Equities and the Economy

After what seems days of bloodletting U.S. stocks stabilized yesterday with the Dow gaining 53 points closing at 16,399, the S&P 500 added 2 to 1,924 but the Nasdaq went the other direction closing down 6 at 4,638. This actually was pretty good considering oil prices, which investors have been keying on for equity price movement, had another lousy day. There were no economic reports of significance released yesterday, but yesterday did mark the first day of the season, the earnings season. Alcoa as usual inaugurated the Q4 season releasing earnings after yesterday’s close posting better the expected EPS but disappointing on the revenue and EBITDA figures. Let the financial accounting contortions begin! If you’re one to follow earnings season keep an eye on the earnings reports from the banks due out later this week. The financial sector is expected to be among the few better performing sectors in Q4.

The fierce selling of stocks has been accompanied by aggressive buying of the CBOE Volatility Index which is up over 13% this year and close to its highest level in 7 years

On a side note, the Russian public may love Vladimir Putin, but their wallets don’t. The Ruble has weakened to 76.50 to the U.S. dollar which is the lowest its traded vs. the dollar in a decade and destroying Mr. and Mrs. Konnikov’s savings.

This morning we’re getting the corrective bounce I’ve discussed and predicted with the Dow up 61 points which is materially down from futures being up 162 points earlier. Now as I said previously, we’re due for a bounce because the market is technically, egregiously oversold. However, the longer we stay at unchanged the lower the probability of the bounce because as time passes the market will technically be working off the oversold condition.

Oil

A new day, a new low for oil. WTI fell $1.75 yesterday, 5.28%, settling at $31.41 and Brent dropped $2 bucks, 6.0%, settling at $31.55. During yesterday’s session WTI traded below $31/barrel touching a 12 year low. The commodity has been down every day in 2016. Yesterday’s losses were the biggest one-day loss since September and on top of prices falling 10% last week. Prices are now down a staggering 70% since June 2014.

U.S. shale production is actually falling, at least per the EIA. They reported yesterday that shale production will fall next month. If that happens it will be the 7th month in a row shale production has fallen. If the EIA’s predictions are correct, production will be down 638,000 bpd below its peak last March. Production is forecasted to fall in the Bakken and Eagle Ford but rise in the Permian. Looks like the economics still work there. That has to be by the barest amounts.

The European Union said yesterday the lifting of Iranian sanctions could come soon. Just what the world needs. Another 1.5 million bpd coming on over the subsequent 12-18 months.

E&P companies are scrambling to survive. Per Morgan Stanley, the current downturn is now deeper and longer than each of the five oil crashes since 1970. According to Wolfe Research, as many as a third of American oil and gas companies could tip toward bankruptcy and restructuring by mid-2017. More than 30 small companies that collectively owe in excess of $13 billion have already filed for bankruptcy protection. According to AlixParnets, a consulting firm, North American oil and gas producers collectively are losing nearly $2 billion per week. In response, capital budgets for 2015 have been slashed a collective 51% from 2014. That reduction is greater than the worst years of the 1980’s. Private equity firms are sitting in the wings like vultures making ridiculously low bids for companies looking to scoop them up. Folks, this is unfortunately going to end up in bankruptcy courts where debt will wiped out making oil and gas fields cheap.

Oil is also poised for a rebound, a correction. This market is also egregiously oversold. Per CFTC data, managed short positions of WTI on January 5th increased almost 10% from the previous week and are at a record high. The boat is heavily listing. This morning WT is down 50¢.

Courtesy of MDA Information Systems LLC

Natural Gas

The correlation between the weather forecast and natural gas prices is very high in the winter. Yesterday’s 11-15 day forecast warmed marginally and prices dropped with natty closing down 7.6¢ at $2.396. I might as well just get to it. Natty is down 9.1¢ this morning. Can you guess how the weather forecast came in overnight? Winner, winner, chicken dinner. Warmer in the 11-15 day time frame. Materially warmer. The eastern 2/3rds of the country will have normal to above normal temperatures with the upper Midwest to experience much above normal temps. It appears the Godzilla El Nino is reasserting itself and wiping out Tokyo (you have to be old like me to get that one).

Elsewhere

Due to time constraints the Elsewhere is being kept short. “Don’t worry about the world coming to an end. It’s already tomorrow in Australia.”