Equities and the Economy

Good morning. For over 80% of the day things were looking pretty darn good with the Dow up an average of 80 points for that time frame. And then the bottom just fell out. There was no major news. Sellers just came in. So instead of a nice, descent up day stocks ended marginally in the red with the Dow down 5 to 17,875, the S&P 500 off 4 at 2,076 and the Nasdaq losing 7 to 4,910. Now you may say “No big deal.” Yes the magnitude of the loss was minimal, but the price action was horrible. It certainly isn’t going to give the bulls confidence.

There was an economic report released yesterday that although I’ve occasionally mentioned I bet you’re not familiar with. However, I think it’s a very important report for these times. It’s the JOLTS report. The Job Openings and Labor Turnover Survey is a monthly report prepared by the Labor Department and reports on job openings, hires and separations. Yesterday’s report for February showed that U.S. employers posted 168,000 new jobs for the month and that brought the overall figure to 5.1 million, the highest total in 14 years! Now to refresh your memory, last Friday the Labor Department released the Employment Situation Report and its incumbent non-farm payrolls data which was horrible indicating the economy was at best moribund. So what gives? Here’s my take on it. Employers are simply not finding qualified workers for their available positions. The skill set of available labor is not matching employers’ job descriptions. Employers are looking for skilled labor with a useful (I emphasize “useful!”) college degree or technical degree, They are not looking for a person with only a high school diploma because for all intents and purposes that person is basically unskilled and U.S. employers cannot compete with the low pay unskilled workers receive in third world countries. So my take-away is that in combination with the JOLTS report, the employment situation report isn’t as bad as initially thought. Employers aren’t hiring, adding jobs, because they can’t find qualified candidates hence the Employment Situation Report last Friday looked bad.

Moving on to this morning, Dow futures are up nicely, 88 points. The Asian markets continue their romp higher with Hong Kong’s Hang Seng joining Japan’s Nikkei hitting 7 year highs. Basically it’s catching up with China’s Shanghai which has exploded this year. The Hang Seng is mostly made up of Chinese focused stocks and have been trading at a big discount to the Shanghai index. A newly launched trading link has facilitated the flow of money of funds from China into the Hang Seng. European stocks are trading mixed.

Today Alcoa reports its Q1 financials after the closing bell kicking off earnings season.

Oil

Oil soared for a second straight session yesterday with WTI closing up $1.84 at $53.98, its highest close of 2015. Over the past 2 sessions WTI has gained 10%. Not to be left behind, Brent added 98¢ settling at $59.10. Igniting this rally was EIA data last week showing U.S. oil production fell by 36,000 bpd in the week ending March 27th. Although the decline was small it was the first since mid-January. After the close of trading yesterday the API released its weekly report on crude and products and the rise in inventories was shockingly high. On an aggregated basis the report stated inventories rose 14.6 million barrels. This is seven times the average of the past 5 years, eleven times more than analysts were estimating and 15.5 million barrels more this year than the same week last year. The numbers were so wholly out of line one must question their validity. Interestingly, crude inventories at Cushing only rose 1.3 million barrels so apparently inventories everywhere else around the country must be growing. The DOE releases its report today.

Adding to the bearish news was a report from Saudi Arabia that the country is producing more oil than they ever have! 10.3 million bpd on average in March. The previous record was 10.2 million bpd set in August 2013.

So how is the market taking this overwhelmingly bearish news? Not so bearishly. WTI is down $1.3 this morning. Hmmm. My antennae are raised.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas rose 3¢ yesterday closing at $2.680 treading water above the lows set earlier this year in the low $2.50s. Yawn. This morning natty is giving back yesterday’s game being down 3.5¢. More yawn. The weather forecast at this time of year is pretty much a moot point as we move from winter to summer so the fundamentals I focus on is the natural gas electric generation burn and nuclear power plant maintenance. The latter will increase natural gas burns. All quiet on the western front, until tomorrow’s storage report.

Elsewhere

Being I’ve been in the energy markets for 35 years I know that the low crude oil prices of late would bring out the “big boys” check books. As a matter of background, the “majors” are always looking to, have to, add reserves. They need to build their balance sheets for they are in a business where every day the balance sheet shrinks as the asset is moved to the income statement. They do this via two avenues: drill or acquire other companies. When oil prices fall, like they have the last 9 months, valuations of companies also fall (no rocket science there). Therefore, sometimes it is more attractive for a well-capitalized company to buy another company to build the balance sheet rather than drill. The “well capitalized’ companies are mostly the “majors” and very, very large independents. Well I’ve been expecting to hear of acquisitions but the one announced yesterday was a bombshell. Royal Dutch Shell announced they were buying BG Group PLC for $69.6 billion. Buying BG will add 25% to Shell’s proved oil and gas reserves and 20% to production. This is a ginormous deal. The Bigs get bigger.  Have a nice day.