Equities and the economy: 

As is said in Texas, I’m back in the saddle after being out of the office last week and it’s times like these that give me the opportunity to look a little more at forest rather than the trees. A week ago Friday’s Blog noted that on Thursday, July 7th, the Dow closed at 17,986, the S&P 500 finished at 2,098 and the Nasdaq ended at 4,877. Last Friday, July 15th, the Dow finished at 18,517, the S&P at 2,162 and the Nasdaq at 5,030. So over the span of last week the Dow gained 530 points, 2.9%, the S&P rose 64 points, 3.0%, and the Nasdaq added 153 points, 3.1%. In summary, it was a great week with the exclamation point being the Dow and S&P 500 are at new record highs! The primary drivers of the gain in U.S. equities has been both domestic fundamentals and foreign events. Regarding the former, U.S. economic data has been quite strong of late punctuated by reports on Friday the most notable one being Retail Sales. The report showed sales in June in broad terms rising 0.6% compared to expectations of 0.2%. Ex-autos and gasoline sales rose 0.7% and this too was much greater than estimates. This data was ever so slightly tarnished by the fact that May sales were revised downward by 0.3%. Still, this was an outstanding report. Industrial Production for June also came in positive coming in a bit better than expected at 0.6%. These good reports came with other data showing that consumer prices were less inflationary than expected with prices rising in June by 0.2% which means currently there’s no inflationary pressure which means the Fed will be in no hurry to raise interest rates which will encourage investors.

Foreign events are also supporting U.S. equities. Events such as those that have occurred in Nice, France and Turkey over the past few days increase angst among investors and when angst increases investors gravitate to safer assets and while in this case it’s not gold or U.S. Treasuries, investors do favor the political safety of the U.S. stock market vs. foreign equities.

The week is starting out benign with the Dow up 32 points lagging the European markets which are trading proportionally somewhat higher.

Oil

On July 7th WTI and Brent settled at $45.14 and $46.40, respectively. Last Friday they closed at $45.95 and $47.61. Simple math tells us that WTI rose 81¢ over the week and Brent gained $1.21 over the week. Not a material change. The attempted coup in Turkey has not affected the flow of oil through the country which is a vital transportation channel of moving oil from Russia and Iraq to the Mediterranean Sea. This morning traders are hating oil with WTI down $1.06 on the fact no disruptions are occurring in Turkey. Additionally, traders are also seeing inventories in gasoline building and that has been the strength of the oil market. If refiners of gasoline reduce their oil purchases this will put downward pressure on oil prices.

It looks like exploration and production companies can make money in the mid $40’s. I say this because for the second consecutive week the oil rig count has grown. Last week by 10 rigs. The Permian Basin has been, and continues to be, the basin with the best economics which is evidenced by the rig count data showing 4 of the 10 rigs were deployed in that basin.

Courtesy of MDA Information Systems LLC

Natural Gas

On July 7th the August natural gas contract closed at $2.777. Last Friday it closed at $2.756. So it, like crude, has done nothing over the week. It looks like the natty market has found equilibrium between supplies in storage, which are 25% greater than the five year average, and big consumption in the electric generation sector which is setting records week after week for burns. I’ve said for many, many weeks that if we’d had a normal winter natural gas prices would be trading $2.75 to $3.00 (I have witnesses!). We’re there. I see more upside than downside on a multi-month basis from here. The weather continues to also provide support with forecasts for above normal temperatures into September. This morning ship remains in “irons” with natty up 0.6¢. Pure chatter.

Elsewhere

Being I’ve been gone a week have a lot of catching up to do, I’m keeping the Elsewhere short leaving you with this thought for the day. We’re in the middle of the baseball season and I love Yogi Berra’s comment on his sport, “Baseball is 90% mental and the other half is physical.”