Equities and the Economy
Good morning. It ain’t good folks. I just ain’t good. Yesterday was the 5th straight losing session for U.S. stocks with the Dow losing 16 points (0.61%) ending at 17,321, the S&P 500 down 19 (0.92%) to 1,993 and the Nasdaq dropping 69 (1.48%) to 4,571. The S&P is now down 4.7% from its December 29th high. Technically the market looks really bad for the S&P closed for the first time in a month below the 2,000 level and also below its 120 moving average. Maybe worse, the support trend line that has been so dominant dating back to late October has been shattered doing the same to investor’s psychology. Since Tuesday, when the Dow traded nearly 300 points higher on the day and then at one time was down 200, the “action” in the market has been decidedly ill. Not helping stocks yesterday was the Swiss National Bank’s decision to stop defending it’s 1.20 francs to the euro floor it’s been doing for 4 years. This sent the Swiss franc soaring and the euro plummeting with it hitting at one time yesterday an 11 ½ low vs. the U.S. dollar. So what’s the big deal about this? Because it came as a complete surprise to the market (the President of the SNB only last month stated the Fx “peg” was “essential”) and markets don’t like surprises, especially when they come from central bankers for this leads to less confidence in central bankers generally which breeds confusion and confusion breeds contempt which is bad for stocks, and good for gold, bonds and Treasury bills, the latter being the “safe havens.” The losses to hedge funds, speculators, banks and corporations will be huge! The mortgages homeowners took out in euros based upon the “peg” are now 15-20% larger and servicing that mortgage will be obviously more severe.
Closer to home, the Labor Department yesterday reported that producer prices fell 0.3% in December which is the largest decline in over 3 years and almost entirely and unsurprisingly attributed to the 14.5% fall in gasoline prices. Core PPI, which excludes the volatile food and energy categories, actually rose 0.3% which was far more than the 0.1% economists were forecasting. For the 12 months period ending in December producer prices are up 1.1% and core prices up 2.1%.
After losing about 1% yesterday and closing on their lows investors continue to bail out of equities ahead of the long weekend with the Dow down 58. Fundamentally, the week in earnings has been OK, not great, and guidance has been fairly bleak. Last night Schlumberger, the world’s largest oil services company, said it would be cutting capex by 25% (big number folks!) and laying off 7% (9,000) of its employees. By the way, European stocks are again higher, albeit marginally, once again on the belief the ECB will come to the rescue in the form of QE. So it’s hold on to your horses. Our markets are closed on Monday, but the rest of the world’s are open and who knows what those crazy Europeans are going to do!
Oil got hammered yesterday giving up almost all its gains from the previous day with WTI down $2.23 settling at $46.25 and Brent losing $1.02 to $47.67. I told you I smelled a dead cat bounce! According to Bank of America this could get a lot worse for the oil bulls. They are forecasting Brent prices to trade as low as $13 by the end of Q1. The term structures remain uncommonly bearish with the Brent March ‘15/March ’16 way out to over $10. Folks at this spread Brent will be stored in every nook and cranny. Even old tankers that cannot compete with the size, speed and efficiency of the modern very large crude carriers are being brought into service. The world will be afloat of oil. This morning WTI is up picking up some bids being up $1.15.
The EIA released its weekly natural gas storage report yesterday stating 236 Bcf was withdrawn from storage last week which was materially greater than the market’s estimate of 225 Bcf. Natty initially traded higher but faded as the day wore on ending the day down 7.5¢ at $3.158. Yesterday was a classic case of “buy the rumor. Sell the fact.” Recall I wrote yesterday that natty had risen 15.7% over the two previous days and I believe traders were front running the storage report. Last week’s report came in bullish relative to expectations and traders were obviously playing it from the long side going into the report but with prices up at $3.233 no one wanted to be long above that number. We started the bull run from down in the low $2.80’s which made sense when looking at coal but the $3.20’s are getting a little pricey for this market.
Natty is still slipping this morning being down 6.2¢ which is a little surprising to me for cold weather is returning to the major gas consuming regions of the country in the 11-15 day time frame. That weather will definitely suck some gas out of storage.
I’m driving home yesterday and pass the name brand gasoline station I usually buy gas at and am astounded to see that regular gas is selling for $1.899/gallon. I’m thinking “Holy Toledo! I can’t remember the last time I’ve seen gasoline so cheap!” So this morning I decide to do some research. It appears that $1.899 is actually no bargain! There are at least a couple of gas stations in the Houston suburbs where you can buy a gallon of gasoline for, drum roll please, $1.449! Now it’s not a national brand and you must pay cash, but $1.449! Cheeeeeeeeeeeep!
On a logistical note, the Morning Energy Report will not be published on Monday due to the holiday. Have a great weekend.