Equities and the economy

While U.S. stocks posted a lackluster day yesterday with the Dow closing 32 points lower at 17,658, the S&P 500 falling 4 to 2,060 and the Nasdaq eking out a gain of 1 to 4,870, equities performance since the beginning of 2016 has been really interesting. For example, the S&P 500 made a massive comeback over the past 6 weeks managing to erase the more than 10% loss in mid-February, but overall for Q1 the bellwether index is up a modest 0.8% and the Dow is up 1.5%. However, the Nasdaq registered its worst first quarter since 2009 losing 2.8%. Just for March the S&P was up a big 6.7%, the largest monthly gain since October. Since reaching a 2016 low on February 11th, the Dow and S&P are up nearly 13% and the Nasdaq is up 14%. The Fear Index, the Chicago Board Options Exchange Volatility Index (VIX), snapped its longest streak of monthly gains in 4 years, falling to its lowest level since August 17 last year (a low VIX means investors feel more confident about investing in riskier assets, like stocks). It was not just U.S. stocks that rebounded. A similar picture emerged looking across the global equity markets. The driver of the rebound? Central banks with their dovish bias. Examples are this week’s comments by Janet Yellen which sent the dollar to its lowest quarterly performance since 2010. Also the ECB whose incremental 20 billion euro bond buying program (now up to 80 billion euro) announced in March kicks in today.

Treasury prices soared in Q1 driving yields down to their largest quarterly drop in nearly 4 years. The sharp drop in yields was fueled by flight to safety rallies at the beginning of the quarter when global equities were selling off and then by tumbling interest rate hike expectations at the end of the quarter with the clear message from central bankers that accommodative monetary policies were not only not going away, but were being enhanced.

Today is the first Friday of the month which means its Labor Department Employment Situation Report day. The report just came out and it was good, and then maybe bad. U.S. employment increased solidly in March and wages rebounded. Nonfarm payrolls increased a big 215,000 in March and average hourly earnings increased 7¢. The unemployment rate inched up from its 8 year low of 4.9% to 5.0%. I’ll go into more detail on this report on Monday.

So where does the employment report put us? Pretty much nowhere with the Dow up 4, which is actually really good for futures were down 110 earlier. “Don’t fight the Fed” and its accommodative policies. What’s really scary to me though is all the financial engineering done by global central bankers (printing money) to remedy a weak fundamental: anemic global growth and deflation, or at least no inflation.

By the way, the big winner for the quarter was gold. It gained more than 16% having its best quarterly performance since 1986, the year of the Iran-Contra affair.

Oil

Similar to equities, oil prices didn’t do much yesterday with WTI closing pretty flat to Wednesday, up 2¢ at $38.34. Brent added a little more, 34¢, closing at $39.60. Oil prices have rallied sharply in the last month after slumping to multi-year lows earlier in the year. For the quarter oil was up 3%. OPEC and some non-OPEC folks are meeting on April 17th to discuss freezing production at January levels, but talk is cheap for yesterday OPEC released a report that its output rose in March to 32.47 million bpd. Folks, the members of that meeting aren’t cutting. It’s economics. The most expensive production will be curtailed, and that is U.S. shale oil production. And that’s exactly what’s happening. I’ll bet you didn’t know this. Oil imports into the U.S. have jumped to a three year high. As of March 25th, the four week average of imports was running at 7.9 million bpd, 9.8% higher than last year at the same time. U.S. producers, who reaped the benefits of the shale revolution, no longer enjoy a steep price advantage over their foreign rivals in selling to domestic refiners. Production has fallen about 600,000 bpd from its peak of 9.6 million bpd last year. Now refineries are buying foreign oil to replace the lost U.S. output.

I have a client who owns and operates an oil import terminal facility and contacted him to confirm what I had read. Here’s his response. “Actually yes. Maybe a coincidence, but one of our crude docks (double sided dock) has two ships on it today which is foreign deep draft crude. And there has been more activity at the dock and I know there are more ships scheduled.”

WTI is getting whacked this morning being down $1.26. As I’ve mentioned countless times, Saudi Arabia is the only country that makes a difference in OPEC for they are the only ones that will voluntarily not produce at full capacity if they choose to do so. And the country’s Deputy Crown Prince just speared the bull stating this morning while you slept that the kingdom will only freeze output if Iran and other major producers do so, and we all know that ain’t gonna happen. His comments have reawakened fear of the global supply glut. WTI prices have now dropped more than $4.50 in less than two weeks from March’s near four month high of $42.00.

Natural Gas

The EIA released its weekly storage report reporting a 25 Bcf withdrawal last week which was marginally lower (bearish) than expectations of a 29 Bcf withdrawal. Natty ended down 3.7¢ at $1.959. There’s a whack of gas in storage currently folks. We’re 1,002 Bcf, 68%, greater than last year and 846 Bcf, 52%, greater than the 5 year average. So why is natty trading $1.949 (down 1.0¢) this morning and not $1.60ish? Because this is old news. It’s built into the market. Traders are looking forward to summer time A/C load and other demand with marginal production growth. In fact, natural gas prices had a banner month in March climbing more than 14%, it’s best monthly performance in more than 2 years (January 2014). However, even with the gain it lost 16.2% in Q1.

Elsewhere

As we all know, April 1st is April Fool’s Day. Do you know how it got the name? It is widely believed that April Fool’s Day originated in France in 1562, or thereabouts, when Pope Gregory replaced the Julian calendar with the Gregorian calendar in the Julian calendar month of April. The day of introduction of the Georgian calendar was made the first day of January Some people hadn’t heard about the change in the date and they continued to celebrate the New Year’s Day, but being on April 1st, and others called them “April fools.” The problem with the generally accepted belief is that it’s not true! The fact is that Pope Gregory XIII ordered Thursday October 4th 1582 to be the last day of the Julian calendar. The next day was Friday October 15th. Thus, April Fool’s Day is an April Fool’s tale!

The April Fool’s Day tradition in France includes Poisson d’avril (“April fish”) which is attempting to attach a paper fish to the victim’s back without being notice.

I like what Mark Twain said about April Fool’s Day. “April 1st: This is the day upon which we are reminded what we are on the other three hundred and sixty four.”

Have a good weekend