Equities and the Economy

We had a second day of chop yesterday with the Dow closing down 99 at 15,915, the S&P 500 literally closing flat to Tuesday at 1,852 and the Nasdaq actually managing to post a gain of 15 points ending at 4,284. However, I was very concerned how we got to those numbers. Why you ask? Because we were trading higher the entire day being up as much as 188 Dow points about an hour after the open only for all the indexes to sell off hard the last hour of trading, i.e., the intraday trading action was horrible. After the close I looked over at my colleague and said to him “We’re going lower tomorrow.” Remember too that for two days we haven’t been able to break through the 1,859 S&P level which was major support but this week became resistance.

There wasn’t any economic reports of significance but there was a closely watched event and that was our Fed chairperson, Dr. Janet Yellen, testifying before the House Finance Committee. All ears were listening for any clues on the Fed’s thinking about its interest rate policy. Early in the day she mentioned negative interest rates (a form of QE) and stocks rallied. Later she mentioned whether negative interest rates are legal. Stocks pulled back. All in all she didn’t give either the bulls or bears anything to trade on. She merely reaffirmed that the Fed is data driven and in a wait-and-see mode. She’ll testify before the Senate Banking Committee today but it’ll be a repeat of yesterday.

Overnight Asian stocks closed lower but we have to take all of them with a grain of salt for the markets in China, Japan and Taiwan are closed for holiday. On the Continent the European market are getting hammered with the three major indexes (FTSE, DAXC and CAC 40) down between 1.52% and 3.10%. Locally it’s just about as bad with Dow futures down a material 184 points, which is up from down 248 points earlier this morning. Corporate earnings are disappointing, especially on guidance by companies (future revenue and earnings). Additionally folks, I need to remind you we’re coming off one of the longest bull runs in history, thanks in many ways to the Fed’s QE programs, which inflated P/E ratios to lofty levels. A correction was due. Breaking that 1,859 support level basis the S&P 500 was a big deal.

So where do we go from here? In my opinion, and this is just me speaking, ultimately S&P 1,640. I must add that I am not your financial advisor and I could be, hopefully, wrong.

By the way, I’ve been talking about the “race to zero” by central banks implicitly devaluing their currency by lowering interest rates to make their exports cheaper as the countries around the world fight for market share in a shrinking global economy. I wrote that 25% of the world’s industrialized economies now had negative interest rates whereas in early 2014 no country had negative interest rates. Get this. Sweden, whose interest rate was negative 0.35%, just lowered it further to negative 0.50%. I guess it’s not a race to zero. It’s a race to negative one!

Oil

Oil prices continue to slip with WTI closing down 49¢ at the egregious level of $27.45. After 4 down days Brent actually managed a bounce settling up 52¢ at $30.84. Note that spread is now out to $3.39. It looks like that although it’s legal to export crude oil from the U.S. the facilities and foreign contracts are not in place yet to take up the supply. WTI actually rallied yesterday morning on a bullish EIA weekly crude and products report showing an unexpected decline in crude inventories, 800,000 bbls. Additionally, the aggregate inventory number (crude, gasoline and products) was modestly bullish showing a rise in inventories of 1.8 million barrels which was much less than Tuesday’s API data showing a whopping 7.2 million barrel increase. However, given that the “jaw boning” by OPEC and non-OPEC ministers to push prices higher has not resulted in anything concrete, i.e. scheduling even a meeting to discuss the situation, and as importantly, the material weakness in the capital markets the bull’s yoke was just too heavy. This morning the pain continues with WTI trading 49¢ lower. Forget about making money. E&P companies are simply and literally trying to survive. Evidence: As if you didn’t already know investment in the oil & gas industry was precipitously falling, here are some numbers from the U.S. Bureau of Economic Analysis (BEA). Mining and exploration investment declined a whopping 35% in 2015, the second largest year-over-year decline since the BEA began reporting the data point in 1948. Most mining and exploration investment reflects petroleum exploration and development, but the category also includes natural gas, coal, and other minerals. Investment declined from $135 billion in 2014 to $87.7 billion in 2015. The BEA cited low commodity prices as the reason. Ya think?!

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas settled 5.2¢ lower yesterday at $2.016. The natty market has really been sedate of late trading around the $2.10 level for about a month now. We get cold snaps pushing prices higher only to be followed by a period of equal length of above normal temperatures pushing prices back down. A classic example of this is today’s forecast. 8 to 15 degrees below normal this week followed by 6-15 days of temperatures 3 to 15 degrees above normal.

Today is Thursday and we all know that means the ever exciting release of the EIA’s weekly storage number. The market is expecting a withdrawal 870 Bcf which is materially less than last year at this time’s 153 Bcf withdrawal and the 5 year average of 168 Bcf. Natty is quiet this morning up 1.4¢

Elsewhere

Something I’ve always been curious about is this thing called the Dark Web, aka, the Deep Web, Hidden Web or Invisible Web. Just what is the Dark Web? The Dark Web is a part of the internet that is not indexed by regular search engines and often not reachable using ordinary web browsers, the browsers you and I use. Additional software is required to access it. It is the home of illegal pornography, drug dealers and even assassins. The U.S. government has taken actions against individuals and together with the Silk Road website (drug trade) they’ve taken down dozens of people. All activity on the Dark Web is not illegal. Some people do if for privacy or their desire to hide their legal activities form other people and the government. Almost any deep web software will, besides access to the deep web, give you full anonymity online too. You actually know of a deep web website: Wikileaks.