Equities and the Economy

Good morning and happy National High Five Day. U.S. equities ended higher yesterday getting a boost from higher oil prices and better than expected earnings. The Dow added 76 points (0.4%) to 18,112, the S&P 500 closed up 11 (0.5%) at 2,107 and the Nasdaq gained 34 points (0.7%) once again over 5,000 at 5,011. I don’t usually comment on the Russell 2000 index but it warrants mentioning this morning because it closed at 1,275, a fresh record high. The Russell 2000 is an index of 2,000 small-cap companies. Energy sector stocks rose 2% getting a boost from rising oil prices (more on that below). Regarding earnings, Delta Airlines yesterday reported earnings better than estimates which encouraged investors to buy stocks. The airlines said this was the best Q1 in its history. So far this earnings season, and it’s still early, 35 or 37 companies in the S&P 500 have either beaten of met expectations. As I’ve mentioned a few times, investors’ expectations have been lowered going into this earnings season have been baked into overall market prices so all we need is news that’s not negative. Earnings and news that are middle of the road are OK.

On the fundamental side, the Fed released its Beige book yesterday (the Beige book is a gathering of “anecdotal information on current economic conditions”), which is prepared ahead of its meetings, stating U.S. manufacturing rose 0.1% in March but overall industrial production fell 0.6%. Going into the report the consensus was for the former to be up 0.2% and the latter down 0.3% so the actuals were modestly ill. Adding to the ill environment was the Empire State Manufacturing Survey (New York area) that came in well below the level of the previous month. The previous index was 7.0 (rounded) with expectations for March to be the same number. The actual number was an abysmal -1 and the first time it’s gone negative since last December and before that the number had been positive since the winter of ’12-’13. All of the aforementioned data suggests a deceleration in economic growth.

The data wasn’t all bad yesterday for the National Association of Home Builders released its index for April which was 56 and up from last month’s 52 and expectations of 55.

This morning isn’t starting is starting out a little shaky with the Dow down 28 which is much better than earlier when it was down 61 points. European markets are weak this morning especially Germany’s DAX which is down 1.43%. Don’t feel too sorry for those invested in European stocks for the major indexes closed yesterday at record highs following an upbeat assessment of the European economy by ECB president Mario Draghi.

I haven’t discussed Greece too much lately but its Prime Minister, Alexis Tsipras, has been racking up the air miles trying to renegotiate Greece’s loans to the troika and find money to pay the notes due as April progresses. I’m not privy to these confidential meetings but I can tell you this, the odds of a “Grexit” a few days ago was 25%. Now it’s 40% (yes there is a market for this!).

Oil

Day after day oil just continues to march higher with WTI skyrocketing yesterday $3.10 (5.8%) closing at $56.39, its highest closing price in 2015. Brent added $1.89 settling at $60.32. WTI prices have surged nearly 30% since falling to a 6.5 year low just above $42 last month. OPEC may be producing at record levels and U.S. crude inventories are at 80 year highs but new and bullish information came in two forms yesterday. The first was the DOE’s weekly crude and products report showing inventories rose but much less than traders expectations and second, the IEA, not our EIA, released a report forecasting a notable increase in the global demand for oil. This morning WTI is correcting a bit, which is not to be unexpected after such a big move, being down 89¢

Courtesy of MDA information Systems LLC

Natural Gas

The May Nymex contract jumped an even 8 cents yesterday closing at $2.610. The colder weather forecast and associated increase in HDD’s brought in some buyers if for no other reason to short cover after natty was hitting multi-year lows. Today’s forecast is pretty much the same as yesterday except the area of below normal temperatures has expanded and forecast to encompass the entire 2/3rds of the eastern part of the nation. This is mildly bullish now but if this jet stream pattern sticks around for the summer (ridge west, trough east) it’s going to suppress A/C loads (CDD’s) and be bearish of natty.

Today is Thursday and you know what that means. It’s EIA storage report day! Traders are expecting an injection of 58 BCF for last week. By the way, beginning last week we’re only going to see injections until next November. It looks like traders have their positions on going into the report for natty is doing nothing being down a penny as I write.
Elsewhere

Low natural gas prices are indeed capturing market share from coal in electric generation. Coal to gas switching is 4.5 Bcf/d higher this year than last. Natural gas’ share of the electric generation market in Q1 2015 was the second highest ever at 24.1 Bcf/d. The record was 24.9 Bcf/d in 2012 when we came out of the warmest winter in 30 years. On an equivalent bases, natty has been lower than most central Appalachian coal and below $2.50 it will begin to displace Wyoming and Illinois basin coal. There’s a lot of demand below amigos! Have a nice day.