Equities and the Economy

Good morning. A very small gain yet yielding another record high for the S&P 500. Yesterday the bellwether index started out lower but eked out a 3 point rise closing at an even 2,100 putting it into new territory. The Dow rose 28 points closing at 18,048 and the Nasdaq added 5 to 4,899. Three factors are at play here. First, Greece remains the focus of investors. (When I say investors I’m not talking about retail investor like you and I. I’m talking about the institutional investors. The big money. The likes of Fidelity and Vanguard.) Yesterday ended in a stalemate between Greece and its lenders, but “investors” are encouraged by the talks. Folks, don’t expect an agreement until the 11th hour, 59th minute, 59th second. Such is the nature of things. That being said, it is in no one’s interest, especially Germany, for Greece to leave the eurozone and cease using the euro. Actually, on balance it would be more beneficial for Greece to leave than it would be to Germany for Greece to leave. Greece is holding the euro down helping Germany. If Greece left the euro would rise making Germany’s exports more expensive. Second, corporate earnings. Earnings season has just ended and although earnings weren’t stellar there was still profit growth which is positive for stocks. Thirdly, although “investors” have the finger on their mouses to sell in a moment’s notice, like in January, since January there’s been a trend of unwinding of the “safety trade,” i.e. treasuries and gold. In the past week or so money has been flowing out of bonds into stocks. You can see this in the bond yield which rose yesterday.

Like yesterday, this morning is starting out quietly, eerily quietly with U.S. equities flat to yesterday’s close. Asian equities rose nicely, particularly Japan’s Nikkei 225 which closed at an 8 year high, and European stocks are currently trading flat to up but the “love” is not crossing “the pond.” U.S. equities are at record highs and P/E ratios at a decade high which are a heavy yoke to carry. At a minimum consolidation is in order. Another reason to be very cautious right now. The CNN Fear & Greed Index for investors’ enthusiasm for stocks is a bit extended (see below). Remember the old adage “when they’re cry’n you should be buy’n and when they’re yell’n you should be sell’n,” which is one of the reasons trading is so, so difficult.

Courtesy of CNN Money

Oil

Oil prices started materially lower yesterday morning but ground their way back into positive territory with WTI closing up 75¢ at $53.53 and Brent adding more, $1.13, settling at $62.53 intraday trading at 2015 highs. WTI’s afternoon price rise actually supported equities. I believe that traders are focusing on the plummeting rig count with that new data released Friday afternoon after the close and traded yesterday which was supportive of oil prices. I fully expect the rig count to continue to fall. Additionally, fighting in Libya has seriously curtailed oil exports supporting prices.

This morning, like yesterday, WTI is starting out lower being marginally down, 34¢. There was no fundamental news overnight. What might be pressuring oil prices this morning are comments this morning from UBS that oil prices will fall from current levels due to rising U.S. production which is enhancing the global supply glut. (Talk about talking your position!!!) The bank is saying Brent should fall back to $45/bbl of lower within the next 3 months. This would put WTI around $40 or lower. They go on to say the highest U.S. oil production in 3 decades won’t be curtailed by the idling or rigs and inventories will keep growing. I’m not sure how much the market is believing the propaganda for according to the latest position of traders report hedge funds positions reflect they’re the most bullish they’ve been in 7 months.

Natural gas

After the short covering pushed prices higher on Friday the shorts reinitiated their positions pushing natural gas down 4.5¢ yesterday. Quite amazing considering temperatures in the eastern U.S. are at record lows. (This global warming has got to stop!!!) So just how cold is it and will it get? (You folks in the northeast can tell me I’m sure!) Tomorrow is expected to be the coldest day of the season trumped only by the cold on January 8th. It is expected to be the 3rd coldest February day of the 2,000’s. February 2015 is shaping up to be the 3rd coldest February on record, based on U.S. gas weighted heating degree days, behind 19790 and 1978. So this means this February is on track to be colder than last February which is sure saying something!

And natural gas prices this morning are trading $2.754 which is just about flat to yesterday’s close. Interestingly, Q3 2015 is trading 15.6¢ higher than March 2015 at $2.910. Calendar 2016 is trading even higher at $3.255. You can interpret this that traders are expecting production to decline beginning in the second half of 2015.

Courtesy of MDA Information Systems LLC

Elsewhere

Another example of the failure of socialism. I’m talking about Venezuela. Although there is no doubt the Maduro Administration will deny it, things are falling apart there. There are lines everywhere in Venezuela for the most basic of things: rice, beef, diapers, toilet paper, and more. Store shelves everywhere are either empty or close to it. Inflation is running wild with food prices up over 80% over the past year. Things are getting so bad that the normally left of center Catholic Bishops there are noting the Maduro government intends to “impose” upon the people of Venezuela a government this is “Marxist and communist” and is responsible for the shortages now plaguing the country and its people. The Iron Lady, Margaret Thatcher, put it succinctly. “The trouble with Socialism is that you eventually run out of the other people’s money.” Have a nice day.