Equities and the Economy

After a few lackluster sessions U.S. equities jumped nicely yesterday with the Dow gaining 168 points, 0.85%, ending at 17,888, the S&P 500, the winner for the day, climbed 23 points, 1.09%, to 2,103 and the Nasdaq added 47, 0.93%, to 5,156. The S&P closed above 2,100 for the first time in a month. Did you buy a new car this year? If you did, you would be part of the group that has helped push 2015 auto sales be at record levels.

The economic data was mixed yesterday. The Institute for Supply Management reported its index for the manufacturing sector fell from 50.1 in October to 48.6 in Nonmember. Very disconcertingly, this was the first time the index has fallen below the all-important 50 number in 3 years. Separately, the financial information services firm Markit Economics reported its index of the nation’s manufacturing sector fell from 54.1 in October to 52.8 in November. Now this is lower, but it is still above 50 which separates expansion from contraction. Folks, no doubt the stronger U.S. dollar is negatively impacting manufacturing. In November alone the dollar was up 4% vs. the euro. Ok, some good news. The Commerce Department reported construction spending rose a healthy 1.0% in October to $1.1 trillion. This is the highest level since the recession began back in December 2007! So indeed, this was very, very good news. I also believe history is playing its hand here. December historically has been the best month of the year. Investors know this and don’t want to get left behind.

As I mentioned on Monday, this is a jam packed week for important data and events. Today ADP releases its jobs report which is looked at as a precursor to the all-important Labor Department’s job report to be released on Friday. Although on a month-to-month basis the ADP data can diverge with the Labor Department’s, over time there is a good correlation. This morning is beginning quietly with Dow futures down 21. Chatter.

Oil

Oil prices have been fairly sedate of late with WTI trading in the low $40’s. Yesterday WTI closed up 20¢ at $41.85 while Brent fell 17¢ at $44.44. Trading has been sluggish ahead of OPEC’s meeting this Friday. Saudi Arabia’s comments last week stating it will “cooperate” with both OPEC and non-OPEC producers on pricing has put jitters into traders. That being said, the market still believes that OPEC will not change course with Saudi Arabia continuing its policy of maintaining market share vs. cutting production to increase prices. Tensions are high among the OPEC members right now and this OPEC meeting is setting up to be one of the most important, and potentially hostile, in years. By the way, this past week was the one year anniversary of Saudi Arabia changing its 40 year policy of cutting production to influence price to one of maintaining market share, and prices have dropped close to 40% from a year ago. Iraq’s output hit a 10 year high last month and Russia’s production hit a post-Soviet high in October. And then you have Iran unequivocally stating it fully intends to increase production once sanctions are lifted and sell it any at any price to gain market share. Not bullish amigos. Now that being said, it’s a “future” and how much (a lot?) has already been built into the price already?

This morning WTI is down 72¢ on API’s report after the bell last night unexpectedly showing an increase in crude stockpiles coming in stark contrast to analysts’ expectations.

Courtesy of MDA Information Systems LLC

Natural Gas

Yesterday natural gas prices closed almost flat to the prior day with the January contract settling down 0.4¢ at $2.231. So you’re looking at the weather forecast every day and like today it’s showing very warm temperatures for the eastern U.S. for at least the 6-15 day period and you’re asking “Why aren’t prices falling?” I’ll tell you why. Yes, temps are warm, but production is flat to down the last 6 months and natural gas burns for electric generation are at record levels. No doubt that if this weather pattern continues into Q1 it will put pressure on natty prices, but for now the warm weather is built into the price. This morning natty is down 3.7¢.

Elsewhere

I’m sure you’ve been hearing, both here and elsewhere, that due to the technology breakthroughs of horizontal drilling and hydrofracturing U.S. oil production has markedly increased reducing the need for imported oil. And you would be correct. Since 2005 crude oil imports into the U.S. have been falling. But what I bet you didn’t know is that during that time imports from Canada (our kissing cousin!) have been increasing and now account for 45% of all imports. 99% of Canada’s oil exports are to the U.S. More than half of these volumes went to petroleum refineries in the Midwest. 97% was transported by pipeline with 3% by rail.

Have a good day.