Brennaman’s Four
Points for the Week
1.
Equity
Markets – Correction? – Volatility was up and stock prices were down this
week as the equity markets had the worst week since May 2012. The S&P 500 closed down 3.5% for the week
followed by a decline in the DOW of 3.2%.The DOW is 4.3% off of the record high
on September 19th and the S&P is off 5.2% from the high on September
8th. We could be in for the long
awaited (anticipated?) correction but the next couple of weeks will tell us a
lot since the corporate quarterly earnings season is upon us. Alco posted strong returns after several
years of lagging productivity citing stronger demand for downstream products
and more advantageous pricing in raw materials.
Pressure on the markets continued with uncertainty in Iraq, the Ebola
situation home and abroad; and the continued slowing of the European Union
economy. Not to mention the ever-slowing
Chinese growth rate. Is it a correction
or is it just a lull in the Bull as it gains new momentum to move to new
highs?
2.
Corporate
Earnings – The Reporting Season Takes Flight This Week – The coming week may
provide us have a glimpse into where the economy is heading as slow growth
continues to dominate the picture. Fifty-three
companies in the S&P 500 will report this week across a wide range of
industries and sectors. Alcoa’s results
are heartening but waning optimism is only an earnings disappointment away. Notable names to look for this week
include: Bank of America, Wells Fargo
and JP Morgan in the money center arena, and General Electric and Honeywell in
conglomerates. Like it or not the money
center banks’ earnings do matter as they are good indicators on where the economy
is going as well as the conglomerates who indeed are multi-national in
scope. Earnings in these two areas could
shed vital information in terms of consumer demand for loans as well as final
demand for goods and services provided by manufacturing companies. Other areas to watch this week and later in
the month will be big oil and transportation.
Oil companies for the obvious reasons that lower oil prices may hurt
earnings but transportation stocks will inform us on levels in demand for
nearly all goods transported inside the country. This week look for Baker Hughes in the Oil
Patch and CSX Transportation. Finally,
Ebay and Google report this week as well, both will shed some light on consumer
appetite for online advertising and sales.
3.
U.S.
Economy – Low Interest Rates and Inflation – Well there continues to be
good news on this front. Low interest rates
and low inflation are enabling U.S. companies to continue to produce products
for domestic and foreign customers.
However, demand is slowing as the European Union approaches stall speed
in their growth. The economy of Germany
is faltering and may go into recession and will pull the Union down with
it. A recession in the EU, the fourth
largest trading partner of the U.S., coupled with the slowing Chinese growth rate
could well spell problems here in the U.S.
An upside to this is raw materials from overseas suppliers are much
cheaper than a year ago or even six months ago as the strength of the dollar
has helped. Unfortunately, this same strength
in the dollar makes our goods more expensive so demand will falter if the EU
slips into a recession or just slows to a very low growth rate.
4.
The Price
of Oil – The Keystone Pipeline – The past week the Keystone pipeline
controversy took another turn as the Canadian government announced that they
are planning to build a new pipeline to the east rather than the west as they
had planned. This project will provide
the heavier crude from the Canadian Artic Sands to the East coast refineries in
the U.S. circumventing issues with the Obama administration and the opposition with
environmentalists. However, the oil will
continue to flow from Canada to various terminal points in the continental U.S.
by rail and truck until the pipeline is completed. The loss of the western passage (mainly due
to cost and opposition from Canadian aboriginal tribes) will not help China in their
desire for the oil. This alone will push
China to strengthen the ties with Russia and Iran for the oil they can provide
China’s economy. The price of oil is nearing
2013 lows and could go lower as global demand weakens due to sluggish economic
growth and the energy renaissance in the U.S.
The low oil prices adversely affect OPEC nations as well as Russia where
the economies are so reliant on oil revenues.
While gasoline prices are going lower here in the U.S. the effect of
lower oil prices is a dual edged sword.
"Opportunity is missed by most people
because it is dressed in overalls and looks like work.” Thomas Edison
Have a good week and enjoy the short work
week.
Steve
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