Equities and the Economy
Good morning. The last Blog was December 23rd reflecting the market action of December 22nd so let’s see what’s transpired since then. On December 22nd the Dow closed at 17,417, the S&P 500 at 2,039 and the Nasdaq at 5,001. Yesterday the Dow closed at 17,528, the S&P at 2,057 and the Nasdaq at 5,041. So we’ve experienced increases of 111 points, 18 points and 40 points, respectively, or about 0.6%. Nothing spectacular but most importantly, higher and not lower. The theme remains low commodity prices, specifically oil. For the year, the S&P is very slightly negative, the Dow is about 2% weaker. The Nasdaq is positive. Apple’s been a drag on the S&P and Nasdaq of late (yes, it’s listed on both exchanges!) with the stock down 9% in the past month on worries that iPhone sales could decline for the first time in 2016. Dow component Walt Disney gained 1.31% yesterday after the company’s latest Star Wars movie topped $1 billion in ticket sales. The force is with them!
Regarding economic news, the only report of significance yesterday was the Dallas Federal Reserve Bank’s Manufacturing index which came in at -20, which was far worse than even the most bearish forecast which was -8. Folks, this is the effect of low oil prices. The “oil patch” has been in a free fall the last month with the oil rig count plunging. Now this report is parochial and not catholic meaning it’s local to the south central U.S. The rest of the country is in much better condition.
This morning U.S. equities are looking really good with the Dow up 163 points following higher equities around the world. All the major Asian indexes closed higher and the European bourses are trading even higher with Germany’s DAX and France’s CAC 40 up 1.82% and 1.71%, respectively.
On December 22nd WTI and Brent closed at $36.14 and $36.11, respectively. Yesterday, WTI fell $1.29 to $36.81 and Brent lost $1.27 settling at $36.62. So oil has gone nowhere over the past week. Note that WTI continues to trade at a premium to Brent. This phenomenon began last week ending a 5 ½ year run of Brent trading at a premium. As I’ve mentioned previously, all things being equal (and that really means transportation constraints) WTI should trade at a premium to Brent.
I don’t believe oil prices are going anywhere for quite a while. There are thousands of wells that have been drilled (technically the term is completed) but are capped waiting for better prices and OECD crude oil stocks are at about 3.0 billion barrels compared to an average of about 2.7 billion barrels for the period of 2009 – 2014. On the other side of the coin is demand which has escalated dramatically as prices have fallen. In Q1 2001 demand was about 85 million bpd. Now it is 95 million bpd, up almost 12%.
This morning WTI is up 86¢.
The weather has turned much colder over the past week and natural gas prices have gone apogee. On December 18th we had a 14 year low settle of $1.764. Yesterday we closed at $2.228, up a whopping 46.4¢ since that low, that’s 26%!. All markets at times get overdone and a couple of weeks ago natty was way, way oversold exacerbating this move. I’d been telling you natty was cheap! Ok, so what about now? The answer lies in whether or not the El Nino is over, or even past its peak. And I don’t have that answer. Longer term forecasts last week showed the northeast to be above normal for January, but the new long range forecast has not come out, and it might change, and then maybe not. If the current cold burst is a short term event prices will retreat. If not, we’re going higher. My belief is that it we were having normal winter weather we’d be in the $2.75 to $3.00 range.
Today the January Nymex contract expires and the bulls are exerting their force with the contract up 13.71¢.
On January 18th President Obama signed the latest budget and in it were some major actions affecting energy. First is the lifting of a 40 year old ban on exporting oil from the U.S. with the first shipments expected next week. In exchange for lifting the ban, a 5 year extension was given for wind and solar tax credits. These tax credits are expected to drive construction of 20,000 to 25,000 MWs of additional solar capacity over the next 5 years, 54% more than would have occurred without the extension.