Equities and the Economy

After a ten day wild roller coaster ride U.S. equities took the day off yesterday with all the major indexes not doing much. While the Dow closed 14 points higher at 16,790, the S&P 500 and Nasdaq closed lower. The former lost 7 points ending at 1,980 and the latter fell 33 points to 4,748. There appears to be a major rotation in the market. Whereas for the past two years the high flying stocks were in healthcare and biotechnologies, they fell with the rest of the market over the past 5 weeks but haven’t bounced back in this last rally. Yesterday the S&P health index lost 2.2%, the worst performer among the ten major S&P sectors and the Nasdaq biotechnology index fell 4%. At one point yesterday the latter index was down 6.6% looking at its biggest intraday drop since August 2011.

What has been rallying has been the energy stocks which have risen with oil prices. These stocks got really beaten up over the past 6 months being pulled lower with falling oil prices.

For the record, there were no fundamental economic reports out yesterday. One may say the Commerce Department’s trade deficit report may qualify as significant but that has really become immaterial, unless it’s extreme, which it hasn’t been for years. With commerce so global in today’s time, a deficit with China is now equivalent to California having a deficit with Texas.

We’re starting off very, very well this morning. Asian markets all closed in the green and more importantly, the European markets are materially higher being up between 0.58% and 1.16% looking for a 4th consecutive higher close. Mining stocks are the big gainers in the UK after a round of ratings upgrades have come on the heels of higher metals prices. U.S. stocks are joining the party with Dow futures up 112 points. Quite frankly folks, it’s the general rebound in commodity prices which are pushing commodity related stocks higher which is pushing the indexes higher. As noted above, health care and the biotechs, the previous high fliers, are still getting pounded.

Oil

Oil prices screamed higher yesterday with WTI popping $2.27, 4.9%, closing at $48.53 and Brent settling $2.67 up, 5.4%, at $51.92. Oil prices got a big boost yesterday from the EIA when it released a report yesterday that it expects the country’s crude output to fall through mid-2016. Similar to equities, a lot of investors and traders believe oil prices have bottomed. This morning oil continues to rally being up 93¢, this time with some help from OPEC. The Secretary General of the organization reiterated today he sees the oil market improving due to higher demand for the group’s crude and a drop in supply form non-member (can you say U.S.). This suggests that OPEC (Saudi Arabia) retains the view that its strategy of defending market share by keeping output levels elevated is working. Additionally, the API’s came out last night showing crude inventories in the U.S. fell 1.2 million barrels contrary to the expectation of a rise of 2.5 million barrels. Now if all the aforementioned is not bullish enough, the IEA (not our EIA) said today it expects world oil demand to increase around 1.7 million bpd this year, one of the fastest rates for years as consumers respond to lower fuel prices.

Oil prices are now at one month highs and have broken out to the upside of the technical pennant pattern I’ve mentioned previously. Bullish.

Talk about lower fuel prices! On my way to the office today I passed the national name brand gas station where I usually buy gas and saw that a gallon of regular gasoline is $1.99/gallon! The E&P companies are hating it but the American consumer has more dollars in their pocket. Got to do some research to see the last time we were under $2.00.

Courtesy of MDA Information Systems LLC

Natural Gas

The front month natural gas price, i.e., November, closed and even 2¢ higher yesterday at $2.470 but all the months were little changed yesterday from Monday. The calendar strips, which I put the most stock in, rose about a penny. Natty prices have been creeping higher of late and are up about a dime form last week’s low just above $2.400. That being said, last week we were talking about gas for October. The current prompt contract, November, is a winter month. Big difference.

The EIA stated yesterday in its Short-Term Energy Outlook it expects natural gas consumption in 2015 will increase by 4% to an average 76.2 Bcf/d from 2014 levels and then increase by nearly 0.2 Bcf/d to 76.4 Bcf/d in 2016. Consumption growth in 2015 is primarily driven by demand from electric power (+15.7%) and industrial demand (+0.4%). Industrial consumption is forecasted to grow substantially in 2016, +4.2%, as new industrial projects come on line, particularly in the fertilizer and chemical sectors.

The weather forecast is little changed from yesterday with no below normal temperatures expected in the entire country for the next 2 weeks. During the next 10 days though above normal temps are expected for the entire U.S. which will continue to suppress natural gas prices. Note I said “suppress,.” Not push lower. Natty prices have been pounded during the last month and I’m not so sure how much more downside remains. This morning natty is bouncing up 5.4¢.

Elsewhere

They’re baaaaack. I’m not talking about the pop culture catch phrase from Poltergeist II. I’m talking about those cash-out refinances that were so popular during the housing boom. Cash-out refinances jumped 68% in Q2 from a year ago. This is the highest volume of this type of refinance in 5 years. Mortgage holders have realized gains of about $1 trillion in home equity collectively over the past year. On an individual basis, borrowers doing cash-out refinances are taking an average of $65,000, which is comparable to what borrowers did in 20006, the height of the housing boom. However, things are considerably different than the last time we had this rodeo. First, the volume is nowhere near where it was back then. In fact, volume is still 80% below where it was at the peak in 2005. Additionally, today’s homeowner is in a far more solid equity position compared to borrowers then who used their home as an ATM pulling out every dollar. Even after tapping equity, the average resulting loan-to-value ratio for today’s borrower is 68%, meaning the borrower is leveraged only 68% of the home’s current value. This is the lowest level in a decade.

The jump in cash-out refinances could be behind the strength in auto sales and home remodeling. Remodeling contractors have been swamped this year having to put off new projects for months.

Cash-out refinances were most popular in California accounting for 30% of all the volume. Far behind in the second spot is Texas accounting for 7%.

Have a nice day.