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Morning Energy Blog – December 7, 2016

Equities and the Economy:

• The “risk on” play continues.
• Dow hits a new record high for second consecutive day.

U.S. stocks closed higher yesterday with the Dow gaining 36 points ending at 19,252, a new record high, the S&P 500 closed up 8 at 2,212 just one point shy of its record high and the Nasdaq added 24 points to close at 5,333. The financial sector has been the big winner since the election logging a huge gain of more than 15% since the November 8th election on the belief that President-elect Donald Trump will work to pass economic stimulus and reduce corporate taxes and regulations and the Fed will be raising interest rates which always helps the banks. What you may not know is the typical business model for a bank is to lend long term and borrow short term. Let’s take the example of a mortgage. They lend for 30 years and borrow short term to “cover” that sale. The normal interest rate yield curve is in contango meaning that interest rates are higher the farther out you go in time. Therefore, if the Fed raises interest rates the spread between the long term, say 30 years, and the near term, one day, gets wider and the bank captures that spread. If the yield curve goes backwardated, and it has occasionally, it’s a sign a recession is coming. Banks stop lending because they would lose money.

Turning to the economic news of the day, the Commerce Department reported that factory orders, the “headline” data, rose a hefty 2.7% in October but we always need to take this piece of data with a grain of salt for an aircraft order can move the data materially. And that’s exactly what happened in October due to a massive one-off 94% increase in commercial aircraft orders. The more important data to me is the orders for non-defense goods excluding aircraft, often viewed as a proxy for business investment, which rose 0.2% and is down 4% from last year. The Labor Department reported that productivity in Q3 rose 3.1% which was pretty much in line with economists’ forecasts. We’re finally starting to see wage inflation, a key Fed indicator of inflation, with labor costs up 0.7% for the quarter and much more than forecasts.

This morning it’s very quiet with the Dow down a single point. The Nasdaq is off 14.

Today is the 75th anniversary of what President Franklin D. Roosevelt said was “A date which will live in infamy.” I’m talking of course about the attack on Pearl Harbor by the Japanese. Japan intended the attack as a preventive action to keep the U.S. Pacific Fleet from interfering with military actions the Empire of Japan planned in Southeast Asia against overseas territories of the United Kingdom, the Netherlands, and the United States. Ninety minutes after it began the attack was over. More than 2,000 American soldiers and sailors died that day and another 710 were wounded. Of the American casualties, nearly half were due to the explosion of the Arizona’s forward magazine after it was hit by a modified 40-centimeter shell.

This past Monday Japanese Prime Minister Shinzo Abe announced he will have a summit meeting later this month with President Obama in Hawaii and will visit Pearl Harbor. He will be the first Japanese leader to ever visit the site.

Oil

• Crude prices fall for a second consecutive day since the OPEC meeting.
• WTI closed down 86¢ at $50.93.

OPEC production data yesterday showed the cartel’s output in November hit another record high at 34.19 million bpd which brought in sellers. That’s up 370,000 bpd from October’s 33.83 million bpd. WTI closed down 86¢ at $50.93 and Brent settled $1.01 lower at $53.93. Folks, the OPEC meeting is not going to bring a raging bull market. The game has changed. The U.S. shale producer is now the world’s swing producer and all trader’s analysis is going to be focused on how quickly and to what degree they will respond to these higher prices. OPEC may have agreed on a production cut but at least for now it’s not translating into a higher cash price. News overnight is that Saudi Arabia’s megalithic oil producer Aramco has cut its prices to Asian customers to preserve market share. That ain’t bullish. On that news oil is on the defensive this morning with the price down 50¢.

weather-12-7-2016
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Courtesy of MDA Information Systems LLC

Natural Gas

• Prices end little changed.
• January contract closes down 1.9¢ at $3.635.

Gas prices chopped around all day and were up as much as 8¢ but waves of producer selling the calendar 2017 and 2018 strips overwhelmed the bulls. When the final bell rang the January Nymex contract settled down 1.9¢ at $3.635. Actual temperatures continue to verify forecasts supporting the market. Average temperatures across the country fell another 3.2 degrees to 41.5 degrees which is the coldest day we’ve seen since February 15th. While the 1-5 day forecast is cold, the 6-10 day is downright nasty. Next Wednesday and Thursday are forecasted to be the coldest days in the Midwest with Cincinnati and Chicago’s highs to be 21 and 29 degrees, respectively, below normal. Yikes!

Last Sunday many parts of the Midwest saw snow (great watching the Packers/Texans game at Lambeau!) including Chicago, which saw a lot of it! According to Illinois State Climatologist Jim Angel Sunday’s snowfall total was the heaviest accumulation for a fall-winter season’s first snow at O’Hare Airport. Sunday’s 6.4 inches of snow blew past the old record of 4.8 inches which was set way back in November of 1940!

Elsewhere

Continuing today’s Japanese theme, something remarkable is happening in Japan these days regarding livestock production. Livestock producers have known for a long time that female cattle about to enter estrous, the period of a female cow’s menstrual cycle when fertilization can and will take place, will walk a great deal more and further than they do when not in this period. Heretofore Japanese cattle producers did their best to observe this change in behavior so they could cull the cow from the herd and take her to a fertilization unit. The cow’s window for prime fertilization is very small only lasting about 12-18 hours and if missed it will be another 21-28 days before she goes into this reproductive state again. Well with the benefit of technology the Japanese have taken this process to a whole new level. Livestock producers have attached the equivalent of a Fitbit to a cow’s leg to monitor their walking distances. This has materially increased the probability of the producer identifying the prime fertilization cycle thus avoiding to a large degree the non-effective fertilization times. This lowers their cost to produce, increases their profit margin and lowers the cost to the consumer. Other amazing advances in agriculture include the use of GPS in farm and harvesting equipment such that the equipment can basically drive itself 24/7. The use of satellites sending images down to earth enable farmers to fertilize to perfection as those satellites can tell a farmer how every few feet of crop production are doing rather than guessing. Another advance, drones equipped with sprayers and performing crop dusting at a much cheaper cost than an airplane and pilot requiring fuel. Martha Stewart would say, “This is a good thing.”

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