Equities and the Economy:

• Profit taking continues.
• S&P falls for third consecutive session.

The bulls continue to be frustrated with a lack of new buying. The S&P 500 fell for its third straight session closing down 7 points at 2,631 and the Dow lost 87 points to 24,201. That being said, the two indexes remain near their record highs set last week. The tech-heavy Nasdaq tried rebounding yesterday but fizzled out ending down 8 points at 6,788. As I’ve mentioned a few times lately, money managers are rebalancing their portfolios. With the prospects that a tax reform bill will actually pass Congress and be signed by President Trump, they are rotating out of tech stocks, which has been the best performing sector this year, to stocks which would benefit from the bill such as banks and retailers. Analysts are stating cutting the corporate tax rate to 20% could boost S&P 500 earnings by an extra 9% next year. For the record, the S&P is up 17% this year. The Nasdaq is up an astounding 27%! I’ll take that all day, every day.

The major economic report yesterday was the Institute of Supply Management’s index of service companies, such as banks and retailers, stating the index fell to 57.4 in November. No need to panic. The index the prior month, October, was a 12 year high. Additionally, and importantly, the index remains well over 50 indicating growth.

Overnight Asian stocks got whacked, partly due to U.S. equities falling yesterday, and the European markets are on the defensive which is translating to a soft start today with the Dow down 48.

As you regular readers know, I keep an eye on bond yield spreads. Yesterday the yield spread of the 5 year vs. the 30 year U.S. Treasury was at its lowest (tightest) since October 2007. Why do I watch the yield spreads? Because just about every recession we’ve had has been preceded by the yield spread going backwardated, i.e., short term yields are higher than long term yields. Why is this important? Because banks lend long term and finance the loans by borrowing short term. If the yield curve goes backwardated, they stop lending, and the economy freezes up.

Oil

• Prices little changed.
• API report neutral.

Oil prices seem to be entering into a consolidation phase post the OPEC meeting last week. Prices ended yesterday little changed from Monday with WTI closing up 15¢ at $57.62 and Brent settling 41¢ higher at $62.86. Yawn. Yesterday Goldman Sachs analysts said they believe risks in the oil market are “skewed to the upside into 2018 on the risk of overtightening, either because of new [production] disruptions, demand exceeding our optimistic forecast or OPEC letting the stock draw run hot.” They added though that in 2019 the price risk is skewed to the downside.

Yesterday evening the API released its weekly crude and products report, which was neutral. While crude inventories fell 5.5 million barrels, gasoline and distillates (diesel, heating oil, jet fuel) rose by 9.2 million barrels and 4.2 million barrels, respectively. Today the EIA releases its crude and products report. Remember, reporting to the API is voluntary. Reporting to the EIA is mandatory.

This morning WTI is lower with negative sentiment in the global equities market impacting the oil markets. WTI is down 68¢.

Courtesy of MDA Information Systems LLC

Natural Gas

• Super cold weather retreating.
• Prices close lower.

Weather forecasts came out yesterday morning showing the super cold weather in the east beginning to retreat in the 11-15 day period which brought in the bears. January natural gas closed down 7.1¢, 2.4%, at $2.914. Interestingly, the calendar 2019 and 2020 strips closed slightly higher. Even though the longer term forecasts are showing the cold weather retreating, folks, this is going to be a very cold weather event. Demand in the Midwest is forecasted to be 10 Bcf/d higher than normal for the next two weeks. That will burn a lot of natty. It looks like the bears have lost their momentum for this morning January gas is trading up 2.2¢.

Another LNG plant is about to go commercial. Dominion Energy announced yesterday its Cove Point, MD facility has begun taking feedgas for commission and will be going “commercial” by the end of the month. That’s another ~0.8 Bcf/d of demand.

Elsewhere

Yesterday in an unprecedented move the International Olympic Committee banned Russia from the 2018 Winter Olympics in PyeongChang, South Korea. Citing “systematic manipulation” of anti-doping rules, a 14 person panel issued the ban. As a result, no Russian officials will be allowed to attend the games. The Russian flag will be excluded from any display. If any “clean” Russian athletes are given permission to attend, they won’t compete under the Russian flag. Instead, they’ll compete under the name “Olympic Athlete from Russia” and under the Olympic flag. Any medals they win won’t be credited to Russia and the Olympic anthem will be played in any ceremony.

The ban was a long time in coming. The doping and subsequent cover–up by the Russian state started back in 2011 and involved at least the 2012 Olympics in London and the 2014 Olympics in Sochi. Over 1,000 athletes were involved. The doping, and the hiding of the doping, were extensive. At one point, small rods were used to pry open the sealed tops of urine testing containers, fluids were switched and the caps replaced, with the containers being exchanged through small holes in a wall. The Russian officials would add substances like salt to clean, switched urine samples to make them appear more real. This was just one example of a very elaborate iceberg of doping and cover-ups.

Russia can appeal the ban decision to the Court of Arbitration for Sport and the country is considering an all-out boycott. In fact, Russian President Vladimir Putin has said that an all-out ban would be “humiliating” for Russia, and could possibly provoke a boycott. Help me out here. If you’re banned from something, how do boycott it?!