Equities and the Economy

Good morning. U.S. stocks closed lower for the second consecutive day yesterday with the Dow falling 78 to 17,698, the S&P 500 losing 8 to 2,060 and the Nasdaq closing down 21 to 4,880. The impetus for the decline was clearly fundamental. Yesterday ADP released its private sector payrolls report which clearly disappointed. ADP stated private sector employers added “only” 189,000 new jobs in March which was well below Wall Street’s expectation of 200,000. ADP’s report is very, very important because it is the precursor to the all-important Labor Department’s employment report which is released tomorrow. This is going to be real interesting because the markets are closed tomorrow. History has shown that although there are deviations on a month-to-month basis, over time there is a correlation between ADP’s report and the Labor Department’s non-farm payrolls report. It appears the collapse in oil prices and the surge in the value of the U.S. dollar is hitting the job market. That being said, job growth is still “solid.”

The other report released was the ISM Manufacturing report which came in a bit disappointing falling last month to 51.5 from February’s 52.9 but most bothersome was this was the 5th month in a row the index has fallen. However, it does remain above the important 50 number which segregates growth from contraction.

Asian equities all closed positive with Japan’s Nikkei up 1.46%. China’s Shanghai closed near its 7 year high again. European equities are currently trading on either side of unchanged. When I came in this morning Dow futures were down as much as 140 points but has rebounded very nicely with it up 100 point currently. Factory Orders were just released showing orders increased 0.2% which was much better than the expectation of a drop of 0.5%.

You may wonder why I always reference Asian and European equities. Well for one, U.S. equities do not trade in isolation. Capital is extremely liquid and flows globally. Just as importantly, one has the opportunity to invest in markets other than the U.S. For example, and I bet you didn’t know this, the S&P has returned a negative 0.6% so far in 2014. Here are some statics for markets outside the U.S.: Japan +10.3%, China +18.3%, France +18.6%, Germany +22.0%. I want to stipulate I’m not giving financial advice but maybe you should have or increase your exposure to international stocks. The mantra seems to be “follow the QE.” When QE was the order of the day U.S. equities performed outstandingly. Since the Fed has stopped its QE, not so much. QE is alive and well in Europe, Japan and China, and the markets there obviously like it.

Oil

After a three day losing streak oil skyrocketed yesterday with WTI leaping $2.49 (5.2%) closing at $50.09. Brent gained a little less, $1.99 (3.6%), settling at $57.10. The driver of the move was the EIA’s weekly crude and products report. As you know, the rig count has dropped precipitously (45%) from its high last year and yesterday’s report showed for the fires time since late December a drop in production. The move up comes in spite of a report that Russian’s production in March was 10.71 million bpd. The significance? That’s a new post-Soviet Union high.

This morning WTI is down 79¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas has been doing nothing all week and yesterday was more of the same with the May contract down 3.5¢ to $2.605. There’s just not a lot of interest in natural gas for now. The market seems balanced. Spring is definitely here in the Midwest and northeast with residential and commercial heating demand basically non-existent. Air conditioners in the south are beginning to run more frequently and will run more if the 6-10 and 11-15 day forecasts of above normal temperatures come to fruition.

The EIA releases its weekly storage report today with the market expecting a withdrawal of 7 Bcf. Note this is after last week’s injection. This flipping between injections and withdrawals is characteristic of the spring season.

I don’t know if you’ve been paying attention to what’s going on in California but for the already multi-year drought ridden state it’s only getting worse. If you remember, in February and March the jet stream pattern had a ridge in the west which resulted in an anomalously warm winter season resulting in the snowpack in the Sierra Nevada mountains currently being at historically low levels. As of yesterday the snowpack was, are you ready, only 6% of normal. This will tremendously impact agriculture and public water usage but it’s also going to dramatically reduce the amount of hydropower. This means the west will be consuming a materially greater amount of natural gas this summer for electric generation. More demand amigos.

Have a great holiday weekend.