Equities and the Economy:

• U.S. stocks begin 2017 in the green.
• Dow still looking to break 20,000.

U.S. stocks began 2017 on a positive note with the Dow closing up 119 points, 0.6%, at 19,882, the S&P 500 climbing 19 points, 0.9%, to 2,258 and the Nasdaq finishing at 5,429, up 46, 0.9%. At one point during the day the Dow got within 62 points of trading 20,000 but the strong start out of the gate fizzled when crude oil prices reversed and fell. Equities were supported by data showing U.S. factory activity rising to a two year high amid a surge in new orders. Let’s be clear here. P/E ratios are frothy. The huge inflow into stocks since the election is a Trump reflation trade. The rally is not based upon an actual improvement in earnings but the expectation that the economy will perform better under Trump. Let’s all hope it does. I’m not saying to short this market. It’s still a buy the dips market.

Overnight the Asian markets closed mixed and the European markets are trading the same. Here in the U.S. Dow futures are up 24 points. Looks like it’s one of those “wait and see how the day goes” days.

Oil

• Oil rallies big in the morning on announcement some OPEC countries cut production.
• Prices fall hard during the day to close lower than Friday.

The oil bulls came out of the 2017 gates stampeding pushing WTI $1.25 higher yesterday morning to new 18 month highs on the news that Kuwait and Oman had cut production but as the day wore on the bears took over and at the closing bell WTI actually closed $1.39 lower at $52.33 creating a daily swing of more than $3.00 with WTI closing at its lowest level in 2 weeks. Brent lost $1.35 settling at $55.47 (for you newer readers I quote Brent prices because it, not WTI, is the world’s benchmark for oil prices). Yesterday was one of the biggest reversal days I’ve seen in years. Traders are very skeptical global production will decline. Remember, oil prices have rallied materially since the announcement of the OPEC/Non-OPEC production cut agreement so a lot of premium is already built into the market. If you’re an oil producer you better be able to make $55/bbl. work basis WTI. The average price for the next 12 months is $55.38 and the average price for the entire year 2021 is only 19¢ higher at $55.33.

Not helping oil, or any commodity priced in U.S. dollars, is the value of the dollar which yesterday touched highs relative to other currencies not seen since 2002. For reference, the dollar index gained 3.6% in 2016 marking its 4th straight year of gains. Speaking of foreign exchange, China’s yuan depreciated 6.5% vs. the U.S. dollar in 2016 and touched an 8 year low vs. the dollar yesterday. I wonder if Donald Trump saw that.

Saudi Arabia believes there will be less oil on the market for at least the near future. Today they announced they are raising prices to their Asian customers beginning in February by 50¢ to $1.00 per barrel depending on the grade of the oil.

This morning neither the bulls or bears are looking for a fight. WTI is up a meaningless 6¢.

Courtesy of MDA Information Systems LLC

Natural Gas

• Natural gas prices get bludgeoned yesterday on warmer weather forecast.
• February natural gas price falls a huge 10.7%.

This week will be very cold for the Midwest and western Plains with Chicago and Cincinnati averaging about 12 degrees below normal, but that is old news which drove natty prices up to just below $4.00 last week which was a two year high. Markets always trade on “new” news and the new news yesterday was that the weather forecast shifted materially warmer in the 11-15 day time frame bringing out just about every bear in the country. Yesterday the February contract lost a whopping 39.7¢, 107%, closing at $3.327. The longs never even had a chance to get out for the market opened up 40¢ lower. That’s gonna hurt a mark-to-market P&L. The move was exacerbated because the market was extremely long going into the holiday weekend. The Commitment of Traders Report showed that money managers (hedge funds) were the longest in 10 years. The wood was dry, the gasoline poured on and the weather forecast the spark.

For you data hounds, natty prices have fallen more than 70¢, 18%, in less than a week. The weather forecast is little changed from yesterday and natty prices are also little changed being down 3.5¢

Elsewhere

I saw this on the Houston NBC station last night. Tru, a local rapper, and his musical partner Yun Groovey, decided to shoot a rap video at a local Lake Jackson (just south of Houston) credit union on New Year’s Day. Tru, Groovey and two other of his buds dressed as bank robbers wearing black face masks and carried four unloaded guns. All was going well, until the Lake Jackson police arrived telling the four to “Get on the ground. Get the (expletive) on the ground!” Why the police action when they were just producing a music video? Because the rappers failed to tell the police or credit union they were filming a music video! In the end, the rappers were questioned, explained what they were doing and released. No charges were filed for which the rappers said they were eternally grateful. Tru was quoted “It was a bad idea with a good reason.”