Equities and the economy

As mentioned in Friday’s Blog, the headline data was the horrible May jobs report noting only 38,000 jobs were added in May. Putting into perspective how bad this report was, when the report was released the CNBC reporter reading the data said, “We seem to have lost a digit somewhere.” The digit he was referring to was a “1” as in 100,000! Now the Verizon strike made the data worse than it really was but even adding in the estimated 35,000 jobs related to the strike the sum is still a really bad number. Adding to the malaise, April’s non-farm payrolls were revised downward by 36,500 and March’s number was revised downward by 41,000. Of note, this was March’s second revision downward. The unemployment rate fell to 4.7% from 5% which you might take as positive but it’s not because the rate fell only because more people quit looking for jobs which according to the Labor Department’s methodology takes them out of the unemployment rate calculation. Equities performed pretty well considering the abysmal labor report with the Dow closing down 32 at 17,807. The S&P 500 off 6 to 2,099 and the Nasdaq finishing the week at 4,943, down 29 points. In other economic data, the ISM’s non-manufacturing index for May came in at 52.9 and below expectations and well below April’s 55.7 number. With the Brexit vote in 2.5 weeks, which is after the FOMC meeting (14th &15th), and with this new jobs data any chance of an interest rate increase at the June meeting has been taken out behind the barn and shot. And shot again. And an increase at the July meeting has been “winged.” I hope to get a better idea of what the Fed is thinking regarding interest rates with Fed Chairperson Janet Yellen speaking today. I guarantee you every professional investor’s ears will be tuned in.

So now that the market has had the weekend to digest the jobs data investors are taking the “bad news is good news” meaning a delay in raising interest rates bringing in some buyers with the Dow up a hefty 116 points. U.S. stocks are also getting some support from European equities with the major indexes there trading up between 0.21% and 1.07%.

Oil

Oil prices leaked off again on Friday with WTI closing down 55¢ at $48.62 and Brent closed back below $50 at $49.64, down 40¢. Oil traded lower on the jobs data. Fewer jobs means less employment which means less economic growth which means lower energy needs. The non-decision by OPEC is old news now. Saudi Arabia and Iran are facing off with the latter stating they will not even discuss production limits until they reach their pre-sanction level of 4.0 million bpd. Reports are they are producing 3.8 million bpd currently.

Oil prices always impact the rig count and it looks like WTI prices have risen to the point to once again get oil and gas exploration companies to drill for per the Baker Hughes rig count report on Friday the number of working oil rigs increased 9 last week to 325, which is still way below the number last year at this time which was 642. This was offset somewhat by the natural gas rig count which fell by 5. The oil rig increase was only the 3rd weekly increase since last August. One data point does not make a trend so I’m anxious to see this week’s report.

This morning WTI is popping up $1.10 being primarily driven by a few factors. First, there has been a marked increase in conflict in Nigeria. Boko Harem has led a massive attack on both the Nigerian and Niger militaries which is following suit of terrorist attacks by the Niger Delta Avengers (NDA). Oil production from the country is currently at a 20 year low. Unless things change in southern Nigeria the NDA wants to take that to zero. Second, the chairman of Abu Dhabi’s Department of Economic Development stated over the weekend the global oil surplus has dropped faster than expected to 1.2 – 1.5 million bpd. Now you might just consider this propaganda except for the fact, and this is third, Saudi Arabia increased the price of its July delivered oil to U.S. and Asian customers due to increased demand. Bear in mind that the Middle East’s indigenous demand dramatically increases in the summer time due to A/C load. Fourth, it’s the correlation at work! Higher equity prices beget higher oil prices.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices closed on Friday almost flat to Thursday with the July contract down 0.7¢ at $2.398. The calendar strips did about the same. Chatter. For the record though, natty prices have rose almost 15% last week. With the advent of summer and higher temperatures A/C demand kicked in driving both the cash and futures prices higher.

This week the northeast and Midwest will see below average temperatures but next week and the week following we’ll definitely see some warmer weather with an associated increase in cooling degree days and greater natural gas power burn. Remember, we set a record in May for the amount of natural gas burned for electric power generation.

We have the third tropical event of the year in the Atlantic with Tropical Storm Colin in the Gulf of Mexico. The current forecast of its path is northeast into the Florida panhandle so it should miss the oil and gas producing properties. This morning natty is up 3.5¢ on the warmer forecast in the 11-15 time frame.

Elsewhere

As I’m sure you know, Mohammed Ali died over the weekend at the age of 74. For those of us old enough to see his amazing boxing skills, he was unequivocally the greatest heavyweight boxer that ever lived. This statement is backed up not only as he being the only three time heavyweight champion having won titles in 1964, 1974 and 1978, but also by being labeled so by some of great boxers he defeated such as Joe Frazier and George Foreman. Joe Frazier, himself a heavyweight champion said of Ali, “Man, I hit him with punches that bring down walls of a city. What held him up?” In what was a fight of the ages and remembered as one of a handful of the best in boxing history, Ali defeated Frazier, who he had previously beat in the 15th and final round in New York, in the “Thriller in Manilla.” Then there was the fight with George Foreman known as “The Rumble in the Jungle” in then Zaire now known as the Democratic Republic of the Congo where Ali, who both sportswriters and boxing experts of the day feared for Ali because of Ali’s age and Foreman’s reputation (40-0 record with 39 knockouts), where Ali employed his now famous “Rope-A-Dope” strategy. Ali laid back against the ropes as far as he could and as best as he could covered his face and body with his gloves while Foreman pounded at him with punishing shots. Ali took them and waited until Foreman became so tired he could no longer raise his arms and then Ali struck back knocking Foreman out in the eighth round in the most remarkable upset of his career.

Ali was very controversial in that he refused induction into the U.S. Army during the Vietnam War as a conscientious objector. He went on trial in Houston on June 20, 1967 with the jury finding him guilty. He was then stripped of his crowns and basically deprived of making a living and relegated to giving speeches for as little as $1,500. In 1971, by a vote of 8-0, the U.S. Supreme Court reversed Ali’s conviction. But many peoples’, including mine, most memorable, touching and emotional remembrance of Mohammed Ali was when, shaking from the Parkinson’s disease that had beset him, he lit the Olympic cauldron during the opening ceremony of the 1996 Olympics.