Equities and the Economy

Yesterday we went from euphoria to chagrin to whew. At this time yesterday Dow futures were up 227 points (euphoria) only to trade lower as the day went on and then going negative a little after 1 PM CST (chagrin) and then recovering in the last 45 minutes of the session to close marginally higher up 28 points at 16,016 (whew). The S&P 500 closed up a single digit at 1,881, however, the Nasdaq closed lower, down 11, at 4,477. Folks, the intraday price action yesterday was horrible. I was very suspect of yesterday morning’s big move up which began in the Asian markets and was the result of economic data out of China that wasn’t bad, but it wasn’t good though either. Based upon that data investors speculated the Chinese government would be/ will be providing more stimulus and bought stocks. The positive price action spread to the European stocks and then to Dow futures in the morning. However, as I stated, the market was egregiously oversold and a bounce was due and to “be careful.” It was once again the oil market that U.S. investors keyed on for equity direction. At this time yesterday the equity markets were much higher but WTI and Brent were flat to down.

There weren’t any economic reports of any major significance released yesterday, so let’s move on to today, and it ain’t good. After watching yesterday’s price action I said to myself, “This isn’t going to be good for tomorrow. The Asian markets are going to key off the disappointing performance of U.S. equities.” And that’s exactly what’s unfolding. Overnight Asian stocks got clobbered with Japan’s Nikkei, Hong Kong’s Hang Seng and China’s Shanghai closing down 3.71%, 3.82% and 1.03%, respectively. The Nikkei is down over 20% from its June 2015 high officially entering a bear market. The European markets aren’t doing any better. London’s FTSE, Germany’s DAX and France’s CAC 40 are currently trading 2.68%, 2.35% and 2.98% lower, respectively. Locally, the Dow is down 201 points, which is much better from earlier when futures were down over 300 points. Folks, we’re in the middle of the way overdue correction. The effect of a slowdown in China’s economy is rippling around the world and is being exacerbated by the Fed taking the punch bowl away. Opens are important but closes are much more so. We must hold the 1,886 level basis the S&P 500. That was the closing back on October 17, 2015. We’ve bounced off that level a couple of times since then, specifically, September 24, 2015 and the next day, September 25th at the levels of 1,921 and 1,931, respectively. If we definitely break this support level the next support level is 1,783, which really isn’t a major support level. By the way, CNN Fear & Greed Index is way down there at 11, Extreme Fear.

Oil

As mentioned above, oil prices didn’t climb yesterday even though equities were higher in the morning. WTI closed down 96¢ at $28.46, a fresh 12 year low, while Brent actually rose 21¢ settling at $28.76. Note that Brent is once again trading at a premium to WTI which is anomalous, albeit that spread is only 30¢. Weighing on the oil market are two reports released yesterday. First, the International Energy Agency (IEA) cut its 2016 estimate for global oil demand due to China’s slowing economy while in terms of supply the organization forecast that despite a projected 600,000 barrel decline in non-OPEC supply this year, the return of Iran to the oil market would fill this gap. It added that the international oil markets could “drown in oversupply” in 2016. Yikes! The other report was from the IMF which once again lowered its global growth forecast.

These are not fun times for oil and gas producers. This is how bad it’s gotten. Last week Canada’s bitumen oil was selling for just $8 per barrel. But it’s even worse. Bloomberg reported that Flint Hill Resources, a refining unit of the Koch brothers, said they would purchase sour crude from North Dakota for -$0.50. That’s not a typo. That’s negative 50 cents. The producer is paying Koch to take it. Now sour crude, higher in sulfur content, normally sells at a discount to WTI but some sour crude in the Bakken is getting hit with the imperfect storm: low oil prices, a shortage of pipeline capacity and higher cost transportation alternatives such as rail and trucking. In full disclosure, North Dakota sour only makes up a small share of the state’s oil output, only about 15,000 bpd, but if you’re the one producing the sour crude it sure makes for good reason to shut it in. Today the February WTI Nymex contract expires and is beginning the day down 92¢.

Courtesy of MDA Infomration Systems LLC

Natural Gas

Natural gas was very quiet yesterday with the February Nymex contract closing down 0.9¢ at $2.091. Natty prices have fallen more than 45¢ in a little more than a week. The next few days are going to be really cold from the Great Lakes all the way to Florida but traders are looking into the future which is showing on average normal temperatures for the Midwest and northeast for the 6-10 day period but the 11-15 day forecast is very bearish with above to much above temperatures coming to the eastern half of the country. Traders though are a little reluctant to sell the market right now because the next couple storage reports are expected to show big withdrawals, the largest of the winter so far and greater than the 5 year average. This morning natty is up 3.4¢.

Elsewhere

The noble Julius Caesar was once kidnapped. He was sailing the Aegean Sea when he was taken prisoner by Sicilian pirates. The pirates asked for a ransom of 20 talents of silver (about $600,000 today). However, according to Plutarch, rather than send his associates off to gather the silver, Julius Caesar laughed at the pirates and demand they ask for 50 talents because 20 was too small of a ransom for himself! Of course the pirates agreed and Caesar sent some of his associates off to gather the silver, which took 38 days to accomplish. Now nearly alone with the pirates (only keeping two servants and one friend), rather than cower, he instead took the route of treating them as if they were his subordinates. He even demanded they not talk during his nap or when he slept at night. He spent most of his time composing and reciting poetry and writing speeches. He would then recite the works to the pirates. He also joined in with playing various games with the pirates as well as their exercises. Basically he pretty much acted like he wasn’t a prisoner. The pirates grew to respect and even like Caesar and gave him freedom to do more or less as he pleased on their ship and island. All that was nice but Caesar definitely didn’t appreciate being held captive. He swore to them he would hunt them down and have them crucified. Despite the fact that once the ransom was paid and he was let go he had to act like a private citizen, Julius Caesar managed to quickly raise a small fleet which he took back to the pirate’s island. Apparently the pirates (they’re not the sharpest pencil in the bunch) didn’t take Caesar’s threats seriously because they were still there when he arrived. He proceeded to capture them and took back his 50 talents of silver, along with all their possessions. He then followed through on his word and had them crucified, despite the proconsul of the region arguing that they should instead be sold as slaves. Authority didn’t give much opportunity for reforming your ways in those days.