Equities and the economy

Not a good day for equities yesterday. Not at all. Specifically, it was the worst day in the last two months. The Dow lost 211 points, 1.2%, finishing at 17,831, the S&P 500 fell 19 points, 0.9%, to 2,076 and the Nasdaq dropped 58, 1.2%, to close at 4,805. Some blame goes to that fruit company, Apple, and its horrible earnings report. But the Bank of Japan’s decision not to add additional stimulus to the economy which caught the market off guard brought in even more selling. Then later in the day the Bureau of Economic Analysis reported that Q1 2016 GDP rose as cant 0.5% which was below economists’ expectations of 0.7% and the slowest pace in two years. Relax on that GDP data point. GDP data is revised at least two times and I guarantee you Q1 GDP will be revised higher. Why do I say this? Because far more times than not Q1 GDP data is revised positive. Now before you panic remember we’re up 15% from the February low and near all-time record highs and S&P 500 EPS are at lofty levels. The air is a little thin up here and the market needs to rest and get acclimated.

Regarding other fundamental data, in the aforementioned GDP report was the Personal Consumption Index which is the Fed’s preferred gauge of inflation. For Q1 the index rose at a scant 0.3% annual rate but excluding the more volatile food and energy components leaves you core inflation which rose at a 2.1% rate. Now remember, the Fed’s interest rate target is 2% and with the labor market looking healthy the combination of this data may prompt the Fed to raise interest rates in the second half of the year.

Every Thursday the Labor Department releases initial jobless claims and the number came in spot-on to analysts’ expectations which was for claims to rise 9,000 to 257,000 last week. I only bring this up because last week claims hit a 40 year low!

This morning there some additional profit taking going on with the Dow down 104 points and in part being dragged lower by red around the world, especially in Europe where the major indexes are down as much as 2.4%. Caveat here: the European markets are playing catch-up to yesterday U.S equities action.

Sell in May and go away???

Oil

Oil prices continue to grind higher yesterday finishing at fresh 5 month highs. WTI finished 70¢ higher at $46.03 and Brent rose 96¢ settling at $48.14. Is there a lot of oil out there? Absolutely. But what traders are focusing on are multiple reports that U.S. production is declining with the most recent reports stating that global oil demand and supply will balance in the second half of this year. Impressively, WTI prices has surged more than 75% over the past couple of months from this summer’s 12 low. Now the bulls are running like they do in Pamplona but price equilibrium is not too far above where we’re currently at for U.S. crude stockpiles are at record levels, 540 million barrels. Helping oil prices, and all dollar denominated commodities, is a weak U.S. dollar which has fallen 6% in 2016.

This morning they’re still having fun in Spain with WTI up 35¢.

By the way, ExxonMobil Corp, the world’s largest publically traded oil producer, just reported Q1 earnings. And they weren’t good. The company said profits dropped 63% in Q1 from a year ago citing plunging oil prices and weak refining margins.

Courtesy of MDA Information Systems LLC

Natural Gas

The May natural gas Nymex contract had its first day as the prompt month yesterday starting on a whimper falling 7.5¢ and settling at $2.078. As I said yesterday, this isn’t surprising to me for the June contract settled 15.8¢ over the May contract when the latter expired and that’s a big gap and some convergence is in order. That being said, even with the loss the June contract is 8.3¢ higher than the May contract expiration price. Similar to oil, traders are anticipating natural gas production to decline in the second half of the year.

Yesterday the EIA reported in its closely monitored weekly storage report that 73 Bcf was injected into storage last week which was slightly more than expectations. Storage levels are currently 870 Bcf, 52%, greater than last year at this time and 832 Bcf, 48%, higher than the 5 year average.

This morning natty is moribund. Everything is trading close to yesterday’s closes.

Elsewhere

To say it’s been a bad last 16 months for coal is an understatement. Low natural gas prices have taken their market share, federal subsidies abound for renewable resources and the EPA has all but declared war on coal fired electric generation. Consumption of steam coal for electricity generation in the U.S. in 2015 was 29% less than from its peak in 2007. Consumption has fallen in every state except Nebraska and Alaska. States with the largest declines were in the Midwest and Southeast with 6 states in these regions accounting for nearly half of the nation’s total decline. Ohio, Pennsylvania and Indiana reduced electricity generated coal consumption by a whopping 49%, 44% and 37%, respectively. No wonder one coal company after another has filed for bankruptcy.

Have a great weekend.