Equities and the economy

It was a sedate day on Wall Street yesterday with some profit taking after the recent rally which took the market to 2016 highs. The Dow closed down 56 points, 0.31%, at 17,737, the S&P 500 fell 7, 0.32%, to 2,066 and the Nasdaq was off 23, 0.45%, finishing at 4,892. Further evidence of the lackluster activity could be seen in the bond market with the 10 year Treasury trading within a 4 basis point range, the narrowest of the year to date. Volume was light at about 84% of the average volume of the last 20 trading days. This looks a like a classic case of some bullish fatigue. Investors are very focused on commodities which are in somewhat of a pullback mode further spurring length liquidation. As you regular readers know, I keep a close eye on the base metal prices which have a master’s degree in the global economy with copper having a doctorate and the latter touched their lowest price level in a month. Additionally, and not to say the correlation has returned, but oil prices, another commodity, fell again.

By the way, the Japanese yen continues to strengthen and is trading 110.57 per U.S. dollar which is materially down (stronger) from almost 125/dollar hit last August. You watch. The Bank of Japan will be the next central bank to do some sort of QE. The ECB last month increased its bond buying by 20 billion euros and Janet Yellen last week came out saying the Fed is in no hurry to raise interest rates. It’s the BOJ’s turn. They meet later this month. I’ll keep you posted.

Turning to the economic news of the day, the Commerce Department reported that factory orders fell 1.7% in February to $454 billion which is the 3rd decline in 4 months. The more important to me ,orders for non-defense capital goods which are a proxy for business investment plans and exclude the volatile aircraft component, fell 2.5%.

Although the Asian markets closed very mixed (Nikkei down 2.42%, Hang Seng down 1.57%, Shanghai up 1.45%) European equities are getting hit pretty hard with the major indexes down between 1.3% and 2.2% for the same reason as I’m seeing in the U.S., profit taking. London’s FTSE 100 is up about 10% since mid-February and investors there, like here, are cognizant of weakening commodity prices.

Oil

As mentioned above, oil prices fell yesterday with WTI closing down $1.09, 3.0%, at $35.70 and Brent finished off 98¢, 2.5%, at $37.69. The bulls had been buoyed by word that OPEC might freeze production at January levels, but that was dashed last week when Saudi Arabia stated any agreement on limiting production levels must include Iran with the latter saying they will not limit production until they hit pre-sanction levels. As I’ve said so many times, in all the world Saudi Arabia is the only country that will curtail production voluntarily and, therefore, is the only country you need to pay attention to for non-fundamental production data.

WTI has erased more than $6/bbl over the past couple of month’s 60% rally as record high U.S. crude stockpiles and high production levels (+9 million bpd) weigh on the bull’s yoke.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices closed 4.2¢ higher at $1.998 yesterday supported by a robust cash market, the consequence of the cold blast hitting the northeast. The Yankees opening day, which was vs. the Astros, was delayed until today because of snow! Intraday prices traded at $2.074, a 6 week high. Weather forecasts are little changed from yesterday with below normal temperatures encompassing the entire east over the next 5 days and lingering in the 6-10 day time frame before reverting to normal. I know it’s early but it will be interesting to see where next week’s storage report comes in.

This morning natty is feeling a tad of pressure down 1.7¢. Chatter.

Elsewhere

The University of North Carolina and Villanova University played for college basketball’s national championship and congratulations to the Wildcats! Yesterday’s game will go down as one of the most exciting in college basketball history! Heck, basketball history period!

Watching the game I noticed that neither team were wearing Converse basketball shoes. You probably don’t know this but Converse shoes are extremely popular with high schoolers throughout the country, even girls (my two high school girls each own a colored pair). Yes, these are the same Chuck Taylor’s we grew up with. Well I was with one of my daughters buying a pair for her and noticed something really strange about them. There was a wide, thin layer of felt around the edges of each shoe’s sole. I’m thinking “What could be the purpose of the felt? What’s the high tech marketing concept?” Well it turns out it has nothing to do with function, at least athletic performance. It has to do with economic performance. You see, the tariff on a rubber soled shoe is 37.5%. The tariff on a shoe with a fuzzy soled shoe, like a slipper, is only 3%. Converse got their shoe classified as a slipper! A classification may be based on the type of material that is present on 50% or more of the bottom surface. And they were smart enough to leave the center of the rubber sole bare to not interfere with traction. There’s a term in the industry for this kind of finagling: tariff engineering. How very sneaky (pun most definitely intended).