Equities and the Economy

Good morning and happy birthday to Eeyore. We started out looking nicely yesterday morning following European equities higher but all the major indexes ended lower as the red hot health care sector dropped sharply. The Dow ended 42 points lower at 18,038, the S&P 500 lost 9 to 2,109 and the Nasdaq took the brunt of the selling closing down 32 points at 5,060 with the biotech sector getting destroyed plunging 4.2%. There wasn’t a lot of news yesterday and what there was was mildly disappointing. The PMI Services for April came in at 57.8, down marginally from March with expectations the number would actually be higher. The Dallas Fed Manufacturing index was also released and it was -16 and while better than March’s -17.4, the Street was expecting a -12. The expectations for all the “minuses” is due to the fall in oil prices.

We’re starting out very choppy this morning with Dow futures up 23 after being down 55 points when I came in. The European bourses are getting knackered today currently trading between 1.09% and 1.71% lower. Developments surrounding Greece continue to influence European markets. Yesterday the European markets jumped 1% on the announcement that Greece’s Prime Minister was “reshuffling” its negotiating team basically demoting Finance Minister Varoufakis taking him off the team. Putting it bluntly, the “Brussels Group,” which the Troika is now called (doesn’t that sound so much more appealing?!) is weary of Mr. Varoufakis and his intransigence and theatrics. So what was given yesterday is being taken back today. And a major reason is the world is waiting to see what the Fed does with the FOMC meeting today and tomorrow. With QE over here in the states, at least the printing of money part, investors have been getting very cautious ahead of these meetings worrying about interest rate increases.

Oil

Oil seesawed in a choppy day yesterday with WTI slipping 16¢ closing at $56.99 while Brent gave up 45¢ settling at $64.83. This morning the seas remain calm with WTI up 5¢. I watch, and have traded, the crude oil ETF USO which tracks WTI prices. The value of the ETF has gone from $0.7 billion last October to $2.8 billion as of last week as traders and investors pile in making a “long” bet on WTI prices. One would think these participants would be very happy as nearby crude prices have risen 7% so far this year. However, the value of the ETF has actually fallen nearly 3.5%. Why? Contango. With deferred WTI prices higher than current prices (the ETF buys front month Nymex contracts) the position must be “rolled” month to month and the contango (higher price of the next month) “eats” relentlessly at the funds net value. I will confess, I got burned by this years ago and am now very cognizant of the effect contango plays. My trade broke even but only after the oil price ran up enough, and higher than my purchase prices, to cover what I lost in the contango.

Today the API releases it crude and products inventory report after the close and expectations are for a crude build, the 21st consecutive week.

Courtesy of MDA Information Systems LLC

Natural Gas

On penultimate day natural gas prices slid with the May contract falling 4.1¢ closing at $2.490. Yesterday research reports showed U.S. production rebounded over the weekend back to the 74 Bcf/d level and with shoulder month temperatures the cash market was pressured. As was inferred in the first sentence, the May Nymex contract expires today setting the price of one “leg” of many natural gas swaps as well as many unhedged heat rate electricity supply agreements and the price for May natural gas deliveries for those on the Nymex + basis product. We’re getting a minor bounce this morning with the May contract up 1.4¢.

The ying-yang is we have ample supply, spring temperatures vs. increased consumption capturing market share from coal. Oh, and did mention that prompt month prices are at 3 year lows.

Elsewhere

Apple released its much anticipated and ever-so-closely watched earnings being it is one of the “generals” of the market with the company blowing out Wall Street expectations its stock price rising after the bell. Apple is the largest company by market capitalization in the U.S., by far, and has $194 billion in the bank. So how much is $194 billion? Here’s on way to think of it. Apple has enough cash in the bank to buy every NFL, NBA, NHL and Major League Baseball team. Youza! Have a good day.