Equities and the Economy:

• More records.
• U.S. wholesale inflation near 6 year high.

The Dow and S&P 500 closed at record highs for a 4th consecutive session yesterday. The Dow posted a healthy gain of 119 points, 0.5%, finishing at 24,505 and the S&P rose 4 points, 0.2%, ending at 2,664. The rotation out of tech stocks continued with the Nasdaq closing down 13 points, 0.2%, at 6,862. The Nasdaq has been the best performing index in 2017 up 27.5% for the year and far outpacing the other two major indexes so it’s not surprising to see investors rotating/rebalancing their portfolios at the end of the year.

The FOMC meets today for the second and final day. A ¼% increase in interest rates is widely expected and baked into the markets. Investors will be mostly focusing on the Fed’s view of the economy going forward. However, the post-meeting press conference held by Chair Janet Yellen will carry less weight this time being it’s her last with Jerome Powell taking over the Chair next year.

The Fed got data yesterday which will support their interest rate hike. Yesterday the government reported the producer price index (PPI) surged 0.4% in November. Core PPI, which removes the more volatile energy and food prices, also rose 0.4%. The increase in the PPI pushed 12 month wholesale inflation rate to 3.1%, the highest since January 2012. The increase in PPI was broad based. Prices for energy, new cars and trucks, transportation and warehousing activities, travel related services, loans and certain foods such as beef and pork were all up. You can’t get a better signal of a strengthening economy than that folks.

We’re starting out today sedate with the Dow up 19 points.

Oil

• Prices retreat from multi-year highs.
• EIA raises forecast of 2018 U.S. oil production.

Oil prices yesterday gave up almost all of their Monday gains. Brent fell $1.35 closing at $63.34 and WTI lost 85¢ settling at $57.14. Prices on Monday shot higher on the report that Ineos was shutting in its North Sea Forties Pipeline System after a hairline fracture discovered last week grew. The system delivers almost 40% of the U.K.’s North Sea oil and gas. Traders don’t really know how to trade this news event because Ineos didn’t give a time frame on how long it will take to repair the pipe only saying it will be weeks, not days.

The API released a bullish crude and products report yesterday stating crude inventories plunged by 7.4 million barrels last week. That was nearly quadruple forecasts. Both gasoline and distillate inventories grew by 2.3 million barrels and 1.5 million barrels, respectively, and pretty much in line with expectations.

That data was definitely bullish, but dampening the bulls spirits a little was the EIA’s monthly report on 2018 U.S. oil production which they again revised higher this time by 60,000 bpd to 780,000 compared to 2017 to 10.02 million bpd. This is a lot of oil folks! It surpasses the previous record of 9.6 million bpd from back in 1970. A lot of this will be exported thanks to the government lifting the ban on exporting oil which occurred in December 2015.

This morning WTI is up a tad, 26¢.

Courtesy of MDA Information Systems LLC

Natural Gas

• Prices get bludgeoned.
• Market focusing on production.

Natural gas exports to Mexico are at record levels as are LNG exports (which will grow by another 0.8 Bcf/d next month with Cove Point, MD going commercial) and the weather may be price supportive, but traders don’t care. All they’re focusing on is growing U.S. natural gas production and infrastructure coming into commercial operation to move that gas to market. Yesterday the bulls were slaughtered with January gas falling a huge 15.0¢, 5.3%, settling at $2.678. Front month gas has dropped a whopping 55¢, 7%, over the past 10 trading sessions. Yesterday’s EIA Short-Term Energy Outlook report only made the bears pile on. The agency forecast U.S. production will increase 6.1 Bcf/d, 8.4%, in 2018 from 2017 while consumption will only increase by 3.1 Bcf/d. Most of the increase is due to the completion of pipeline systems currently under construction becoming operational allowing constrained gas in the Northeast to get to market.

I always focus on the calendar strips and this has caught my attention. The calendar 2018 strip has fallen to a 20 month low just above $2.70, and importantly, now below the 2019, 2020, and 2021 strips. It’s been a long time since the 2018 strip was below those other strips. That may bring in some price support for 2018.

Today’s weather forecast is giving the bulls some hope shifting with the 11-15 day term shifting much colder with very, very cold weather over the Hudson Bay creeping further south into the plains. The cold hasn’t reached the major gas consuming regions of the upper Midwest and northeast year, but it’s close, and the weather models have been slowly trending that way. Natty is up 2.2¢ this morning.

Elsewhere

Tesla has been trying to convince the trucking community that it can build an affordable electric Semi truck, and it looks like it just convinced a Fortune 100 company of it. PepsiCo, ranked 44th, just announced it reserved a hundred of the electric big rigs, the largest known order to date. PepsiCo justified the purchase as it looks to continue to reduce fuel costs and fleet emissions. PepsiCo’s order adds to orders by more than a dozen other companies including Wal-Mart and Sysco Corp. According to Reuters, Tesla now has at least 285 truck reservations.

Tesla has not revealed what the full price of the electric semi-truck will be, but Elon Musk said, according to A.P., that they are “confident that this is a product that’s better in every way from a feature standpoint.” Tesla says the Semi’s drivetrain comes with the guarantee to last 1 million miles, or equal to about 40 trips around the Earth. Musk has said it is capable of going 500 miles on a single electric charge even while hauling an 80,000-pound load. The primary detriment for buying the truck has been the same for purchasing any electric vehicle: the battery range and time to recharge.

The semitrailer will come with Tesla’s Autopilot system, which is the car maker’s driver assistance system that uses sensors, radar and cameras to steer, speed up and slow down a vehicle based on traffic and road conditions. It will also come equipped with a system that doesn’t only warn the driver about a lane departure, but one that actively keeps the truck in its lane. Production on the semis is expected to begin sometime in 2019.

Apparently the truck is gaining in popularity. Tesla initially asked for reservation charge of $5,000 per truck when it introduced the Semi on November 16th. That amount has now risen to about $20,000.