Equities and the Economy:

• Dow off for 3rd of 4th session.
• Losses remain minor.

The major U.S. stock indexes finished lower yesterday with the Dow closing down 30 points at 23,409, the S&P 500 falling 6 points to 2,579 and the Nasdaq dipping 20 points to 6,738. The positive news is that the closing values were well off intraday lows with the Dow down as much as 107 points at around 9 AM CST. Energy stocks were the primary drag with oil prices getting whacked. The Dow and S&P have closed negative for the previous 3 of 4 days. Forgive the redundancy, but this market is way overdue for a pullback. While it can cause consternation, it would be healthy for this market which is very “frothy” with overstretched equity valuations. The mode this year has been to “buy the dip.” Let’s see if it continues.

The gap between short and long term U.S. Treasury bond yields is currently at its lowest/flattest in decades. We need to keep a close eye on this. Every recession we’ve had has been preceded by a condition when short term yields are higher than long term yield. This is called a “backwardated” market. Why is this important? Because lending basically stops. Lending firms always lend long term at higher interest rate and cover that liability by borrowing short term at a lower interest rate. That’s the normal condition and it’s called “contango.” You go backwardated and lending stops freezing the economy.

The National Federation of Independent Business released its optimism index for October stating it rose to 103.8 from 103.0. It remains at lofty levels as more small business owners say they expect higher sales and think now is a good time to expand.

Yesterday the Labor Department released its producer price index for October it rose 0.4% from September. Of importance, for the previous 12 months the index is up 2.8%, the largest since February 2012. It’s widely expected the Fed will raise interest rates at its meeting next month. This will give them additional data to support that move.

This morning profit taking continues and the Dow is sharply lower down 115 points (re-read paragraph 1).

Oil

• Prices get hammered.
• IEA report to blame.

Oil prices tumbled yesterday after the IEA (not our EIA) forecasted in its monthly report that global oil demand will decrease in 2018 by 100,000 bpd compared to 2017. While this really isn’t much, it is in marked contrast to OPEC who recently released a report stating global demand will increase next year, and by an amount greater than their previous report. Oil prices were also weighed down by a general sell-off in all commodities, led by nickel and copper, resulting from weaker than expected economic data from China. For the day WTI closed down $1.05 at $55.70 and Brent lost 95¢ settling at $62.21.

Refreshing your memory, oil prices closed at a two-year high on November 6th getting a big boost on Saudi Arabia’s anti-corruption shake-up. A major headwind for prices is data continues to show U.S. production is and continues to increase with current production levels are record levels.

Last evening API released its regular weekly report noting that crude oil inventories rose 6.5 million barrels counter to forecasts of a drop of 1.2 million barrels. Adding fuel to the fire (pun most definitely intended) gasoline stocks increased by 2.4 million barrels versus expectations of a 850,000 barrel decline. Distillate inventories, which is mostly diesel, were bullish decreasing more than forecasts, but the bearish of the former two statistics is outweighing the latter and WTI is down 52¢ this morning.

Courtesy of MDA Information Systems LLC

Natural Gas

• Prices close lower.
• U.S. production strong.

Despite supportive weather forecasts natural gas prices declined yesterday with December gas falling 6.5¢ closing at $3.102. After reaching a 5 month high to open the week, prices have pulled back 17¢, nearly 5%. A major headwind for the bulls is the continual increase in U.S. dry production. In the EIA’s latest Drilling Productivity Report the agency noted that production from the 7 major U.S. shale regions is expected to increase in December by 770 MMcf/d, 1.3%, to 61.7 Bcf/d marking the 11th consecutive month of higher production levels. This is primarily the result of increases in the Appalachian, Permian and Haynesville shale regions and is being facilitated as new pipeline capacity, which has been under contraction for months and sometimes years, is coming on-line. More capacity is expected by the end of Q1 2018.

The 1-10 day forecast this morning is little changed from yesterday’s, but the 11-15 day forecast is a bit milder for the all-important, major gas consuming regions in the eastern U.S. That being said, natty is up 2.5¢ as I write driven by a little stronger cash market. The weather forecast is definitely price supportive with no normal to above normal temps forecasted for the remainder of November for the eastern half of the nation.

Elsewhere

Less than one day. That’s the length of time it took Gatorade to settle a lawsuit from California accusing the company of false advertising for implying in an online game that drinking water slows runners down. The state collected $300,000. A rounding error to PepsiCo who owns Gatorade.