Equities and the Economy

It began ugly and ended ugly. I’m talking about U.S. equities. At about this time yesterday Dow futures were down 274 points and although prices did recover a tad intraday the day still ended lousy. The Dow lost 252 points, 1.47%, closing at 16,907 and below 17,000 for the first time since October 14th. The S&P 500 fell 27 points, 1.32%, at 1,990, below the psychologically important 2,000 level and the Nasdaq closed down 55, 1.13%, at 4,836. The S&P is right in its support range of 1,987 to 1,995. We have to hold this level of it’s very possible we could revisit the flash clash low of 1,867 to 1,882 seen on August 25th, which was the S&P’s 2015 low, and the second lowest 2015 close on September 28th. Based upon yesterday’s close, the S&P is now down 5% since December 29th. Folks, that’s only 5 trading sessions!

Equity prices fell yesterday but the fundamental economic data was good. The ADP Research institute reported that the private sector added a whopping 275,000 new jobs in December blowing out expectations of an increase of 197,000. Per Moody’s Analytics. “Strong job growth shows no signs of abating except in the energy industry. If this pace of job growth continues, which seem likely, the economy will be back to full employment by mid-year. The last time the economy was at full employment was nearly a decade ago.” Now the government’s monthly employment report comes out tomorrow but everyone looks at the ADP data for insight into the Labor Department’s report. All I can say is the Fed is smiling, and oh, you can bet more interest rate increase are coming.

The Dow is currently down 235 points, and you should breathe a sigh of relief for Dow futures were down 321 points when I came into the office. Once again, fingers are pointing to China. For the second time this week trading was suspended as “circuit breakers” kicked in after the market (specifically the CSI 300) dropped 7% resulting in, and this is scary, the market being open for less than a half hour for the entire day. Unsurprisingly, the angst in Asia has spread to Europe where all the major indexes are trading materially lower between 1.73% and 2.44%, with Germany’s DAX performing the worst, and a material improvement from earlier today.

Richard Fisher, the former CEO of the Dallas Federal Reserve (2005-2015) has an interesting take on U.S. equities. He says to not blame China for the recent sell-off in equities. While he acknowledges the importance of the world’s second largest economy, he believes another factor and one of greater importance than China is impacting the pricing of the U.S. stock market now. That is, the effect of the Federal Reserve’s accommodative monetary policy. Mr. Fischer spent 10 year on the FOMC influencing U.S. monetary policy. He states the purpose of the zero interest rates engineered by the FOMC along with the massive asset purchases of Treasuries and agency securities we know as quantitative easing, was to create a wealth effect for the real economy by jump-starting the bond and equity markets. He states that with these actions the FOMC achieved its objective. Interest rates fell and rested at 239 year lows, and the stock market reacted bottoming out in March of 2009 and rising dramatically through 2014.

He believes QE front-loaded the market and pulled forward the price-reaction function of the market. He states that it would not be unreasonable to expect subdued returns in 2016 given that stocks are still richly priced by historic standards. He added that the Fed is focused on the real economy looking out to the intermediate term, not necessarily on sustaining the stock market today. He notes that the real economy has been extensively repaired adding the easy money in investing has been made.

Mr. Fisher concluded commenting that we’ll now see who the truly smart investors are and who merely looked smart by having ridden the rising tide engineered by the Fed. He finished by quoting Warren Buffett, “You only learn who has been swimming naked when the tide goes out.”

Oil

Oil prices continue to get pounded with WTI losing another $2.00, 5.5%, settling at $33.97, marking the 3rd consecutive lower session with WTI and Brent closing at their lowest levels since 2004. Brent lost $2.16, 5.9%, closing at $34.23. In yesterday’s case it was fundamental data that pushed prices lower. The DOE released its weekly crude and products report yesterday noting that although crude stockpiles fell 5.1 million barrels and more than the 5 year average of 3.76 million barrels, gasoline inventories showed a massive build with gasoline stocks jumping a huge 10.6 million barrels. The expectation was for a 2.0 million barrel increase.

This morning WTI is trading 58¢ lower at $33.39 which is materially higher than earlier for at one point WTI was trading just above $32. Obviously, the weakness in global equities in weighing on oil prices.

Low commodity prices, including oil, is wreaking havoc with Vladimir Putin. After the release of the DOE’s report yesterday the ruble tumbled toward its all-time low vs. the U.S. dollar. Now this might on the surface seem good because Vladimir will be receiving U.S. dollar equivalent prices for his oil but tell that to Aleksei and Natasha who are seeing the price of milk rise but are seeing no increase in their income. That, my friends, is called inflation

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices leaded a little lower yesterday with the February contract closing 5.8¢ lower at $2.267 with the weather forecast yesterday slightly warming up the 11-15 day time frame. That being said, the 2017-202 calendar strips, which I watch closely, were unchanged. Today’s 6-15 day forecast has no above normal temperatures anywhere east of the Rockies which will keep natural gas demand elevated as we approach the statistically coldest period of the year.

Today the EIA releases its weekly storage report and the market is looking for a withdrawal of 100 Bcf which is slightly less than last year and the 5 year average.

It was sweater weather yesterday, at the North Pole. A freak North Atlantic storm drew warm weather to the North Pole pushing temperatures a huge 50 degrees above normal and incredibly, above freezing. This is only the 4th time since records have been kept that temperatures have gone above freezing in the period of November through March

Elsewhere

Automobiles continue to get cooler, and more sophisticated. Starting this spring buyers of the newest Ford Escape will get a free mobile connection linking their small SUV to their smartphone over AT&T’s high-speed cellular network. The connection, which will be free for 5 years, will allow drivers to unlock the SUV, start it up, check the gas level or locate the parked vehicle. Ford and AT&T say they plan to offer the “SYNC Connect” service in at least 10 million vehicles over the next five years.

AT&T already counts 5.8 million connected cars, including 1 million added just in the third quarter of last year. Some connections even offer an in-car Wi-Fi hotspot so passengers can watch videos and play online games without taxing their data plans.

The two companies expect to scale the program up quickly across Ford’s entire line of North America with the potential to impact billions of vehicles globally.

One obstacle is consumers concerns about privacy and security. These fears were stoked in July when Wired reported that hackers had taken control of a Jeep via its online entertainment system. Chrysler then recalled 1.4 million units to eliminate the software vulnerability. The auto industry agreed to a set of privacy principles in 2014 which the Federal Trade Commission overseas. However, most car companies are going well beyond what is required in the self-regulatory oversight agreement. Makes sense. No car company wants to be known as the car company that’s not protecting their customer’s privacy.