Brennaman's Four
Points for the Week
1.
Market
Performance –Not a bad week If We Were in the Late 1990’s – Last week was
not a bad week or a good week depending upon your inclinations. A little volatility because of the Ukraine
situation and the continued ISIS situation in Iraq. But in the grand scheme of the market history
it was a normal week. Some have described week’s market returns as tepid. The broad
markets were up 1.29% for the S&P 500 and 2.15% for the NASDAQ. One percent return in one week is considered
tepid? In the late 90’s and even into
the first decade of the century a 1% move was good – for a month! Now we are crying that the market is failing
and the worst is yet to come. I remember
early in my career when we had a 20 point move on the DOW Jones Industrial
Index and we were ecstatic (if it was upward).
Now it is tepid and we are morose.
I feel last week is indicative of what we are going to see for the
foreseeable future; low volatility, the market moving on real company news and
sudden moves as a result of national or global events. Just like the good ol’ times. So what are the equity markets telling
us? The markets as a whole are a great prognosticator
(or discounter) of the economic future.
The current market conditions reinforce the belief that investments in
the equity markets are worth the risk, the FED is going to stay on the sidelines
even after the Bond Buy-Back program ends in Oct and that better economic times
are closer than they were just six months ago.
An old adage is particularly true in this case in that market prices
almost always lead economic fundamentals.
2.
Agriculture
– Good News & Bad News – The U. S. Department of Agriculture has
repeatedly upgraded the forecast for corn, wheat and soy bean production this
year as a result of mild temperatures and more normal rainfall (still low
levels in many states). Corn production
alone is likely to break records in 2014 in terms of total production and yield
per acre. Very good news indeed. Now the bad news. Speculation on possible bumper crops has circulated
for over six months driving down the price of corn per ton by nearly 30%. The potential loss of earnings has had ripple
effects as farmers (large and small) may defer new equipment purchases in the
coming year. Stocks of note that could
be affected include John Deere and Caterpillar.
The impact on Deere is the largest with the return year-to-date of -5.8%
(whereas the S&P 500 is up 5.8%). However,
if the sanctions remain in place against Russia, the nations of the EU will
probably absorb much of the excess and the remaining grain will go a long way
to replenish feed stocks for the U.S. beef, pork and poultry industries. The resulting good news may be lower prices
for these areas next year.
3.
Ukraine –
Success on the Ground May Spell Further Trouble – The situation in Ukraine
appears to be getting a bit more favorable for the government in Kiev as the
Russian Separatists strongholds continue to weaken. While Russia continues to support them it
appears that the attempts to resupply them with arms is being interdicted by
the Ukrainian Army at the border. The developments
late in the week with Russian military formations crossing or cruising the
Ukrainian frontier and being repulsed caused the market jitters all over the world
especial in the European and U.S. Markets.
The longer view is this situation needs to be resolved in a manner
favorable to the European Union (EU).
Delayed or cancelled natural gas deliveries to the EU will most likely
hinder the growth of the collective economy and could push the continent into a
recession once again despite the extraordinary measures taken by the EU Central
Bank.
4.
Chinese
Economy – Growth Continues to Slow – The Chinese economy continues to slow
as the central government continues to struggle with large numbers of
unemployment, scarce resources and lower demand for their goods in overseas
markets. Many of these markets are
experiencing slower growth as well and consumer demand is not on a strong
upward curve (U.S. and the EU). Chinese
manufacturing levels are the lowest levels seen in a decade and affect all
sectors; leading to layoffs, plant idling and a reallocation of government
assets. This trend is not new and has
been evident going back well into 2013.
What does it mean? While the U.S.
is a significant importer of Chinese goods they are also important consumers of
our natural resources (steel, coal, wood, etc.). A slowdown in their economy will definitely
impact our economic well-being as well.
Indeed we live in a global, mutually reliant economy.
“I was really too honest a man to be a
politician…and live” Socrates
Have a good week and enjoy the waning days
of Summer but alas, Autumn too is wonderful.
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