Equities and the Economy

Santa continues to deliver gifts well past Christmas giving a wonderful present yesterday of materially higher stock prices. The Dow rose a big 193 points, 1.10%, ending at 17,721, the S&P 500 added 22 points, 1.05%, finishing at 2,078 and the Nasdaq was the winner on the day climbing 1.33%, 67 points, to 5,108. A rebound in oil prices was the primary driver of yesterday’s move with WTI up 2.9%. As I’ve mentioned previously, for the last couple of months there’s been a pretty good correlation between oil price movement and equity price movement. Many investors view oil prices, which are extremely transparent and global, as a surrogate of the supply and demand of global commodities which are themselves an indication of global economic growth. U.S. stocks also rode the bandwagon of Asian and European stocks higher. A word of caution here. It’s the end of the quarter and year and money managers are doing their typical “window dressing.” Window dressing is where poor performing stocks in a portfolio are sold and high performing stocks are bought so that when end of the quarterly statements are produced it looks good to investors even though the fund has only been invested in those assets for a few days or weeks.

There was some very positive economic reports released yesterday. The Conference Board published its consumer confidence index for December coming in at 97 which was well above forecasts as well as above November’s 90. Better job availability was the primary driver behind the higher number. Case-Shiller released its 20-city home price index stating prices rose 5.5% in the 12 months ending October and up from September’s 5.4%. Home values have climbed at roughly a 5% during 2015 as strong hiring has bolstered a real estate market still recovering from the housing bust which triggered the Great Recession, which believe it or not, is now 8 years past. Seems like it was just a couple of years ago. Much of the price increase can be attributed to a lack of inventory. Still, mortgage rates are averaging less than 4% which the historical average closer to 6%.

This morning equities are retreating just a bit with Dow futures down 52 points. Not surprising after such a big up day yesterday, and on lower oil prices this morning.

Oil

As mentioned previously, oil prices rose yesterday with WTI closing up $1.06, 2.9%, at $37.87 and Brent gaining $1.17, 3.0%, settling at $37.79. Yesterday’s gains erased much of Monday’s rout. Yesterday the API released its weekly crude and products data. It surprised everyone showing a 2.9 million barrel increase in inventories last week. This was not only above estimates for inventories were forecast to decrease 2.6 million barrels, but inventories normally decrease in late December as holders of oil reduce inventories to reduce taxes for taxes are paid each year based upon inventory levels on December 31st. This cannot be viewed as bullish of oil prices. On the bearish AP data WTI is getting whacked down $1.22 this morning. The DOE will release its data today.

Courtesy of MDA Information Systems LLC

Natural Gas

All the commodity action has been in natural gas as of late with the first cold winter blast hitting the nation skyrocketing prices. Yesterday natty added another 14.4¢ closing at $2.372. Yesterday’s close was important for it was the expiration of the January 2016 contract meaning it impacted many natural gas supply agreements as well as those floating their heat rate product. Bad luck on the timing of the cold blast. That being said, $2.372 gas for January, one of the two coldest months of the winter, is pretty darn cheap! Impacting prices is this bout of cold weather resulting in some natural gas wells to “freeze off.” Bentek, a research firm, estimates that U.S. production has dropped 10% due to freeze offs. I’ve used that term before but I bet most of you don’t know what it means so let’s educate. It’s intuitive that when a well “freezes off” it stops flowing, but why? Here’s why. The natural gas production stream not only includes methane, and if it’s wet gas, condensates such as propane, butane and others, but also water. When temperatures drop below freezing the water freezes and forms a plug in the pipe preventing flow. The plug remains until temperatures rise to above freezing and it melts. To answer your next question, it’s cost prohibitive to install equipment or materials to prevent the few occasions wells freeze off, except in rare cases.

Well, it’s appearing this burst of wintery weather is coming to an end. The weather forecast for the 1-5 day period is showing very warm weather from the Appalachians eastward and in the 6-15 time frame the eastern half of the country to have above normal temperatures. On this forecast some length is bailing with natty being down 15.1¢.

Elsewhere

I’m not sure you read this but India and Russia just signed a huge agreement. Last week Russia’s Vladimir Putin and India’s Prime Minister Narendra Modi met in Moscow to finalize the deal. The agreement is for Russia to build 6 nuclear power plants in India over the next 20 years. Also, Indian oil companies will be buying stakes in Russia’s Rosneft’s (the Russian oil company) hydrocarbon assets in Russia and will be cooperating in further exploration and production of Russian oil and gas. This is a major shot in the arm for Rosneft. Additionally, India’s Reliance Group signed a huge contract with the Russian maker of the S-400 regional air defense system worth $4.5 billion.

Both Putin and Modi said Russia and India have formed a strategic partnership, India’s second one after the U.S., but very importantly, Modi said he and Putin share a common vision of a new world order. Oh, and I don’t want to forget to tell you that India has joined China in not abiding by Western sanctions on Russia instituted over the events in Ukraine. Winners: India, Russia and Rosneft. Losers: U.S. and China.