Equities and the Economy:

• Trading muted.
• Earnings need to verify current lofty stock prices.

The action was muted yesterday with the Dow closing up 39 at 20,689, the S&P 500 adding a single point to 2,360 and the Nasdaq closing 4 points higher at 2,692. At the macro level there really hasn’t been any surprises of late, bad or good, and as such stocks have been chopping around recently. The next major event is the reporting by S&P 500 companies of Q1 earnings, i.e., earnings season, which has technically just begun but most companies report next week or the following one. Current stock P/E ratios are pretty lofty based on historical standards boosted by what investors believe will be a very good Q1 earnings seasons with many companies expected to show double digit earnings growth. If a company fails to meet expectations their stock price will get hammered. Remember, just like commodities that are traded in the futures market, current stock prices have future performance expectations built into the price and investors are moving from blind optimism to, as Rod Tidwell said in Gerry Maguire, “Show me the money!”

There weren’t any major fundamental economic reports released yesterday, another reason there was no material price action yesterday. A news worthy event is happening later this week. China’s General Secretary Xi Jinping will be in town to meet President Trump. I wish I was a fly on the wall in that meeting.

This morning stocks are trying to rally being up 69 points.

Oil

• Prices continue to rally.
• Up 9% from March lows.

Oil prices pushed higher yesterday with WTI gaining 79¢ closing at $51.03 and Brent up a hefty $1.05 settling at $54.17. After hitting 4 month lows last month prices have rallied 9% over the past couple weeks to a 4 week high on talk from OPEC of extending the cuts and reports that inventories in storage facilities in the Caribbean are declining. Food for thought, whether or not OPEC does extend the production cuts beyond June 30th, which will be decided at its May 25th meeting, I guarantee you all you’ll hear from OPEC from now until the meeting is that they will extend the cuts. Why would they say otherwise???

Last evening the API reported that aggregate (crude, gasoline and products) inventories fell a whopping 6.4 million barrels last week. This compares to a typical build in inventories for this week of 2.9 million barrels. Perhaps the shutting-in of Libya’s Sharara field had an impact, but whatever, this report must be interpreted no other way than very bullish. On the API report WTI is up 75¢ this morning. The DOE reports today and let’s see if the API numbers are confirmed.

Courtesy of MDA Information Systems LLC

Natural Gas

• Prices up big yesterday.
• Spring time prices now at winter price levels.

Natural gas prices were up huge yesterday with the May Nymex contract closing up 16.5¢, 5.3%, at $3.293. Spring time prices, i.e. May, are trading at winter prices, i.e. February. Prices have rallied 78¢, 30%, over the past 6 weeks. All the focus is on production,. Yesterday I told you U.S. dry production fell below 70.0 Bcf/d which we haven’t seen in a long time. Now that was revised upward during the day yesterday to above 70.0 Bcf/d but the point is that while demand is increasing, production has been flat the last few months and below last year at this time. Also remember that 44% more nuclear plant MW’s are off-line this year compared to last for refueling. Don’t forget, natural gas storage levels are more than 15% below last year. Now that’s all no doubt bullish but 1) the higher prices go the more coal will be consumed for electricity generation at natural gas’ expense and 2) current prices are sure to capture the producer’s eye and the rig count will definitely go up. This morning natty continues to grind higher up 2.9¢.

Elsewhere

If you were to drink a Cherry Coke in China you would definitely be surprised to see what’s on the can. You’ll never guess. A drawing of billionaire Warren Buffet’s head! As any Berkshire Hathaway shareholder knows, Buffet loves Cherry Coke, so much so he agreed to let Coca-Cola use his likeness for free for 6 months to celebrate its recent launch in China. While it might seem odd to use the American investor to market a product in China, Buffett has actually become something of a rockstar there. An estimated 2,000 to 3,000 investors from China attended his Berkshire Hathaway annual meeting last year and Chinese TV even covered it! The special-edition Cherry Coke cans will also be available in America during Berkshire’s annual meeting in Omaha this May. Oh, did I mention that Berkshire Hathaway is currently Coke’s largest institutional investor with a stake of over 9% of the company. Coincidence? I think not.