Equities and the Economy

October 2105 was the best month for U.S. equities in four years and the momentum carried into the first trading day of November with all the indexes posting very nice gains. The Dow climbed 165 points, 0.94%, to 17,829, the S&P 500 jumped 25, 1.18%, to 2,104 and the Nasdaq was the big gainer rising 1.18%, 73 points, to 5,127. The Dow is now positive for the year and the S&P is at its highest level since August. But here’s the headline: the Nasdaq 100 closed at its highest level in 15 years! Whoop! The big gainers yesterday were healthcare and biotechnology stocks, which have been really beaten up as of late. The main biotechnology ETF, the IBB, went apogee yesterday rising a whopping 3.87%.

Stocks rose in the face of mixed fundamental data with the Institute of Supply Management reporting yesterday its index of manufacturing activity fell from 50.2 in September to 50.1 in October. Now rounding the number off to two digits gives us an unchanged index but the index has ticked lower for a 4th consecutive month to fresh 2013 lows. Manufacturing may be struggling but construction is doing well. The Commerce Department reported that construction spending rose 0.6% in September. The housing market continues to show strength with single family home construction rising 1.3% and multi-family housing rising a stout 4.9%. All this being said though, when it comes to equities it seems the most important thing is the availability of money and globally money is very abundant and easy with QE going on everywhere.

Overnight the Asian markets closed mixed but the more important European markets are all trading marginally in the red weighed down a tad by VW shares which has fallen over 3% following the emissions scandal which now includes their luxury Porsche brand. Here in the states equities are starting off a tad light looking east across the Atlantic for direction with Dow futures down 24 points. We’ve had a very nice rally over the last month and are at highs so a mild correction would not surprise me. Might be a nice place to buy.

Oil

Oil prices retreated a tad yesterday with WTI falling 45¢ closing at $46.14 and Brent settling down 77¢ at $48.79. We can use the weak manufacturing data as an excuse, but really the price movements were chatter. Russia continues to produce like crazy with output there hitting a post-Soviet peak for the 4th time this year. This certainly is not a bullish fundamental.

There has been a changing of the guard in the oil patch. Russia is once again back on top as the world’s largest oil producer over taking Saudi Arabia. Russian oil production has been increasing of late being up 0.4% in October from the previous month to 10.78 million ppd. Saudi Arabia produces 10.1 million bpd. However, the Saudis do remain as the world’s largest exporter of crude because so much of what Russia produces is needed domestically.

S&P has cut Saudi Arabia’s credit rating by a notch from AA-/A-1+ to A+/A-1 attributing the downgrading to a “pronounced negative swing” in the Kingdom’s fiscal balance. King Salman has taken issue with the downgrading, but S&P is right. Although Saudi Arabia still has a huge sovereign wealth fund its reserves are being materially tapped. This year alone Saudi Arabia will run a $100 billion deficit with next year’s deficit forecasted to be worse. It would be reasonable to wonder why this is happening being they are the worlds’ second largest producer of oil. It all has to do with entitlement spending. The Wall Street Journal earlier this year printed what the price of Brent oil needs to be per barrel to match various countries entitlement spending. Here you go.

Libya $215
Algeria $111
Saudi Arabia $103
Iran $93
Venezuela $89
Nigeria $88
Russia $78
The UAE $73
Iraq $71
Qatar $59
Kuwait $47

At current prices only Kuwait is not deficit spending.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices gave up all their short covering gains from Friday falling 6.5¢ yesterday to $2.256. Folks, you can buy December gas, a winter month, for $2.25 (wholesale). Amazing! There is absolutely no doubt the El Nino is playing a major role in the price of natty with its associated warm weather. On Thursday the high in Chicago will be an astounding 19 degrees above normal at a spring like 70 degrees. Cincinnati will be 16.5 degrees above normal. Philadelphia is forecasted to be an incredible 20 degrees above normal this Friday hitting 78 degrees. If we didn’t have the El Nino prices would be 50¢/MMBtu higher. Natty prices last week reflected this forecast with them coming within a nickel of their 10 year low last week,

I guess traders have all the shorts they want on for natty is up $0.0010 as I write. Complete chatter.

Elsewhere

In yesterday’s Blog I told you about three nuclear power plants that either had or were planned to be closed. That being said, it’s expected that the U.S. will actually add net MW’s from nuclear generation over the next 5 years. Between now and 2020 more than 2,000 MW’s of nuclear generating capacity is scheduled for close, however, during that same time frame more than 5,000 MW’s are scheduled to come on line. Entergy announced that by no later than 2019 it’s closing it 685 MW Pilgrim Power Station in Massachusetts and its 678 MW Oyster Creek plant in New Jersey. Offsetting those lost MW’s are five reactors that are under construction including the Watts Bar Unit 2 in southeastern Tennessee which is projected to begin commercial operation next year. Two other plants, one in eastern Georgia and the outer in South Carolina, are expected to begin operation in 2019 and 2020, respectively, after experiencing significant project delays of 2 to 3 years.

There are 99 nuclear reactors in the U.S. located at 62 different nuclear power plants in 30 states. Most are located east of the Mississippi. Illinois has the most nuclear reactors followed by Pennsylvania.

Have a good day.