Equities and the Economy: 

I’ve been out of the office travelling on business for the last four business days and based upon what the stock market has done, I should travel more. Last week both the S&P 500 and Dow set new record highs and the Nasdaq closed at a 2016 high. On Friday the Dow climbed 54 points, 0.3%, to finish at 18,571. The S&P 500 rose 10 points,0.5%, closing at a new all-time high of 2,175. The S&P is now up 6% for the year. The Nasdaq climbed 26 points, 0.5%, ending at 5,100, a new 2016 high. For the record, the Dow hit a new all-time high last Wednesday, pulled back a little on Thursday and captured back some, but not all of, Thursday’s losses on Friday. Investors continue to climb the “wall of worry.” It’s a rally that no one believes in. P/E ratios are high, it’s one of the longest bull markets in history and economic growth has been marginal. And we go higher! Recently, the market has been driven by a batch of better than expected earnings reports from numerous companies during this earnings season. The big events this week are the continuation of earnings releases (about 40% of S&P 500 companies are due to report) and the Fed’s meeting on July 26 & 27. You can bet the Fed won’t be raising interest rates at this meeting but investors will be pouring over the post-meeting communique for clues on the pace and timing of the next rate hike. This morning we’re getting a little pullback with the Dow down 106 points.

Oil

It appears that the equity/oil price correlation has broken down for as stocks have risen to record highs oil prices have faltered. On Friday WTI lost 56¢ closing at $44.19 and Brent fell 51¢ settling at $45.69. After hitting a high of $51.67 on June 9th due to the wild fires in Canada and terrorist activities in Nigeria oil prices have been in retreat with traders looking at abundant crude supplies and weak gasoline prices despite gasoline demand being at its highest level in recent years. Even at these lower prices E&P companies are expanding their drilling programs. Baker Hughes reported on Friday the oil rig count grew by 14 rigs which is the 4th consecutive week the rig count has increased and its grown in 7 of the last 8 weeks. There’s one thing the bulls may have in their corner. The CFTC releases futures contract position data and their latest report showed that hedge funds and money managers are the “shortest” they’ve been since early March. The boat is listing a little too much to the short side. That being said, this morning those shorts are winning with WTI down 92¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Since July 7th natty has gone nowhere, at least in the larger sense. On July 7th the August natural gas contract closed at $2.777. On July 15th is closed at $2.756. Last Friday it closed at $2.777. That being said, last Thursday the contract hit a low of $2.625 but the major heat wave the Midwest and Northeast are currently in brought out buyers both in the cash market and the futures market. The power market continues to set records in sucking up natural gas. Last week the average power burn in the U.S. was 36.5 Bcf/d which is the highest ever. Last Thursday set an all-time record of 40.7 Bcf/d which was a full 1 Bcf/d higher than the previous record.

Although the weather forecast remains bullish traders aren’t jumping in to buy this morning with natty down 1.8¢. Bullish moves are tempered because even with the record power burns we still have a record amount of gas in storage for this time of year (3.3Tcf). By the way, the August Nymex contract expires Wednesday.

Elsewhere

When this summer is over it’s going to go down as “the summer of cheap gasoline.” Even with demand at multi-year highs and that we’re in the heart of the driving season, gasoline prices are at their lowest level in 12 years per AAA. The national average price of gasoline was $2.19 last Thursday marking its lowest average for this time of year since 2004. And this isn’t even adjusted for inflation. Gasoline prices have fallen in 39 out of the last 40 days. U.S. average gas prices, which hit an all-time peak of $4.11/gallon in July 2008, are now 57¢ cheaper per gallon than last year and $1.38/gallon lower than in 2014. This translates into a savings of $15 to $35 per fill-up compared to two year ago. Per AAA, some 30% of U.S. gas stations are selling gas for less than $2 per gallon.