Equities and the Economy

Good morning. Horrible, horrible, horrible price action yesterday. When I came in yesterday Dow futures were up 523 points. When I finished writing this Report the Dow had eased off to being up 283 points. When closing bell rang all the gains evaporated with the Dow finishing down 205 points,1.29%, at 15,666. The S&P 500 and Nasdaq were just as bad with the former losing 25 points, 1.33%, to 1,868 and the latter off 20, 0.45%, to 4,506. There’s a trading term for yesterday’s price action: “bear trap.” And it sure was. Before the open all three benchmark indexes were trading firmly higher on the announcement by the PBOC of a massive stimulus bringing in buyers only for the market to close materially lower. I’m thinking that investors around the globe are losing faith in central bankers’ ability to stimulate their respective economies. Folks, this is not how bull markets act. Bull markets open lower and close higher. Bear markets open higher and close lower. And that’s what we had yesterday. I sure hope this does not portend more pain is ahead. CNN’s Fear and Greed Index remains deep in the Extreme Fear region at 3, the same as yesterday, but there ain’t much lower to go. This is the lowest level I’ve ever seen for this index.

Regarding economic data here in the States, which for the last few days I haven’t even mentioned for investors were in a panic mode caring little about the fundamentals, we had mixed reports. On the positive side the Conference Board published its Consumer Confidence numbers which came in at 101.5 in August up sharply from July’s 91.0. This was far above the consensus of 83 to 94. However, the survey was taken prior to stocks melting down and I guarantee you if the survey was taken today the index would come in materially lower than 101. Also released were new home sales by the Commerce Department with sales rising 5.4% in July compared to June coming in at expectations. By the way, the sales in the northeast were very strong with a 23.1% gain. Youza! Further on housing, Standard & Poor’s/Dow Jones reported yesterday that homes prices in June rose 5% on an annualized basis among the 10 largest cities but on the down side prices in June actually fell 0.1% after the seasonal adjustment.

This morning the so closely watched now Chinese Shanghai composite waffled between red and green today ending down 1.27% which is rippling to European markets only in a more muted sense with Germany’s DAX down ½% which is an improvement from where it opened. Locally Dow futures are 284 points higher but I’m not breaking out the bells and whistles because as I’m sure is fresh on your minds, this is how we started out yesterday, and we all know what happened.

Oil

Oil prices closed higher yesterday with WTI settling $1.07 up at $39.31 and Brent gaining 52¢ to $43.21. Note that spread is now under $4 at $3.90. Take it from an ex-trader of 35 years, spreads compress when commodity prices go lower. Yesterday after the close the API released its crude inventory data showing a truly stunning drop of 7.3 million barrels in inventories. Not only is this a huge number and far, far larger than anyone anywhere forecasted but in the opposite direction with an in inventories of 1.2 million barrels was expected. One would think this would be manifestly bullish but it looks like traders are not believing the data for WTI is down 22¢. It looks like they’re waiting for the DOE report today at 9:30 CDT.

The war of words continues amongst the OPEC members. Iran’s Energy Minister, Mr. Zanganeh continues to lobby for an emergency meeting of the cartel to discuss prices while Saudi Arabia yawns saying the regularly scheduled December meeting is all that is necessary at the moment.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas manage to eke out a 3.5¢ gain yesterday closing at $2.685. The weather forecast continues to lend some support with above and much above normal temperatures forecast for the eastern half of the country for the first 9 days of September. Forgive the redundancy but this time frame is September where CDD’s drop off dramatically, especially the farther north you go. Actually, Toronto could have some spectacular weather during this time frame. Natural gas traders have escaped the angst investors and traders of just about every other commodity and equity around the world has experienced with natty prices pretty much moribund, at least compared to the volatility of the former. This morning is the same with natty up 1.4¢ as I write. By the way, the September Nymex futures contract expires tomorrow.

Elsewhere

Will all the damage done lately to our portfolios I thought you could use some economic humor. Here are definitions of capitalism, depending on what country you reference.

Traditional Capitalism: You have two cows. You sell one and buy a bull. Your herd multiples and the economy grows. You sell them and retire on the income.

American Capitalism: You have two cows. You sell three to your publically listed company using letters of credit opened by your brother-in-law at the bank. You then execute a debt/equity swap with an associated general offer so that you get four cows back, with a tax exemption for five cows. The milk rights of six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to seven cows back to your listed company. The annual report says the company owns eight cows with an option on one more. You sell one cow to buy the president of the United States leaving you with nine cows. No balance sheet is provided with the release. The public buys your bull.

Australian Capitalism: You have two cows. You sell one and force the other to produce the milk of four cows. You are surprised when the cow drops dead.

French Capitalism: You have two cows. You go on strike because you want three cows.

Japanese Capitalism: You have two cows. You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk. You then create clever cow cartoon images called Cowkimon and market them worldwide.

German Capitalism: You have two cows. You re-engineer them so the live for 100 years, eat only once a month, and milk themselves.

British Capitalism: You have two cows. Both are mad.

Canadian Capitalism: You have two cows. Come to think of it, they look more like a pair of moose. In fact, yes they are. One speaks French, one speaks English. One fights to create a new country, the other won’t let it. They both play ice hockey well.

Italian Capitalism: You have two cows, but you don’t know where they are. You break for lunch.

Russian Capitalism: You have two cows. You count them and learn you have five cows. You count them again and learn you have 42 cows. You count then again and learn you have 12 cows. You stops counting cows and open another bottle of vodka.

Swiss Capitalism: You have 5000 cows, none of which belong to you. You charge an outrageous fee to others for storing them.

Chinese Capitalism: You have two cows. You have 300 people milking them. You claim full employment, high bovine productivity, and arrest and detain without trial the journalist who reported the number cows.

Smile. Have a nice day.