Equities and the Economy

After three sessions of lower prices, including spanning the new year’s holiday, U.S. equities leveled off with an uneventful day yesterday. The Dow closed up 10 points at 17,159, the S&P rose 4 to 2,017 and the Nasdaq was the laggard falling 12 to 4,891. With respect to economic data yesterday, there really wasn’t much except for U.S. auto sales. WardsAuto, which provides data used the U.S. government for economic analysis, said 2015 sales set a record at 17.39 million vehicles sold breaking the 2000 level of 17.35 million. Low gasoline prices, easy credit and moderate economic growth boosted the industry. The auto industry has steadily recovered since 2009 when sales were 10.4 million, the lowest level since WWII adjusted for inflation.

Let’s move on to this morning for things are anything but sedate. While the Asian markets closed mixed with Japan’s and Hong Kong’s markets closing down about 1%, China’s Shanghai rallied 2.25% but I believe this was sort of “manufactured’ by the Chinese government because they announced today they would extend the ban on selling short by major shareholders. The ban was announced last summer to help arrest the market crash there at the end of August which if you recall sent stocks around the world plummeting. In fact, the Dow hit its 2015 nadir at that time. However, European stocks are cratering today with the three major indexes I follow (London’s FTSE, Germany’s DAX and France’s CAC 40) down between 1.51% and 1.90%. U.S stock futures are following the Continent’s lead with Dow futures down a very material 274 points. Three reasons are being identified for the selling. First, today China released data on its service sector stating its Purchasing Managers’ Index for the sector dropped to a 17 month low at 50.2. The second item is that North Korea announced today they successfully carried out a hydrogen bomb test. A few hours earlier an earthquake was recorded near the site of previous North Korean nuclear tests. Third, oil prices continue to fall with Brent and WTI again lower this morning. In my opinion, and this is only my opinion, I think reasons 1 and 3 are the rationale for today’s equity weakness. Yes, a North Korean nuclear test is not good for geopolitical stability, but they’ve previously conducted nuclear tests, and even bombed populations on nearby islands, and it hasn’t roiled the equity markets.

Folks, equities have rallied for about six years which is much longer than the average bull market and many, many analysts are saying that stocks are fairly valued meaning there’s few value opportunities out there. Additionally, since 2009 the Fed was stimulating the market with their bond buying program and lower interest rates. The Fed’s bond buying program is over and they’ve begun raising interest rates. Now before you panic, corrections are normal and healthy for the market in the longer term.

Oil

As I mentioned, oil prices are lower this morning with WTI down $1.26, 3.7%, looking to close lower for the third consecutive day and at their lowest level since mid-2004. The weak Chinese PMI services data is dragging equities lower which is weighing on oil prices. Slowing global economic growth with burgeoning oil inventories with more to come with the expected lifting of sanctions on Iran is not a formula for rising prices.

It’s really amazing how the pricing dynamics of the global oil market have changed over the last decade. Ten years ago the escalation in tensions that has occurred this week between Saudi Arabia and Iran would have added $3 to $5 a barrel to the price of crude oil. Last Thursday, the last trading session before Saudi Arabia executed the Shiite cleric, WTI and Brent closed at $37.04 and $37.28, respectively. Yesterday WTI and Brent closed at $35.79, down 79¢, and $36.42, 80¢ lower. So not only did prices not go up, they fell about 2.3%! And not only did prices fall in the futures market but they also fell in the cash market for yesterday Saudi Arabia announced it was lowering the price of its crude to some its European customers. You can thank horizontal drilling and hydrofracking. More specifically, you can thank George P. Mitchell who invested many years and millions of dollars to refine the hydrofracking process, and then gave the technology to the general public for free for others to exploit.

Natural Gas

With the cold weather that’s coming into just about the entire U.S. next week now built into the market natural gas prices have stabilized. Yesterday the February contract closed down 0.9¢ at $2.325. Chatter. Today’s forecast is little changed from yesterday. For those of us residing in the eastern half of the country we are going to see a radical change in temperatures from this week to next with the upper Midwest and northeast going from temperatures much above normal to much below normal. The 11-15 forecast is little changed from yesterday with pretty much normal temps in the eastern half of the country being normal. We’ve now spent a week trading just below last week’s one month high of $2.387.

Regarding electricity, the trend of the last three year’s remains entrenched, and it will continue throughout 2016. That is, an increasing amount of electric generation will be fueled by natural gas. Yesterday, the Florida Public Service Commission approved FPL’s request to build a 1,7633 MW natural gas fired combined cycle plant for $1.2 billion with a start date of June 2019. Also, Mission Rock Energy Center petitioned California regulators to build a 275 MW natural gas fired plant in Ventura County. Keep an eye out your window. You’re going to see either a coal fueled power plant converted or shut down, or a natural gas fired plant built.

Courtesy of MDA Information Systems LLC

Elsewhere

With the rise in tensions this week between Sunni Saudi Arabia and Shiite Iran I thought it timely to present a primer on the two schisms. I wish I could claim the following but Mr. John Harney of the New York Times deserves the credit.

After the death of the Prophet Mohammed in 632, a schism emerged because Mohammed had not appointed a successor to lead the Muslim community and disputes arose over who should shepherd the new and rapidly growing faith. Some believed that a new leader should be chosen by consensus; others though that only the prophet’s descendants should become caliph. The title passed to a trusted aide, Abu Bakr, though some thought it should have gone to Ali, the prophet’s cousin and son-in-law. Ali eventually did become caliph but only after Abu Bakr’s two successors were assassinated.

After Ali was also was assassinated, with a poison-laced sword at the mosque in Kufa, in what is now Iraq, his sons Hasan and then Hussein claimed the title. But Hussein and many of his relatives were massacred in Karbala, Iraq in 680. His martyrdom became a central tenet to those who believed that Ali should have succeeded the prophet. The followers became known as Shiites, a contraction of the phrase Shiat Ali, or followers or Ali.

The Sunnis, however, regard the first three caliphs before Ali as rightly guided and themselves as the true adherents to the Sunnah, or the prophet’s tradition. Sunni rulers embarked on sweeping conquests that extended the caliphate into North Africa and Europe. The last caliphate ended with the fall of the Ottoman Empire after WWI.

The Sunni and Shiite sects of Islam encompass a wide spectrum of doctrine, opinion and schools of thought. The branches are in agreement on many aspects of Islam, but there are considerable disagreements within each. Both branches include worshipers who run the gamut from secular to fundamentalist. Shiites consider Ali and the leaders who came after him as imams. Most believe in a line of 12 imams, the last of whom, a boy, is believed to have vanished in the ninth century in Iraq after his father was murdered. Shiites known as Twelvers anticipate his return as the Mahdi, or Messiah. Because of the different paths the two sects took, Sunnis emphasize God’s power in the material world, sometimes including the public and political realm, while Shiites value martyrdom and sacrifice.

More than 85% of the world’s 1.5 billion Muslims are Sunni. They live across the Arab world, as well as in countries like Turkey, Pakistan, India, Bangladesh, Malaysia and Indonesia. Iran, Iraq and Bahrain are largely Shiite. The Saudi royal family, which practices an austere and conservative strand of Sunni Islam known as Wahhabism, controls Islam’s holiest shrines, Mecca and Medina, Karbala, Kufa and Najaf in Iraq and revered shrines for Shiites.

Saudi Arabia and Iran, the dominant powers in the Middle East, often take opposing sides in regional conflicts. In Yemen, Shiite rebels from the north, the Houthis, overthrew a Sunni dominated government, leading to an invasion by a Saudi-led coalition. In Syria, which has a Sunni majority, the Alawite Shiite sect of President Bashar al-Assad, which has long dominated the government, clings to power amid a bloody civil war. In Iraq, bitter resentments between the Shiite-led government and Sunni communities has allowed the Islamic State to proliferate.

I sure wish Mohammed had subscribed to succession planning.