Equities and the Economy:

U.S. equities ended modestly lower yesterday with the Dow off 52 points to 18,086, the S&P falling 6 to 2,127 and the Nasdaq down 14 finishing at 5,200. Chatter. If we must “blame” something let’s blame oil prices for they were marginally lower on the day. Giving you a status report on earnings season, 7% of the S&P 500 have reported and the numbers are coming in better than expected. Expectations are for a 0.1% decline for the quarter which is an improvement from the 0.5% decline expected on October 1st. That being said, how can a decline push stock prices higher??? Especially when valuations are already very high? (hand scratching head).

Turning to the economic news of the day, the Federal Reserve Bank reported that industrial production rose 0.1% in September which was right in line with Wall Street’s expectations. Manufacturing rose 0.2% which was better than expected and mining rose 0.4% which was pleasantly better than expected. The latter driven primarily by a recovery in oil and gas prices.

When I came in this morning the Dow was up a hefty 124 points but has backed off to up 51. This morning it’s “risk on” for global equities. The Asian market closed higher with some of the indexes materially higher, and the all-important European stocks are up big trading at least 1.07% higher with Germany’s DAX up a huge 1.45%. The latter being boosted by 1) a small rebound in oil prices, 2) the U.S. dollar which has retreated from 7 month highs, and 3) and the greatest influencer, a report came out this morning that U.K. inflation rose to 1% which was above expectations. So why does inflation matter? Because it means demand is increasing.

A word of caution here. Yes this is a nice bounce but stocks have been slipping since early September and we’re near support at 2,100 basis the S&P. Keep an eye on that level.

Oil

As mentioned above, oil prices slipped marginally yesterday with WTI down 41¢ at $49.64 and Brent off 43¢ to $51.52. Pressuring the market were comments from Iran, OPEC’s third largest producing member, stating it intends to increase production to 4 million bpd this year from the present 3.89 million bpd. That’ll complicate a production freeze! Especially considering that Saudi Arabia is pushing for the freeze. And as we all know, Iran and Saudi Arabia are not, um, the best of friends. And let’s not forget Russia the only other country who may even consider freezing production. Putin has stated he’s amicable to freeze talks. Well one of his best friends, Mr. Sechin, Rosneft’s president, has no interest in freeze talks. As a matter of background, both Putin and Sechin became friends while both were in the KGB. While they are no longer members of the KGB there’s a saying in the espionage world, “Once KGB, always KGB.”

When I came in this morning WTI was up 75¢. It has since retreated and is now down 16¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices eased a little yesterday closing down 4.1¢ at $3.244 with the bears coming in on the weather forecast which continues to show above normal temperatures for the east in the 1-5 day time frame and the Midwest from today for the next 2 weeks, which takes us through the end of the month. It does appear though that the northeast will be normal to below normal for the 6-15 day time frame. That being said, we’re trading in the $3.30 area which is fairly stout. I’ll tell you why we’re at this price level, and it’s going to stick with us for the next couple of months, at least. The longer term weather forecast is for January through March to experience below normal temperatures for the Midwest and East. Traders are going to be afraid of being short for that time frame which will support the entire market. That being said, a normal temperature scenario, at least, is built into the market and if we see normal to above normal temps in those months it’s going to weigh on prices. Also, the higher prices are going to stimulate drilling. Remember yesterday I reported the gas rig count rose by 11 last week. $3.00 or higher gas will definitely bring more rigs into action.

Elsewhere

Here’s some trivia for when things get really boring at your next social function and the discussion turns to energy. What’s common about the world’s nine largest electric generating plants? They are all hydroelectric facilities. Four of them are located in China with all of them built within the last 13 years. South America is home to three: two in Brazil and one in Venezuela; one is in Russia and one in the U.S., the Grand Coulee dam in the state of Washington. It supplies hydropower to eleven western states.