Equities and the Economy

Another good day! Like’n it! The Dow continued its climb closing up 212 points, 1.29%, at 16,697, the S&P 500 ended up 22, 1.15%, at 1,952 and the Nasdaq added 39, 0.87%, to 4,582. The second consecutive day of gains for stocks was helped by a 3% jump in oil prices which in turn reduced fears banks could be hit by debt defaults. The Dow has now recovered 1,027 points, 6.6%, since closing at its low on February 11th. Folks, that was only 9 trading sessions ago! Before I get to the fundamental data I want to address the technical picture for we are at a critical point. Specifically, there’s a lot of resistance right here. Basis the S&P 500, we have the 50 day moving average right here, the February 1st high of 1,947, and the 1,950 level I’ve mentioned numerous times. From a pure trading, not investing, perspective, you don’t buy here. If anything, you take profits (if you’re a trader and not an investor). The rules in trading are that you buy support and sell resistance, and then buy again if you break through resistance. Getting through all this resistance would be quite bullish.

Turning to the economic news, the Labor Department released its weekly report on initial jobless claims noting claims rose marginally, 10,000, to 272,000 last week which was pretty close to expectations. No market moving data there. The Commerce Department reported some good news yesterday noting durable goods (goods with a life span of at least years) rose 4.9% in January which is the strongest month-on-month showing in almost a year and way above Wall Street’s expectations. The key component, orders for non-defense capital goods excluding aircraft, rose 3.9% which is the largest m-o-m gain in over a year and a half. This data point is really important because it’s viewed as a proxy for business investment plans.

This morning we’re testing that resistance. We were up 116 earlier today, with WTI up over a dollar, but WTI has pulled back and Dow futures are only up 11 right now. The Asian equities which all closed in the green and European equities trading the same.

Oil

Oil prices continue to grind higher with WTI closing up 92¢ at $33.07 and Brent adding 88¢ to $35.29. I am always watching the spreads (i.e., shape of the curve) and they continue to move bullishly with the contango shrinking. A week ago the average of the WTI and Brent spread was $8.08 and a month ago it was $7.96. This morning it’s $7.45. Something is happening below the surface in the crude oil market arguing for a more bullish case for oil. U.S. crude inventories are at record highs, Saudi Arabia is not cutting production unless Iran will, and that ain’t gonna happen, and U.S. production has only marginally decreased despite a plummeting rig count. Yet prices continue to climb. I realize there’s been a lot of jawboning going on, especially by Venezuela, but it feels like something more is going on here. Your antennae should be up! WTI is up 57¢ this morning.

Courtesy of MDA Information Systems LLC

Natural Gas

The March Nymex natural gas contract expired down 6.7¢ at $1.711. Did I mention that’s a 16 year low! There was a fundamental reason for the price drop. Yesterday the EIA released its weekly natural gas storage report noting that last week the U.S. withdrew 117 Bcf from storage. Now that number itself doesn’t mean much to you, but this will. Expectations were for a 142 Bcf withdrawal and the bottom of the expectation range was 126 Bcf. So you can see the actual number was hugely less than what the market was expecting. Prices immediately dropped after the number was released. Storage levels are now 31% greater than last year and 29% greater than the 5 year average. And we have only about 5 more storage reports showing withdrawals before the injection season begins.

Due to its low price natural gas continues to capture a greater share of the coal market. The EIA reported yesterday coal production is down 20% vs. a year ago. Not sure you’ve noticed by coal companies are going into bankrupt.

This morning the April contract become the prompt month and it is down 2.4¢, but even with it being down it is still 4.8¢ higher than March’s expiration value. This is convergence.

Elsewhere

It’s tax time and many of us are working on our taxes. Oh, what fun! Here’s an astounding piece of data I came across. According to the Tax Policy Center, of note this is a nonpartisan Washington based research group, 45.3% of American households, roughly 77.5 million, will pay no federal individual income tax in 2015! (However, this does not necessarily mean they do not owe state income taxes). Half of the 45.3% pay no federal tax because they have no taxable income and the other half get enough tax breaks to erase their tax liability.

Despite the fact that rich people paying little in the way of income taxes makes plenty of headlines, this is the exception, not the rule. The top 1% of taxpayers pay a higher effective income tax rate than any other group, around 23%, nearly seven times higher than those in the bottom 50%. On average, those in the bottom 49% of the income spectrum end up getting money from the government. Meanwhile, the richest 20% of Americans, by far, pay the most in in income taxes forking over nearly 87% of all income tax collected by Uncle Sam.

The top 1% of Americans, who have an average income of more than 2.1 million, pay 43.6% of all federal individual income tax in the U.S.