and approaching a point of an uneasy standoff Merkel talks, Putin poses and Poroshenko acts as if he has control of the situation.  Over the holiday President Poroshenko of Ukraine attempted to cutoff the Crimea from the Ukrainian infrastructure in an effort to pressure Russia to act on the behest of Ukraine to ease the tensions in eastern Ukraine.  Russia has been doing little in helping the situation but has not been active in degrading the situation any further of late.  Angela Merckel of Germany is pressing Vladimir Putin to act more in concert with world opinion to stem the growth of the conflict but is accomplishing nothing.  Meanwhile Putin is busy making friends with Kim Jong-un of North Korea in an attempt to repair a relationship that soured after the fall of the Soviet Union.  Merkel, Poroshenko and Putin are to meet in Kazakhstan in mid-January along with Hollande of France.  Should be an interesting meeting.  Will the sanctions be a topic of concern?  The pressures of the economic sanctions are certainly having their effects on the economy of Russia (or is it just the oil price decline?) but they are not achieving the desired goals in relation to the Crimea and eastern Ukraine.  Sanctions have a poor historical record.

“If there’s more than one way to do a job and one of those ways will end in disaster, then somebody will do it that way.” Edward A. Murphy, Jr. (author of “Murphy Lives” – Murphy’s Law

 Have a good week and have a safe Happy New year.

Steve

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