Equities and the Economy

It’s a new year and welcome back. Let’s take a quick look at where stocks ended last Thursday and for the year. Last Thursday, which was the last trading day of 2015 and which seems a year ago (pun intended), equities closed down with the Dow ending down 179 points, 1.02%, at 17,425, the S&P 500 off 19, 0.94%, at 2,044 and the Nasdaq finishing off 1.16%, 59 points, at 5,007. As it was all week, trading volume was very light. Apple was the laggard falling 2% pulling both the Dow and Nasdaq (it’s listed on both) lower. For the year, the Dow and S&P finished 2.23% and 0.73% lower, respectively. Last year was the S&P’s worst performance since 2008 but before you get all negative remember for the three previous years the S&P had double digit gains. I’ll take that performance. The Nasdaq had a pretty good year gaining 5.5% fueled by biotech stocks and major tech names, except Apple, which ended about flat to where it began.

Let’s move on to this morning for major events have occurred over the weekend while you were asleep. The major event affecting global equities this morning is originating in China where the Shanghai Composite index closed down a whopping 6.86%. It got so bad there that Chinese authorities temporarily halted all trading. Folks, when an authority halts trading, particularly the government of the world’s second largest economy, that’s never a good thing for equities. The driver of the selloff was a fresh report on Chinese manufacturing, specifically, that it continues to slow down. The December Purchasing Managers Index came in at 48.2, down from November’s 48.6, and contracting for the 10th consecutive month. Remember, the demarcation point is “50” which separates expansion from contraction and thus, China’s manufacturing is contracting which investors interpret as global demand is decreasing. Further, most of the “internal” indexes such as new orders for exports and employment also fell, with the latter having fallen for 26 months in a row! Additionally, I don’t know whether you’ve noticed this but the Chinese Renminbi has fallen relentlessly since November. Normally, a cheaper currency would support a nation’s manufacturing for it makes exports cheaper. So you can see that even with the cheaper currency Chinese manufacturing is not improving. Not a good omen my friends.

The chaos in Asia is unsurprisingly being felt in Europe especially in Germany where its bellwether index, the DAX, trading down 4.12% this morning. The grief is being felt across The Pond with the Dow down a very material 382 points, 2.20%. Ouch!

Oil

The other big event over the weekend was Saudi Arabia announcing yesterday it is severing diplomatic relations with Iran. The world’s largest oil supplier executed a prominent Shiite cleric over the weekend that prompted Shiite protestors to set fire to the Saudi Embassy in Tehran. Sayyed Ali Hosseini Khamenei, Iran’s Supreme Leader, stated Saudi Arabia would face “divine vengeance” for the act. Needless to say, when tensions increase between the two Middle East super powers it’s not good for anyone. Upon the news oil futures prices shot skyward but crude ran into material selling soon thereafter and WTI is up 91¢ this morning. Currently the world is “long” of oil and although the price “fear premium” has increased, supplies are currently uninterrupted. Both Saudi Arabia and Iran understand they only have two exports: oil, and sand. And nobody wants the sand.

A historic event occurred last Thursday afternoon. ConocoPhillips Co. and NuStar Energy LP exported the first tanker of crude oil in 40 years. The tanker was loaded with oil from the Eagle Ford shale of South Texas and left the port of Corpus Christi. Vitol Group, a Dutch oil trading powerhouse, bought the cargo. The lifting of the export ban was part of the budget deal signed by President Obama which included extending renewable energy credits for 5 years.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices jumped again on Friday closing up 12.3¢ at $2.337. Front month natty has now risen a 70¢ over the last couple of weeks. Remember though, we are bouncing off a 14 year low in natural gas prices. It’s all about the weather and whereas in November and most of December extremely warm temperatures blanketed the eastern half of the country setting record highs, the last week or so the weather forecast has hinted of a shift to colder weather. Last Thursday the forecasters were stating that one of the weather models (the European) was indicating cold weather was to hit the eastern part of the nation which is why natty closed higher that day. Well that’s materialized in today’s 11-15 day forecast showing the first serious bout of cold weather to hit the major natural gas consuming regions. Very interesting to me is that apparently traders already had their position on for natty is only up a penny as I write. Now I understand that storage levels are at a record high for this time of year but it is surprising that the market is not up more. I need to check the cash market. It may be trading below futures which makes traders reluctant to go long(er).

Elsewhere

Robert Todd Lincoln, Abraham and Mary Todd Lincoln’s first son, lived a life of irony. As a young lad he was rescued from a moving train by Edwin Booth, the elder brother of John Wilkes Booth, his father’s assassin. But this was just the beginning of the strange twists of fate he would encounter throughout his lifetime. Naturally, he was at his father’s bedside when he passed away. However, this would not be the last time he would see a president die. In 1881, as secretary of war, he was traveling with President James A. Garfield and witnessed his shooting at a Washington, D.C. railroad station and was at his side when he passed. In 1902, he attended the Pan-American Exposition in Buffalo, NY with President William McKinley and once again witnessed the shooting of a president.

After the death of McKinley, Robert Todd Lincoln refused to attend any further presidential functions and retired to his summer retreat in Manchester, Vermont where he became a virtual recluse. And in one final twist, when he died he was buried in Vermont becoming the only member of this father’s immediate family not to be buried in the Lincoln plot in Springfield, Illinois.