Equities and the Economy

A really good monthly jobs report boosted stock futures early Friday and in early trade but was not enough to rescue last week being the worst 5 day beginning to a year ever for the U.S. stock market. On Friday, the Dow fell 168 points, 1.02%, to 16,346, the S&P 500 dropped 21, 1.09%, to 1,922 and the Nasdaq last 34, 0.97%, to 4,644. The intraday price action was horrible for the Dow was up 140 points early in the session only to finish negative. That’s not bullish price action amigos. For the week the Dow and S&P lost 6% and the Nasdaq fell 7%, the worst weekly decline since September 2001. Those are material losses my friends. Remember folks, on average bear moves occur four times faster than bull moves. The only even mildly positive fact was that the volume was lower on Friday than Thursday, 12% lower for the Nasdaq and 9% for the NYSE. All three major U.S. indexes are down about 10% from their 52 week highs.

The entire week investors stressed over the Chinese economy and the depreciation of the yuan. The Shanghai Composite had its worst week ever in its short 25 year history. But it’s not just China. Very low oil prices are weighing on the stock prices of oil and gas exploration and service companies and many of those stocks are in the major indexes. Additionally, other low commodity prices, such as the base metals, are telling investors global demand is weak.

As I mentioned, equity prices sold off in the face a very good jobs report from the Labor Department. In December the U.S. economy created 292,000 new jobs which was way above the consensus of 215,000. The unemployment rate held at 5% but this was because almost half-million people entered the workforce going from 62.5% to 62.6%. That being said, the labor force participation rate remains at near a four decade low. Additionally, job gains were revised up by 41,000 for November and 9,000 for October. The only blemish in the report was that average hourly earnings, a very closely followed data point by the Fed for rising hourly earnings is one of the biggest drivers of inflation, held steady with economists’ forecasting a 0.2% increase as well as average hours per week remaining at 34.5. Stock prices soared higher upon the report’s release but the euphoria proved ephemeral when it was realized that much of the job gains were due to seasonal adjustments because of the materially warmer weather that pushed construction employment sharply higher.

While you slept the major Asian bourses all closed in the red with Hong Kong’s Hang Seng and China’s Shanghai getting hit the worst, 2.76% and 5.33%, respectively. Fortunately, the European markets are shrugging off the negative Asian news with the three major indexes there all trading between 0.17% and 0.90% in the green. U.S. equity futures began the day lower but are currently trading higher with Dow future up 92 points. Quite frankly, there is no major fundamental news supporting the higher markets in Europe and the U.S. but I will say this, technically the market is egregiously oversold in the short term and a correction higher is due. Now unfortunately I can’t say we’ve seen the bottom to this move, but a bounce higher from Friday’s close wouldn’t surprise me.

Oil

On Friday oil prices fell for the 5th consecutive day with WTI closing down 11¢ at $33.16 and Brent fell 20¢ settling at $33.55. The two benchmarks were down 10% for the week and hit fresh 12 year lows. Oil prices continue to fall despite a continuing drop in the rig count. Baker Hughes reported Friday the oil rig count fell another 20 rigs last week to 516 rigs. This compares to last year at this time when 1,421 rigs were operating. The number of rigs currently working is at a 5 year low. The world is currently producing about 1.5 million bpd more than it consumes and making it even worse, both OPEC and the IEA (not our EIA) expect global demand to slow in 2016 to around 1.20 – 1.25 million bpd from 2015’s very high 1.8 million bpd. I’ve had the following discussion with numerous people but and I keep telling them “You want higher oil prices.” Look at your portfolio/401K and you’ll see why. This morning WTI is down 45¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Colder overnight and midday forecasts on Friday pushed natural gas higher on the day with natty settling up 9.0¢ at $2.472. Last week prices rose almost 16¢, or 6.8%, to a 2.5 month high. Over the past 3 weeks prices have risen more than 80¢ from the mid-December intra-day low of $1.684 as forecasts turned from super above normal to normal to below normal. This morning’s forecast is showing very cold weather to hit the upper Midwest next week followed by somewhat above normal temperatures for that some region in the 11-15 time frame which is slightly warmer and the bulls are taking a few chips off the table with natty down 5.4¢. There’s no doubt what the big question is in traders’ minds. “Will the Godzilla El Nino we had in November and December reassert itself in Q1 2016?” I don’t know for if I did I wouldn’t be writing this blog right now.

Elsewhere

Natural gas spot prices in 2015 at the Henry Hub, Louisiana averaged $2.61/MMBtu, the lowest annual average since 1999. Daily prices fell below $2.00 in 2015 for the first time since 2012. Although demand increased, prices were weighed down by record production and extremely warm Q4 2015 temperatures resulting in storage inventories being at record levels as of December 31, 2015. The low prices led to a marked increase in the use of natural gas in electric generation. Per the EIA, in 2015, 26.5 Bcf/d was consumed in electric generation surpassing the previous record of 24.9 Bcf/d in 2012. Natural gas surpassed coal as the leading source of electricity generation on a monthly basis for the first time ever in April 2015, and then did it again in each of the four months of July through October. Natural gas in the residential and commercial sectors, which is mostly for space heating, fell 6.7% and 4.4%, respectively, due to a warmer winter in 2015 than 2014. Power burn of natural gas has been so strong this winter that despite the warmer winter total demand has remained above 77 Bcf/d so far. Although this is lower than the last three winters it is higher than 7 winters prior those three.

On a somber note, David Bowie died yesterday.