Equities and the Economy

Good morning. Crazy is an understatement for Friday’s price action! So how crazy was it??? Friday was the most volatile single day for the S&P 500 and Dow in four years, specifically, October 4, 2011! And the great news was that it was for the good! Early in day after the negative Labor Department released its Unemployment Situation Report for September the Dow was down nearly 260 points, then buyers came in and stocks started rising, and continued to do so the rest of the day entering green territory at 12:35 EDT and never looking back. When the bell rang the Dow posted an awesome rise of an even 200 points, 1.23%, to 16,472, the S&P 500 climbed 27, 1.41%, to 1,951 and the Nasdaq added 81, 1,75%, finishing at 4,708. It appears the take away from Friday was bad news is once again good news with investors thinking the weak data will push back when the Fed will raise interest rates. Believe it or not, it’s now been almost a decade since the Fed has raised interest rates.

Overnight the Asian market rallied nicely following the action in the U.S. markets with the three major indexes finishing between 0.48% and 1.62%. European markets are even doing better with its three major indexes hugely higher trading between 2.16% and 3.42% higher. The euphoria is spreading to the U.S. with Dow up 185 following through on Friday’s action. Technically, Friday was a very positive day posting a near perfect reversal, that is, the market made a new low only to reverse and close above the previous day’s high. There are many, many technical indicators but “reversals” are one of the most reliable. Now, I must warn you that indeed sometimes the reversal is a false signal but more often than not it is a reliable indicator.

Oil

Although oil got a boost from equities on Friday with WTI closing up 80¢ at $45.54 and Brent ending 44¢ higher at $48.13, both oils continue to be range bound with WTI still waffling around $45. That being said, the shape of the curve is changing with the contango lessening meaning the discount the front month has to the deferred months is shrinking. This implies crude oil is less aggressively bidding for storage.

The oil bulls definitely got a boost from the Baker Hughes rig count report released at its regular time which is late Friday showing a week-on-week decline of a big 26 rigs drilling for oil. This puts the U.S. total a 614. So what does this mean? Well last year at this time there were 1,591! So the rig count year-on-year is down 61%. As I like to say, that’s material!

Russia and Saudi Arabia continue to be aggressive producers of crude with Russia now producing 10.74 million bpd in September up 0.4% from August’s production levels. For reference, back in 2005 the Russians were producing just under 9.0 million bpd so as you can see Russia has continued to increase production. Saudi Arabia is also increasing supplies. Back in 2005 their production swung widely between 8.0 million bpd and 10.0 million bpd as they attempted to control crude price by adjusting production. The Saudis have since changed their strategy (as of last November) and are now aggressively defending market share and once again producing over 10.0 million bpd and letting the market set the price of crude. Further evidence of the Saudi’s intent to capture market share was evidence over this past weekend with their announcement they are cutting prices to Asian customers by $1.70/bbl and to U.S. customers by 30¢/bbl.

This morning WTI is blowing off the negative Saudi announcement and keying on equities as WTI is trading $1.01 higher.

Courtesy of MDA Information Services LLC

Natural Gas

After a week of falling prices profit taking came in Friday with traders closing out some positions ahead of the weekend and natty ended 1.8¢ higher at $2.451. Of note, the calendar strips were all up at least 2.2¢. Natty prices fell more than 13¢ (5%) over the past several sessions with the advent of Fall weather and the forward weather forecast showing above normal temperatures for most of the nation for the next two weeks. That being said, most of the “aboves” are in the western half of the country with only marginal aboves in the east so the impact to population heating degree days will not be overwhelming. However, if this weather pattern continues into November and December it will, at a minimum, limit any price rallies.

This morning the November contract is up 3.4¢.

Elsewhere

The United States officially acquired California for Mexico in February of 1848, but had its eye on the province long before that time. In the fall of 1842 the Pacific Ocean was full of warships. Everybody was casting a hungry eye at the weakly held provincial capital of Monterey. Leading the U.S.’s effort was Commodore Thomas Jones of the USS United States. He was under orders that California was not to fall into the hands of any power other than the U.S. The tricky part was he was also ordered to be careful and not start a war with precipitate actions. The commodore could not allow the French or English to beat him to the punch, but neither could he move against Mexico without good reason.

The justification came to him on October 19, 1842. A rumor reached the flagship that Mexico and the U.S. were at war over Texas. At 9 AM the next morning Jones struck sending 150 marines onshore who proceeded to lower the Mexican flag and raise the Stars and Stripes. California now belonged to the U.S. However, there was a problem. There was no truth to the rumor! The U.S. was not at war with Mexico. Effectively saying “Ooops, sorry” to the Californios, Jones hurriedly replaced the American flag with the Mexican flag. Thus, in October 1842 the United States had possession of California for a grand total of about 30 hours. The Mexican government was naturally irate and it wasn’t until January 1843 that they formally forgave the Americans, and it came with a price. Mexico demanded ten thousand dollars, eighty military uniforms and a set of instruments from the band on Jones’ ship. So the short lived capture of Mexican California by the United States in 1842 was actually a musical comedy.

Have a nice day.