Equities and the Economy

First of all, I want to congratulate all of you who are reading this at work. Over 1.5 million workers call in sick today, the day after Super Bowl, and millions are late. Maybe it has something to do with the 325 million gallons of beer drank yesterday! I’m sure a lot of you forgot what happened in the markets on Friday so I’ll summarize. The Dow fell 212 points, 1.29%, to 16,205, the S&P 500 dropped 35, 1.85%, ending at 1,880 and the Nasdaq just got obliterated losing 3.25%!, 147 points, finishing at 4,363. The excuse for the selloff was the Labor Department’s Employment Situation Report. The report showed nonfarm payrolls increased 151,000 in January which was much less than forecasts of 190,000. This to me would be bullish of equities because it would mean the Fed would delay an interest rate hike. But it was two other statistics which caught investors’ attention. The first was the unemployment rate fell to 4.9%, an eight year low. The second, and debatably more important, was wages which rose sharply, 0.5%, and the work week rose 0.1 hours which are both indications of a tightening labor market. Add in that our Fed Chairperson, Janet Yellen, has stated the economy needs to create about 100,000 jobs a month to keep up with growth in the working age population and the bottom line is that once again discussion of when an interest rate hike might happen is front and center. Whereas the market was pricing in no interest rate hikes in 2016, now it’s 50/50 for a hike in December.

Friday’s closes were very close to some major technical support which is 1,859 to 1,867 basis the S&P 500. We need to hold that level or we’re going lower. And that level is very much at risk with the bears mauling the market this morning with the Dow down a huge 341 points. The S&P is down 39 points which puts us at 1,841. It’s disappointing earnings particularly in the technology sector (on Friday Apple lost 2.6%, and Amazon and Facebook each lost 6%) and concerns about global growth weighing on the market. Today’s closes are very important.

Oil

Oil prices were weaker Friday with WTI losing 83¢ closing at $30.89 and Brent off 40¢ settling at $34.06. The employment report along with a rising U.S. dollar is to blame. That being said, the dollar fell 3% to the euro and yen last week which is very material, and supportive of oil prices but apparently it was not enough to overcome over supply fears for it failed to rally oil prices materially. On Friday Baker Hughes released its weekly rig count report noting 48 fewer rigs were drilling for oil and gas compared to the week before and down to 571 rigs. This compares to 1,456 rigs a year ago at this time. Specifically to oil, there were 31 fewer rigs working compared to the week before for a total of 467 rigs. Last year at this time 1,140 oil rigs were working. Although it is still profitable to drill in parts of the Permian Basin (west Texas), the rig count there has fallen from 417 a year ago to a scant now 180. In the Williston in North Dakota there were 137 rigs working a year ago. Now, just 42! I’ve been through these cycles. A day of reckoning is coming.

Equity futures are lower and the dollar is slightly higher which is pushing WTI lower today by 53¢.

Courtesy of MDA Information Systems LLC

Natural Gas

After dropping to a six week low just above $1.95 last week natural gas has rallied with it closing Friday at $ 2.063, up 9.1¢. Natty has been getting a boost from the cash market with much below normal temperatures in the eastern third of the nation over the next 10 days. Additionally, prices were at 6 week lows and due for a bounce. This morning we’re up 8.3¢ with the weather forecast coming in colder over the next 10 days than Friday’s forecast. That being said. Natty is soooo cheap. Just go ask your friendly oil and gas producer!

Elsewhere

The turmoil in the stock market hasn’t hurt homeowner’s, at least with respect to their plans to improve their properties. According to an Angie’s List survey, for homeowner’s who’ve already set their spending budgets for 2016, 79% plan to spend as much or more on home improvement projects this year compared to last year. The survey found that millennials plan to spend more as more than older homeowners. The Angie’s List findings confirm a report issued by the Joint Center for Housing Studies at Harvard University last month which projected that home remodeling would pick up this year, particularly this summer. Their Leading Indicator of Remodeling Activities projected that annual spending on home improvement projects in 2016 could surpass its 2006 peak.

Home improvement projects are making more sense as an investment than they have in recent years. While most renovations don’t pay off dollar-for-dollar when you sell a home, the return on investment for remodeling projects increased to 64.4% in 2016 from 62.0% in 2015 and the second highest return in the past eight years.