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
Steve
No comments:
Post a Comment