Brennaman’s Four Points for the Week
1.
FED Watch – QE III Over; Now What – The
Federal Reserve Open Market Committee (FOMC) formally ended Quantitative Easing
III (QE III) this week after a year of tapering in the Bond Buy-Back
Program. But the real news is that the FED is not finished with QE.
As you may recall there was Operation Twist which in fact was a form of QE
whereby the FED purchased long or short term bonds to force interest rates to a
level where the economy could be stimulated with lower loan rates for
business. There is disagreement as to whether this program has worked but
historians and economists will debate this in classrooms for at least a
generation. Nonetheless the FED will continue to do this for a period of
time albeit not at the level they did in 2011. Simply put the FED has a
huge position in the fixed income market and we really, really do not want them
to exit their positions in an expeditious fashion. Such an action would
surely drive bond prices down and interest rates would likely climb in a
precipitous manner. Besides the FED may need that tool to fight inflation
if ever it raises it head above 2%. The wording in the FOMC announcement
made it very clear that they would remain in an accommodative position for
“sometime” as long as inflation was muted and unemployment continued to be
elevated.
2.
Financial Markets – Steadily Marching Upwards
– The FOMC announcement on Wednesday and the release of the GDP numbers on
Thursday prompted the markets to continue the upward mobility off the October
15 lows. The DOW and the S&P 500 have both moved nearly 10% off the
bottom and are firmly entrenched back in positive territory for the year.
The ebullience felt by investors is a far cry from the depths of despair many
were feeling as the markets roiled all portfolios. The volatility on the
way down and the meteoric ride up calls for pause and reflection. What
actions did we take or should have taken during both periods? Sometimes
doing nothing is the best course of action. Selling into a decline can be
like trying to catch a falling knife – not many good options come out of that
play. Likewise selling into a decline and then trying to decide when to
get back in can be hazardous as well for opportunities that look good in a
declining market are often sand traps waiting to keep you from your real
purpose. Yes, a well thought out portfolio appropriate for the time
horizon and risk profile of the investor is almost always the best solution for
a market we are observing now. The financial markets can be a fickle
companion.
3.
Economic Growth – Growth Numbers Surprise To
The Upside – The U.S. GDP growth rate was 3.5% for the 3rd
Quarter surpassing the expected number of 3 - to 3.1%. Government
spending, personal consumption and inventory build contributed but lower
imports, higher exports and lower fuel prices precipitated the surge. The
poor growth rate from the 1st quarter (-2.1%) has been surpassed by
the following resurgence and sets up the economy to possibly reach 2.2 to 2.5%
for the year if the 4th qtr. hits the consensus estimate of 2.7 to
3%. Obviously a couple of revisions on the 3rd qtr. number are
coming and there is a lot of global uncertainty but the U.S. economy is on the
comeback trail. Lower oil prices, a stronger dollar and an accommodative
central bank paint an appealing scenario to continue to propel the nation’s
growth.
4.
Corporate Earnings – Good News Continues From
The Oil Patch – Corporate earnings continued to come in this past week lead
by ExxonMobil and Chevron Corp. These two energy giants shrugged off the
impact of lower crude oil prices and relied heavily on their diversified
business portfolios, namely the results of refining operations versus
exploration and extraction of resources. The glut of oil from domestic
production as well as from imported oil has to find some where to be refined
into petroleum products. Over the last decade many of the smaller players
have exited the refining segment citing the inability to build and maintain
necessary levels of scale. Exxon and Chevron have actively increased
their refining efforts through expansion and acquisition. The Energy
Renaissance we are seeing in North America (Canada and the U.S.) has benefitted
these two companies allowing them to weather the pressures on margins as oil
declined to the low $80’s from the yearly highs on June 20th
($107). The Nations of OPEC (Organization of the Petroleum Exporting Countries) meet
later this month to discuss the situation of declining oil prices. They
are expected to cut production in order to stabilize oil prices and thus their
own revenues. The U.S. is in a favorable position to withstand this move
and while prices may rise, the impact should be minimal. OPEC needs the
revenues and is likely as not to decide to maintain production to protect their
interests at home (many of their economies rely on the revenues to fund their
governments) and continue to generate revenues with a larger degree of
certainty. The Energy Renaissance will help insulate the U.S. from big
oil shocks as they develop.
"The right of voting for
representatives is the primary right by which other rights are protected.
To take away this right is to reduce a man to slavery, for slavery consists in
being subject to the will of another, and he that has not a vote in the
election of representatives is in this case”, Thomas Paine, “Dissertation on
First Principles of Government”.
Have a good week and be sure to vote on
Tuesday – every vote counts.
Steve
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