Equities and the Economy

Yesterday the markets were closed so let’s review the last trading day, which was Friday. I’ll make this like ripping off the Band-Aid, quick and painful. The Dow fell 391 points, 2.39%, ending under 16,000 at 15,988 (we were over 18,000 last July), the S&P 500 lost 42 points, 2.18%, ending at 1,880 and the Nasdaq closed down 2.75%, down a whopping 127 points, at 4,488. Intraday the Dow traded below its August 24th low to trade at its lowest level since October 2014. Friday’s price action was driven by lower oil prices and fundamental economic data further darkening the growth picture. I’ll discuss oil prices in the next section but here’s the economic data. The headline is “The Economy Got Hit From All Sides in December.” Producer prices for the month were deflationary coming in for the month at -0.2% after having risen 0.3% in November. Even stripping out the more volatile food and energy prices, core inflation was up only 0.1%, I’m sure to the Fed’s dismay. Retail sales for last month were disappointing. In broad terms they were -0.1% last month after being up 0.3% in November. The bad news just kept coming on Friday with the government reporting Industrial Production for December was -0.4% month-on-month compared to November. Additionally, November’s number was revised down from -0.6% to -0.9%. Further, capacity utilization fell from 77.0% to 76.5%. Now there was one report, and an important one, that was positive. The University of Michigan’s consumer sentiment index rose to 93.3 for early January from December’s 92.6.

The S&P is off about 15% form it’s high in May which means we are in “correction territory.” The Russell 2000, which is a small-cap index, hit a low not seen since July 2013. With the sky falling investors ran to safety and one of those havens is, besides U.S. Treasuries, the Japanese Yen which traded at a one year high vs. the U.S. dollar. Generally speaking, if a country is dependent on selling its natural resources for income its stock market and currency has been getting slammed this year. Example, Russia where it’s currency yesterday traded for a few brief moments at 80 Rubles/dollar touching its record low.

It’s a new day and the sun is shining on the equity markets today. China released data today showing Q4 GDP coming in line with economists’ expectations, which was a relief to investors for they were fearing worse. The data brought in buyers taking the Hang Seng and Shanghai materially higher with them closing up 2.07% and 3.22%, respectively. The positive data is also materially boosting European stocks with all three major indexes up 2.15% to 2.65%. The love is spreading across the pond with the Dow up 126 points, but this is well off earlier when Dow futures were up a very nice 227 points. I’m not a soothsayer but a word of caution for you. I’ve been telling you the equity markets, and oil market, is grossly oversold. A bounce of some reasonable size is due, and bouncing off the August 24th low, which as I said we hit Friday, is a very reasonable level upon which to bounce. Technically, the first level of resistance is the 1,905 to 1,910 level basis the S&P. Just be careful out there

Oil

As mentioned above, oil prices once again fell on Friday with WTI closing down $1.78, 5.7%, at $29.42 and Brent lost $1.94, 6.3%, at $28.9 Driving the markets lower were announcement that the western world’s sanctions on Iran could be lifted as soon as the past weekend, And as I’m sure you all know by now, they were giving Iran the green light to sell its oil on the open market and oil prices did fall yesterday in the international markets with Brent testing fresh lows not seen since 2003 below $28/bbl and ending the day down 1.4%. Iran is currently exporting about 1 million bpd and can increase that by 500,000 bpd in just a few months. Their goal is to produce 2 million bpd within a year. With equities so strong this morning one might expect oil to rally, but it’s not. WTI is down 38¢ from Friday’s settle but with all those Iranian tankers that were loaded up sitting on the water now steaming toward foreign ports keeping pressure on an already over-supplied market.

Over the weekend I paid $1.559 for a gallon of regular gas at a name brand station and thought I was hitting a home run. Until I read the following this morning. There’s a price war between three gas stations in Houghton Lake, Michigan with one station selling gasoline for 47¢ a gallon this past Sunday. That’s not a typo! According to GasBuddy.com the next lowest price in the country was about $1.29 at a station in Virginia. Gas prices are averaging $1.889 today, down 17¢ from last year’s average of $2.061. The year with the highest average was 2008 at $4.12, just before the Great Recession.

Courtesy of MDA Information Systems LLC

Natural Gas

On Friday natural gas prices leaked lower closing down 3.9¢ at $2.100. Natty prices have erased more than 50% of their more than 80¢ rally if the past month. It’s always all about the weather in the winter and although temperatures are brutally cold currently in the upper Midwest with zero and sub-zero wind chills it’s called a “future” and the future looks warm. Once this seriously cold cold snap moves out temperatures move to normal and above normal in the 6-15 day time frame. Natty is up 1.4¢

Elsewhere

On a very sad note, Glenn Frey, co-founder of one of the greatest bands ever, the Eagles, died yesterday of cancer at the age of 67. He and Don Henley formed the band in 1971 in Los Angeles. Frey and Henley began together playing back-up for another legend, Linda Ronstadt, later forming the Eagles with David Geffen’s Asylum Records. The Eagles won Grammy for rock, pop and country spanning an amazing time frame form 1975 to 2008. Frey and Henley wrote and sang most of their hits including “Take It Easy,” Heartache Tonight,” New Kid in Town,” One of These Nights,” Best of My Love,” and maybe one of the best songs of all time, “Hotel California.” Two of the Eagles albums would go on to rank among the bestselling albums ever released: Eagles, Their Greatest Hits (1971-1975) and Hotel California (1976). Each sold more than 20 million copies. In 1998, the Eagles were inducted into the Rock & Roll Hall of Fame and a year after that the Recording Industry Association named the Eagles to its list of Artists of the Century, alongside the Beatles, Elvis Presley, Barbara Streisand, Elton John and Garth Brooks.