Equities and the Economy

Good morning. The market needed some fundamental news to move and it got it Friday in the form of the announcement that the Greek government got a 4 month loan extension from the eurozone ministers (who’s kidding who? It’s really Germany for they have footed most of the bill!). The agreement removes the immediate risk of Greece running out of money next month and possibly being forced out of the single currency. As part of the conditions for the extension Athens must submit a list of reform proposals today. You know what all this is folks? “Pretend and extend.” Greece pretends it will do the right things and the troika extends the loan. Kinda reminds me of the banks and “too big to fail.” What European officials should accept is that Greece may never repay its $366 billion debt. Greece’s current bailout program requires it to reduce debt below 110% of GDP by 2022 which means Greece must run a budget surplus of over 4% for well over a decade. I guarantee the betting line on that one is heavily skewed to the “under.” What is needed is debt relief, a “haircut,” but European institutions will likely continue to reject that option because they want Greece to get its fiscal house in order. In this latest loan extension Greece really got nothing. What’s going to happen is that over time the public is going to realize that the newly elected government really isn’t that much different than the old one and elections will be called endangering the existing bailout deal. Folks, the probability of Greece’s exit, aka “Grexit,” is as high as it ever was.

All that being said, the financial markets liked the loan extension and buyers came in on the news pushing what was looking like a bad day into a very good one. The Dow and S&P 500 hit record highs with the former closing up 155 points (0.9%) at 18,140 and the latter climbing 13 points (0.6%) ending at 2,110. And let’s not forget about the Nasdaq. It rose for the 8th consecutive session adding 31 points (0.6%) to 4,952. Friday’s climb higher was tough though with the Dow swinging from a triple-digit loss to a triple-digit gain. All three major indexes closed higher for the week: S&P up 0.6%, Dow up 0.7% and Nasdaq up 1.3%.

There was some domestic economic data released on Friday and that was the Markit flash purchasing managers index which rose to 54.3 and better than economists’ forecasts. However, drilling down below the headline numbers showed that the U.S. economy has entered a slower growth phase.

As I look at it this morning markets are mixed around the globe. Locally, Dow and S&P futures are down and Nasdaq are up, and all marginally.

Oil

WTI prices fell somewhat on Friday with the slick stuff closing down 82¢ at $50.34. Brent held in there settling up a penny from Thursday’s close at $60.22. Supporting Brent prices is the chaos in Libya which has sharply reduced production there. Offsetting somewhat the reduction of Libyan production is Venezuelan exports. A report released Friday noted the Venezuela’s’ exports have leaped higher with the U.S. now importing over 900,000 bpd. To put this number in perspective, Venezuela is now exporting more crude to the U.S. than Saudi Arabia. It’s pretty ironic that we are the largest buyer of Venezuela’s major export yet the government there blames the U.S. for all its ills including the empty shelves in the grocery stores.

Baker Hughes released it weekly rig count report on Friday noting another 70 rigs were “laid down” last week in North America. There is now 733 (31%) less rigs working now than there was a year ago. Texas has seen the largest reduction with 270 fewer rigs (32%) working now than a year ago. Remember folks, those shale well decline curves are 50% to 80% the first year.

This morning WTI is getting hit trading down $1.66. It seems like every morning when I come in WTI is trading materially lower but recovers at least some of its losses by the end of the day. Let’s see if we get a repeat. Pushing prices lower today was an announcement from Oman they would be increasing output. Additionally, Libya reported it will reopen an oil pipeline that has been shuttered. Let’s see how long that stays open!

Natural Gas

Natural gas prices jumped 11.7¢ on Friday closing at $2.951. It doesn’t take a rocket scientist to figure what’s supporting prices and that is obviously the bitter cold that has, is and will continue to encompass the eastern half of the country. The 6-10 day forecast this morning is coming in colder today vs. Friday which is pushing natty up this morning, 3.9¢. I’m sure that many of you are sick and tired of seeing dark blue and purple all over the map. Hang in there. It will end, but unfortunately not for at least two weeks. Probably longer. The record cold air we’ve been having has been responsible for a 47¢ (18%) rise in prices over the past month.

Courtesy of MDA Information Systems LLC

All this miserably cold weather is the result of the jet stream buckling and forming a strong ridge which is focused over the northern/eastern Pacific and over Alaska allowing Artic air into the U.S. Think of a slide in a children’s park. All this cold is going to result is some seriously large withdrawals of natural gas from storage over the next few weeks.

Mark your calendars. Tomorrow is expiration day for March Nymex options and more importantly to most of you, the March futures contract expires on Wednesday.

Elsewhere

You can bid adieu to falling gasoline prices. AAA reported the average U.S price for a gallon of regular gasoline stood at $2.276 which is up about 11% from a month ago. Gas prices have now climbed 25 days in a row for a total of 24¢ a gallon, the longest streak of daily price increases since last March. That being said, the glass is very half full. Prices are still about 33% lower than they were a year ago. It’s expected that prices will continue to climb resulting from the 25% rise in crude prices we saw as WTI moved from $40 to $50 per barrel as well as the more expensive summer blend of gasoline refiners will soon be producing to meet EPA requirements. Have a good day.