Equities and the economy

On Friday the Dow eked out a small gain of 21 points to close at 18,004 while the S&P 500 closed literally flat to Thursday at 2,092. The more volatile and technology heavy Nasdaq lost 40 points, 0.8%, finishing at 4,906 dragged down by disappointing earnings announcements from Microsoft and Alphabet (Google). For the week the Dow gained 0.6% and the S&P was 0.5% higher, a new high of the year for the latter. The Dow is now up 3.3% for the year and the S&P is up 2.3%. The Nasdaq is struggling somewhat posting a loss last week of 0.6% and is down 2.0% for 2016.

In the fundamental news, Markit U.S. flash manufacturing PMI fell to 50.8 in April compared to 31.5 in March, which it is the lowest level since September 2009. The index is still above 50 which indicates expansion, but barely. Even though manufacturing data has consistently been weak in the last months if central banks remain accommodative the propensity is for the equity markets to climb and further stretch valuations despite weak fundamentals.

This morning U.S. equities are starting on a weak note with Dow futures down 50, which is really good being the major Asian markets closed down about ¾% and the European bourses are trading about 0.9% lower. But as I’ve said many times, it’s the closes, not the opens, that matter. One factor that could support the market is that oil prices were trading about 50¢ negative today but have clawed back to up unchanged and as we all are aware, for the past several months U.S. stocks have moved in lockstep with oil prices.

The beg event this week is the FOMC meeting. If they raise rates it will totally catch the market off guard for the market is forecasting only a 1% chance of rates being raised at this meeting.

Oil

Oil prices rose on Friday with WTI closing 55¢ higher, 1.2%, at $43.73. Brent settle up 58¢, 1.3%, at $45.11. This is the third week in a row oil prices have closed higher. Although the gains were small it’s impressive oil prices being the dollar has been moving smartly higher after its recent beating. On Friday it closed at a 3 week high vs. the yen. It rose 2.0% on Friday alone on a report the Bank of Japan is considering expanding its negative rate policy to bank loans and could cut rates further. (I told you so!).

The rig count keeps falling. On Friday Baker Hughes in its weekly rig count report stated another 8 oil rigs were laid down bring the U.S. total to 431, another record low. The natural gas rig count stayed pretty flat being down 1 to 88. 7 of the 9 rigs lost were in Texas.

This morning WTI is unchanged but as I mentioned above, that is up about 50¢ from its low earlier today.

As I’ve stated in numerous Blogs, the lower oil prices of the last couple of years are hurting not just U.S. producers but also sovereign countries, including the biggest oil producer Saudi Arabia. It’s estimated at the kingdom needs an oil price of about $100 to meet its budget which includes huge entitlement programs. A couple of year ago the kingdom “gave away” billions of dollars to placate its citizens to ensure the Arab Spring did not come to the country. Riyadh posted a record deficit of 98 billion dollars in 2015 and projects an 87 billion dollar shortfall this year. Now the treasury there still has a swack of money in its coffers but the balance is declining. At the end of 2014 the country had 732 billion in reserves. At the end of last year it was down to 612 billion. In an attempt to shore up its finances, the country is taking out a 10 billion loan, the first in at least 15 years! Additionally, the kingdom is looking at doing something unprecedented, selling a piece of Saudi Aramco. The amount offered is quite small, 5%, but considering the company is valued at a whopping 2 trillion dollars you don’t have to sell much to get a nice chunk of change!

Natural Gas

Natural gas prices finished strong on Friday closing up 7.2¢ at $2.140. A combination of disappointing production and increasing fundamental demand from the fertilizer and chemical industry, exports to Mexico, coal plant retirements replaced with gas fired and LNG exports rising is driving this market higher. Here’s some data for you. ERCOT reported that in March coal’s share of the electric generation market was just 13%, a record low. Coal’s market share has been declining for months. In 2014 it was over 40% in ERCOT and in June of 2015 it was 32.4%. Through March of this year it has averaged just shy of 20% in ERCOT and down 20 points from 2014. At the same time wind generation in ERCOT is booming being up 58% y-o-y at 15.1 GWh/d. Additionally, natural gas’ market share has been building steadily since early 2014 rising from about 25% in early 2014 to just under 50% this March following a peak of near 55% in early 2015.

This morning natty is trading down 6.3¢ on a much milder forecast than we saw last week. Although the southeast will have above normal temperatures this week, the extended forecast is for that heat to dissipate with below normal temps in the south in the 11-15 day time frame. If that materializes it will kill the A/C load and CDD’s.

Courtesy of MDA Information Systems LLC

Elsewhere

Had a headache? You may have taken Aspirin for relief. The product has been around so long I bet you can’t even remember it being discovered. Interestingly, aspirin was discovered during experiment with waste product. It all began with Friedrich Bayer (the name sound familiar?!), born in 1825, the only son in a family of six children. His father was a weaver and dyer, and Bayer followed in his footsteps. In 1848, he opened his own dye business, which became very successful. In the past, all dyes had come from organic materials, but in 1856 coal tar dyes were discovered. Bayer and Friedrich Weskott, a master dyer, saw great potential in coal tar, and in 1863 they formed Friedrich Bayer et Compagnie to manufacture the dyes.

Bayer died on May 6, 1880, while the company was still in the fabric dye business. The company went on to employ chemists to come up with innovative dyes and products and in 1897 that’s exactly what one of the chemists, Felix Hoffmann, did. While experimenting with a waste product of one of the dye components to find relieve for his father’s rheumatism, Hoffmann chemically synthesized a stable form of salicylic acid powder. The compound became the active ingredient in a pharmaceutical wonder product: Aspirin. The title was named “a” from acetyl, and “spir” from the spirea plant, also known as Spiraea ulmaria), the source of salicin.

However, Hoffmann did not discover “aspirin.” He “rediscovered” it after studying experiments on acetylsalicylic acid made 40 years earlier by French chemist Charles Gergardt. In 1837, Gergardt produced good results, but the procedure was difficult and time consuming. He decided that it was not practical, and set it aside. But Gerhardt knew quite well about potential cures of acetylsalicylic acid because it had been proclaimed for more than 3 500 years!

In early-1800, German Egyptologist Georg Ebers bought papyruses from an Egyptian street vendor. The Ebers Papyrus, as they are known, contained a collection of 877 medicinal recipes from 2500 BC and recommended an infusion of dried myrtle leaves for rheumatic and back pain. Even in 400 BC Hippocrates of Kos, the father of all doctors, recommended a tea extract from the bark of the willow tree for fever, pain, and labor. The active substance in this juice, which does in fact ease pain, is, as we know today, salicylic acid. In China and Asia and among North American Indians and the Hottentots of South Africa the beneficial effect of plants containing salicylic acid was known from early times.

Although it relieved pain, the willow bark extract, salicylic acid, caused severe stomach and mouth irritation. Hoffmann’s breakthrough came on August 10, 1897 when he produced the first 100% chemically pure form of acetylsalicylic acid, thus without the free salicylic acid. On March 6, 1899, Bayer registered Aspirin as a trademark. Not without a challenge, though. In fact, initially it received trade certificates only in the US. In England and Germany other companies challenged the patents citing their own research. Hoffmann’s written evidence prevailed and when he retired in 1928 Aspirin was known throughout the world. He, however, lived unrecognized until his death on February 8, 1946 in Switzerland.

Aspirin was Hoffmann’s most remarkable, but not his only success. A few days after he succeeded in synthesizing acetylsalicylic acid, he manufactured another compound for which the Bayer company had high hopes but today finds dubious popularity: diacetylmorphine, or heroin, a substance obtained a few decades earlier by English chemist C.R.A. Wright. Heroin was prescribed cautiously during WWI but by 1931 it disappeared from medicine lists in almost all countries.