Equities and the Economy:

• U.S. stocks close lower for 3rd consecutive day.
• Plunging oil prices and interest hike weighing.

Materially lower oil prices dragged down energy stocks and combined with the realization that interest rates are and will be rising this year investors did some selling. The Dow lost 69 points, 0.3%, closing at 20,856, and the S&P 500 fell 5, 0.2%, to 2,363. Amazingly, the Nasdaq managed to post a gain of 4 points to 5,838. Yesterday was the first time since late January that the Dow and S&P both closed lower for three consecutive sessions.

The big report yesterday was ADP’s private sector employment report which showed a scorching 298,000 rise in hiring last month and way above economists’ expectations of 190,000. One of the sectors with big gains was construction which was helped due to the record warm February we just had. Investors will look for confirmation of this number in tomorrow’s Labor Department report for February, but an interest rate increase next week is all but assured. After many years of monetary accommodation the Fed is realizing it’s time to take its foot off the economic accelerator. The billion dollar question is how resilient is the U.S. economy? And for the Fed, how many interest rate increases to do? And for us, how will a rise in interest rates affect the stock market, and our portfolios? At some point the reality of an economy that has levered itself up through credit will begin to bite. Might be a good time to review your allocations. Now I’m not Chicken Little but we’re way over due for a pullback. Forward P/E ratios are very high.

Other economic reports included the Labor Department’s report on productivity. The major point I saw was that labor costs rose 1.7% in Q4 2016 and up from 0.7% in Q3. Wage inflation is one of, if not, the major driver of core inflation. More fodder for raising interest rates.

This morning European stocks are trading about ½% lower while here in the U.S. we’re hanging in there with the Dow up 34 points.

Oil

• Oil prices get hammered yesterday.
• Weekly EIA report shows U.S. inventories continue to rise.

After months of boredom there were fireworks in the oil markets yesterday where oil prices got bludgeoned. WTI fell $2.86, 5.4%, closing at $50.28 and Brent lose $2.18, 5.0%, settling at $53.11. Both oil closed at their lowest level since December 7th. While OPEC continues to tout high compliance to its output cut agreement, U.S. production continues to rise. Yesterday the EIA in its weekly crude and products report stated crude inventories rose 8.2 million barrels last week to a record level of 528.4 million barrels. This was the 9th consecutive week inventories rose. That being said, the report, like the API, showed big draws in gasoline and distillate stocks, but the fact the U.S. oil production continues to increase is the overriding factor. The EIA report showed U.S. production is for the 3rd consecutive week over 9 million bpd. Also, it sure didn’t help the bulls when Harold Hamm, CEO of shale player Continental Resources, said yesterday at the CERA energy conference here in Houston (a conference attended by EVERY significant player) that U.S. production growth is “going to have to be done in a measured way of else we’ll kill the market.” His comment coincided with the beginning of the slide in oil prices yesterday. Oil prices were set up for this move down. If you recall, I mentioned that CFTC data showed there was a cumulative record long position held by speculative traders. The boat was listing way too much. Some of this length needed to be flushed out.

This morning the slick stuff is still under pressure. WTI traded as low as $48.75 this morning which is the first time this year its traded below $49 and which we haven’t seen since late November. Prices have recovered a bit this morning with WTI down 73¢ at $49.55. $50 is big support and we’ve broken that support. The bulls are in trouble.

Courtesy of MDA Information Systems LLC

Natural Gas

• Cold forecast continues to support prices.
• EIA storage report due today.

As always in the winter, natural gas prices swing with the weather forecast, particularly the prompt month. Yesterday’s morning forecast shifted colder for the 6-10 day period bringing in new buying. The April contract closed up 7.7¢ at $2.901. Prices have rallied 17%, nearly 45¢, since last month’s low. Again though, I’m not seeing much movement in the 2018 and forward calendar strips. This morning the forecast once again moved colder but this time in the 1-5 day time frame bringing in even more buyers. Natty is up 5.6¢ with every month except April trading over $3.00. If prices stay here E&P capital expenditure budgets will definitely increase.

Today the EIA releases its weekly storage report. Folks are looking for a 54 Bcf withdrawal. Remember, last week the EIA reported a 7 Bcf injection, the first ever for a week in February.

Elsewhere

We’re all familiar with the famous Scripps National Spelling Bee. Well a new record was set last Saturday by Edith Fuller. So what did she do? She beat out 50 competitors at the Green County Regional Spelling Bee in Tulsa, Oklahoma. Nothing special there. Except she did it at the record setting age of 5! The youngest kids prior to her to qualify were 6 years old. There is no minimum age to enter the competition. Edith, who is homeschooled, won by correctly spelling jnana, a term for knowledge in Hinduism, according to the Merriam-Webster Dictionary. Edith’s mom, Annie Fuller, told the local newspaper, Tulsa World, Edith prepared for the competition by looking up the definition of each word she misspelled to learn more. She moves on to the national competition with 280 others in National Harbor, Maryland in May. This event certainly seems to be a young person’s game. Last years co-winners were Jairam Hathwar and Nihar Janga, 13 and 11, respectively.