Equites and the Economy

Good morning. Well it was a heck of a run! Folks you may not have realized it didn’t realize it but the way long overdue correction just happened, and I bet you didn’t even see it for it happened so fast! On Friday we just ended the third longest running bull market in history. The definition of a correction is a 10% decline and on Friday the Dow registered a 10% drop from its record high in May. This is regarded as a “correction.” As of Friday the S&P 500 and Nasdaq had not officially corrected but it looks like they’re going to share that dubious distinction after today’s closing bell. Bear in mind it’s been 4 years since the last correction which is amazing considering corrections occur on average about once every 18 months.

I had to take a second look at the numbers after the close on Friday because at first I thought I was looking at stock indexes for an emerging market. But, alas, it was unfortunately in our backyard where the annihilation took place. Custer fared better at Little Big Horn than equities performed Friday. Here are the numbers: Dow down 531, 3.12%, to 16,549. S&P 500 down 65, 3.19%, to 1,971. Nasdaq down 171, 3.52%, to 4,706. The Blue Chip index had its biggest drop since August 2011. Volume on Friday was the biggest of the year. For the week both the Dow and S&P lost 5.8%. This was their largest weekly loss since September 2011. And that was the good news! The Nasdaq lost a staggering 6.8% on the week. This is more than the Black Knight’s flesh wound! All three indexes are now in the red for the year. Apple is down 21% from its high. ExxonMobil is off 28%. Proctor & Gamble is down 23%. Wal-Mart is down 27%. When the “generals” of the market are showing losses like this you can tell there’s a lot of fear in the market. You can see it in the Fear Index, the VIX, was up for the week, are you ready, 100%! This is the biggest weekly jump in, well, how about, forever! Safe haven assets like gold and T-bills rallied. The yellow stuff was up 4.2% on the week to $1,1159/oz. and yields on Treasuries are falling. Forget yield. It’s a stampede for preservation of capital. In the last four session $1.3 trillion in U.S. market value has been wiped out. Poof. Mexico just got wiped out. At least its economy did for that’s about the size or Mexico’s economy.

Over the past few weeks investors have been bombarded with a relentless string of global data points that speak to a massive, massive transition to “risk off” including the latest Friday morning with China’s PMI manufacturing report coming in at a 6 ½ year low. A decade or so ago China played a much smaller role in the global economy but today it’s the second largest economy and what goes on there effects the entire world. Falling Chinese demand has send prices plunging for all manner of commodities – iron, copper, oil – and that has walloped countries that export them.

This morning it’s shear panic around the world and that’s a gross understatement. Investors in China were hoping the government would come in over the weekend with stimulus measures to support the market, but they didn’t get it. The result, buyers were nonexistent and China’s Shanghai closed down 8.49%, the biggest one day percentage drop in 8 years!. Folks, that’s 1,405 Dow points! And it’s almost that bad in Europe and the U.S. with Germany’s DAX off 4.18% and Dow futures down 745 points as I write. At one point this morning the Nasdaq 100 futures were off 5% which is “limit down” which means trading is halted. Apple is down 5.49% currently. I could go on but this is going to be one very ugly day so I’ll just let it go and update you on tomorrow morning. My bet is you’re going to be checking the market more often today then you usually do.

There’s an old saying in the market. “You should be sell’n when they’re a-yell’n and buy’n when they’re a-cry’n.” Well there’s a river of tears out there right now, but stepping in to buy is soooo hard.

By the way, the recent equities action has got to make the Fed reconsider raising interest rates next month.

Oil

When China’s economy sputters its commodities that get hit for the final destination for massive amounts of commodities is China. Oil is just another commodity and it was another down day for oil. WTI fell 87¢ settling at $40.45 with intraday trades at below $40. Brent lost even more closing down $1.16 at $45.46. WTI fell more than 5% for the week and has posted 8 consecutive losing weeks and is down almost 25% for the year. WTI is on its longest weekly losing streak in 29 years! Brent is down the last 7 or 8 weeks. Both oils are at 6 ½ year lows. If that’s not enough to make an oil and gas producer despondent I don’t know what is. OPEC has been counting on lower prices to stimulate demand (it usually does) but I guarantee you they didn’t count on China’s economy slowing this much.

Oil prices continue to plunge, which should really not be a surprise to you, with WTI down $2.00 this morning trading at $38.45. This is the lowest price since the financial crisis. This will only exacerbate equities fall for drillers and other energy companies make up a significant chunk of the S&P 500 index. Shares of companies in that index have plunged 35% in the past 12 months. I’ve heard so many times how people want lower oil prices. I’ve countered “No you do better with reasonably higher oil prices.” Now you see what I’m talking about.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices fell on Friday closing down 7.9¢ at $2.676. Now typically the price action in the equities market does not affect the natural gas market but it was such a big risk-off day on Friday traders could have been selling anything and everything including natural gas. Natty is down 3.9¢ this morning and it’s got to be because of equities because the weather forecast this morning is more bullish compared to Friday’s with the 6-15 day forecast showing above normal temperatures coming to the eastern 2/3rds of the country which will increase natural gas load. That being said, the current 6-15 day forecast is for the last 3 days of August and first week of September when average CDD’s are much lower than in July and August. Near term there is very little A/C load for the eastern half of the country with temps in the Midwest and east well below normal. It won’t be long folks before the leaves start changing color.

Elsewhere

A new boom is taking shape in the oil fields of west Texas, but it’s not what you think. It’s solar. Solar power has gotten so cheap to produce and so competitively priced that it’s taking hold in Texas, and without the incentives that are available in stated like California, Nevada and North Carolina. While there is federal financial support for solar projects there is no state subsidies or mandates that encourage solar power. Texas currently has only 193 MWs of large-scale solar arrays, enough to power about 40,000 homes. However, ERCOT is forecasting that between 10,000 MWs and 12,500 MWs of solar generating capacity will be installed by 2029. That’s roughly equal to the size of all the solar farms currently operating in the U.S.

The plummeting cost of big-scale solar projects is the driver behind the expansion. Last year, municipal utility Austin Energy signed a contract with a solar development company to build a 150 MW solar facility in Pecos, County, making it one of the largest solar farms in the country. On a sunny afternoon the facility could provide more than 5% of the city’s power needs.

As goes the tag line of the old cigarette commercial “You’ve come a long way baby!”

Have a good day. Does it feel like we’re in the reality TV show Survivor? And losing!