Equities and the Economy:

• S&P 500 closes at record high.
• FOMC minutes of May meeting reinforce rate hike coming.

Like a boxer getting knocked to the mat, i.e., last Wednesday, U.S. equities bounced up and keep on fighting. Yesterday the S&P 500 closed 6 points higher at 2,404 and while the gain was minimal it was enough to push the index to a new record high. For the year the S&P is up 7.5%. The Dow and Nasdaq rose 75 points to 21,012 and 24 points to 6,163, respectively, and although not at record highs, they did close at their second highest level ever. It’s not just U.S. equities that are higher. The global economic recovery is pushing stocks higher across the world with a common international index also posting an annual gain of 7.5%.

Here’s what’s going on. The world economies have been and are improving being stimulated by central bank QE programs. Central bank actions always lag. Regulators are always behind the curve. They’re slow to act during recessions and slow to get out in good times. What we have today is the latter. Even with economies around the world improving, central banks have been reluctant/slow to remove stimulus for fear of their economies slipping back into recession. As we sit today they still have their foot on the monetary accommodation gas pedal. Thus, the combination of a recovery with stimulation is very bullish.

Want more evidence of a recovering economy? Q1 2017 earnings season is just about finished with 97.6% of the S&P 500 companies having reported. Total earnings for these companies are up a huge 13.6% from Q1 2016 with revenues up 7.2%. 72.3% of the companies that have reported have beaten EPS estimates and 65.4% have beat revenue estimates. That’s impressive!

The minutes of the May FOMC meeting were released yesterday and there are two take-aways. Frist, interest rates will be raised, and soon. The market is pricing in a 90% probability of a rate hike at next month’s meeting. Second, although improving, the Fed is concerned about a lack of inflation. This means they’ll take a gradual approach to raising rates. Investors believe they’ll be only two rate hikes this year. If June is one, that means only one more over the next 6 months.

I discussed new homes sales yesterday. Existing home sales were reported yesterday by the National Association of Realtors noting sales fell 2.3% in April. Now this may seem disconcerting but unlike new home sales which also fell, the drop in existing home sales was primarily due to lack of inventory which has fallen a whopping 9% from last year.

This morning the Dow is up 67, on pace to set a record high.

Oil

• Oil prices post first loss in 6 sessions.
• OPEC extends production cuts for 9 months.

Oil prices posted their first loss in 6 sessions yesterday, but the losses were minor. WTI fell 11¢ to $51.36 and Brent lost 19¢ settling at $53.96. Merely a flesh wound to the Black Knight. OPEC began its 172nd ordinary meeting today and it didn’t take long for the members to agree on production cuts. The only real question was whether the term was 6 or 9 months. That’s been answered, 9 months, until March 31, 2018. Also, the cuts will be the same as current, 1.3 million bpd, not including non-OPEC members like Russia. There was rumblings of deeper cuts but that didn’t happen.

Yesterday the DOE released its weekly crude and products report, which was neutral. Crude inventories fell more than expected while gasoline inventories fell less. Both are occurring because refineries are working full-out. The data point that caught my attention was that product exports (gasoline and diesel) are up more than 30% y-o-y.

Traders are digesting all this new data and WTI is down 29¢. I told you this earlier this week regarding the OPEC meeting, “Buy the rumor. Sell the fact.”

Courtesy of MDA Information Systems LLC

Natural Gas

• Prices continue to pivot around $3.20.
• EIA storage report today.

Natural gas prices ended little changed yesterday from Tuesday with the June contract closing a penny lower at $3.208. We’ve been broadly pivoting around $3.20 for almost 2 months now.

The EIA releases its weekly storage report today. Traders are looking for a 70 Bcf injection, which is about what was injected for this week last year but materially below the 5 year average. We need to catch up. Current inventories are 14% below last year.

This morning as we wait for the storage report it’s dead. Natty is literally unchanged. By the way, the June natural gas Nymex contract expires tomorrow.

Elsewhere

Have you been following Bitcoin? It’s gone apogee! Let me throw you some numbers. If you had bought $100 of bitcoin 7 years ago you’d be sitting on (drum roll please), a whopping $72.9 million!!! Over the past 12 months the digital currency is up over 400%! Just 7 weeks ago an ounce of gold traded at a $250 “premium” to bitcoin. As of yesterday bitcoin traded at a $1,000 premium over gold!

A week ago Monday marked the seven year anniversary of Bitcoin Pizza Day, the moment a programmer named Laszlo Hanyecz spent 10,000 bitcoin on two Pappa John pizzas. That event is widely recognized as the first transaction using the cryptocurrency. While the digital currency continues to be associated with criminal activity, it slowly but steadily is gaining acceptance in the legitimate world. For example, recently passed legislation in Japan allow retailers to start accepting bitcoin as a legal currency. There’s still some major issues that need to be addressed before it will be viable for a broad and mainstream consumer base, but when you think about it, it would be really cool, and efficient, if there was only one currency, and it was digital. Exchange rates would still exist but the “friction,” or currency exchange expense, would be eliminated. The fact is, we’re moving toward a cashless society.