Equities and the Economy

Just as generals ordered their men in the Civil War to “hold the line” so did the S&P 500 1,862 to 1,869 “line” of support hold with equities strongly bouncing off that level and putting in a great performance yesterday. The Dow rose a big 282 points, 1.77%, finishing at 16,167, the S&P 500 closing up 27 points, 1.43%, at 1,904 and the Nasdaq rising an even 50 points, 1.10%, to 4,568. That symbiotic relationship between oil and equities continues to hold with oil prices rising and the energy sector being the biggest gainer, 3.8%. Certainly helping stocks were positive earnings reports from Sprint Corporation, Proctor and Gamble Co. and 3M.

Yesterday was a good day fundamentally. Standard & Poor’s reported that its S&P/Case-Sheller 20-city home price index rose 5.8% on annualized basis in November which is up from October’s 5.5%. Expectations going into the report were for a 5.7% increase so this is definitely positive news. The report added that home prices accelerated at their fastest pace in 16 months in November. Separately, the Federal Housing Finance Agency said house-price gains pushed past their 2007 peaks. Low inventory continues to be the theme in the housing market. Far more surprising, and far more positive, was the Conference Board’s report that its consumer confidence index rose from 96.3 in December to 98.1 in January. Economists were looking for a 96. The report noted that low gasoline prices and the strong labor market were the driving forces for the increase. Finally, additional good news came from the Labor Department reported its unemployment rate fell in 25 states in December, it rose in 14 states and 11 states there was no change.

This morning U.S. equities are retracing a bit with Dow futures down 62 points. Guess what? Oil prices are lower this morning. The Asian markets closed mixed overnight and the major European bourses are down, but only marginally. Investors appear to be on “pause” this morning with the FOMC concluding its two day meeting today. There will not be a press conference with the committee only releasing its post-meeting statement. With all the turmoil in the global equity markets and more importantly, inflation very benign due to the fall in oil prices, I seriously doubt they will raise interest rates. They won’t lower them, but they won’t raise them. Tomorrow it’s the Bank of Japan’s turn to meet, which will last two days.

Oil

As mentioned above, oil prices rose with WTI climbing $1.11, 3.4%, closing at $31.45 and Brent gaining $1.30, 3.9%, settling at $3.9%. It was headlines rather than fundamentals that got traders covering their shorts yesterday on the news that Saudi Arabia and Russia are talking about cooperating to manage production. I wonder if Saudi Arabia is saying to themselves, “$30 [Brent] has got to hold.” Additionally, Kuwait’s OPEC governor stated “OPEC is willing to cooperate with producers outside the group if they show they are serious about cooperating. That is one heck of a big “if”!

This morning WTI is down 53¢ on a very bearish API report last evening. They industry group reported that crude inventories rose 11.4 million barrels last week, nearly 4 times forecasts and that gasoline inventories rose by 4.1 million barrels, 5 times forecasts. The only thing mildly bullish was that distillates fell by 600,000 barrels with the market looking for a much more material drop of 2.1 million barrels.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices spent another day meandering closing 2.2¢ higher at $2.180. The weather forecast has shifted much colder in the 11-15 day time frame which is bringing in the bulls. The weather forecast today is a repeat of yesterday’s forecast showing the cold weather that’s in the western plains in the 6-10 day time frame moving into eastern U.S. in the 11-15 day period. This will definitely jack up the HDD’s. The colder forecast is bringing in more buyers this morning pushing natty up 2.5¢ and back above $2.200 for the second time in the past month. Today is an important day for the February Nymex contract expires today setting the price of next month’s natural gas and electricity supplies for those with unhedged positions. I thought all of you in the upper Midwest and east would like to know Houston is forecast to have a high of 78 degrees on Monday.

Cheniere Energy has once again delayed the date of their first LNG load for export. For most of last year is was to be January 2016. Then last month they said March 2016. This week they filed a report with FERC stating that now the first liquefaction train will finish construction in May 2016. They also stated that train 2 will now be completed in August as opposed to June 2016. Why do I want to take the “over” on that?!

Elsewhere

The drop in oil prices is having its negative domino effect. United States Steel Corporation just announced it plans to cut nearly 679 employees at its plant in Lone Star, Texas which is located in the northeastern part of the state. This may not seem like a lot but the city of Lone Star only has a population of 1,580 people. This recent announcement is in addition to 142 employees already laid off in Texas. The company attributed the cuts to a decline in its orders for “tubular products.” That’s another name for drill pipe.