Good morning. U.S. equities ended lower yesterday for a second straight session with the Dow losing 97 points to close at 17,641, the D&P 500 fell 17 to 2,028 and the Nasdaq was off 39 points to 4,665. The assault on stocks was once again driven by lower oil prices as investors continue to worry if the lower prices are indicative of bigger issues in the global economy. Unsurprisingly, it was the energy index that pulled equities lower with it down 3.1% yesterday. Gold and U.S. Treasuries, the safe haven assets, have been rallying during the last couple weeks with the 10 year T-bill now yielding only 1.91% and gold up to $1,233, the highest in a month. The S&P is now down 3% since hitting its high on December 29th.
Moving on to this morning, earnings season began yesterday after the bell with Alcoa, traditionally always the first company to report earnings, coming in well beating estimates for both earnings and revenues which could give investors some confidence in an otherwise shaky environment. Asian stocks closed mixed overnight and European stocks are, for the second consecutive day, rallying which is pulling U.S. futures higher with the Dow up 143 points. But we’ve got to be very careful here for this looks like déjà vu to me. When I came in yesterday morning Dow futures were up 40 on the coattails of European equities and we saw how that ended. The driver to push us lower may be the same which leads me to my discussion of oil.
What pushed oil lower, and stocks, yesterday was a report released by Goldman Sachs materially lowering their forecast for oil prices for this year. Goldman reduced their 6 and 12 month WTI predictions to $39 /bbl and $65/bbl, from $75 and $80, respectively, and its estimate for Brent for the period were cut to $43 and $70, from $85 and $90. Now you may say this is only one company’s opinion and I’ve seen them right about their oil price forecast and I’ve seen them materially wrong. But the fact is Goldman’s opinion does move markets and when the report “piles on the trend” it’s going to influence the market. The bottom line is in the numbers and oil got whacked yesterday with WTI losing $2.29/bbl (4.7%) closing at $46.07 and Brent falling $2.68 (5.3%) settling at $47.43, both at 6 year lows. Saudi Prince Alwaleed didn’t help the bulls stating yesterday (and this is profound) that he is positive that we’re “never” going to see $100 per barrel prices again. Wow!
OPEC refuses to cut production clearly taking aim at U.S. shale producers. Why do I single out the shale producers. Just listen to the previously referenced Prince Alwaleed. The one “positive side effect” of the oil crash is it will allow Saudi Arabia to see “how many shale oil production companies run out of business.” I’d say that’s pretty darn direct. I’ve been in markets for 35 years folks and markets always get overdone (can you say “bubble”?) and they go to where maximum pain is felt. I believe WTI will trade below $40, at a minimum, before we see a bottom. But be ready. Have your gun powder dry for energy equities will be a raging buy down there. By the way, it just struck me. Where’s all the talk about “speculators” moving the market? I hear how those evil people always push prices too high. Have you heard any discussion about speculators pushing prices too low???
This morning oil continues to collapse with WTI was down $1.35 when I came in but is finding some buyers, down “only” 52¢. Possibly some short covering on higher equities. Brent is down $1.16. Note that spread is now only 72¢! That’s the tightest since July 2013. The spread “closing” is at least in part reflecting the U.S. and European economies with the former performing materially better than the latter, which is why the ECB wants to do a QE. U.S. oil and gas companies are reacting properly to the lower oil prices “laying down” rigs. In the past 4 weeks the oil rig count has dropped by 93, the most in any week in the last 10 years! And this has only begun. The last time oil prices were this low the rig count was around 700. Currently there are about 1,400 rigs working. You do the math. For reference, in the 1985 oil collapse at the cycle bottom the rig count was cut 65% from the previous peak. We have a long way to go.
It’s cold right now but traders trade the future and the future is showing warm temperatures in the eastern half of the country beginning next week for about 2 weeks and on that forecast natty got whacked yesterday closing down 15.1¢ (5.1%) at $2.795. Today’s forecast is pretty much unchanged from yesterday. Oh, the western U.S. will see below normal temperatures but no gas trader cares. They’re much more tuned in to what the temperature in Chicago and New York are, and they are both going to be above normal. For example, next week Chicago is going to see 5 straight days of temperatures 5 to 10 degrees above normal. This morning natty is up 6.6¢ finding a bid, and I’m sure its folks doing the coal/natural gas analysis.
Late last week world trade took another step forward as the largest container ship in the world, the MSC Oscar, christened and setting sail. The Oscar will carry just over 19,000 TEU’s. A TEU is a twenty foot equivalent unit. You may not know it but you are exposed to TEU’s every day. They are the big steel boxes on the trailers of the semi’s you see every day. Shipping, like so many other businesses, is about efficiency and the Oscar will move cargo cheaper (and just as fast) than ever before across our oceans. By the way, the United Arab Shipping Company is reported to be taking delivery of an even large ship, the Brazen, in April. In a world of increasing global trade these monster ships will be a source of downward, deflationary pressure for years, all to the benefit of the consumer. Have a nice day.