Equities and the Economy

This is not the déjà vu I wanted to see all over again. At least you have your health (hopefully!) because our 401K’s or portfolios continue to get pounded. Ugly is not a proper description for yesterday. Grotesque is a better word. Forget economic reports. Forget PMI’s. Forget housing starts. Forget Retail Sales. Forget where interest rates are going. Over the last few sessions it has been nothing but a complete and unadulterated fight for survival. Liquidity is all that matters. Getting “smaller” is the primary objective. Sell first, ask questions later. Everything is being tossed overboard, babies, bathwater, kitchen sinks. I’ll first give you the end of day numbers and then I’ll give you the play-by-play because it is worthy of note. At the closing bell the Dow ended down 589 points, 3.58%, at 15,871, it’s 8th worst one-day point loss in history and worst daily point decline since August 8, 2011. The S&P 500 lost 78 points, 3.85%, to 1,893 and the Nasdaq dropped 180 points, 3.83%, to 4,526. The Dow is now down 13.3% from its high in May, the S&P is off 11.2% and the Nasdaq is down 13.3%. As you might easily surmise, investors are down-right scared with CNN’s Fear & Greed Index hitting 3 (out of 100). This is the lowest I’ve ever seen it.

The play-by-play, i.e., intraday action, was absolutely insane! In the opening four minutes the Dow fell 1,089 points! If we had closed at that point it would have been the worst day for the Dow in history! Fortunately, after that the market started to climb and at around 12:10 Central time the Dow had recovered almost 900 points of the losses and I was thinking “This might turn out ok. If we can end the day close to or equal to Friday’s close it would be immensely supportive of the market.” And then then more selling came in. As I foretold in yesterday’s report, the S&P and Nasdaq have joined the Dow as officially being in correction territory, down 10%. Yesterday’s percentage losses were the greatest one day losses in four years with the Dow closing at its lowest level since February 2014. More than 2,000 stocks hit new 52 week lows in yesterday’s rout including Chevron, GE Berkshire Hathaway and PepsiCo.

The carnage in Chinese shares last week brought many investors to conclude the People’s Bank of China would take some action over the weekend to support the financial system, and when they didn’t, the race was on. To the bottom that is. And whether you like it or not, what is bad for China is bad for the U.S.

One would think that gold prices would have skyrocketed in a flee to safety but in times like these when liquidity is all that matters even gold didn’t perform falling ½%.

Overnight it looked like the rout would continue with China’s Shanghai closing another 7.63% lower hitting its lowest level since December. Chinese shares today fell, are you ready, 15% in the last two days! However, after the close the PBOC announced a massive stimulus move including injecting massive sums of money into the financial system, the most in 6 months, as well as cutting interest rates by 25 basis points to 4.6% and reducing reserve requirements. Unsurprisingly, investors around the world are taking the positive news and adding to their risk positions with Germany’s DAX and France’s CAC up 4.54% and 4.60%, respectively. U.S. investors are jumping on the bandwagon with the Dow currently up 283 points but this is much less then when I came into the office when futures were up 523 points. Folks, we aren’t out of the woods yet. My belief is we’re going to enter a consolidation phase with support at the level when we were down 1,089 points yesterday,15,460, and resistance being around the 17,068 level and we’ll stay in this range for a few weeks if not months. Let’s see if this happens and then develop a plan. I have to add one caveat. If today we close near yesterday’s close, i.e., this morning is nothing but a dead cat bounce giving length a bounce to sell into, forget the last couple of sentences.

By the way, China has now overtaken Greece as the top of the worry list for investors.

Oil

Unsurprisingly, oil got sucked into equities abyss yesterday with WTI closing $2.21 lower at $38.24 hitting a fresh 6 ½ low which if you recall, was when we were deep in the recession. Brent lost about the same, $2.27, settling at $42.69. Note that spread is $4.45. Now just like WTI, Brent is a benchmark index with other oils priced off those indexes based upon factors such as quality. Well, Middle East oil, which is in most cases is lower quality than Brent, is being materially discounted with Middle East sellers adamant about capturing market share. For example, Irving Oil in St. John, New Brunswick, one of the largest refineries on the East Coast, two years ago brought in 100,000 bpd of Bakken crude. Today. Zero! Now part of this is because there is less crude being produced in the Bakken. You can see it in the rail shipment data. In Q4 2014 132,000 carloads of oil moved out of the Bakken. In Q1 2015 that number dropped to 113,269. In Q2 it dropped further to 111,068. Clearly lower oil prices and the resulting lower rig count is affecting production in the Bakken.

This morning oil is bouncing on the equities bounce with WTI up $1.10. All eyes are on equities.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices were off about a nickel in the morning as the stock market melted down but with the realization that warmer weather is coming in for the 6-15 day time frame natty found some support finishing down 2.6¢ at $2.650. Yesterday’s close was the lowest in 2 months. This morning’s weather forecast is coming in warmer for that same time frame which is bringing in some buyers with natty up 2.6¢ as I write. One of the characteristics of an El Nino is above normal temperatures for the winter in the upper Midwest. I’m very curious to see if the above normal temperatures in the 6-10 day time frame continue deeper into the autumn and winter months.

Elsewhere

I’m not sure you ever used Uber (I have) and its service is definitely having an effect even on business travelers to the detriment of taxis. In the 3 months ending in June Uber overtook taxis as the most expensed form of ground transportation according to expense management system provider Certify. Uber accounted for 55% of ground transportation receipts compared with taxis 43%. That’s a big jump from the beginning of the year. In Q1 Uber had only 46% of receipts. In a few cities Uber beat out taxis by a wide margin. For example, in San Francisco 70% of rides expensed in Q2 were for Uber. In Dallas its 60%. LA 54%. For the record, many business travelers may be jumping on the Uber trend but employers still have reservations about safety and liability. Personally, I find Uber quite convenient. You jump in. Jump out. You don’t even need to exchange payment with the driver.

Have a good day.