Equities and the Economy:

• Caution prevails.
• U.S. indexes closed mixed.

Caution remained the order of the day with another choppy day for U.S. equities. The Dow closed down 22 points at 19,805 while the S&P 500 and Nasdaq closed 4 and 17 points higher at 2,272 and 5,556, respectively. Over the past month the gap between the Dow’s high and low prices has been a tiny 1.4%. Putting this in perspective, the last time volatility was this low for the Dow for a month was 1957! Usual volatility in a typical month is 6-7%. In fact, the typical trading day range over the past 60 years has been 1.5%. This will not last. Things always revert back to the mean.

Let’s move on to yesterday’s important economic data. The Federal Reserve reported that Industrial Production rose 0.8% in December and while it did come in at Wall Street’s expectations, it was the largest monthly percentage gain in nearly two years. Impressive! Additional data came from the Labor Department stating its consumer price index rose 0.3% in December. Core CPI (excludes energy and food) rose 0.2% m-o-m. For the full year 2016 the broad consumer price rose 2.1% and core process rose 2.2%. Does that mean anything to you? It should. The Fed’s inflation target is 2%. Speaking of the Fed, Chairperson Janet Yellen was on the speaking circuit yesterday. She said, “ Waiting too long to begin moving toward the neutral [interest] rate could risk a nasty surprise down the road – either too much inflation, financial instability, or both.” Pretty clear higher interest rates are coming. Her hawkish comments sent the 5 and 10 year Treasury interest rate yields to highs not seen since 2014.

This morning the chatter continues. The Dow is down 29. The S&P and Nasdaq are unchanged.

U.S. economic data has been quite positive lately but remember, equity prices are priced with expectations built in. A stock price is priced at what investors expect the performance of a company to be in the future, commonly 6 months. I came across a piece of data I felt worthy of passing on to you. There’s a statistic called the Rydex Ratio. It shows the relationship (ratio) between bullish and bearish mutual fund managers. Presently the ratio is at multi-decade highs and is higher than it was at the height of the Dot.com bubble! Now this doesn’t mean you should go sell the farm for share prices will probably remain at current levels and move higher. That said, there will be a day of reckoning. Boats cannot stay heavily listed to one side. If only we knew that date.

Oil

• WTI falls $1.40 closing at $51.08.
• EIA forecast rise in U.S. shale production.

On November 30th OPEC announced an agreement to cut production by 1.8 million bpd including Russia immediately driving prices higher, that’s old news now and traders are focusing on 1) production cut compliance, and 2) how will other countries, particularly the U.S. respond. Well the new news was from the EIA this week forecasting February U.S. shale production will rise by 40,750 bpd to 4.748 million bpd. Additionally, OPEC in in its monthly report forecasted demand for its oil in 2017 will fall by 400,000 bpd. The OPEC report caught most everyone by surprise and bought out the bears. Oil prices fell to a one week low with WTI dropping $1.40 to $51.08 and Brent settling $1.55 lower at $53.92.

This morning oil prices are rebounding a bit being up 62¢ with technical traders buying on the one week low.

Courtesy of MDA Information Systems LLC

Natural Gas

• Warmer forecast
• Cash market weak.

Warmer forecasts wreaked havoc on the bulls yesterday with further pressure coming from the noon update showing no material cold through the remainder of the month. Additionally, with the current very warm weather cash prices are getting crushed further weighing on the bull’s yoke. Natty opened a nickel down and selling continued throughout the day. When the final bell rang the February contract settled 11.0¢ lower at $3.302. That being said, for the last couple of weeks we’ve been pivoting broadly around the $3.30 figure. Today’s forecast is the same as yesterday’s with below normal temperatures in the southeast and Texas in the 11-15 day time frame. With no change in the forecast natty is little changed this morning up 2.1¢.

The EIA weekly storage report comes out today. The market is looking for a withdrawal of 240 Bcf. Will let you know about that tomorrow.

Elsewhere

Interesting U.S. facts:

• The seven rays on the Statue of Liberty’s crown represent the seven continents.

• The Texas capitol is 15 feet taller than the U.S. Capitol. That was not an accident.

• Hawaii is the only state in the U.S. where coffee is grown.

• Alaska has a longer coast line than all the other states combined.

• African American inventor Elijah McCoy created a device to keep train wheels oiled while the train was running. There were other similar devices but McCoy’s was the best. Station agents would ask for the “Real McCoy.”

• The current United States 50-star flag was designed by Robert G. Heft as a class project. He originally was given a grade of B-. After the flag was adopted by Congress his grade was changed to an A.