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Morning Energy Blog – August 29, 2016

Equities and the Economy:

Friday was the event investors had been waiting for all week which was our Fed Chairperson, Janet Yellen, speaking from Jackson Hole, WY (beautiful place!). Yellen told a gathering of central bankers from around the world the U.S. economy was nearing the central bank’s goals of maximum employment and price stability but as expected, she did not indicate when the Fed would act (she really can’t do that!), i.e. raise interest rates. Her speech caused a volatile session with the Dow fluctuating from about 110 points down to 129 points up but when the final bell rang the change on the day was not really much with the Dow closing down 53 points at 18,395. The S&P 500 fell 3 points finishing at 2,169. The Nasdaq actually posted a gain of 7 ending at 5,219. Volume was greater than average which we haven’t seen for most of August. In addition to creating volatility, her speech increased the probability of a rate hike in September with the odds climbing to 36% from 21% on Thursday. Also, the odds of a rate hike in December went from 52% to 64%. Complicating the whole rate hike matter is the election in November and although Fed spokespeople say the election does not enter the rate hike equation, historically the Fed doesn’t raise rates in November (the FOMC meeting is 11/1 & 2) over concerns of appearing to affect the election. Additionally, no press conference is scheduled for November and traditionally the Fed doesn’t make changes to monetary policy at meetings without a press conference. So it’s next month (meeting is 9/20 & 21) or December (meeting 12/12 & 14). On a side note, gold hit a five week low as the odds of an interest rate hike grew. Gold is a non-interest bearing asset and rising interest rates are bearish gold because of the increased cost of holding the asset.

It appears that now with Yellen’s speech out of the way the market is going back to its August ways with the Dow up 96 points. It’s trench warfare. On the bull side you have an improving global economy, especially here in the U.S., with global central banks’ extremely accommodating monetary policy and on the bear side you have S&P 500 stock P/E ratios at very frothy levels with the propensity of an interest rate hike which is bearish of stocks.

Oil

The oil price action on Friday mirrored equities with material volatility yet ending largely unchanged. At one point during the day crude oil prices were up 2%, 94¢, but then drifted lower and at day’s end WTI posted a 31¢ gain settling at $47.64 and Brent closed up 25¢ at $49.82. Oil prices were also taking their cues from the movement of the U.S. dollar which chopped around following Yellen’s remarks. After climbing to six week highs earlier this month WTI has fallen almost $3.00 and last week prices were down over 2% largely on the comments by the Saudi oil minister watering down expectations of an agreement on freezing production levels at their meeting next month on the 16th-28th.

Baker Hughes released its rig count report on Friday and after 8 consecutive weeks of drillers adding rigs they cut rigs by 2 last week, and those were gas rigs. The oil rig count was flat.

This morning the bears are out with WTI down 81¢ primarily on two factors. First, Iraq, which has increased exports from its southern ports this month, said on Saturday it will continuing ramping up production. Second, the U.S. dollar is stronger today and as we all know by reading this Blog, a stronger U.S. dollar is bearish of commodities priced in U.S. dollars.

Blog Weather 8-29-16
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Infomration Systems LLC

Natural Gas

Natural gas prices were under pressure Friday morning trading down about a nickel on a marginally cooler forecast but recovered those losses when the weather forecast update came at noon showing a warmer trend. At the final bell natty closed up 2.5¢ at $2.871. The calendar strips barely moved in price. Today the September natural gas Nymex contract expires which will set the price of natural gas and heat rate product electricity supplies for September for those unhedged. The weather forecast continues to show warmer than normal temperatures for the next two weeks but this expiration day is beginning very quietly with natty up 1.4¢. That being said, with this morning’s gain natty prices are up nearly 40¢, 15%, in a little over two weeks and trading near a four week high.

Elsewhere

I’m sure you heard of the lawsuit against McDonald’s that its coffee scalded a woman; well here’s one for you. A class action lawsuit against Starbucks just ended where the company was sued for, drum roll please, too much ice in their cold beverages. The lawsuit claimed that “Starbucks’ advertising practices are clearly meant to mislead customers when combined with the standard practice of filling a cold drink cup with far less liquid than the cup can hold.” Specifically, the lawsuit specified that when a Venti Cold Drink is filled up to the top black line “they are only pouring about 14 ounces of Cold Drink into the cup, not 24 fluid ounces.” The judge dismissed the case stating “If children have figured out that including ice in a beverage decreases the amount of liquid they will receive, the Court has no difficulty concluding that a reasonable consumer would not be deceived into thinking that when they order an iced tea, that the drink they receive will include both ice and tea…”

There’s no shortage of lawsuits involving beverages. The most famous was the aforementioned coffee one, Liebeck v. McDonald’s, where Leibeck was awarded $2.9 million (later reduced to $500,000). What you might not know about this lawsuit is that hundreds of customers had filed complaints against McDonald’s because of the coffee’s hot temperature.

In 1991 Richard Overton sued Anheuser-Busch for $10,000 claiming the company was falsely advertising its beer would have magical effects on his dating life. Anheuser-Busch (BUD) had a series of ads that depicted men drinking beer and surrounded by throngs of beautiful women. He claimed the ads caused him emotional distress, mental injury and financial loss. Outcome: case dismissed.

Then there was Anna Ayala who claimed she bit into a “crunchy” finger while chowing on a cup of Wendy’s chili. It turned out that Ayala’s husband had bought the finger from a co-worker, who had lost it in an accident, for $100 and stuck it in the chili. Wendy’s claimed that Ayala’s claim inflicted more than $2.5 million in lost revenue. Outcome: Ayala was sentenced to nine years in prison, of which she served four.

Sometimes it’s not the fast food companies that are under fire. Sometimes they’re the targets. Last summer there were rumors circulating that KFC was genetically modifying its meat and manufacturing an eight legged, six winged chicken and serving it to its customers. KFC’s parent, Yum Brands, sued three Chinese companies that were spreading the rumors on social media. Outcome: Each firm was ordered to pay KFC $100,000. Good luck collecting on that.

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