Equities and the Economy

Breaking a four day winning streak the Dow and S&P 500 closed lower on Friday with the former losing 141 points (0.8%) ending at 17,673 and the latter off 11 points (0.6%). The Nasdaq bucked the trend closing 7 points higher (0.2%) at 4,757. The day might not have been good but all three indexes managed to log gains for the week with the Dow up 0.9%, the S&P up 1.6% and the Nasdaq up 2.7%. With all the volatility last week I bet you didn’t know this but the Nasdaq actually had its biggest weekly advance since October. The volatility is being exacerbated by the earnings report of companies with negative reports from companies like UPS pushing the market down and positive reports from Starbucks and E-Trade boosting stocks. Supporting equities last week, mainly European, was the ECB’s finally announced, expected and larger than anticipated bond buying program, aka QE. As far as fundamental news, sales of existing homes rose 2.4% in December to a seasonally adjusted annual rate of 5.04 million which was pretty much in line with expectations. More disconcerting, Markit’s manufacturing purchasing manager index edged lower in January to a reading of 53.7 from 53.9 in December marking its lowest reading in 12 months.

Enough of last week for we have a weekend of news and events to deal with and the big one is the results of the Greek election where the leftist party Syriza was elected with its leader Alexis Tsipras is taking on international lenders (can you say Germany?!) pledging to end 5 years of austerity and renegotiate Greece’s debt agreements. The election of a left wing government is not at all surprising to me. Overall, unemployment is around 25% and for those under 25 it is a staggering 50%. Think about what you/we would be doing if we were experiencing that here in the U.S.!

Investors are concerned the conflict with other euro zone governments could put more strain on the currency bloc. Germany has said a pardoning of debt is out of the question but opened the door to a possible extension of Greece’s loan payments. Don’t expect an immediate resolution to this matter. Greece has enough money in its coffers to pay its debt until this summer which is when I expect some resolution to the issue.

There’s been a lot of volatility in equities this morning with both the euro equities getting hit hard when the markets opened but both have bounced back nicely with the major European indexes now waffling on either side of unchanged. The U.S. equity futures markets are down marginally but this a heck of a lot better than earlier when Dow futures were down 130!

Our Fed has a two day meeting this week beginning tomorrow. I expect nothing of material from the meeting. Dr. Yellen and her colleagues will note the dollar’s strength and falling oil prices and they are data driven but they will sit hard upon their hands when it comes to a policy change.

Oil

WTI and Brent moved in opposite directions on Friday with WTI closing down 72¢ closing at $45.59 while Brent settled up 27¢ at $48.79. The latter got a small bid from the uncertainty over Saudi oil output following the death of King Abdullah while the former weakened on follow through from the stunning EIA report on Thursday noting stockpiles of oil around Cushing, OK are at 80 year highs. We now have about 400 million barrels of oil stored with the 5 year average approximately 340 million. By the way, don’t expect any change in oil policy from the new Saudi King, King Salman. President Obama, who is currently in the second most populous country of the world, India, will travel later this week to Saudi Arabia to meet the new king.

This morning WTI is down 15¢, chatter. WTI has now traded in the low mid $40’s for 9 trading sessions. That doesn’t mean we’ve seen the low but it’s past the time to short WTI. Bad risk/reward.

Courtesy of MDA Information Systems, LLC

Natural gas

The volatility in natural gas continues with natty closing up 15.1¢ (4.8%) at $2.986. Friday’s jump was a combination of a marginally colder weather forecast, the big snow event hitting the northeast this week and, last but by far not least, short covering ahead of the weekend. Remember, we are right in the middle of the statistically coldest time of the year (last 2 weeks of January and first 2 weeks of February) and traders don’t want short over the weekend only to come in Monday and see a “bunch of dark blue” on the weather forecast map, especially when natty is trading in the low $2.80’s. Prices have waffled around $3.00 for about a month now with traders weighing near record production with elevated demand resulting from below normal temperatures in the major gas consuming regions of the country.

This morning the weather forecast is little changed from Friday and some of the weak shorts that bailed out on Friday are jumping back in today with natty down 10.8¢. That being said, the east will indeed see about 2 weeks of below normal temperatures which will elevate demand for natural gas resulting in above normal weekly EIA storage withdrawal numbers.

Elsewhere

If you go to bed with dogs, you get fleas. And if you try to explore for oil and move if from a former Communist country you go broke! That is lesson that ENI SpA, Total SA, Royal Dutch Shell PLC, the China National Petroleum Company and Exxon Mobil are finding out. These are the companies that have invested heavily in developing the Kashagan Oil field in Kazakhstan. This is a monster field, perhaps the largest yet discovered and certainly among the 5 largest. These companies have been working with the Kazakhstani government now for, are you ready, 17 years trying to get the first barrel of crude out of the field. They have spent $50 billion so far which is 10 times the original estimates. And it only gets more expensive. Recently hoping these first barrels would move through a pipeline built to carry crude from the field the consortium found out that the metal in the pipeline was “fatigued” and is utterly incapable of carrying crude. The cost? It is being quoted as another $3 billion. If the past is prologue to the future that will turn into $10 billion real quick, depending on which official has to be bribed, and how often.