Equities and the Economy

Good morning. I hope you had a pleasant holiday weekend. Let’s get last Thursday, the last day the U.S. markets were open, out of the way for a lot has occurred since that time. On Thursday the Dow fell 28 points to 17,730 losing 1.2% for the week. The S&P 500 finished just one point down at 2,076 but also recorded a 1.2% loss over the week. The Nasdaq closed down 4 points at 5,009 booking a 1.4% loss last week. On Thursday the Labor Department released its Employment Situation Report and the data was average, at best. The particulars were that the U.S. created 223,000 jobs last month which was a bit less than economists forecasted. Worse though was that April’s and May’s figures were revised down 60,000. Now this is not a large revision but the fact it was a revision for the worse is not good. The unemployment rate fell to 5.3% but for the wrong reason which was the labor force participation rate fell to 62.6% from 62.9%. Further, the average work week and average hourly earnings were flat. This is the 4th consecutive month the average work week was unchanged and average hourly earnings are up a scant 2% from a year ago.

Ok, let’s move on to today because a lot has happened over the weekend and really it all happened yesterday. First, congrats to the USA women’s soccer team who put a thump’n on Japan winning the World Cup 5 to 2. More importantly to your portfolio is that Greece held its referendum yesterday and whereas polls going into the vote showed a close outcome with the “Yes’s” prevailing, the actual vote was a resounding 61% “No” to austerity and the Brussels Group. Prime Minister Alexis Tsipras asked Greek citizens to vote “No” and he got his wish. This puts him and his left-wing Syriza party in a stronger position at home, whether it does so internationally is another question. In my opinion the “No” vote is like a person who is loaded up on debt stating to the bankruptcy judge he doesn’t think his debt burden is fair. Okaaaaay, but you created the debt and that doesn’t make the debt go away. What Greece wants is not its debt restructured. It wants it forgiven. The Brussels Group can’t do that because if they did that then Spain, Italy and Portugal would come screaming asking for the same thing.

By the way, this afternoon Greek time, the Kremlin stated Russian Prime Minister Putin received a phone call from Prime Minister Alexis Tsipras. The two leaders discussed the results of Sunday’s referendum and “several questions about the further development if Russian-Greek cooperation.” The head of VTB, Russia’s second largest state bank, said over the weekend that Russia might be interested in buying Greek assets if they were privatized but unlikely to give Greece loans. Even Russia sees Greece as an economic black hole.

One interesting outcome of the referendum is that Greece’s controversial Finance Minister, Yanis Varoufakis, resigned stating certain parties on the other side of the negotiating table wanted him “absent” from future meetings and Prime Minister Tsipras judged his resignation to be potentially helpful in reaching an agreement. Here’s a little bit of trivia regarding Yanis Varoufakis I bet you didn’t know. From January 2013 until he was appointed Greek Finance Minister in January 2015 Mr. Varoufakis taught at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin.

The results of the Greek vote are roiling global equity markets this morning. As always, trading began in Asia and Japan’s Nikkei and Hong Kong’s Hang Seng got whacked losing 2.08% and 3.18%, respectively. China’s Shanghai actually closed up 2.41% on additional stimulus measures announced by the government. The Shanghai is definitely the anomaly though for European indexes are all materially lower between 0.62% for London’s FTSE to France’s CAC which is 1.60% lower. Greece may be a long way from the U.S. but we’re feeling it here with eh Dow down 121 which is a lot better than earlier today when it was down 153 points.

So why is what’s happening in Greece, who’s GDP is the size of Louisiana, such a big deal to global markets, especially the European ones? Because investors are worried about contagion. If Greece leaves the EU and brings back the drachma, will Spain, Italy and Portugal also default on their debt and leave the EU making the EU nothing but a failed experiment? That’s would be a lot of debt being defaulted. Think about it in these terms. Economically, if Wyoming, who’s GDP ranking is 47 out of 50 states, left the U.S. it would be no big deal. However, politically it would be a tsunami.

Oil

Oil prices on Thursday ended little changed from Wednesday with WTI down 3¢ to $56.93 and Brent settled up 6¢ to $62.07. Chatter. It’s not chatter this morning for the Greek vote is impacting oil prices with WTI getting hammered down $2.42, 4.3%. Traders believe the turmoil surrounding Greece will weigh on the European economy lowering energy demand. Not helping the bulls was Baker Hughes’ rig count report released Thursday, a day early, showing that for the first time in 30 weeks the oil rig count increased, by 12, to 641. It appears the combination of a $60 per barrel price and lower service costs (rig rates, etc.) have created an environment where oil and gas producers can make a little money.

Courtesy of MDA Information Systems LLC

Natural Gas

On Thursday the EIA released its weekly storage report noting inventories rose 69 Bcf the previous week which came in right at expectations. That being said, the market rallied on the number before giving back most of its gains ending 3.9¢ higher at $2.822. I believe we saw the rally because although the 69 Bcf was at the expectation, it is below last year’s 102 Bcf injection and more importantly, the 5 year average of 75 Bcf.

This morning natty is giving up all of Thursday’s gain, and more, being down 8.0¢ being dragged lower on a very benign weather forecast. The Pacific Northwest is doing all it can to help the bulls though with multiple days of record high temperatures last week and this in combination with very low hydropower means the natural gas peaking plants in the region are sucking hard on “the pipe.”

Elsewhere

Sometimes in history the things that almost happened are as interesting as the things that did. Just about every book on WWII shows the famous picture of President Franklin Delano Roosevelt meeting with Winston Churchill and Joseph Stalin in Tehran in 1943. What’s rarely mentioned is that historic moment might never had occurred because the president, the joint chiefs of staff and numerous other top American leaders on board the USS Iowa were nearly all victims of a torpedo attack on the way to the summit. On November 14th when the convoy was just east of the Caribbean and to the horror of the officers on the bridge a live torpedo was spotted in the water heading toward the Iowa. Now remember, this is the time German submarines were wreaking havoc in the Atlantic. The Iowa turned sharply and fortunately avoided the torpedo which exploded in the ship’s big wake.

Amazingly, the torpedo that almost got FDR and the Iowa was not launched from a German U-boat but from the USS William D. Porter, one of the escort destroyers. The “attack” had taken place during a drill in which a torpedo had been accidently launched. The Porter was immediately ordered out of the convoy and sent to a naval station in Bermuda. Fully armed U.S. Marines met the Porter in Bermuda and placed the entire crew under arrest, the first time ever that a U.S. Navy crew was arrested en masse. This was the also the first time that the commander-in-chief of the armed forces of the United States was ever in danger of being a victim of friendly fire. Have a good day.