Equities and the Economy
Good morning. As I mentioned yesterday, its earnings season. The “fundamentals” in the equities market. And the fundamentals were not good yesterday. Microsoft, United Technologies, Proctor & Gamble and Caterpillar all came out with disappointing earnings and/or reduction in revenue forecasts, aka sales. If that wasn’t bad enough, Durable Goods Orders for December were horrible. The Street was expecting a decline from November in the order of 0.5%. The actual number came in down 3.4%. A massive miss. Further, the previous month’s number was revised for the worse which is always a sign of economic weakness rather than strength. Drilling down beneath the headline number the “internals” were ugly as well with machinery orders down 3.7%, the worst decline since late 2012.
OK, now for the glass is half full. The Conference Board yesterday reported that its index of consumer confidence rose from 93.1 in December to an outstanding 102.9 in January. This is the report’s highest level since August 2007 and importantly, much better than economists’ expectations. Falling oil and gasoline prices will do that! Yesterday we also had the new home sales report from the Commerce Department showing new home sales rose 11.6% in December compared to November and well above expectations.
So you’re at the craps table and have all this data and throw the dice and what happens? You crap out. The bad data heavily outweighed the good data and investors bailed faster than a ship that is sinking. All the major indexed closed materially lower with the Dow posting a loss of 292 points (1.65%) to 17,387, the S&P 500 closing down 27 (1.32%) at 2,020 and the typically more volatile Nasdaq really getting whacked losing 91 points (1.90%) to 4,681.
This morning we’re getting “a little love” with the Dow up 59. Yesterday investors were noting what the aforementioned companies earning were but everyone was talking about Apple whose earnings announcement was coming after the closing bell. Well it wasn’t good news. It was great news! Apple reported a record $18 billion in quarterly profit, and one of the biggest in corporate history. The driver? People love the larger screen iPhones. You really need a perspective on this. Apple’s profit is on par with the GDP of Yemen. It’s equal to the debt faced by Detroit which sent it into bankruptcy. Tim Cook, CEO of Apple, could buy the Dallas Cowboys, the most expensive sports franchise in the U.S. and possibly the world, with about 16 days of profit. Apple’s quarter was bigger than the full year profit of 373 companies listed on the S&P 500, including GM! So how is Apple’s results translating? Apple is supporting the entire market. But that’s a very, very heavy yoke to carry.
As equity prices fell so did the U.S. dollar’s value against most currencies (not unsurprising) which propped up commodities in general and oil specifically. At one time yesterday WTI was up 3% but then backed off that high. At market close, 1:30 CST, WTI ended up $1.08 at $46.23. Brent settled $1.44 higher at $49.60. The WTI market is egregiously short and yesterday’s move was definitely some short covering.
After the close the API released its crude and products report which in aggregate (crude inventories + gasoline + distillates) was materially bearish. The aggregate number showed a 7.0 million barrel build in stocks with the 5 year average being 2.0 million barrels. Now as I’ve said before, take the API data with a grain of salt for reporting to the API is voluntary. The DOE data reporting is mandatory and their report is due out today and therefore carries more weight. That being said, the API data does influence the market and is pushing WTI down $1.04 this morning.
Yesterday was penultimate day for the February natural gas contract which means the February Nymex contract options expired and there was a major battle around the $3.00 number. Natty rallied in the morning as traders came in and saw colder weather forecasts and even colder weather on the midday forecast update but some serious selling came in at the $3.00 level and at the close natty settled up an even ten cents at $2.981. Today is a very important day for the February contract expires which will set not only “one leg” of many derivative trades but also the price of electricity for February for those on an unhedged heat rate product as well as the price one will pay for the month for natural gas for those on a basis product.
This morning the weather forecast is showing some darn cold weather for the eastern 2/3rds of the country next week but the 11-15 day time has moderated a tad. Traders are taking it all in as mildly bearish with natty being down 11.8¢ as I write. That being said, being its contract expiration day anything can happen. When I was trading I always avoided having an open position going into contract expiration day because crazy things can happen.
We all know Elon Musk is incredibly creative and some would say a visionary but what he’s done with the latest model of his Tesla is insane! That last word is not just an adjective. It’s also a noun as in the new button in the latest Tesla called “Insane Mode” As a matter of reference, the standard Tesla Model S goes for 0 to 60 mph in 5.8 seconds which is pretty darn fast. But when you hit the Insane Mode button in the new model the car will take you to 60 mph in an amazing 3.2 seconds. This is the kind of acceleration you’d get in a Lamborghini or Ferrari. I’ve never before put links in my Morning Energy Report but check out these people’s reactions! https://www.youtube.com/watch?v=LpaLgF1uLB8. Have a good day.