Equites and the Economy
Good morning and happy National Oyster Day. For a third consecutive day U.S. stocks closed lower with the Dow falling 47 points, to 17,551, the S&P 500 lost 5 closing at 2.093 and the Nasdaq was off 9 to 5,106. Similar to the previous sessions all the indexes closed well off their intraday lows. Putting serious downward pressure on equities was a bad Apple. AAPL is in both the Dow and Nasdaq and the U.S.’ largest company fell again closing down 3.8%. This is the 11th consecutive day of lower closes and is now off 13.7% over the same time frame. I mention Apple because it is the posterchild of U.S. equities. It’s one of the “generals” of our stock market. In war, generals lead. They also lead in equities, and in this case the concern is if this general is leading us down. Also not helping stocks were earnings reports from Allstate, which had its biggest one day loss in 5 years, and NRG Energy that posted a loss with analysts expecting a small profit. The only domestic economic report of significance released yesterday was Factory Orders. In June, and as expected, they rebounded from May’s horrid -1.0% to +1.8% led by a surprisingly large increase in civilian aircraft orders: +65% month-on-month. Machinery and auto orders were up nicely too. The drag on the number were orders for oil and gas related industries. Don’t expect this to get better next month.
Overnight Asian markets closed mixed with the closely watched Chinese Shanghai closing down 1.65% despite a positive Chinese PMI services index report. There’s good news on the Continent with equities trading significantly higher with the major indexes up between 1.0-1.5%. The love is spilling across the pond this morning with all the U.S. major bourses up, albeit not as much as our western European friends, with Dow futures up 78 points.
Although I watch the schedule of when economic reports will be released, I rarely bother you with it. However, two very important reports are going to be released imminently and you need to heed, one today and one Friday. Today ADP will be releasing its Employment Report which reflects the employment situation in the private sector. This is the precursor to Friday’s Labor Department’s Employment Situation report. These two reports, especially the latter, are two of the most important reports of the month. The ADP report is important because although an individual month’s data can diverge between the two, over time they correlate very well.
Commodities priced in U.S. dollars (and there are a lot!) came under pressure yesterday afternoon when Atlanta Fed President Dennis Lockhart said “there is a high bar right now to not acting” with respect to the Fed raising interest rates at its September meeting. Mr. Lockhart’s opinion is important because 1) he is a voter on the FOMC currently (as opposed to other Fed officials who make public comments but are not voters), and 2) he is considered one of the more dovish committee members. Thus, “hawkish” comments from a “dove” are noteworthy. Maybe Mr. Lockhart is just setting the stage for a dissent vote to not raising interest rates next month but his comments put a bid into the U.S. dollar yesterday.
Despite the strength of the U.S. dollar yesterday oil did manage to find a bid with WTI closing 57¢ higher at $45.74. Brent rose 47¢ settling at $49.99. Remember though WTI lost $1.95 on Monday putting in a 4 month low so this is but a token victory for the bulls. WTI is higher again this morning, 52¢, rising on the API report late yesterday which showed U.S. crude oil inventories fell 2.4 million barrels last week. The market was looking for less of a decline, 1.5 million barrels. More credence is put in the DOE’s crude and product inventories report which is released today at 9:30 CDT. The oil bulls yoke is very, very heavy currently on concerns of global oversupply exacerbated by a slowing Chinese economy. The only thing the bulls can pin their hopes on is that the DOE report shows a decline in U.S. production. Previous reports have noted U.S. production has declined the last two months. However, don’t forget, the last two weeks the Baker Hughes rig count report has shown an increase in the rig count, albeit it is still 60% lower than July 2014 which is bearish.
Natural gas prices continue to rise adding another 6.4¢ to the 3.2¢ it gained on Monday closing at $2.812. Forgive the redundancy but the $2.75 to $2.80 level is a range the market has been extremely comfortable in for most of this summer. Natty’s recent boost has been due to a stronger cash market resulting from elevated A/C loads and record power sector demand which continues to support prices. Looking at the forecast demand will not be waning over the next couple of weeks with normal to above normal temperatures forecasted for the eastern and southern portions of the nation. This will make traders reluctant to sell. Additionally, savvy traders are noting that production continues to slip. Whereas a few months ago the U.S. produced 74 Bcf/d now we’re producing 72 Bcf/d. This morning natty continues to creep up being 3.7¢ as I write.
Oil prices peaked last summer and since that time, specifically June of 2014, the combined market capitalization of the 157 energy companies listed in the MSCI World Energy Sector Index or the Bloomberg North American Independent Explorers & Producers Index has lost about $1.3 trillion. Putting this into perspective, this is the equivalent to Mexico’s annual GDP. And this all occurred in a little more than a year. Think about that. Mexico’s economy just vanished in 13 months.
Have a good day.