Equities and the Economy

Good morning. I return from my vacation with the dubious distinction of having to report that panic struck the equity markets yesterday with U.S. stocks suffering their worst selloff in 2015. It was a broad-based rout with the S&P 500 losing 44 points (2.11%) to 2,036 and posting its biggest one day drop since February 2014. The other major indexes also experienced big losses with the Dow closing down 358 points (2.06%) and below 17,000 to 16,991. This was the Dow’s worst day since February 3, 2014. At its high back in May we were over 18,000 at 18,351, so we’ve lost a lot in just 3 months. The Nasdaq took the worst of the thrashing falling 2.8%, 142 points, ending the day at 4,877, its steepest decline since April 10, 2014. The impetus global equities losses of late has been serious concerns over the Chinese economy. Specifically, it slowing dramatically. When the world’s second largest economy slows it ripples around the world. Yesterday more data came out reinforcing this concern with China’s Caixin/Markit manufacturing PMI falling to 47.1 in August with expectations of a 48.2. Putting this in perspective for you, this was the weakest reading for the index since March 2009. This is the 6th month in a row this index has been below 50. Remember, as in the case for PMI’s around the world, anything below 50 indicates economic circumstances are weakening rather than strengthening. The Chinese government has been ferociously trying to stimulate the economy by lowering interest rates, lowering reserve requirements and dramatically reducing the value of their currency, the yuan, but none of it appears to be working. The weak data has resulted in China’s bellwether Shanghai index falling 11.5% just this week! That’s a portfolio killer!

By the way, if you drill down into the indexes you’ll find:

Biotechnology shares have fallen 12% in just the past month
The basic material sector is off more than 15%
Media stocks are down more than 13%
Real estate investment trusts are down about 10%
The industrial sector has fallen nearly 9%

Investors angst can readily be seen in the CBOE Volatility Index, VIX, aka Fear Index, which is up 50% over only the last 3 trading days. CNN’s Fear & Greed Index has been and remains deep in the Extreme Fear area at 10. As I’ve mentioned previously and often, the S&P P/E ratios have been at lofty levels for months now and hence are vulnerable to a long overdue correction.

While you slept the Asian market got destroyed playing catch-up to the U.S. markets with Japan’s Nikkei closing down 2.98% and China’s Shanghai getting obliterated down 4.27%. European stocks are getting whacked as I write with Germany’s DAX off 1.29% and France’s CAC down 1.35% also playing some catchup. Here in the U.S. as triage is being applied equities continue to decline with Dow futures trading 90 points lower. The risk-off mode and flight to safety is in full swing with yields on U.S. treasuries falling to multi-month lows with gold rising 2.2% having its best day since April.

Oil

Oil prices closed mixed yesterday with WTI climbing 34¢ settling at $41.14 while Brent lost 54¢ closing at $46.62. However, this is almost $4 less than when the last Morning Energy Blog was published. A slowing Chinese economy along with OPEC producing at or close to record levels in conjunction with resilient U.S. production resulting in an oversupplied global market continues to weigh on prices. Free markets work pretty efficiently and commodity prices, including oil, will continue to fall until it’s too expensive to produce. On a global basis, the highest cost production is U.S. shale so that should be the first to get hit. U.S. production to date in 2015 has been strong because a lot of it was financially hedged at higher prices than today. However, most 2016 production has not been hedged and we could see some big reduction in production next year without a jump in prices.

This morning oil continues to slip being down 45¢ at $40.87. Pretty hard to believe it was only a little over a year ago WTI was trading over $100/bbl. Wow.

Courtesy of MDA Information Systems LLC

Natural Gas

As the world seems to be collapsing, at least my stock portfolio, natural gas prices operate in a vacuum continuing to waffle on either side of $2.80. Just when one of the animals becomes comfortable some event happens knocking it to the ground. Yesterday it was the bear’s turn to get blind-sided. As a matter of background, the EIA last week released storage report surprising everyone with a much bigger than expected storage injection, that’s bearish, which sent prices tumbling. Yesterday, the exact opposite happened sending prices rallying being up as much as almost 10¢ intraday. Sellers came in at that point though and when the bell rang to end the day natty finished up 3.9¢ at $2.755. And this morning it’s giving it all back being down 3.8¢ as I write.

The weather forecast for the next 6 days is very bearish for natural gas which should result in a pretty healthy storage injection next Thursday. However, before you get all “beared up” note in the forecast temperatures will be rising to above normal in the 11-15 day time frame which will bring those peaking generating plants back on, at least in the afternoon. That being said, note the end of the 11-15 day period is in September and CDD’s will be dropping like a rock.

Elsewhere

This past July a major event occurred in the wind generation market. In that month the first U.S. offshore wind farm began development. The developer, Deepwater Wind, installed the first foundation of its Block Island Wind Farm located three miles southeast of Block Island, Rhode Island. The project will have five turbines totaling 30 MWs of generating capacity and is expected to come online in 2016. Although this is a first for the U.S., offshore wind technology has grown steadily in Europe currently with approximately 7.9 GWs of installed offshore wind turbine capacity with the first project completed in 1991 off the coast of Denmark.

Have a good weekend.