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Europe: +44 (0) 207 198 1634 Good morning. The minutes of the Fed’s June meeting were released yesterday and the key take away was that the Fed is confident the economy has rebounded from the rough winter and they expect growth to continue over the next few years. That being said, they also stated that damage from the recession would continue to limit the pace of growth (memories are long!). The Fed also stated their bond buying program will end in October assuming the economy continues to grow. The latter was wholly expected by the market. The market digested the minutes as the economic recovery remains intact and the QE “crutch” being removed is an indication of strength. On the news, and after 2 days of selling off, the Dow rose 79 points to 16,986, the S&P 500 added 9 to 1,973 and the Nasdaq added 26 to 4,419.
Let’s move on to this morning for all the above is moot for Dow futures are getting crushed as I write being down 140. It appears yesterday was a “dead cat bounce.” It sure looks like we’re into the correction everyone has been waiting for. Asian stocks closed mixed but they will get hammered tomorrow and European stocks are trading lower on a percentage basis than U.S. futures. It ain’t going to be pretty today folks. As I’m mentioned previously, we haven’t had a correction in more than 2 years and the S&P P/E’s are trading at levels where there’s no room for error. Another concern is hedge funds, who are usually the biggest players when it comes to shorting stocks and have been burned over the last couple of years for doing it, have their lowest short position on in years. In fact, according to Markit, shortselling of stocks is at its lowest level since before the financial crisis began in 2008 and we know what happened shortly thereafter! Now this may at first blush seem positive but it often signals a top for when they return to the market it could get ugly. Currently the boat is listing way too far to the long side. Now I’m not forecasting a capitulation but we need a correction. It will sting but it will be healthy in the long run.
Oil got whacked yesterday with WTI, which had escaped the carnage in price on Tuesday, getting the worst of it yesterday falling $1.11 to $102.29. After getting hit hard on Tuesday Brent fell less, 66¢, to $108.28. The DOE released its weekly crude and inventory report yesterday and while the aggregate number was in line with expectations gasoline inventories were lower than expected which weighed heavily on WTI futures prices. It appears gasoline demand is down 0.4% this year vs. last year at this time which the market wasn’t expecting. This morning WTI is down “only” 26¢ which is somewhat surprising to me for with equities on a global scale getting hammered I would have expected more. Lower equities beget lower energy demand begets lower oil prices. Oil has been falling for more than a week partly because worries about disruptions of the Iraqi oil supply have subsided and Libyan oil is returning to the global market. Political strife has shut ports and disrupted production in Libya but agreements with local militias are now expected to open two ports. A major field restarted production Tuesday. Analysts said crude shipments could ramp up quickly because oil has accumulated in tanks at the closed ports.
Natural gas is bivouacking after its capitulation over the last few weeks closing down 3.4¢ yesterday at $4.170. The deferreds were down even less. As you can see from the forecast below there is absolutely not threat of above normal temperatures in the east and south over the next two weeks and in fact “much belows” are present in the 6-10 day time frame killing A/C load meaning there is no need for those natural gas peaking plants to run. That being said, this forecast is built into the market. Remember, it’s called a “future,” not a “present,” for a reason!
It’s EIA storage report day and the market is expecting an injection of 86 Bcf. It will definitely be less than 100 Bcf which ends 8 consecutive triple digit injections. Although we’ve seen no material heat in the eastern and southern U.S. it is still July folks and we are in in the hottest time of the year. So hold on to your hats and let’s see what happens at 9:30 CDT. Traders must be going out to restock their Maalox for natty is literally unchanged from yesterday’s settle.
Californian real estate, which is very volatile because you can borrow up to 100% or your equity, has been booming the last couple of years. One of the major drivers of this has been international buyers, specifically the Chinese. The Chinese spent $22 billion last year buying homes in the U.S. up a whopping 72% from the same period a year ago with California being their favorite spot (which makes total sense). The Chinese bought 32% of the homes sold to foreign buyers in the state, double the amount of the #2 foreign buyer that being the Canadians. Chinese buyers paid a median price of $523,148 per transaction compared with a U.S. median home price of $199,575 for an existing home. By the way, foreign buyers don’t appear to have liquidity issues. 70% of international buyers pay cash.
Have a good day.
