Equities and the Economy

Good morning. Purge. Heave. Hurl. I’m not talking about a body’s response after consuming too much alcohol but the analogy applies to equities yesterday. And don’t look at your 401K. You ain’t gonna like it. After yesterday we are all going to have to work a little longer. So how bad was it? Bad. Real bad. The Dow lost 293 points (1.62%) to 17,718 and is now again negative for the year. The S&P 500 lost 30 points (1.46%) to 2,061. Those two indexes preformed in stellar fashion compared to the Nasdaq which just got annihilated losing a staggering 118 points (a very material 2.37%) to 4,877 as investors continued to jettison semiconductor and biotech stocks which have been the high fliers for the last 12 months. The Nasdaq had its worst day in 11 months. And lest not we forget yesterday was the 3rd losing day in a row. Now we are coming into the end of the quarter when “window dressing” is the norm and possibly we saw a lot of profit taking, especially in those tech stocks but some poor economic data sure didn’t help our cause. The Commerce Department reported business investment spending plans fell for a 6th straight month in February. Another piece of data, durable good orders also weren’t good falling 1.4% which was much more than expectations of a rise of 0.1%

Even the announcement of the Kraft Foods/H J Heinz merger, which is usually seen as positive by investors, couldn’t support the market. Investors ran to safety with gold notching its 6th straight winning session but U.S Treasuries, which are normally seen as a safe haven, fell on a weak auction for five-year notes. On the lousy durable good orders the U.S. dollar fell relative to the euro which helped commodities including oil.

Overnight the Asian markets closed mixed with Japan’s Nikkei 225 following U.S. equities closing much lower but Hong Kong’s Hang Seng closed marginally down and China’s Shanghai actually closed positive. The European markets though, which are tied more closely to U.S. equities, are getting hit hard with the major indexes all down about 1.3%. Locally, the bears are out of their caves again with Dow futures down 92 points. CNN’s fear greed index is now down in the fear category at 38 which is dead center in the 2nd to the lowest quartile. Our long overdue correction may be at hand folks.

Oil

The oil bulls were stampeding yesterday raising WTI $1.70 to $49.21 and Brent climbed $1.37 settling at $56.48. The weaker U.S. dollar helped those bulls but its fighting in Yemen that’s increasing the fear factor (no I’m not talking about the TV show) in oil. Now Yemen produces less oil than Denmark but here’s what you need to know. Yemen is at the southern end of the Saudi peninsula and its northern neighbor is Saudi Arabia. Saudi Arabia is Sunni. The Sunni government in Yemen has collapsed as the rebels known as Houthis revolted with the country basically in a civil war. Saudi Arabia claims the Houthis are tools of Shiite Iran, Saudi Arabia’s arch enemy. Yemen is the eastern shore of the Strait of Hormuz through which much of the Middle East’s oil is shipped. Folks, just about every conflict in the Middle East is between the two powerhouses there, Saudi Arabia and Iran. The two are having surrogate wars all over the Middle East. Take Syria. It was the Sunni rebels who rebelled against President al-Hassad who is a an Alawite which is a Shia sect. I don’t have enough time or space here to go on but it’s always Sunni vs. Shia, Saudi Arabia vs. Iran.

Overnight events have escalated in Yemen with a coalition of Sunni countries, Saudi Arabia, United Arab Emirates, Bahrain, Qatar and Kuwait, launching attacks against Houthis positions. The coalition said the attacks were in response to a request for help from Yemen’s President Abdurabuh Mansur Hadi, who is of course Sunni. Iran went public stating the strikes are a “very dangerous development” and contradicts international law. I mentioned this week how “exogenous” events can affect markets and this is an example of one folks. The events are driving oil higher with WTI up another $1.49 to $50.70 with the volume traded 4 to 5 times normal. I’m sure this will be an excuse for your local gas station to immediately raise prices. Fast to go up. Slow to come down.

The DOE released its weekly crude and products report yesterday which came out materially bearish with crude inventories rising twice what the API reported Tuesday evening. The aggregated estimate was for a build of 0.38 million barrels. The actual aggregated build was 5.83 million barrels with crude inventories rising 8.7 million barrels as refinery “turn around,” i.e. maintenance, reduced gasoline production concurrently build crude stocks. But when it come oil prices bombs trump inventory data every time.

Courtesy of MDA Information Systems LLC

Natural Gas

Unlike oil, natural gas has been boring with prices waffling just into the coal equivalent price (a freebie for you readers who happen not to be wise enough to be clients!) yesterday falling 6.3¢ closing at $2.723. Today’s weather forecast is identical to yesterday’s and I’m sure frustrating for those of you in the northeast desperately ready for some spring weather. Natural gas demand will be picking up in the upper Midwest tomorrow through the weekend with Cincinnati and Chicago experiencing temperatures over the 3 days 10 to 17 degrees below normal. Brrrr.

It’s Thursday which means it’s natural gas storage report day. As I mentioned yesterday, we’re approaching the end of the natural gas withdrawal “season” and in fact the market is expecting the first injection of the year at 11 Bcf. That being said, preliminary numbers are for a very small withdrawal in next week’s number. The seas remain calm and using a sailors term, natty is “in irons” up a meaningless 0.7¢ this morning.

Elsewhere

So what’s our oil and gas resource base look like? Very, very good. The EIA says the U.S. has approximately 610 Tcf of technically recoverable natural gas and 59 billion barrels of technically recoverable tight oil resources, i.e. shale, which ranks us second globally after Russia,

On a completely unrelated note, there is one metal that is liquid at room temperature. What is it? No fair Googling!