Equities and the Economy

Good morning. An interesting phenomenon is happening right now. I’ve seen this happen occasionally and it’s happening once again. That is that equity traders are taking their cues from the movements in the price of oil, specifically WTI. Early in the day WTI was getting pounded and equities were trading negative on the day. Then in the afternoon WTI rallied and although not huge, it managed to claw back to unchanged and this brought buyers into equities. Now there is some sense to this being there are so many energy related stocks in the major indexes. Oil goes up, people buy oil and gas related stocks and vice versa. Additionally, the market was oversold following 3 down days and importantly, right on support around that 2,000 basis the S&P 500 level so the market was primed for a bounce and with the little bit of positive news from oil we got a nice bounce with the Dow jumping a hefty 225 points (1.31%) to 17,417, the S&P 500 closing up 19 (0.95%) to 2,021 and the Nasdaq adding 45 (0.98%) to 4,683. You may not have realized this but since early December we’ve been trading in a 119 point range between 1,975 and 2,094 basis the S&P, and that’s the high and low with most of the activity in between.

Let’s move on to this morning for investors are getting their trading queues from more fundamental economic data and that is the Commerce Department’s report this morning that Q4 GDP was 2.6% which is sharply lower than Q3’s 5% rise. Now we need to put Q3 in perspective because growth for that quarter was ridiculously spectacular and not sustainable. For all of 2014 the economy grew at 2.4% compared to 2.2% in 2013. Good news came in the form of all important consumer spending which rose a huge 4.3% in Q4 and at the fastest pace since Q1 2006 and an acceleration from Q3’s 3.2%. Now the yang to the ying. The good consumer spending was offset by a drop in capital expenditure with business spending on equipment down at a 1.9% rate, the largest contraction since Q2 2009. With the mixed data the bulls and bears are battling it out in the trenches. This morning Dow futures were down triple digits and now the Dow is down “only” 89 points. Remember, the closes are more important than the opens.

Oil

As mentioned above, oil was getting knackered yesterday morning being down $1.08 but the market ran out of sellers and profit taking came in pushing WTI back up with it closing 8¢ positive on the day at $44.53. Brent added a little more, 66¢, settling at $49.13. WTI was down $1.03 in the morning sinking below $44/bbl to $43.58 for the first time in 6 years. I believe the price pressure will continue on WTI being U.S. production continues to climb with recent data showing U.S. production is 9.2 million bpd, a 28 year high. For you traders out there I want to reiterate that I believe the time to short WTI is past and it’s time to look on entering from the long side, but be patient. This morning WTI is up 79¢.

Natural gas

The EIA released its always much anticipated weekly storage report showing the U.S. withdrew 94 Bcf last week. This was materially less than traders estimates and sellers came in galore pounding natty down 12.3¢ (4.3%) closing at $2.719. Intraday it traded below $2.70 which is the first time that’s happened since late September 2012. Current natural gas inventories are 324 Bcf above last year and 79 Bcf below the 5 year average. Lest we forget that at this time last year we were in the middle of the Polar Vortex.

This morning the weather forecast, which is extremely cold for the next 10 days for the northeast and MidAtlantic states, has moved marginally warmer for the 11-15 day time frame which is bringing the bears out of their caves with natty being down 4.7¢.

Courtesty of MDA Information Systems LLC

Elsewhere

Are you ready for a showdown? Last night the Senate passed a bill approving the completion of the 840 mile Keystone XL pipeline defying an all but assured presidential veto threat. The vote was 62-36 in favor with 9 democrats joining 53 republicans. The republican’s glee may be short lived for they know they don’t have the necessary 66 votes to overcome President Obama’s veto.

Have a good weekend. By the way, the Pats are favored by 1.