Equities and the Economy
Good morning. After being closed for three days U.S. markets reopened yesterday and by judging the numbers at the close, Dow up 4 to 17,515, S&P 500 up 3 to 2,023 and Nasdaq up 20 to 4,655, one might think it was a yawner of a day. Au contraire. It was anything but. The volatility, which has been characteristic of the equity markets this year, continued yesterday. When I came in yesterday morning to write my report Dow futures were up about 80 points on the coattails of the global markets. Things then began to deteriorate and at about 10:45 CST it was looking really bad with the Dow down 180 points from Friday’s close equating to a 260 point decline over about 4 hours. But then the bulls dug their hoofs in and snorted and ground their way back to close positive territory on the day. There was only one report of economic significance here in the U.S. yesterday and that was the National Association of Home Builders homebuilder sentiment index which fell from 58 to 57 which was expected by economists. Most importantly is the index is still above 50 which means there are more optimistic homebuilders than pessimistic.
All the focus in the Western world right now is on the ECB meeting tomorrow and the expectation of an announcement by its president, Mr. Draghi, of a large scale QE. We know how equities love QE and European stocks have been climbing the last couple of weeks solely on the anticipation of this QE for they haven’t risen on “fundamentals” for the economies across Europe are falling into recession one by one and in aggregate deflationary recession. Hence, the rationalization of the QE. I may be wrong but this sure feels to me like a “buy the rumor. Sell the fact.” I fear the ECB will disappoint investors. I hope I’m wrong.
This morning the Dow is 38 points lower weighed down by disappointing earnings from IBM. Remember IBM is one of the 30 stocks in the Dow index. By the way, the formerly named International Business Machines just celebrated its 100th anniversary. Quite an accomplishment! Weighing on the market in general are weak overall earnings. I know it’s early but 51 companies of the S&P 500 have reported earnings with average earnings growth of just 0.36% greater than Q4 2014.
After rallying $2.44 (WTI) last Friday oil got bludgeoned yesterday giving up 94% of that gain with WTI falling $2.30 closing at $46.39 and Brent losing less, 85¢, to $47.99. As I mentioned in yesterday’s report, it was the IMF’s report released Monday forecasting lower global growth in 2015 that resulted in oil selling off. That being said, WTI does appear to be consolidating above last week’s low of $43.43 for we’ve now traded for 4 days above that level. Although the term structure (front month year spread) moved back out again yesterday the contango is still narrower than a week ago. My antennae are up. The time to be bearish of oil may be over. I’m not saying it’s time to get long, just not initiate new shorts. This morning WTI is up $1.28 possibly on short covering with the aforementioned consolidation being recognized by traders with them concluding it’s time to take some chips off the table and book some profit.
Natural gas slipped a little Friday, 3.1¢, but it got taken out behind the woodshed yesterday and whipped like a 1900’s misbehav’n school boy losing a very material 29.6¢ (9.5%!) closing at $2.831. As I mentioned yesterday, the weather forecast moved materially warmer over the weekend with the Arctic blast that was supposed to blanket the Midwest and east retreating with below normal temperatures now only forecasted for the mid-Atlantic and northeast. Granted these are densely populated areas and considered “major gas consuming regions” but the new news was a shift to the warmer and the bears overwhelmed the bull like Moses releasing the Red Sea. This morning the weather forecast hasn’t changed materially from yesterday with cold air still expected in the 6-15 day time frame in those same regions. This morning natty is up 8.4¢ on a normal correction from the big down move yesterday. Additionally, we’re getting near the previous low and that’s where at least some shorts will cover. Remember, sell resistance and buy support. $2.805 is support.
I’m sure you’ve heard how bad the air pollution is in China due to the burning of coal for electric generation with no or minimal pollution reduction equipment and the skyrocketing number of cars and trucks being purchased by the emerging middle class. But now there is another source. One so bad it is being call “the criminal culprit” responsible for especially severe air pollution in the Sichuan province. That would be the local residents smoking of bacon! The meaty dish is a long enjoyed delicacy in China’s famous province. The government owned Chongqing Evening News reported the centuries old winter tradition of smoking pork is behind a material and measurable rise in air pollution and causing respiratory issues. But I like my pork dumplings! Have a good day.