Equities and the Economy

Maybe it’s the dog days of summer, but U.S. equities have really been sedate of late, albeit the major indexes are indeed bivouacking near record highs. The S&P 500 did manage to hit a new high intraday but could not hold onto the gain and closed down 3 points at 2,171. That being said, July was a great month for the index rising 3.6%, its best month since March. The bellwether index rose as economic reports show the U.S. economy is picking up and corporate earnings are not as bad as initially been feared. Earnings are now expected to decline 3% for the second quarter, per Thomson Reuters, an improvement from the 4.5% decline expected on July 1. I know, as I’ve preached, what’s important is how actual data comes in relative to expectations, but negative earnings are still negative, and yet equities are trading at record highs. I think part of this is that the economies in other parts of the world (Europe) are performing worse than the U.S., therefore, foreign money is pouring into U.S. equities. And you certainly aren’t going to get any yield from bonds, especially when some central banks (Japan) are offering negative interest rates.

The Dow fell 27 points yesterday closing at 18,405 and the Nasdaq, which has been on a tear of late, jumped 22 points to 5,184, its highest level since July 21 last year.

Anyway, regarding fundamental economic data, the July ISM manufacturing index was unchanged from June at 53 with the important point here being the index is above 50 indicating expansion. In another report, construction spending fell 0.6% in June due to a drop in spending on manufacturing facilities and commercial buildings. Regarding the latter, commercial building construction in Houston has been derailed due to the fall in oil prices. The amount of commercial building office space currently available in the sublease market is at an all-time record high.

European stocks which are getting hammered this morning with Germany’s DAX down 1.3% and Frances CAC 40 off 1.4%. Fortunately U.S. stocks are faring a bit better with the Dow futures down only 50 points.

Oil

“They” hated energy yesterday. Both oil and natural gas. WTI got hammered losing $1.54, 3.7%, closing at $40.06 and Brent fell $1.39, 3.2%, settling at $42.14. Intraday, WTI traded below $40 for the first time since April. Looking at all the fundamental supply and demand data, traders are believing that the supply glut we’re currently in may be stickier to resolve than had initially been anticipated. More than ample global oil and fuel stockpiles combined with expectations of declining motor fuel consumption with the summer driving season ending in a few weeks and the slow ramping up of production levels by several of the world’s largest producers is making the bulls yoke very, very heavy. Additionally, U.S. E&P companies have adjusted their metrics such that at least some can make money at $40. Pioneer Natural Resources CEO Scott Sheffield thinks so. He said that “Definitely we can compete with anything that Saudi Arabia has… [and] We have the best rock.” He pointed out that a decade ago the average shale well decline rate was 90%. Today it’s 18%. Technology, technology, technology.

This morning WTI is getting a long overdue bounce being up 69¢. Can you say “dead cat”?

Courtesy of MDA Information Systems LLC

Natural Gas

“They” didn’t like natural gas any better. Yesterday the September contract got hammered falling 10.5¢, 3.7%, closing at $2.771/MMBtu. A combination of the weather forecast coming in a bit cooler yesterday morning (albeit still showing extensive areas of above normal temperatures) and production up 0.5 Bcf/d brought in sellers. While weekly injections into storage have been way below both last year and the 5 year average, total inventories are still at record highs for this time of year, 3.3Tcf. Although prices have traded as low as $2.62 and a high very near $3.00, gravity continues to pull the price to the $2.75 level which on average is where we’ve been since mid-June. This morning natty is up 0.3¢. Complete chatter.

Elsewhere

Earnings season just ended and of course Facebook reported. During their Q2 earnings call (yes, the S&P 500 companies have conference calls explaining their earnings) Facebook’s management stated that 23% of the world’s population is on Facebook. Think about that. That equates to a stunning 1.7 billion people using Facebook! It’s even more awe inspiring when you realize that 25% of the world’s population is less than 14 years old and less likely to be on Facebook and that billions of people living in the world live in abject poverty devoid of computers and the internet. Again, I stand in awe.