Good morning. Unfortunately on Friday U.S. equities took up where they left off on Thursday with the Dow 70 points to 16,493, the S&P 500 fell 5 points to 1,925 and the Nasdaq lost 17 to 4,352. Last week was the worst week for U.S. stocks in two years. For the week the Dow lost 2.8%. The S&P fell 2.7% and is now off 3.2% from its July 24th record close. The Nasdaq ended down 2.2% for the week. The big economic news Friday was the jobs report for July which although was marginally disappointing with job creation slightly less than economists’ expectations, it still signaled the economy is sustaining its momentum. Additionally, good news came in with the Institute for Supply Management’s manufacturing index rose more than the market expected. And remember Q2 GDP came in at a whopping 4%. What we have here is the opposite of what we had when the FED’s QE was in full swing. Good news for the economy is bad news for the market because it means the Fed will reduce the liquidity that’s boosted stocks. The current stock market rally has continued for nearly 3 years without a decline of more than 10% and the market is/has been way over due for a correction. However, I don’t expect capitulation for the economic environment remains healthy and the S&P 500 is trading at an average price-to-expected earnings ratio of 15.4, which is not very stretched relative to the historical average of 14.1.

Photo: Achterkant Cabine Good Times Bad Times by Solor Guard Exclusive Truck Parts / Licensed under CC BY 2.0

The week is starting out better than the way it ended with the Dow up 17. Not to be a Debbie downer but let’s see how it ends. Bull markets end strong. Bear markets end weak. European stocks are boosting U.S equities this morning. Yesterday the government of Portugal announced a bail out rescue of the country’s largest bank, Banco Espirito Santo, preventing it from collapsing and potentially destabilizing the banking sector region wide. The entire market breathed a sigh of relief on the government’s action and yields on Portuguese, Spanish and Italian (the P – I – i – g -S) bonds dropping 5 or 6 basis points.

It’s still earning season and we’ll continue to see a flurry of quarterly reports but the week will be relatively lean on economic data.

Oil sold off with equities on Friday with WTI falling 29¢ to $197.88 but Brent just got destroyed falling $1.18 to $104.84 despite events in Gaza, Ukraine and, most importantly, Libya. A supply glut on West African and North Sea physical grades is pushing Brent lower which is impacting WTI. WTI plunged $4.00 last week to near a 6 month low. With the central government of Libya completely ineffective in managing the country and tribal warfare everywhere (ISIS), the Kurds (who have long wanted an independent state and who were gassed by Muammar Gaddafi) are taking an aggressive posture and shipping the oil in their region they control out of Ceyhan, Turkey looking for buyers. Word is they’ve sold a shipment to LyondellBasell here in the States but Lyondell has since stated they would buy no more fearing reprisals from the U.S. government who has taken sides with Baghdad. That being said, the U.S. government has been noticeably silent on the matter as of late and you know what that means in government speak, “silence denotes content.” This is no small matter for the Kurds receive approximately $100 million for each shipment. One can fund an army on that.

This morning WTI continues to bleed being down 17¢.

Natural gas on Friday gave back most of its gain from Thursday falling 4.3¢ closing at $3.798. For the last week and a half we’ve been range bound between $3.75 and $3.85 after dropping precipitously for the prior 6 weeks. I have my reasons why prices have stopped falling. The weather (which has just been incredible this summer!) continues to favor the bears with no threat what-so-ever of a heat wave through mid-August. The west continues to have wave after wave of above normal temperatures exacerbating the extreme drought conditions there. The weather may favor the bears but the price action isn’t with natty being up 4.4¢ as I write.

Have a good day.

 

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