Equities and the Economy:

Aided by stronger than expected earnings U.S. stocks closed higher yesterday. After reaching a session high of 139 points the Dow settled back but still closed nicely in the green up 76 points, 0.42%, at 18,162. The S&P 500 added 13, 0.62%, ending at 2,140 and the Nasdaq rose 0.85%, 44 points, closing at 5,244. The boost came from, first) Goldman Sachs beating both revenues and earnings. Now it alone wouldn’t have been that big of a deal but what’s important here is that it’s data continued with what has already been a strong earnings for big banks. Wells Fargo previously reported strong earnings. Second, Netflix rose a huge 19% after posting quarterly results and much higher than expected international subscriber growth. Those were unequivocally the big drivers of the day for stocks.

Turning to the economic data, the Labor Department reported its consumer price index rose 0.3% in September which was at economists’ expectations. On an annual basis prices rose 1.5% with the increase in September largely due to the 2.9% increase in energy prices. Core CPI, which does not include the volatile energy and food components, rose 0.1% for the month and 2.2% for the year. Does that last number mean anything to you? It should. The Fed’s target is 2.0% inflation. The Federal Reserve’s mandates are 1) maximize employment (whatever that means), and 2) manage inflation. The Fed has stated that the current unemployment rate of 5.0% is at or very close to full employment and their inflation target rate is 2.0% (core inflation). This is why at least half of the voting FOMC members are pushing for an interest rate increase.

With the Asian markets closing mixed and the European markets very marginally higher U.S. investors and traders are receiving no direction and the equity futures markets are reacting appropriately with the Dow up a sedate 34 points. Better green than red.

Quite frankly, we’ve been range trading since early July. Remember, support is 2,100 basis the S&P 500.

Oil

Similar to equities, oil prices rallied in the morning but ended only marginally higher with WTI posting a gain of 35¢ to $50.29 and Brent closing up a meaningless 18¢ at $51.68. Let’s move on. After the bell the API released its weekly report surprising the market stating U.S. crude inventories fell 3.8 million barrels last week with the market expecting a rise of 2.2 million barrels. Offsetting that somewhat, gasoline inventories rose 0.9 million barrels vs. and expectation of a decline of 1.2 million barrels. Distillates, which is primarily diesel, dropped a big 2.3 million barrels which was greater than the 1.6 million barrel anticipated decline. So you can see the report was bullish. Adding to that Saudi Arabia’s Energy Minister Khalid Al-Falih stated this morning that other OPEC producing nations have given strong indications they will cooperate with the production cuts. Oh, I’m sure they will cooperate, orally and even on paper, but making that happen at the wellhead is a completely different thing. Money rules and fiscal concerns trump. That being said, the longer OPEC and Russia can talk the market higher means more revenues in the treasury. By the way, the IMF projects that Saudi Arabia needs $80/bbl to balance its budget. The kingdom ran a record deficit last year of $98 billion, 15% of GDP. Maybe that’s why Saudi Arabia is, for the first time ever, going to the debt market. The bond offering was today. And the response was overwhelming! Saudi Arabia was looking to raise 17.5 billion. They got 67 billion! Why so much? Because it’s what’s going on everywhere. The search for yield. The interest rate is well over the U.S. treasury yield. Sure beats negative interest rates. It certainly appears that investors feel there’s no threat to the monarchy.

On the API report and continuing rhetoric from OPEC oil prices are up 84¢ this morning. The EIA’s crude and products report will come out today.

Courtesy of MDA Information Systems LLC

Natural Gas

After climbing to a 2016 high of just above $3.350 prices have retreated and erased nearly 45% of their past month’s gains. Yesterday natty closed pretty much unchanged, up 1.9¢, at $3.263. As I’ve been saying for weeks now, the weather forecast has been bearish and it’s weighing on the bull’s yoke. And today the bull is stumbling with the weather forecast getting even warmer for the northeast in the 11-15 day time frame which takes us into November taking natty down 9.4¢ this morning. Additionally, the cash market is much weaker than the November Nymex price trading at least 42¢ lower than the future’s price. That’s a lot of weight to carry. We’re getting to levels more in line with my expectations. I still believe the November price is a little high.

Elsewhere

Here’s some good news for you. For the first six months of 2016 residential customers on average paid less for their electricity than they did for the same time in 2015. The average price for the first half of 2016 was 12.4¢/kWh which is 0.7% lower than the same period last year. If this trend continues for the entire year it would be the first time since 2002 this has happened. Over the past 5 years nominal residential prices have increased and average of 1.9% annually, about the same as inflation. Declining fuel costs, especially natural gas, have been the key driver of the recent reductions in retail electricity rates.