Equities and the Economy

Unfortunately Super Bowl Monday began where Super Bowl Friday ended with another wave of selling sending U.S. equities markedly lower. The Dow fell 178 points, 1.1%, to 16,027, the S&P 500 sank 27, 1.4%, to 1,853 and the Nasdaq ended down 79, 1.8%, at 4,284. And it could have been worse. The Dow was down 401 points intraday but recovered most of those losses. Technology shares, which were the darling last year (the FANG’s), have been getting hammered this year with the tech-heavy Nasdaq 110 points away from being down 20% from its recent high. The significance of that? A drop of 20% defines a bear market. For the year, and we’re only just over a month into it, the Dow is down 8%, S&P down 9.3% and the Nasdaq has lost 14.5%. The flight to quality/safe haven continues with the 10 year Treasury note, which is the Treasury benchmark, falling to 1.936% yesterday experiencing the largest one day decline since July 6, 2015. Treasury yields have dropped more than 50 basis points since the start of the year to the lowest level since February 2, 2015. If you recall, last Friday I wrote that my antennae were up because on Thursday both equities and bonds ended higher which shouldn’t happen. When equities and bonds move in the same direction I always go to the bonds for the bond market is way larger than in the equity market. The saying is, “the smart money is in the bond market.”

One last and important thing to say about yesterday’s price action. We closed below strong support, 1,859 basis the S&P 500. Not good. Not good at all. We need to close above that level today to give a signal we’ve stopped going down. If close lower today my target, for now, is 1,640 for the S&P, 213 points below yesterday’s close.

It was a mixed bag in Asia overnight with the Nikkei closing lower and the Hang Seng closing higher. Regarding the Nikkei, it closed down 5.4% the biggest daily decline since last August With equities falling across the globe folks have been flocking to the yen, another safe haven, which is making it more expensive relative to other currencies and putting a drag on Japan’s exports. It’s a race to zero! (see Elsewhere). The European markets are currently getting whacked being down between 1.54% and 2.63% with the banking sector experiencing the largest losses. Banks have been hit hard as declining interest rates squeeze profitability and as existing loans come under pressure on soft economic growth. The malaise continues this morning with Dow futures down 128 and S&P futures down 15. Folks, what you’re seeing is the result of what happens when the (Fed’s) punch bowl is taken away. Janet Yellen will be testifying before Congress tomorrow (regularly scheduled) and let’s see if she can bring some “positiveness” to stocks saying something along the lines that due to global economic concerns interest rate hikes will be delayed. That would be a quasi-QE which would boost stocks

Oil

With a sea of red across the equity market it’s not hard to understand oil prices closed lower with WTI down $1.20 closing below $30 at $29.69 and Brent off $1.18 settling at $32.88. One of the bullish drivers last week was the ever hawkish Venezuela and its oil minister trotting around the globe meeting with various OPEC countries and Russia trying to get a meeting set to discuss production cuts. Well he met with Saudi Arabian oil ministers on Sunday and the outcome? As I expected. No production cuts were made. Not even a reference to the same. NO talk of setting a meeting. So traders came in selling yesterday. Interesting, the CFTC noted in its weekly position report that short positions were at an all-time high and long positions were at their highest since last June. There’s big bets out there folks.

The IEA (not our EIA) released a report stating the global oil market will be oversupplied by 1.75 million barrels during the first half of 2016. This is in range with previous data which was 1.5 million barrels. In global terms those two numbers are the same. Every time we get below $30 the selling dries up and that’s what’s happening this morning with WTI up 19¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices put in another positive day yesterday closing up 7.7¢ at $2.140. Yesterday’s morning weather forecast came in a lot colder for the 6-10 day time frame giving a slight boost to prices. I say slight because the 11-15 day forecast came in warmer. U.S. production has been healthy of late being 72.5 Bcf/d. That being said, that is about what we were producing last spring. So although we’ve seen no decrease in production, we’ve seen no increase. However, demand has increased: exports to Mexico, base industrial demand and gas burn in the electric generation sector the latter being at record levels and up 17% from a year ago, and this is despite national temperatures averaging 5 degrees higher than last year. The effects of the El Nino have masked the increase in demand. And this I know, the El Nino will be gone by the summer. Today’s forecast is similar to yesterday’s. Any snow that’s on the ground will be gone by February 23rd. This morning natty has eased off a bit being down 2.9¢.

Elsewhere

Here’s a great, and unfortunate dismal, barometer of the global economy. In 2014, that’s only two years ago, there were no countries in the industrialized world with negative interest rates. Negative interest rates are when the central bank of the country charges its client banks for parking money at the central bank. Under “normal” times client banks earn interest for parking money. Central banks do this to encourage lending by the client banks. Actually, in early 2014 there were no nations either industrialized or not with negative interest rates. That changed in mid-2014 when just over 15% of the economies of the world allowed their central banks to move interest rates into negative territory. Now with the inclusion of Japan, Switzerland, Sweden and Denmark in recent weeks 24% of the world’s GDP now has a central bank allowing negative rates! This is also a not so subtle way for central banks to manipulate their currency. Positive interest rates attracts money and makes a currency stronger. What we have here folks is increasingly a race to zero! To get one’s currency cheaper than another’s to increase exports and support the domestic economy. Recently the Chinese government has been interviewing spending billions of dollars to support its currency, the yuan. If it capitulates, and I really don’t think it will at least in the near future for its reserves are large, equities around the world will get unadulteratedly hammered! Just look at a chart of the Dow or S&P 500 for the period between August 17, 2015 and August 25th. That was when the market believed the Chinese government was manipulating the yuan to make it cheaper and sending a clear signal that China’s economy was slowing.