Brennaman’s Four Points for the Week September 15, 2014

Brennaman’s Four Points for the Week

1.       Ukraine and the European Union – Do Sanctions Equal a Cold Winter for the EU? – The latest round of sanctions indeed have more teeth and will strike to the heart of Russia’s ability to freely trade the number one resource they have that is high demand at least in the European Union –Natural gas.  We saw a hint of things to come as supplies to Poland were curtailed with no explanation forthcoming from Gazprom, the Russian gas conglomerate.  Poland in turn was forced to curtail deliveries to Ukraine for short time.  The delayed deliveries are a harbinger of what is to come as the winter months unfold.  The latest sanctions also hit home in the U.S. as Exxon Mobile and BP Oil are affected directly.  The latest sanctions are aimed at future development of oil production and these two companies are in long-term agreements with Roseneft and Gazprom to expedite this production.  Both stocks were off strongly as the week closed.  The flow of natural gas to the EU is critical and the West is walking a fine line between not affecting current production while trying to nudge Russia “back into line” with the majority of Europe.  Right now Putin has two tools in his tool box:  Military power and natural gas supplies.  Which does he choose to use?  Dare we wonder?

2.       Ukrainian – The Quiet of a Ceasefire Does Not Mean All is Well – The ceasefire signed into effect less than two weeks ago has resulted in a lower level of shooting and the exchange of artillery fire.  While the majority of Russian troops have departed Ukraine proper it is believed that upwards of 1000 are still embedded with Russian separatist units providing aid, support and intelligence back to Mother Russia.  Meanwhile the Russian Separatists maintain gains from five months of fighting with no signs of conceding this control back to the Ukrainian central government.  The government in Kiev is considering concessions (appeasement?) to ease the situation and bring relief to Ukrainians caught in the cross-fire.  But alas, these attempts have been met with contempt and derision by the separatists and outright ridicule from Moscow.  Meanwhile Russia is solidifying gains to yet another seaport on the Black Sea.  How long until annexation is a fait accompli?

3.       The U.S. Economy – Does the EU Really Matter? – There should be no doubt the economic progress the U.S. will make in the future is tied to the fortunes of the European Union.  The EU is our fourth largest trading partner behind, Canada, China and Mexico.  Admittedly, we import from all four than we export to them.  The material and goods we receive are vital to our production of the items our companies in turn export to them, hopefully at a profit.  Without a strong and fruitful economy in the EU we would face the danger of a lower level of supply from their factories, depressed market for our finished goods and a general malaise in the global economy as a the overall purchasing power in the developed world is lessened as a result of a deeper recession in the EU.  If that is not enough to concern the casual observer, the EU as a block is the third largest holder of U.S. Sovereign debt behind China and Japan.  Along with significant cultural, economic and defense connections our historical alignment is strong.  Yes, the EU does matter despite the misgivings we have from time to time.

4.       Market Report – One Down Week Does Not Make for the Beginning of Correction – The market last week failed to rise above its opening numbers as the world of finance attempted to get a handle on a multitude of issues vying for attention.  The news out of the Ukraine and the further slowing of the EU and Chinese economies only added to the daily trauma on the trading floors.  Oil (as measured by West Texas Intermediate) is down to $92 on lower demand and increased stockpiles, here and abroad; the difficulties in Iraq/Syria notwithstanding.  Lower prices on oil is good for consumers as this is translating into lower gasoline prices at the pump but energy companies are taking it on the chin as their near-term profit margins may well be compressed.  Considering the Energy sector is a significant portion of all of the indices, one should not be surprised by the lower market results.  Another factor weighing on the investor’s psyche continues to be the upcoming Federal Reserve Open Market Committee meeting this next week and the enduring anxiety on when the FED will raise short-term interest rates.  With the U.S. economy slowly progressing in the right direction the debate continues to simmer on the timing of the next move by the FED.  FED watchers will look to parse the vague language sure to come out of the two day meeting to garner a hint on the next move.  Ironically, the FED may have some of its work done for it as market trading pushed the yield of the 10 yr. U.S. up to 2.61% up from 2.46% a week earlier, a 6.1% move.  Nonetheless, the FED will move and we will go on, looking for the next wall of worry to climb.

“Worry never robs tomorrow of its sorrow, but only saps today of its strength.” A.J. Cronin

Have a good week and take a walk, smell the roses.

Brennaman's Four Points For The Week September 8, 2014

Brennaman’s Four Points for the Week

1.       Economic Results – Keeping the FED in A Box – Economic numbers this week reflected a mix bag of positive and not so positive developments.  Unemployment for the month of July ticked down to 6.1% from 6.2% in June but this was in part because the participation rate also went down to 62.8%, the lowest level in 36 years.  Hourly incomes for non-managerial positions also increased 2.5% from a year ago, definitely good news but the work force only grew 125,000 for the month whereas the average for the last 6 months has been in the 225,000 arena.  A casual observer would think these numbers would cause market jitters but the DOW Jones and the S&P 500 both posted strong numbers for Friday and eked out another positive week.  This begs the question, Why?  The economic numbers in effect presents the Federal Reserve Open Market Committee (FED) with a situation of a growing economy (4.2% GDP for the 2d Qtr.) and a stagnant job market.  Both representing goals along with keeping inflation in check.  The pressure to raise rates is almost non-existent with inflation at 1.7%.  The Box the FED is in will, more than likely contain their need (or desire) to raise interest rates until well into the 2d half of 2015.

2.       Ukrainian Ceasefire – Who Loses? – The winners are easier to ascertain at first glance.  The European Union (EU) wins, if the cease fire holds and Russia wins as well for it will not be long before all is forgotten and capitalism prevails.  The EU wins because the repercussions from the conflict begin to lessen and Putin wins as a result of the stalemate, sanctions notwithstanding.  The Russian Separatists are still in possession of a large swath of eastern Ukraine and supported by Russian military forces.  The EU (and the U.S.) will be hard pressed to press any additional sanctions since they net effect may well be a further drag on the European economy.  And as we have seen the past sanctions did not seem to have any effect in regards to the current outcome.  So the losers are the people of eastern Ukraine, the 2,600 dead citizens and the country at large.  Four plus months of fighting and Russian troops on their sovereign soil places President Poroschenko in a tight corner with no real help in sight from the West.  President Poroschenko and the EU need to reevaluate the future in the dawning of a revitalized and emboldened Vladimir Putin.

3.       NATO – A Rebirth of An Alliance – The leaders of the North Atlantic Treaty Organization met this past week and the outcome was predictable but the leadership was different.  For the first time since the organization was formed in 1949 the United States was not the leader in the forefront.  Great Britain and France took center stage in pushing for the establishment of a spearhead force to deter potential adversaries or challenges to member nations.  This is not necessarily a bad thing.  For decades the U.S. shouldered the bulk of the cost and responsibility for being the one on line; and Great Britain did their part as well.  The recent events in Ukraine only highlight the state the alliance has devolved into since the fall of the Iron Curtain in 1990.  A strong NATO will go a long way in stabilizing relations in Eastern Europe and ensuring consistent and vital economic growth.

4.       Market Anxiety – To Stay or Not to Stay – The volatility of late has been almost nothing to be concerned about yet the collective anxiety of the investing world would lead one to believe we are losing a fortune every day in the market despite record highs on the S&P 500.  Such is the short time frame of mind investors have developed since the first market bottom in 2002, not to mention the bottom in March of 2009.  The long term investor, whether it be five, seven or ten years’ time frame is better served to be in the market and invested in a portfolio of securities that is aligned with his / her level of accepted risk.  Admittedly we climb a wall of worry (or fear) each Monday morning as the financial announcers outline the latest items of worry for the day or week ahead.  However, careful analysis and planning will help the investor weather these weekly (or daily) storms and keep their boat afloat in a manner that assuages their own demons in regards to the market.

“Never take counsel of your fears” Thomas J. “Stonewall” Jackson

Have a good week and read a good book.

Steve

Brennaman's Four Points For The Week September 1, 2014

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 4^th 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.

Brennaman"s Four Points For The Week Auguat 25, 2014

Brennaman”s Four Points for the Week

1.       The Economic Recovery Continues – Housing Starts - A Strong Leading Indicator – As I mentioned last week that market fundamentals lag the progress in the markets, the same can be said for the economy.  This past week we saw the housing markets continue to show signs of increase demand for existing home sales and a willingness of consumers to spend (borrow) to make the purchases.  The average thirty year mortgage rate dropped again to 4.1% and the fifteen year rate to 3.23%, both 52 week lows.  Existing home sales rose to the highest level in ten months but still lower than this same period in 2013.  A big number is the percentage of homes sold that were in a distressed status (foreclosure or under-water).  This number represented only 9% of the total homes sold down from the peak of 50% in 2009, 40% in 2011 and 20% at the beginning of 2014.  New housing starts also registered a good number with new starts climbing to 15.7% from a month earlier.  New home sales come out today at 10:00 AM.  The number of new home starts was greater than any month since November 2013.  A primary reason existing homes (and new home starts) are important is because it is a good barometer of the willingness for home buyers to accept risk and the follow-on spending that occurs as home buyers upgrade the home or appliance after the purchase; further stimulating the economy.  This trickledown effect is vital to the recovery. 

2.       Earnings Season Ends – Good News & Bad News – Nearly 70% of the reporting S&P 500 companies met or exceeded earnings projections for the 2d quarter.  There were some obviously poor results and some high profile names failed to make any progress in their efforts to move forward.  Sears continues to bleed at the seams as they posted another net quarterly loss of $573 million in the quarter.  On the other hand, Hewlett-Packard surprised the market with an increase in income and profit for the quarter citing better demand for personal computers and increased sales in most product categories.  While their earnings per-share was in line with analysts’ expectations ($.89) the “whisper number” was for a loss and disappointment.  Hewlett-Packard, under the leadership of Meg Whitman still has a tough road to slog as competition remains tight in the sector.  But it was definitely good news.  We saw many surprises and disappointments as swell in the earnings season but all in all it was normal as the companies reported earnings and more importantly provided forward looking  guidance that are normal and not indicative of a bubble forming of any kind.  Investing in large cap, dividend paying stocks of United States companies is still a good play.  The U.S. Bull is still running in the street.

3.       Ukrainian Success on the Ground – Does Indeed Spell more Trouble – The situation in Ukraine continues to devolve daily as the war of words between Moscow and Kiev has shifted to verified artillery firing into Ukraine and a forced entry of a convoy into Russian Separatists held territory in Ukraine proper.  Ukrainian armed forces are beginning to tally large losses in the militia and newly formed units as well as rising civilian deaths and refugee migration.  This was all ahead of separate meetings between Angela Merkel of Germany and the leaders in Kiev on Saturday and the scheduled meeting between Vladimir Putin and Ukrainian President Petro Poroshenko and European Union officials in Minsk, Belarus on Tuesday.  It appears that the visit by Merkel was largely symbolic and there is not much hope for anything constructive to come out of Minsk.  Merkel is expected to be in Minsk as well.  Free trade, decentralization of cross border trading and gas deliveries to the European Union are certain to be high on the list of items to be discussed.  Interestingly enough Merkel stated that “she did not want to do anything that would hurt Russia, indeed she wants to have good trading and diplomatic relations with Moscow.” (Reuters 8/24/14). 

4.       Federal Reserve Watch – Move Long Nothing To See Here – The Federal Open Market Committee (FED) Chairwoman Janet Yellen made a speech in Jackson Hole, WY this past week as a part of the FED’s annual policy and strategy retreat.  She disappointed many if not all observers as her speech did not reveal anything new to presage they next move by the FED after the end of the Bond-Buy Back program in October.  The markets were off on the lackluster speech but still ended another week of positive returns.  The FED’s next policy meeting will be the 2 day meeting on Sep 16-17.  Market analysts are hoping for clearer language that will signal the timing of interest rate moves by the FED in 2015.  Let’s not forget that the labor market and GDP are high on the FED’s list to come to grips with in all of these discussions.  On a side note, the yield on the 10-year U.S. Treasury Bond held steady at levels above 2.4% for much of the week after starting the week at 2.36%.  Trading late on Friday pushed the yield back to 2.4% from a weekly high of 2.44%.  A good bit of volatility for an investment sought after for its stability.  On a positive number the low yield on the 10-year directly relates to lower mortgage rates paid by home buyers.

“A woman is like a tea bag; you never know how strong it is until it's in hot water.”

             ― Eleanor Roosevelt

 Have a good week and enjoy last week of Summer.

 Steve

Brennaman's Four Points for the Week August 18, 2014

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.

 Steve

Brennaman’s Four Points for the Week August 11, 2014

1.      Equity Market Correction Did not materialize – Just A Return to Volatility – The market last week opened with a bang then settled into a simmering morass of fear, uncertainty and doubt.  The combined news from the Middle East (Israel, Gaza and Iraq) and the continued threat from Russia / Ukraine threatened to upset the already tepid trading levels in U.S. Markets.  Bottom line is by Friday the market as measured by the S&P 500 was essentially flat for the week and still positive for the year (5.8%).  Earnings this past week were a broad mix of surprises and disappointments.  In the Mega-Cap space Citigroup continues to underperform due to their settlement with the U.S. Justice Department slammed their earnings, resulting in net income per share of only $0.03.  Without the settlement the income would have been $1.24 beating estimates handily.  Therefore the stock was up on the announcement.  It makes you wonder what will make a stock’s price go down if legal troubles and low income does not do it.

2.      Economic Situation – No Big Change But Things Are Moving in the Right Direction – We are still trying to come to grips with the 2d quarter GDP growth of 4% after the dismal showing in the 1^st quarter of (-2.1%).  No doubt we will see a downward revision of the 2d Qtr. number but that is to be expected.  We are seeing improvement in many key leading and lagging indicators that indicate that the slow recovery is gaining momentum.  Unemployment is holding at 6.2%, capacity utilization rate is approaching historical levels and office space utilization is improving in key urban markets.  Not everything is coming up roses as we are still observing employment participation rates moving in the opposite direction as we would expect in a recovery.  We feel part of this movement is a two decade plus improvement in production efficiency through technology and an increased focus on lean operations in all industries.  Also an area of concern is the weak level of wage growth and the high level of long-term unemployed population in the country.  If the economy continues on this course and inflation remains within the FED’s target area (2%), the FED will stay on the sidelines after they stop the bond-buy-back program in October.  I keep saying it:  Do Not Fight the FED!

3.      Agriculture – As If A Continuing Draught Was Not Enough; Putin Decides on a Hunger Strike For Russia –   The simmering situation in Eastern Ukraine took on another look last week as Vladimir Putin decided to strike back at the coalition against Russia’s actions in the eastern half of the Ukraine.  He announced late last week that he was banning for one year all imports from the U.S., The European Union and several other players for their part in placing sanctions on Russian exports and imports.  While this will cause a significant price drop in many agricultural commodity categories, especially in the EU, who does this really hurt?  Russia cannot produce enough food for the population as it is (imports on average 40% of all food categories).  This is one of the reasons that the eastern half of Ukraine sis important to Russia as it is a significant source of agricultural products for export to Russia and other countries (It is important to remember that during the Soviet era Ukraine provided greater than 40% of the agricultural production for the Soviet Union – Putin remembers).  At the beginning of this week Putin may be pulling back from the brink of invading Ukraine but as the Ukrainian Army makes headway in reasserting control will Putin stay on the sidelines?  Not a bet I am willing to take.

4.      HealthCare in America – Law of Unintended Consequences – Every action has an equal and opposite action (Newton’s Third Law of Motion) or as I like to paraphrase it there is always an unintended consequence to an action taken by an individual or in this case the Federal Government.  As time marches by we see different turns in the unfolding of the Affordable Care Act implementation.  The latest installment (too numerous to list) involves unexpected profits.  Yes, profits (and costs to insurers) that were unforeseen.  Namely, hospitals and other providers have seen a dramatic spike in requests for service across the board in terms of demographics and services needed.  Increased surgeries (elective and emergent), the fulfillment of delayed care as previously uninsured / underinsured seek treatment as well as other care (maternity and geriatric).  Who are the beneficiaries?  Hospitals, urgent care providers and local physicians are bearing the “brunt” of the increased activity and reaping gains.  Who is footing the bill?  Insurance accompanies participating in the healthcare exchanges and the U.S. Government (you and me).  I am not complaining, as a renovation in our health care system was and is still needed, but the real unintended consequence will be higher premium rates in 2015 and beyond as the cost structure has to be balanced.  So, will the Affordable Care Act actually produce affordable healthcare?  Capitalism will win out and the heavy hand of the government will intervene.  Hence the law of unintended consequences.

 “It is the highest impertinence and presumption, therefore, in kings and ministers to pretend to watch over the economy of private people, and to restrain their expense. They are themselves, always, and without any exception, the greatest spendthrifts in the society.”  Adam Smith

Have a good week and watch for children as school starts this week everywhere.

Steve

Brennaman’s Four Points for the Week August 4, 2014

Brennaman’s Four Points for the Week

1.      Equity Market Correction? – Does Not Appear So – I had to rewrite this section as the markets opened positive this morning, starting with large cap and spreading to mid and small.  The drop we experienced last week was dramatic in many aspects.  True to form the old adage buy on rumor and sell on fact took hold as the economic numbers came in strong as a surprise to most observers.  Couple the GDP growth number of 4% (annualized for the quarter) with good job numbers along with the average investor looking for reasons not to remain exposed; the market tanked.  It is almost as if it is a self-fulfilling prophesy after all the market Bears have been announcing the end was near.  Is this the beginning of a correction?  I can only say that the conditions are ripe for a correction with market valuations in the high range and bull sentiment rising (until this past Thursday).  But the prospect that easy money from the FED will be here for at least the next 7-8 months and the U.S. economy is not recovering at a faster pace, I still think there are gains to capture in the equity market with the right asset allocation.  How well do you sleep with your risk profile?

 2.      Economic Situation – Nothing Has Really Changed– The 2d quarter GDP growth of 4% is staggering in the light of what we saw in the 1^st quarter of -2.1% (revised upward from   -2.9%.  I believe the 2d qtr. growth rate is an anomaly as was the weather induced 1^st quarter.  Much of the production was deferred until the 2d quarter as demand picked up and inventories built as the 1^st quarter ended.  Pent up demand while still weak across the board, still drove manufacturers to bring on new employees, open dormant lines and continued the move to normalcy.  However, wage growth is still anemic and unemployment edged up as many long-term unemployed reentered the job search.  The FED did not disappoint in that they reduced bond purchases by $10B and reaffirmed that the program will end sometime in the Fall.  In their announcement last week the FED gave no indication or hints as to when they will raise interest rates going forward.  Still, our best guess in late 2d quarter 2015 or later.  Inflation will drive this number with the unemployment rate a definite influencer.  Better to listen to what the FED says they will do rather than prognosticate.  Remember:  Do Not Fight The FED!

3.      The Middle East – Putin Has Got To Love It –   The confrontation between Hamas and Israel in the Gaza strip has diverted much of the media’s attention away from the Ukraine and the economic sanctions imposed on the oligarchs in Russia, as ineffective as the may be at the current time.  Vladimir Putin continues to parlay his influence in the Western hemisphere with yet another trip to South America, meeting with the Brazilian leadership, hoping to build economic relations within the region as he and Russian companies continue to seek out new markets for the goods they produce.  President Obama stating that Russia “doesn’t make anything” (Reuters and the Economist magazine) further illustrates relations between the U.S. and Russia are seeking new lows.  The crises in Ukraine and the Middle East threaten to overshadow our national security and economic interests at home and abroad.  China no doubt is watching.

4.      Earnings Season – Earnings Have Exceeded Expectations – Earnings reports are in from 359 of the 500 companies in the S&P 500 with 236 exceeding analysts’ expectations while 74 firms missing estimates.  Surprisingly, Financials led the charge followed by Industrials and Technology companies.  A dichotomy is the Financials sector had the most companies to disappoint, 13 while Consumer Discretionary followed up with 12 losers.  What does it mean?  Not much really.  Considering that 66% of companies (236) that have reported through July 31 exceeded expectations is a good indication that we are indeed still recovering from the Great Recession.  While only 20% (74) missed expectations the quality of earnings in too many cases is clearly evident that we still have a journey ahead of us in terms of growth and productivity.  Still, there is still light at the end of the tunnel (could be an oncoming train) so the next week of announcements may tell us the next junction ahead for us.  Of course, it can be said that the Earrings per Share (EPS) numbers we are seeing are somewhat inflated due to share-buy-back efforts by many of the large cap names in the index.  Nonetheless, by the measure of quarterly earnings in comparison with year-over-year earnings we are experiencing the results that may embolden the Federal Reserve next year.  Time will tell if this lagging economic indicator will hold sway and be verified by more forward looking data.  Earnings to look for this week are concentrated in the Energy and Utility sectors.  Look for strong earnings from Duke Energy, Transocean and EOG Resources. 

"Success is never final, failure is never fatal.  It is courage that counts.” John Wooden

Have a good week even if the market is not pretty.