Equities and the Economy

And the pain continued. U.S. stocks had their worst day in three months yesterday marking the worst start to a new year for the S&P 500 and Dow Jones ever. Yes in history! On the heels of the Chinese stock market being halted for trading for the second time this week triggered by the “circuit breaker” of a 7% decline and the Chinese yuan falling to its lowest level since March 2011, equities both here and Europe got crushed. The Dow lost 393 points, 2.32%, finishing at 16,514, the S&P 500 fell 47, 2.37%, to 1,943 and the Nasdaq got hit the hardest losing 3.03%, 147 points, ending at 4,689. All three indexes closed just barely above their lows for the day. From the high made back in May, the S&P is down 8.8%. We’re still a long way from a bear market though which is defined as a 20% or more decline. Capital is fleeing to safe havens like Treasuries and gold with the latter up 3.2% this week.

By the way, the VIX (aka Fear Index) is up 30% this week!

Going back to China, refreshing your memory, it was the devaluation of the yuan that sent stocks crashing at the end of August. Investors take the weakening of the yuan as a sign of weakness in the Chinese economy. The health of China’s economy has big implications for countries all around the world, even though the U.S. economy is doing fairly well and Europe’s economy looks healthier. China has been a big driver of global growth for 15 years, and now they’re not, and disconcertingly, global investors are not comfortable the government has a plan for the next 15 years. For example, the Chinese government stated yesterday that the stock market “circuit breaker” I mentioned previously was being suspended. It was only instituted four days ago!

There were two economic reports of significance yesterday. Both were employment related and both were positive. First, the Labor Department released its weekly initial jobless claims (initial unemployment claims) report noting claims last week fell 10,000 to 277,000 and in line with expectations. Now these numbers probably don’t mean a lot to you, but here’s the important part. Unemployment claims have now been below 300,000 for 44 consecutive weeks, the longest trend since the early 1970’s, and at the lowest level in 15 ½ years!. That fact is even more impressive considering the U.S. population in the 1970’s was about 2/3rds of what it is today making the present day claims all that more impressive. I guarantee you the Fed will take note of this data. Another reason to raise interest rates.

The other report was the Challenger, Gray & Christmas jobs-lost survey. The report stated the number of jobs lost in December fell from 31,000 in November to 23,600 in December. Another piece of data that looks good but what does it really mean? How about this? This was the smallest number of jobs lost in the U.S. economy since June of 2000, down 24% from November and the lowest December job-cut total on record! Saying this report was “very strong” would be an understatement!

After multiple days of panic a bit of calm has come to global markets this morning. After multiple days of losses of 7% triggering the “circuit breaker,” the Chinese markets rebounded last night closing up 1.97%. Hong Kong’s Hang Seng also closed in the green by 0.59% and Japan’s Nikkei closed marginally lower. European stocks are trading flat to marginally higher from yesterday’s closes. Here in the U.S. the Dow is up 81 which is down from being up 142 earlier. The Labor Department just released its Employment Situation report for December. The big kahuna of fundamental economic reports. I’ll go into more detail on Monday but just let me say this, “It is a good one.” U.S. job growth surged in December with nonfarm payrolls leaping by 292,000, way more than even the most bullish forecast which was 250,000. The unemployment rate held steady at its 7 ½ year low of 5%, even as more people entered the labor pool. Additionally, the October and November jobs data was revised upward, and you regular readers know I place a lot of credence in revisions. Folks, this was a great report!

Now if we could get commodities to rally we’d really start to have some fun!

Oil

Oil, poor oil. With no technical or fundamental data to support prices they again yesterday with WTI closing down 70¢ at $33.27 and Brent off 48¢ settling at $33.75. This is the 4th straight session of lower closes and at new 11 year lows. Turmoil in China and a falling yuan along with a string of weak economic data along with no hint that Saudi Arabia has any intention of cutting supply has left the global market oversupplied between 1.0 and 1.5million bpd. And let’s not forget Iran’s intention to increase production 100k to 150k bpd once sanctions are lifted. That being said, a Reuters survey this week found OPEC production to have fallen 170,000 bpd in December. This was primarily due to a reduction in output from Iraq which had record breaking production month in November. However, OPEC is still pumping close to record levels. OPEC has boosted production by almost 1.40 million bpd since November 2014 which was the month Saudi Arabia announced it was abandoning its 40 year old policy of modulating production to influence price in favor of capturing market share.

Kinda of awkwardly funny about Iraq. ISIL holds material areas of the war torn country and battles loom every day, but production is increasing. In fact, in 2014 Iraq was the world’s fastest source of supply growth. Both sides are shooting bullets but the oil continues to flow. Everybody wants the revenue!

This morning calm prevails with WTI down a meaningless 11¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices shot up yesterday closing 11.5¢ higher at $2.382. No question what the driver here is, the EIA storage report. The agency stated 113 Bcf was withdrawn from storage last week which way above market expectations of a withdraw of 100 Bcf. Prices gapped higher immediately upon the release of the report and remained at the elevated level the rest of the trading session. Yesterday’s high of $2.429 was the first time the prices traded over $2.400 since the Middle of November. Prices have now rallied nearly 75¢ from December’s 16 year low of $1.684 coincident with the forecast which shifted from temperatures setting record highs to more normal temperatures.

This morning’s forecast is not much different from yesterday’s showing pretty much normal temperatures for the eastern half of the country.

The oil industry is not going to get any sympathy from the coal industry. The EIA reported yesterday U.S. coal production has decreased by a whopping 11% over the past year, with the trend downward. Last week’s coal production was down 32% compared to a year ago and coal carloads (a closely monitored data point) last week were 35% below year ago levels.

Elsewhere

I mentioned Ford yesterday and it’s only fair I give space to GM, after all this is the election season when equal are time is required. GM and ride-hailing company Lyft, Inc. are forming an unprecedented partnership that they feel will help them beat their rivals in the self-driving future. GM has invested $500 million in Lyft as part of a round of $1 billion fund raising. GM gets a seat on Lyft’s board and access to the three year old company’s software, which matches riders and drivers. Lyft also becomes a preferred vehicle provider, with the chance to get many more people behind the wheel of a GM car. GM also gets an enviable global reach. Lyft get the expertise of the 108 year old company with decades of experience in making connected and autonomous vehicles.

Together the companies plan to open a network of U.S. hubs where Lyft drivers can rent GM vehicles. That expands Lyft’s business by giving people who don’t own cars a way to drive and earn money through Lyft. GM also gets a leg up on Ford and Daimer AG who are developing their own ride-sharing services.

Longer term, GM and Lyft will work together to develop a fleet of autonomous vehicles that city dwellers could summon using the Lyft mobile app.