Equities and the Economy:

On Friday U.S stocks had their worst day since June with investors hitting the “sell” button and taking profits. The Dow lost 394 points, 2.1%, ending at 18,085, the S&P 500 shed 53 points, 2.45%, to finish at 2,128 (the biggest one day drop since June 24th, the day after the Brexit vote) and the Nasdaq dropped 134 points, 2.54%. to 4,126. For the week the Dow was down 2.2%, its biggest weekly percentage drop since the first week of 2016. Looking for a reason, pundits are pointing to hawkish talk last week by Boston Fed Reserve Bank President Eric Rosengren, who is viewed as a dove, and the failure by the ECB to announce any monetary stimulus at its meeting last week, but my take on this is this was waaaaay overdue. The equities market was at record highs and it’s has been long in the tooth for months. It’s been 42 straight trading days since the S&P has moved more than 1% on the day and as I’ve been saying for quite a while S&P P/E valuations have been at very high levels. Investors have been investing per “the trend is your friend” closing one eye and pushing the “buy” button. We needed this. Maybe even some more. Interestingly, bond prices fell meaning yields rose. Usually when there’s a risk off move like we had on Friday bonds, which are considered safe havens, get bid up with yields dropping. Not on Friday. With hawkish talk by Fed officials on interest rates bonds sold off with the 10 year Treasury interest rate hitting its highest level since June 20th. Additionally, the bond market was overcooked, i.e., the market was very long. Evidence: per JP Morgan the 5 year futures market was a record net long.

But it’s not chicken little. Even with Friday’s correction the S&P is up 5% for the year. Extrapolating that for all of 2016 results in a 7.5% annual gain. You should take that all day every day. Overnight the Asian markets collapsed and the European indexes are trading materially lower but those are both reactions to the price action here in the U.S. Friday. Let’s see how the U.S. market trades today. When I came in Dow futures were down over a hundred but we’re bouncing back nicely with the Dow up 70 points right now.

I know this is a little premature, but the FOMC holds its two day meeting next week on Tuesday and Wednesday. Fed futures still show only a 24% probability of an interest rate hike in September.

Oil

Oil prices got caught up in the risk off sentiment on Friday with WTI losing $1.74, 3.7%, closing at $45.88 and Brent fell $1.98, 4.0%, settling at $48.01. Equities fell. Oil prices fell. Not really much more to say here. If you recall, prior to the fall on Friday oil prices shot up Tuesday, Wednesday and Thursday on the API and DOE data showing a big drop in crude inventories, but remember, Tropical Strom Hermine probably prevented oil tankers from unloading and shut in some production. This morning WTI was down over $1 but oil traders are following equities and WTI is currently up 46¢.

Baker Hughes released its rig data showing the active rig count rose by 11 last week, +7 oil and + 4 gas. This is the 9th week out of 10 that the rig count has increased. It appears drillers have managed to lower the break even price. Interestingly, it was offshore Louisiana that showed the most increase rising 8 rigs.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas was oblivious to the chaos surrounding it closing down an immaterial 0.9¢ at $2.797. However, this was after the big jump in natty prices, 13.0¢, resulting from the bullish storage report on Thursday. This morning we’re up a hefty 11.3¢ on a very strong cash market. This morning cash is trading 7¢ above the futures market. The weather forecast has been and continues to show above normal temperatures for the eastern U.S. The natural gas load associated with all those coal plant decommissionings and new natural gas fired plants is definitely being felt in the market.

Elsewhere

Yesterday was the 15th anniversary of the attack on the World Trade Center and the Pentagon. Here are 10 things you may have forgotten.

1) We don’t know how the hijackers got into the cockpit of some of the planes. The comprehensive report of the commission created to investigate the attacks, which was published in 2004, said no one could determine how the hijackers were able to get into the cockpits of the four planes they hijacked.
2) Passengers and crew aboard the planes provided critical information. Those aboard all 4 planes called family and friends from cellphones or used the aircrafts’ radio communications to report the hijackings which alerted the authorities
3) Light passenger loads made it easier for the hijackers to maneuver. American 11, bound from Boston to LA, was 51% full. United 175, Boston to LA, was only 33% full. American 77, Washington DC to LA, was only 33% full and United 93, Newark to SF, was only 20% full.
4) A missing hijacker made it easier for United 93 passengers to storm the cockpit. This is the only one of the 4 planes that did not strike its target, the U.S. Capitol. It was the only one with 4 hijackers instead of 5. The 5th had been refused entry by a suspicious immigration inspector in Florida in August.
5) The World Trade Center had been targeted previously. Shortly after noon on February 26, 1993 a bomb planted in a parked van in the center’s underground garage exploded killing 6 and wounding more than 1,000.
6) Vice President Cheney ordered United 93 to be shot down. The report added, however, the Air Force fighters that were airborne at the time probably would not have found and reached United 93 in time.
7) Earlier plots also targeted commercial aircraft. Ramzi Yousef, who planned the 1993 WTC bombing, had planned a massive attack on 12 U.S. airlines over the Pacific in 1995. An accomplice turned him in in 1995 and the plot was never carried out.
8) The U.S. worked on multiple attempts to kill Osama bin Laden before 9/11. The CIA and other agencies developed a plan to capture bin Laden in 1998. It was hampered by concerns from military officials on having to rely on Afghan tribal leaders. Also, President Bill Clinton authorized cruise missile strikes against bin Laden’s compound in Afghanistan which bin Laden survived.
9) The CIA warned President Clinton about hijackings in 1998. In the December 4, 1998 President’s Daily Brief from the CIA the agency told Clinton that “bin Laden was preparing to hijack US aircraft and other attacks.” The plan the agency said was to hijack planes to gain the release of Yousef and other terrorists.
10) Saudi Arabia had multiple ties to the hijackers. 28 pages of the 9/11 report remain classified and the subject of intense speculation about their contents. Those pages, which were released this past July, showed multiple links to associates of Saudi Arabian Prince Bandar, the former longtime ambassador to the U.S. 15 of the 19 hijackers were from Saudi Arabia.