Equities and the Economy

Good morning. It’s been a week since the last report so let’s step back just a little bit and see what’s transpired. A week ago the Dow, S&P 500 and Nasdaq ended at 17,666, 2,050 and 4,728, respectively. Yesterday they closed at 17,862, 2,069 and 4,801, respectively. So over the course of the last 7 calendar days the Dow has gained 196 points (1.1%), the S&P is up 19, (0.9%) and the Nasdaq is 73 points higher (1.5%). Yeah! But it hasn’t been without angst because there’s been tremendous volatility along the way. Yesterday was a classic example. Although the Dow ended basically flat to Tuesday, up 7 points, the range of the day was 137 points and most of that range was on the down side with the index being over 100 points down around 1:15 Eastern and then managing to claw its way back to unchanged. The major driver of the markets over the past week has been investors’ jitters surrounding the negotiations between Greece’s new government leaders, who are fighting austerity, and its creditors, mainly Germany with its “no change in loans” stance. The parties continue their meetings in Brussels with folks wondering if it will end with Greece leaving the eurozone or having its debt restructured. My vote is the latter. Why? Because Germany cannot afford to have Greece leave. You’re probably saying “What?! Germany is the economic power house of Europe and it doesn’t need Greece.” Oh yes it does! Germany knows that if Greece were to leave the eurozone, and most importantly the euro returning to the drachma, the value of the euro would skyrocket making its exports more expensive and Germany lives and dies on its exports. Mercedes Benz, BMW and Siemens would not be happy. So my bet is this will all end with Greece’s debt being restructured. It being extended to some point in time beyond which all of the present participants are long gone from this earth.

Overnight an agreement for a cease fire in Ukraine was announced which is being viewed positively by global markets. The Asian markets all close nicely higher and on the cease fire news the European markets are higher with Germany’s DAX and Frances CAC 40 skyrocketing being up 1.72% and 1.17%, respectively. U.S. equities are getting some “love” from the overseas action with Dow futures up 40.

Oil

A week ago WTI and Brent closed at $53.05 and $57.91, respectively. Yesterday WTI closed down $1.18 at $48.84 and Brent fell $1.77 at $54.66. So over the week WTI and Brent have dropped 8.0% and 5.6%. Weighing on oil prices yesterday was the DOE weekly crude and products report showing aggregate inventories coming in a bit more than expectations. The contango in WTI has been wide and continues to expand. Two months ago WTI’s front month year spread was $3.69. Now it is at $11.30, the widest ever. So as the contango continues to increase more and more oil goes into storage. According to Bloomberg there is currently about 40 million barrels of oil stored at Cushing, OK. This compares to the lows last summer of about 15 million barrels. In the 8 weeks ending at the end of January there was an average of about 300,000 bpd moving into storage at Cushing. According to the EIA, there is about 85 million barrels of storage capacity at Cushing. Assuming the contango remains, this means that the storage at Cushing will be full somewhere between early June and early July. I expect the contango to remain for according to the EIA’s report yesterday U.S. oil producers are pumping out and average of 9.2 million bpd, the most since the Federal government started keeping records! Things could get real interesting this summer. Traders are shrugging off the DOE’s report this morning with WTI up $2.15.

Natural Gas

Natural gas shot 12¢ higher yesterday closing at $2.797. A week ago natty settled at $2.754. So basically we’re flat to then, but we did decline to an intraday low of $2.567 which occurred last Friday. The weather forecast then turned materially colder which is continuing in today’s forecast with much below temperatures encompassing the eastern half of the country for the next 2 weeks. Furnaces will be running 24/7 over the next 5 days in the Midatlantic with temperatures in cities like Cincinnati and Philadelphia as much as 23 degrees below normal. It appears the cold weather forecast is built into the market for natty prices are basically unchanged being up $0.002 this morning. So we have a super cold weather forecast and natty is only trading $2.80ish? Hmmm.

The EIA releases its weekly natural gas report this morning and the market is expecting a withdrawal of 165 Bcf for last week. Last year at this time we saw a huge withdrawal of 234 Bcf and the five year average is 178 Bcf.

Courtesy of MDA Information Services LLC

Elsewhere

As you know, Valentine’s Day is rapidly approaching. If you don’t have a restaurant reservation by now, as they say in New York, forget about it! But you still have time to buy flowers! According to Today, Americans will spend about $18.9 billion on Valentine’s gifts this year. But be careful. Ordering flowers online can be like eating fast food. The picture looks great but when it arrives it doesn’t look anything like what you ordered. It would be very nice if we got what we paid for! Apparently, the root of the problem is name-brand websites do not have local floral shops and orders get filled by third-party associations. This creates a huge quality control issue. So what to do? Buy local or, if you do purchase online, be sure to read the reviews first. Have a good day.