Equities and the Economy

Good morning and happy National Chocolate Chip Covered Cashews Day. After getting pummeled on Friday I guess investors had a chance to think about the markets over the weekend and concluded things weren’t really as bad the price action warranted that day and came in Monday morning buying. The Dow jumped 209 points (1.2%) to 18,035, the S&P 500 rose 19 (0.9%) to 2,100 and the Nasdaq ended up 63 points (1.3%) at 4,995. Note that these gains, although nice, are not offsetting the larger losses from Friday when the Dow lost 280 points and the S&P fell 24. Folks, you might as well get used to this kind of volatility for almost 50% of the volume now is computer traded which is heavily influenced by momentum meaning moves both higher and lower are exacerbated.

One of the major reasons investors felt more confident yesterday was a move by the Chinese government over the weekend. After a couple of regulatory moves late last week designed to curtail speculation in the Chinese stock market, yesterday the government cut the amount of reserves commercial banks are required to hold against their lending. It’s estimated this will free up about $200 billion for lending.

There wasn’t any significant macroeconomic news yesterday that moved the market but it is earnings season and the companies that did report yesterday were mostly positive. This week is the biggest earnings week of the Q1 earnings season with 147 firms due to report representing 32% of the S&P 500. So far only 3% have missed earnings per share estimates vs. 15% historically.

This morning we’re getting some nice follow through from yesterday with Dow futures up 82 points. The Asian markets closed higher but this was more catch-up from the higher move in U.S. and European equities yesterday. The major European bourses are all nicely in the green this morning however they are pairing their gains after a German report noted the economic sentiment there fell for the first time in 6 months as investors fret over events in Greece. Speaking of Greece, the government there is looking in every nook, cranny, sofa, chair and car seat to find change to pay its next bailout payment. Yesterday the Greek government ordered public entities including state owned companies and pension funds to transfer their cash reserves to the central bank. Basically a confiscation. Eurozone finance ministers meet Friday with Greek representatives but few expect a major breakthrough. Apparently May 11th is really the next critical date in this Shakespearian tragedy.

Oil

The oil markets were sedate yesterday with WTI rising 64¢ to $56.38. Brent didn’t even move from Friday’s close at $63.45. I’ve commented extensively about the precipitous fall in the U.S. rig count but the opposite is happening in Saudi Arabia. Per Citi, the rig count in Saudi Arabia has gone to new all-time highs in recent weeks resulting in production rising by 700,000 bpd since last December. One thing that will temper the effect of the dropping U.S. rig count is rig productivity. The EIA reports that production/rig (productivity) in drilling in shale formations has doubled over the past two years.

Today the Nymex May WTI contract expires but it’s starting out very quietly with the contract down ever so marginally this morning, 7¢. WTI futures have rallied over 30% over the last 4 weeks from a 6 ½ year low just above $42 to a 4 month high near $57.50. The U.S dollar is stable this morning.

Courtesy of MDA Information Systems LLC

Natural Gas

Since rising last Thursday natural gas prices have given up all their gains and more with the May contract falling 9.8¢ settling at $2.536 taking its direction from the cash market. Stepping back and looking at the forest rather than the trees, natural gas prices really haven’t done much over the past 3 weeks trading on either side of $2.60 during that time frame. Temperatures will be much below normal for the Midwest this week but then slowly moderating close to normal as we enter May. We’ll get some load, particularly, Thursday and Friday this week, kicking on some heaters at night but being “spring” it won’t be too big of a deal. This morning we’re gravitating back towards that $2.60 level being up 4.3¢.

Elsewhere

The U.S. is indeed getting incredibly more fuel efficient. Take a look at the chart below. Based upon Real Dollar of GDP (2009), the nation’s “efficiency” has risen 62% over the last 65 years and the trend looks to continue. As Martha Steward would say “This is a good thing.” Have a good day.