Equities and the Economy

Thursday we stopped falling and Friday we had a nice big up day for U.S. stocks with the Dow posting a very healthy 211 point, 1.33%, gain closing at 16,094, the S&P 500 adding 38 points, 2.03%, ending at 1,907 and the Nasdaq posting at big 119 point rise, 2.66%, to 4,591. The beaten down energy sector had the largest gain rising 4.3%. Friday’s higher closes resulted in U.S. equities posting their first weekly gain of the year. For those of you keeping score, the Dow, S&P and Nasdaq were up 0.7%, 1.4% and 2.3%, respectively, for the week. On a more somber note, the indexes are down about 6.5% in 2016 and more than 10% from their 52 week highs. The symbiotic relationship between oil and equities continued Friday. Oil prices rose big which brought in buyers. Additionally, ECB president Mario Draghi’s comments last week about more economic stimulus (“We’ll do everything to support the markets.”) possibly in the ECB’s March meeting along with the Bank of Japan hinting of more QE brought in buying in an egregiously oversold market. Speaking of central banks, the Fed, more specifically the FOMC, meets for two days beginning tomorrow and the Bank of Japan Thursday and Friday. A month or so ago the Fed was sending signals there would be four interest rate increases this year but now the market is not expecting an increase until at least June.

Although it was about oil and oversold conditions, there was some fundamental data released Friday. The National Association of Realtors released its sales report for December showing a huge increase in the sale of existing homes from November’s report. The was way above expectations even when considering the implementation of changes to the mortgage loan process. I discuss this report more in Elsewhere. There was additional good news in Markit Economics flash reading report for U.S. manufacturing for January with its index rising to 53 from December’s 51.

Overnight the Asian markets closed somewhat higher, 0.75% to 1.36%, playing catch-up to U.S. stocks. European equities as well as U.S. futures are trading lower (Dow futures down 63 points) pulled down by weaker oil prices. If you haven’t forgotten, it’s earnings season and this week Apple and Microsoft among 10 other Dow titans due to report including industrial majors Boeing, Caterpillar and DuPont.

Oil

As previously mentioned, oil prices skyrocketed Friday with WTI rising 19%, $2.66, closing at $32.19 and Brent up 10%, $2.93, settling at $32.18 logging its biggest one-day gain since the end of August. Those gains, similar to equities, translated into oil’s first weekly gain of the year. Baker Hughes released its weekly rig count report noting the oil rig count dropped 5 last week to 510. Last year at this time there were 1,370 rigs working. Amazingly, production has barely fallen being flat to down 3%, depending on the source of the data. This morning oil is trading lower on a report out of China that diesel demand there dropped 5.6%. Additionally, Saudi Aramco stated today it will not lower investment in energy prices despite the current low prices. Their horizon is much longer than the next 12 months. WTI is down $1.20 this morning.

By the way, the low oil prices are seriously affecting Russia. Her economy shrank 3.7% in 2015.

Courtesy of MDA Information Services LLC

Natural Gas

Natural gas did absolutely nothing on Friday with the February Nymex contract closing up 0.1 ¢ at $2.139. The deferred contracts were up ½¢. Total chatter. After having dropped to a three week low last week at $2.044 natty prices have spent nearly a week waffling around $2.10. The cold weather and system that hit the Tennessee Valley and northeast this weekend has moved out and much warmer weather is in store for those regions over the next 10 days. However, the 11-15 period has shifted colder, which I mentioned the models were hinting at last week, with the east moving from much above temperatures to close to normal. In that time frame the jet stream dips bringing some cold weather to the upper plains. The question is whether or not that cold weather shifts eastward increasing natural gas demand. This morning natty is down 2.9¢. More chatter.

Elsewhere

You regular readers know I like to follow the housing industry and the data was good for December after a not so good November. The National Association of Realtors on Friday stated that sales of existing homes climbed a whopping 14.7% last month to a seasonally adjusted annual rate of 5.46 million. In December sales surged in the Northeast, Midwest, South and West, with the Western states recording an incredible 23.2% increase. Sales in November had plummeted but this was due to newly adapted mortgage disclosure rules which temporarily slowed down the closing process. Last month’s rebound capped a year that produced the highest annual sales total. The increase was attributable to steady job growth and low mortgages which drew buyers to the market causing both sales and prices to climb steadily. Americans bought roughly 5.26 million homes in 2015, a 6.5% increase over 2014. The median sales price rose 6.8% to $222,400. The November sales rate dipped to 4.76 million units because of new government rules that are meant to protect buyers. The Consumer Financial Protection introduced new guidelines in October for informing home buyers about interest rates and fees for their mortgages. Prices pushed higher as the number of listings shrank giving those shopping for a home fewer options.

NAR forecasts that in 2016 sales will be flat but prices will rise more than 4%. A price increase that big would compound a persistent problem of 2015, that a rising percentage of first time buyers cannot afford to buy a home. Home values rose last year at more than twice the pace of income. The housing market continues to recover slowly from the disaster more than eight years ago. Sales remain well below their peak of 7.08 million in 2005 but that was when adjustable mortgage rates with no money down and other risky loans fueled a buying frenzy that eventually imploded triggering the worst downturn in our economy since the Great Depression (watch the movie The Big Short. It’s nominated for Best Picture, Best Supporting Actor, Directing and Film Editing. Better yet, read the book. I did. It’s great!)