Equities and the Economy

There was no Blog on Friday but I mentioned Thursday morning that based upon Wednesday’s close that both short and long term support lines had been broken basis the S&P 500. I also mentioned that this alone was not enough to force a capitulation but investors’ fingers would be on the sell trigger. Well their fingers went firing on Friday pushing the major indexes posting big losses. The Dow fell 310 points, 1.76%, ending at 17,265, the S&P 500 lost 40 points, 1.94%, to 2,102 and the Nasdaq took a big hit, 2.21%, a huge 112 points, finishing at 4,933 and below the psychologically important 5,000 level. For the week the S&P fell 3.8%, tis’ worst week since that horrible week ending August 21st which was when stocks plunged on fears of a slowdown in China. The Dow fell 3.35% and the Nasdaq lost 4.1% for the week. Although I do follow it I don’t mention it often but the Russel 2000, a broad index of mostly small cap stocks, fell 5.1% for the week, its biggest weekly percentage decline since May 2012. It goes without saying last week was a horrible week for our 401k’s. It was the continuing plunge in oil prices which made investors negative. Oil alone doesn’t make sentiment bearish or bullish, but oil prices are extremely transparent and global and investors use the price of oil as a surrogate for the demand for commodities in general so when oil prices are down investors view global demand is down and that’s not good for global equities.

Ok, that was last week and it’s a new week. The Asian markets were volatile and closed mixed with Japan’s Nikkei 225 losing 1.80% but China’s Shanghai up 2.51%. European indexes started the morning off nicely in the green but have given their gains up and are now trading marginally negative, which is what Dow futures are doing being off 5 points. The big event this week will be the FOMC’s meeting tomorrow and Wednesday. This is the meeting the Fed may announce an interest rate change. Fed funds rate futures are indicating a 70% to 80% chance of a ¼% rate increase.

I’ve been telling everybody for years “You want higher oil prices.” Now you see why.

Oil

As I mentioned, it was the continuing deterioration of oil prices that pulled equity prices lower. On Friday WTI fell $1.14, 3.1%, settling at $35.62 and hitting fresh 7 year lows. Brent got whacked even more falling $1.80, 4.5%, closing at $37.93. This is the first time Brent has closed below $48/bbl since late 3008 with 2008’s low of $36.20 firmly in focus. On the week Brent lost a very material 12%. It’s simply a new chapter in the “Over supply/stagnating demand” book. The latest chapter was written by the IEA which stated in its latest monthly report its forecast for global oil demand growth in 2016 will slow to 1.2 million bpd day from this year’s 1.8 million bpd growth rate. Add on that Iran reaffirmed its intention to boost crude exports early next year which is when sanctions are expected to be lifted and you don’t have a pretty picture for the bulls to paint. That being said, the Saudi Arabian led strategy of maintaining market shared at the expense of price just may begin to have an effect. A recent report shows non-OPEC supply growth decreased 300,000 bpd in November from 2.2 million bpd increases at the start of 2015.

We’re not seeing any bounce in prices this morning with WTI down 24¢, which is actually a lot better than earlier when it was down 86¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices closed down only 2.4¢ on Friday at $1.990 but below the psychologically important $2 level. Front month prices have now plummeted nearly 60¢, 24%, over the past 2 months. The enormous El Nino is absolutely having its effect with the weather to date across the eastern U.S. amazingly warm. I watched the Green Bay Packers football game yesterday and although folks had coats and hats on, it was raining. It should be snowing this time of year in Wisconsin!

Let’s just move on to today for the weather forecast came in warmer for the 11-15 day forecast and natty is getting obliterated being down 12.0¢ as I write trading at $1.870! Warm weather will now take us almost through the entire month of December. This is the lowest prompt month price we’ve seen in 14 years, September of 2001! To break that low we need to get below $1.763. Remember too, each day of warm weather and below normal HDD’s means one less day to withdraw that gas before the end of the storage withdrawal season which is March 31st meaning a higher beginning inventory level going into the injection season.

Elsewhere

The first exports ever out of the U.S. of liquefied natural gas are right around the corner. Cheniere Energy’s Sabine Pass LNG export facility began receiving its first substantial deliveries of natural gas on December 10th as the unit begins ramping up to commence exports. Train 1 has an operational capacity of 0.7 bcf/d and is expected to begin exporting next month.