Brennaman’s Four
Points for the Week
1.
The Power
of Oil – Russia and ISIS – Russia provides more than 30% of the natural gas
the European nations need to heat their homes, produce electricity and to power
the economy. Energy is also a strong
capitalistic tool that has not been used directly by Vladimir Putin in the
current situation in Ukraine. On the
other hand, the Islamic State of Syria (ISIS) has gained control of
considerable petroleum assets in Iraq and is purported to be raising nearly $1
million a day to support their terrorist activities, selling oil at $25 to $60 per
barrel (spot price is @ $95). Sanctions
may have an impact on Putin (no evidence so far) but the international
community obviously has ready buyers of cheap oil. The volume from the sale of oil by ISIS is so
low as to have a negligible on the world supply (and prices) but obtaining it
at any price from ISIS provides them with assets that Al Qaeda never dreamed of
having at their disposal. Couple these
resources along with fanatics from western countries willing to execute the
agenda of ISIS, the problem may soon well be on our shores and not in some far
distant land.
2.
Summer
Doldrums are Behind US – Will volatility and Risk Return With The Fall – This past week we witnessed the S&P 500
break 2000 for the first time and it is indeed a momentous time in the history of
the Market. But what should we take from
this event. That it was inevitable goes
without saying considering in the history of the markets we know they been on
the upswing for about 66% of the time.
The S&P 500 rally from the bottom in 2009 (March 9) has extended
2,000 days as of Friday. 2,000 days. This Bull market is the 4th
longest (best?) since 1928 (Morningstar & Shiller) with the average length
of 3.8 years. September and October are
historically the most volatile months of the year and many investors become skittish
and look for the exits. This year will
probably be no different. But let’s look
at another period that sways the human emotion.
The saying "Sell in May and Go Away” is a favorite of many but if you had
sold the market in early May of this year you would have missed 6.5% return
from the equity market; 2/3 of the way to an average year (9.5%) on the S&P. Yes, volatility may return this month and
risk is always present but if you are not in the market chances are you are
losing as well with interest rates on certificate of deposits well below ½% and
the U.S. Treasury no bargain either.
Settle in for the ride; while it may not be the new Batman roller
coaster coming in 2015, it always an interesting experience.
3.
Ukrainian
- The End May be Near –The situation in Ukraine has reached a point where
victory by Kiev is beyond the logical possibility. Russian forces, albeit without identifying
flags and unit decals, have facilitated Russian Separatist gains on several
fronts and the talks in Belarus are moving in the direction of an outcome not
favorable to the Ukrainian government and perhaps the European Union. If the Separatist achieve any degree of autonomy
it will be seen as a victory by Vladimir Putin and may embolden him to take
similar actions in other former Soviet satellite nations. The economic implications are already being
realized as the economy of Ukraine is reeling and the value of their currency
has plunged against all relevant foreign currencies. Natural gas will not flow to Ukraine from
Russia until they pay their current outstanding bill which has become harder as
the currency has fallen. If Kiev
continues to hold a hard line against the Separatists Putin may well increase
military (covert as it is) pressure or offer to sell natural gas at a low rate
or even forgive the debt if Kiev acquiesces and comes back in the “fold”. Putin is unlikely to back down any time soon
and President Poroshenko will face problems within his own government as the
civilian fatalities rise and the overall lack of military success presses him
for a resolution. Time is not on his
side and favors Putin; and economic sanctions have failed.
4.
The
Economy and The Markets – Definitely Positive Developments – The GDP numbers
for the 2d quarter were revised upward to 4.2% from 4.1%. While a revision is not unusual the direction
is usually downward. Further indication
that the economy is moving in the right direction. Inflation remains tame at 1.7% well below the
FED’s target of 2%, the housing market continues to advance while capital goods
production, with or with aircraft orders, is improving, what’s to worry? FED will raise rates when they do, so nothing
we can do there and the consumer will eventually rise up and spend since work
hours have increased even though wage growth is non-existent. The markets as I mentioned last week will
reflect all of these things but real earnings and profit growth will matter
more now than at any time in the last 5+ years.
Since buying the shares of companies creating high quality profits (sustainable
and transparent) is something we can control we should focus on this area in
our investing. Asset allocation and the
selection of stocks (or mutual funds) should be the focus of the investor’s
effort since these actions will be the few things they can do and control to
grow their wealth.
“The only place success comes before work
is in the dictionary.” Vince Lombardi
Have a good week and if you can enjoy an
afternoon at the beach or pool before the warm weather is all gone.
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