Equities and the economy

Boy did we need yesterday. After getting hammered the prior two sessions equities around the world rallied big yesterday somewhat repairing our 401K’s and stock portfolios. The Dow posted a great gain of 269 points, 1.57%, to 17,410, the S&P 500 rose 36, 1.78%, ending at 2,036 and the Nasdaq popped 2.12%, 97 points finishing at 4,692. Now here’s the big question going forward. Was yesterday’s price action just a dead cat bounce in a short term oversold environment or was it a healthy dip that should be bought? If I knew I wouldn’t be writing this Blog but sitting on a beach in Hawaii with a libation in my hand that has a little umbrella sticking out of it. That really sums up yesterday’s price action for although fundamental reports continue to be produced, it’s the knee jerk emotional reaction to Brexit and the rubber band snap back that’s dictating the recent price action.

Speaking of fundamental reports, the Commerce Department reported yesterday that the nation’s GDP grew 1.1% in Q1 revising upward by 0.3% it’s first estimate and coming in better than economists’ expected. The Conference Board reported that its index of consumer confidence rose from 92.4 in May to 98.0 in June. Folks, this is an outstanding number! Finally, Standard & Poor’s/Case-Shiller released its 20 city home price index which rose 5.4% in April y-o-y. Although this was slightly less than the 5.5% increase in March, the number was strong showing the housing market continues to improve. A shrinking supply of homes for sale has intensified competition with demand fueled by a healthy job market. Home prices are now just 9.6% below their peak set nearly a decade ago. This also means that fewer and fewer homeowners are “under water” on their mortgage.

This morning the market continues to post a nice recovery with the European markets posting healthy gains of 1.62% to 2.45% with the love spreading across the pond with the Dow rising all morning and now up 163 points.

Oil

Everyone around the world was clicking the “buy” button yesterday to go long whatever asset they could and that included oil. WTI rose $1.52/bbl, 3.3%, closing at $47.85 and Brent gained $1.42, 3.0%, settling at $48.58. Brent’s gains yesterday came off Monday’s 7 week low. After skyrocketing to multi-month highs the U.S. dollar eased vs. the euro (and sterling) which helped the bulls. Fundamentally, 7,500 Norwegian oil workers are threatening to go on strike this Saturday if their demands for higher wages are not met. The fields in focus represent 18% of Norway’s total output. Historically, if there’s been a strike it’s been very short lived so I’m not weighting this much with respect to price action.

The bulls got some help from API’s crude and products report yesterday which noted an aggregate decline of 5.1 million barrels in inventories with expectations of a drawdown of just 0.5 million barrels. Today we’ll see the more important DOE crude and products report.

This morning WTI is up 72¢ coat tailing equities.

Courtesy of MDA Information Systems LLC

Natural Gas

Headline: Natural Gas Prices Skyrocketing! And that’s not an understatement. The July Nymex natural gas contract expired yesterday up a whopping 20.1¢ at $2.917/MMBtu, a 1.5 year high and levels not seen since last summer. Can you say short squeeze?! I haven’t seen a short squeeze like yesterday in three years, and more than that in the summer time. The July contract expired a huge 95.4¢ higher than the June contract which equates to 49%. Think about that. The price of natural gas rose 49% in just one month! This even astounds this ex-trader of 30 years! This all started the Tuesday after Memorial Day when the cash market was strong, and it stayed that way all June. With that closing price I guarantee you you’re going to see more coal burned in July than June.

The long and short term weather forecasts are helping the bulls. Today’s forecast once again shows extended warmth across the country boosting A/C load and the August and September forecast are showing above normal temperatures. When I came into the office the August contract, which is now the prompt month, was up about 5¢ but that has retreated to down 2.3¢.

Elsewhere

Wind power in Texas continues to grow. Through the first five months of the year wind turbines provided more electricity to the grid than nuclear power and nearly as much as coal. Through May 2016, wind contributed about 18% of the grid’s power which falls in the middle of coal, 21%, and nuclear, 13.5%. Now in full disclosure, wind power generation is typically the greatest in the spring and this was evident in March’s wind power production which contributed 21.% of the grid’s load. This is really impressive when you realize that for that same month coal contributed only 12.9%. March was also the first time wind contributed more than 20% of the state’s power for a full month.

Wind projects continue to come on line. Canada’s Alterra Power is developing a 200 MW wind project in Comanche and Mills counties in west Texas. As a matter of perspective, one megawatt typically powers 200 homes in the hottest Texas days.