Equities and the Economy

U.S. equities weren’t trading too badly for most of the day being marginally negative, until the last two hours and then it got ugly with selling coming in hard. At the bell the scorecard read Dow down 208 points, 1.3%, at 15,885, the S&P 500 off 30, 1.6%, to 1,877 and the Nasdaq finishing 73 points lower, 1.6%, to 4,518. Many folks are going to point to oil prices as the culprit of yesterday’s down move and yes, oil prices did close 5% lower, but the WTI market closes at 1:30 Central time. Equities began falling at 1:00 PM with the big drop began at 2 :00 PM, well after WTI’s close. I’m going to get to this right now. The 1,862 to the 1,869 range basis the S&P 500 better hold. I mentioned this level last week and the market bounced right off it last Thursday and Friday. This is an area of major technical support. If we definitively break this level it could get really ugly.

What concerns me is the market is hanging its hat on central banks to rescue it. It’s addicted to QE, and needs a fix, especially right now. The ECB met last week suggesting more QE could come at its March meeting. Our FOMC meets today and tomorrow with the market anticipating a shift to a more dovish stance from last month meaning no interest rate increase. The Bank of Japan meets Thursday and Friday with the market anticipating an announcement of further easing its monetary policy. This is of great concern to me. What happened to the fundamentals?! I’ll tell you this. If all of these central banks ceased to increase, note I did not say decrease just cease to increase, their QE programs, global equities would go lower. A material part of this bull market’s run, which began in the second half of 2011, can be attributed to central banks QE programs. Now I do think the central banks will expand their QE programs, at least in Europe and Japan, but this can’t go on forever. You see what happens when the punch bowl, the drug, is taken away. The Fed did that in the middle of last year when it ended its bond buying program (and I’m not even talking about raising interest rates) and the U.S. stock market topped out. QE programs inflate equity prices resulting in P/E ratios getting too high, and then no one wants to buy them for they are viewed as “expensive.” A correction becomes inevitable. And we are in one.

With respect to the fundamentals, the Dallas Fed released its General Activity Index for January and expectations were low going into the report for the oil and gas sector is a big part of the survey, but no one expected it to be this bad. January’s index came in at -35 with the market expecting – 20. Additionally, December’s index was revised down to -22. Adding fuel to the fire, drilling down into the numbers, the Production Index for January was -10 compared to December’s +13. Things are imploding in the Oil Patch!

This morning support is holding with Dow futures up 88 and S&P futures trading above support at 1,880. Wednesday through Friday are critical which is when the FOMC ends its meeting and the BOJ ends its.

Oil

As mentioned previously, oil prices fell yesterday with WTI closing down $1.85, 5.7%, at $30.34 and Brent off $1.58, 5.2%, settling at $30.50. The oversupply dynamic is once again forefront with Iraq yesterday stating the country’s oil production hit a record high in December with a senior official stating it’s hoping to raise production this year. That announcement came on the heels of Saudi Aramco announcing it is further investing in oil production. WTI is up 36¢ this morning on newswire reports that Russia and Saudi Arabia are discussing possible supply cuts and that Iraqi would be willing to cooperate. I can just hear the conversation. Russia and Iraq say, “Saudi Arabia, you cut production and we’ll not increase it.” Then Russia and Iraq announce three months later production is higher. How the heck is Russian going to not increase production when their economy shrank 3.7% last year. They need every bit of hard currency they can get. The ruble is trading close to record lows at 82 to the dollar.

By the way, the name brand gasoline station where I buy gas is selling regular for $1.59. Wow! And I wonder how much of that is taxes?!

Courtesy of MDA Information Systems LLC

Natural Gas

It was another quiet day for natural gas with it closing 1.6¢ higher at $2.158. Once the current cold snap leaves the eastern U.S. some very warm temperatures are coming in the 6-10 day period which will melt all that snow from last weekend. The 11-15 day forecast has turned markedly colder especially for the upper Midwest and the bulls came in buying driving prices 6¢ higher earlier but prices have backed off being up 2.2¢ as I write. Interesting we’re not higher. It may be because we are in the middle of bid week (when the physical players come out to buy and sell gas for the subsequent month) and the cash market is not higher. As an fyi, the February Nymex contract expires tomorrow.

Elsewhere

The Conseil Europeen pour la Rechcerche Nucleair, the organization known as CERN that operates the largest particle physics laboratory in the world, made a truly stunning announcement last week. I’m going to reproduce the article because I don’t want to be accused of misinterpretation or misrepresentation. “Scientists said on Thursday they recorded particles travelling faster than light – a finding that could overturn one of Einstein’s fundamental laws of the universe. Antonio Erediato, spokesman for the international group of researchers, said that measurements taken over three years showed neutrinos pumped from CERN near Geneva to Gran Sasso in Italy had arrived 60 nanoseconds quicker than light would have done. ‘We have high confidence in our results. We have checked and rechecked for anything that could have distorted our measurements but we found nothing.’ he said. ‘We now want colleagues to check them independently.’”

“If confirmed, the discovery would undermine Albert Einstein’s 1905 theory of special relativity, which says that the speed of light is a ‘cosmic constant’ and that nothing in the universe can travel faster. That assertion, which has withstood over a century of testing, is one of the key elements of the so-called Standard Model of physics, which attempts to describe the way the universe and everything in it works.”

Now in full disclosure I haven’t fact checked this report (and would appreciate feedback from anyone that does) but the implications of this are mind blowing! Time travel being just one.