Equities and the Economy

Good morning. It’s been one day up and one day down for U.S. equities, until yesterday, and unfortunately it was two days down. All the major indexes close for the second consecutive day with the Dow falling 105 points (0.58%) to 18,011, the S&P 500 off 13 points (0.61%) to 2,092 and the Nasdaq losing 16 (0.32%) and once again closing below 5,000 at 4,995. It’s been very, very choppy of late. The S&P hasn’t had back-to-back up days in 25 days, the longest stretch since 2001. Bottom line folks is that the market is looking for a new direction, and I hope it’s not down. Even CNN’s Fear and Greed Index is dead neutral. Enjoy the calm for volatility will return faster than you want.

The Labor Department released its consumer price index data showing core prices, which excludes food and fuel, rose 0.2% last month which is the second consecutive month it’s risen. Including food and fuel prices also rose 0.2% which was the first advance in 4 months. It’s no coincidence this coincides with the stabilization of oil prices the last couple of months. Bottom line, inflation is creeping into the economy. I don’t mean this in a negative sense because the Fed’s target is 2% annually and with oil prices falling hard the second half of last year inflation was completely benign. Today’s inflation data will make the Fed, who is “data dependent,” lean toward tightening. But remember, we have a dovish Fed this year so they will be slower than last year’s Fed to act in raising rates.

New home sales were reported for February and came in strong at 539,000 units marking the best month in sales in seven years. Also, January’s new home sales were revised quite materially higher so this data was truly a big positive. Other positive data came in the form of Markit’s flash manufacturing purchasing managers index which unexpectedly rose in March to 55.3 form 55.1 in February marking the highest reading since last October. The economy continues to grind forward.

This morning U.S. stocks are being dragged down by the Europeans with the latter all trading in the red and so are U.S. equities with the Dow down 39. I don’t, but sure wish, I had Kraft Foods in my portfolio. This morning it was announced they were merging with H.J. Heinz Company. The impact? The stock is up, are you sitting down?, 32% this morning! There’s a party going on somewhere!

Oil

Oil spent the whole day doing nothing. A little up. A little down. And closing at $47.51, up a meaningless 6¢. Brent fell 81¢, settling at $55.11. Although there was little movement in the front month (WTI), the “shape of the curve,” i.e., front month vs. deferreds, continues to grind “tighter,” or less contango, over the past week and a half. Yes, WTI continues to bid for storage, but a bit less enthusiastically. This may be evidence that WTI is trying to find a bottom. I say “may” because exogenous events will change price direction in a heartbeat and there are two in play right now. First, there are rumors, I repeat, rumors, circulating that legislation may be proposed to end the prohibition against exporting crude from the U.S.(bullish). Second, Iran continues to make public statements regarding it increasing oil production. This morning Platt’s reported that an Iranian oil ministry official, Mr. Mohammad Souri, a former chairman of state owned National Iranian Tanker Company, told a conference in Emirates yesterday Iran could produce 4 million bpd within 2 years and production could rise to 5.5 million bpd within 5 years (bearish). Just one catch. The sanctions need to be eased and that has yet to happen.

This morning it’s all quiet with WTI up 33¢ $47.84 which is materially off the lows of $42 a week ago.

Natural Gas

Natural gas prices continue to tread water around $2.75 and a little above last month’s 2.5 year low of $2.567. As we all know, the Northern Hemisphere is transitioning into spring which changes the dynamics of the natural gas market. The other season that is also changing is the natural gas “season” when we go from withdrawals from storage to injections. This transition may happen in this week’s report, for last week’s storage activity, with the first injection of the year quite possible. More on that tomorrow. So now instead of the focus solely on gas weighted heating degree days we have to monitor cooling degree days, nuclear plant maintenance, coal price equivalents (which are different for every region of the country) and production among a myriad of other fundamentals.

Courtesy of MDA Information Services LLC

Today’s weather forecast is a repeat of yesterday’s which means you poor souls in the upper Midwest and northeast aren’t going to see spring until April (although you will get a respite next week to “normal.”). This morning the chop continues with natty being down 3.9¢. Chatter. By the way, the April Nymex contract expires on Friday.

Elsewhere

I’m noticing a lot of folks are liking oil prices in the low $40’s and are bullish oil focusing on the precipitously dropping rig count and believing prices will rise in the future and want to get long. There are various ways to get long including various ETF’s that mimic Nymex future prices. These ETF’s actually purchase futures, mostly in the front month (ex. USO). Be very, very careful here. What I’m finding out is many, if not most, people don’t understand the effect a contango market has on their capital investment. A contango market in commodities will eat you alive. Why? Because of the “roll.” In markets severely contangoed, as is WTI currently, the roll expense incumbent in owning the front or second month futures that must be rolled (i.e., front month contracts sold and the next futures month purchased) is egregiously expensive. Let’s do an example. As of last night’s close the June WTI contract was $1.62 premium to the May contract. Therefore, WTI’s price must rise more than $1.62 to be profitable. Looking even more forward, the May 2016 contract closed at $57.37, or $9,86 higher than May 2015. Therefore, WTI must rally almost 21% just to break even. Trust me on this for a couple of years ago I bought UNG, the natural gas ETF, and experienced it. If you want to get long oil I recommend buying equities of companies’ that are unhedged and sensitive to movements in the price of WTI. Have a good day.