Equities and the Economy

Saying August 2015 was a lousy month would be an understatement for it was the worst for Wall Street since 2012 erasing some $5 trillion in global equity value. Unfortunately, September picked up right where August ended. All the major indexes suffered heavy, triple digit losses with investors fleeing riskier assets like equities. The Dow lost a whopping 470 points, 2.8%, to 16,058, the S&P 500 fell 58, 3.8%, to 1,914 and the Nasdaq tumbled 140 points, 2.9%, to 4,636. Make no mistake about it my friends, yesterday’s losses were no flesh wound. This required triage. Yesterday traders and investors cited swelling anxiety over the state of two of the world’s biggest economies as reasons for the steep losses. First, in was another day showing weakness in the Chinese economy with China releasing its official PMI index for August 2015 which not only came in below 50 indicating a contraction in the economy but also showed the economy there was contracting at the swiftest pace since August 2012. The gloomy data out of China ignited a selloff in Asia that spread around the world and then we “piled on” on in the negative sense, when here in the U.S. the Supply Management’s manufacturing PMI dropped to 51.1 for last month from July’s 52.7 which not only was worse than expectations but showed factory growth last month slowed to its lowest level since August 2013.

The VIX, aka Fear Index, shot up 11.3% yesterday ending at 31.14. When this index is above 20 uncertainty is the prevailing theme and wild swings can be expected. CNN’s Fear & Greed Index has been for the last month and continues to be in the Extreme Fear region at a 9 level (out of 100.).

This morning ADP released its National Employment Report showing private payrolls increased 190,000 last month. Now this was lower than economists’ expectations of a gain of 201,000 but it is a step-up form the 177,000 positions created in July. Investors closely follow this report for they look at it for direction to the Labor Department’s employment situation report due out Friday. Although the ADP and Labor Department reports can show significant variations on a month-to-month basis, they do tend to correlate over time. Hence, investors interest in the ADP report.

The Labor Department released a report this morning showing nonfarm productivity increased at its strongest pace in 1 ½ years in Q2, keeping inflation subdued for now. The government revised productivity to show it rising 3.3% annually which is the quickest pace since Q4 2013. This is up from the 1.3% reported for Q2 last month.

The Dow is up nicely this morning, 183 points, but I’m really worried about a dead cat bounce here. My target for this bear market to end is around 14,700. Ugh. I sure hope I’m wrong.

Oil

After rising 27.5% the last three days oil prices succumbed to the tremendous weight of the heavy losses in equities and the associated realization that a slowing global economy requires less energy. WTI got knackered yesterday falling $3.79, 8.3%, closing at $45.41. The WTI price is now down 13.3% for 2015. Brent prices felt the same pain closing down8.8%, $4.59, at $49.56. Regarding OPEC, major oil producers Venezuela and Russia have been trying to get OPEC, i.e., Saudi Arabia, to have an emergency meeting and have Saudi Arabia be the sacrificial lamb and cut production. Saudi Arabia’s response. Ah, no. While the recent low prices seen for oil (WTI $39 last week) are painful, Saudi Arabia has no intention of giving up market share and are sitting back waiting for U.S. production to decline. The last couple of reports from the EIA have indeed shown U.S. production has declined but they’re waiting for bigger declines. This is a big change folks. For the last 40 or so years Saudi Arabia has been the global swing producer. They are now forcing that role on the U.S. producers.

By the way, and not unsurprisingly, all commodities took a beating yesterday.

This morning WTI continues to slip being down 92¢. Traders will look to the DOE’s crude and products report this morning for their next price direction.

Courtesy of MDA Information Systems LLC

Natural Gas

Yawn. Natural gas closed up 1.3¢ yesterday at $2.702. Interestingly, it was 10 degrees warmer in Pittsburgh yesterday than in Houston! A/C load in PJM will be elevated this week meaning the grid operator will be calling on some peaking plants which will provide support for natty. However, beginning Monday the current heat wave will dissipate and in the middle of the month the upper Midwest will see its first real shot of cold air. Traders are taking the forecast in stride for natty is trading down 3.6¢ as I write.

Elsewhere

The 4th of July has become one of America’s most celebrated holiday. Family barbecues, homemade ice cream, parades, fireworks. It is a grand show of patriotism, but there is one small problem. Nothing very important happened on July 4th, 1776, except that the delegates of the Constitutional Convention in Philadelphia had to cut their work short because of a horde of giant horseflies that invaded Independence Hall.

The first official move toward independence for Great Britain come on June 7, 1776 when Richard Henry Lee of Virginia petitioned the Second Continental Congress to make a clean break form the mother country. Nearly all the delegates leaned toward Lee’s motion but preferred to ponder the matter so his motion was tabled. They didn’t ponder it long for actions taken by the British during the next month put reconciliation beyond reach and on July 2, 1776 Lee’s motion was brought back for a vote and it passed unanimously. That night John Adams wrote to his wife Abigail, “The Second Day of July, 1776, will be the most memorable in the history of America. I am apt to believe it will be celebrated by succeeding generations as the Great Anniversary Celebration.”

So what did happen on July 4, 1776? Actually, the Congress met that day for a single item of business which was to approve the wording of document regarding independence. As the meeting was called to order the July temperature began to rise quickly. The sergeant at arms opened the windows to allow any hint of a breeze to flow across the room. While the windows were open a slight puff of wind brought in an invasion of giant horseflies from a nearby stable. The assembled delegates went from debating points of the document to swatting horseflies. After a few minutes of battle, the insects prompted one tormented delegate to move to accept the document as it stood, the motion was seconded, passed and the delegates fled the building.

Therefore, the notion that July 4, 1776, is Independence Day clearly misses the mark. We should be celebrating our independence on July 2nd when the vote on independence was actually taken. What Americans should be celebrating on July 4th is National Horsefly Day!

Have a good day.