Equities and the Economy

After a day of bivouacking on Friday U.S. stocks surged yesterday with the Dow popping a very nice 229 points, 1.40%, ending at 16,621, the S&P 500 rose 28, 1.47%, to 1,946 and the Nasdaq closed up 67, 1.48%, at 4,571. As it has for months now, Wall St. followed the lead of global oil prices which closed 6% higher yesterday. Monday’s stock gains were as broad as they were strong with all 10 major S&P sectors finishing higher. As an FYI, the S&P companies are still trading at 16 time earnings, which is average, not cheap, which may give pause to institutional investors to wait and see before jumping into the market.

There was only one economic report of significance released yesterday and that was the “Flash” Purchasing Manager’s Report and it was good news/bad news. Bad news: the index came in at 51.0 below expectations of 52.5. Good news: it remains above 50 which is the demarcation between expansion and contraction.

We need to discuss the technicals because we’re close to an important point. We’re approaching the first level of resistance which is the 1,950 level basis the S&P 500. I’ve mentioned this level previously and hopefully we can get through 1,950 and make our way to the next level of resistance which is 2,000. Feed that bull!

Oil

Oil have been the driver of global equities of late and as mentioned above both WTI and Brent prices rose with the former climbing $1.84, 6.2%, closing at $31.48 and the latter up $1.68, 5.1%, settling at $34.69. WTI is now $5.43, 21%, higher than the 12 year low it hit a week and a half ago on February 11th. Prices got a boost from and IEA report yesterday stating U.S, shale oil production could fall by 600,000 bpd this year and another 200,000 bpd in 2017. Of note, the contango in the oil price curve continues to narrow (the spread between the prompt month oil price and the oil price one year from now). This is an indicator of the current supply/demand balance and it tells me that crude is less aggressively bidding for storage meaning the current surplus in the market is shrinking and not growing. I always watch these spreads and the fact the spread is narrowing has my antennae up. Interestingly, the U.S. dollar has rallied for two weeks now which is negative for commodities priced in U.S. dollars, yet oil prices are higher. Hmmm.

This morning WTI is taking a breather being down 1.34¢. Markets don’t go straight up.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas was moribund yesterday with the March contract rising 1.7¢ to close at $1.821. However, all the calendar strips from 2017 through 2020 closed lower with the 2020 strip off 6.1¢ at $2.691. The weather forecast has warmed up a little in the 6-10 day time frame while the 11-15 day forecast has cooled off a little with the two forecasts pretty much cancelling each other and natty is showing it being down 2.4¢. Note the 6-10 day forecast takes us into March and although I’ve seen many March’s come in colder than normal, statistically, the odds are against it, especially with this year’s El Nino. Even if March does come in colder than normal, because we’re exiting winter, HDD’s will be decreasing lowering gas load. The next thing to watch is the refueling of the nuclear power plants which happens in spring and can add materially to natural gas load.

Just a head’s up, the March natural gas Nymex contract expires this Thursday.

Elsewhere

I’m sure you’re familiar with actions by various entities, including the government, raising the minimum wage to $15/hour to improve the quality of life for those people earning that paltry wage. $10/hr. $15/hr. $20/hr. It actually may be a moot point. The White House in its annual economic report to the president states there is an 83% chance that automation will replace a job with an hourly wage of $20/hr. and below. For jobs with wages between $20 and $40 per hour there’s a 31% chance automation will displace the job. Above $40 per hour there is only a 4% chance automation will replace a job. The White House used the same data that underlines other research in the field of labor and robots to arrive at the conclusion.

The key question is what happens when a robot takes one of these low wage jobs. Traditionally, innovation leads to higher income, more consumption and more jobs, but he question is whether the current pace of automation may in the shorter term increase inequality. One study found that higher levels of robot density within an industry lead to higher wages in that industry. However, that could be because the absence of lower-skilled biases wage estimate upwards.

Think about this the next time you go into a fast food restaurant or sandwich shop and order your meal on an Apple iPad whereas previously you gave your order to a person.