Equities and the Economy:
• Q4 2016 GDP disappoints.
• U.S. equities close the week mixed.
The Commerce Department reported on Friday that 4th quarter 2016 GDP grew at an annualized rate of 1.9% which was disappointing for economists were looking for something closed to 2.2%. This was after Q3 2016 GDP rose at a rate of 3.5%. Trade was the weighing factor with the strong dollar making its impact felt with exports subtracting 1.7% from the expansion in the October to December period, the most since Q2 2010. This normally would have seriously weighed on equities but drilling down into the data consumer spending, the biggest part of the economy, rose 2.5%, at expectations. The Commerce Department also released Durable Goods Orders for December which came in lower than the forecast of +2.5% actually falling 0.4% but that was entirely due to the always volatile defense aircraft category. Orders for nondefense goods excluding aircraft, a category viewed as a proxy for business investment plans, rose 0.8%, nicely above The Street’s forecast of 0.2%. Lastly, the University of Michigan reported its index of consumer sentiment rose from 98.2 in December to 98.5 in January. This is the highest this index has been in 13 years! The consumer is feeling pretty good!
Investors felt indifferent about this fundamental data with the Dow falling 7 points to 20,094, the S&P 500 closing down 2 points at 2,295 and the Nasdaq rising 6 to 5,661. Remember, earlier in the week the indexes closed at record highs so a breather is not to be unexpected. The S&P 500 is up 2.5% so far this year, very strong.
This morning stocks are on the defensive with the Dow down 61 points weighed down by European stocks which are trading about 1% lower. President Trump’s immigration ban announced over the weekend is being blamed. It’s not the ban itself that is causing the pullback but the uncertainty it brings to investors and “confusion breeds contempt” and investors reduce risk. This will pass. It’s a bull market amigos.
The big event of the week is the FOMC meeting tomorrow and Wednesday.
• WTI takes a hit on Friday.
• Price flat for the week.
WTI lost 61¢ on Friday, 1.1%, closing at $53.17 which was its largest single session loss since January 18th, but for the week prices were little changed with the benchmark down less than 0.1%. Brent fell 72¢ on Friday settling at $55.52. On Friday Baker Hughes released its weekly rig count report and rigs are in a very strong bull market. Last week 35 additional rigs were operating, 29 oil and 6 natural gas. The rig count is up a big 53 in just two weeks and up 14% from year ago levels.
Independent shipping data released today indeed shows that there has been around 75% compliance on the OPEC deal announced in November. While this must be considered a relative success, especially with higher levels of compliance expected going forward, this is offset by the rising U.S. rig count. Some analysts are stating that U.S. oil production could rise by a whopping 1 million bpd by the end of the year mitigating the OPEC cut of 1.8 million bpd, and the 1.8 million bpd cut assumes full compliance, which isn’t going to happen. This may inspire some OPEC producers to cheat on their production cuts because all they’ve done is given their market share to the U.S. producer. Also, remember the OPEC deal expires June 30th.
This morning oil is quiet with WTI down 29¢.
• The February Nymex natural gas contract expires for the month at $3.391/MMBtu.
• This morning’s forecast shifts warmer.
The February Nymex natural gas contract had its last day in existence closing up 0.9¢ at $3.391. Prices were lower all day but in the last 30 minutes, which sets the settle price on expiration day, the bulls came in rallying the market 5¢. As I’ve said, traders have been playing this market from the long side with some forecasters looking for a cold February or March. Well if below normal temperatures are to come to the midwest and the east, they’re not coming until at least the second half of February. This morning forecast takes us to February 13th showing no signs of below normal temps. The south and west will have above normal temps and the all-important Midwest and east will have normal temperatures. The polar pig that was in western Canada last week isn’t dropping into the U.S. to the glee of those of you in upper midwest and northeast.
This morning’s forecast not only shows no polar pig destined for the U.S. but not cold air either. The midwest and northeast will be normal.
If any of you are coming to Houston for the Super Bowl you’re going to have a week of spectacular weather! Highs in the mid 70’s. Low humidity. No rain. Chamber of Commerce weather!
There’s a big diamond mine in Russia, the Mirny Mine, that is now closed. It was a HUGE mine. The mine was opened in 1957 in the harshest of environments being it’s located in eastern Siberia. In the summer the ground turned to slush and the winters were so cold oil would freeze and car tires and steel would shatter. The Russians did figure out a way to produce the mine and it operated for 44 years finally closing in June 2001 after the yields got too low. At its peak it produced 10 million carats a year.
The fact that the mine is currently the second deepest excavated hole on earth being 1,722 feet deep, and 3,900 feet in diameter is itself remarkable, but this is what’s truly amazing. The hole creates a vortex that can suck a helicopter into it! The hole is so deep that the earth warms the air inside it. Two things happen then. First, the warm air rising from the hole is less dense and gives less lift to helicopter rotors than the cooler air outside the diameter of the hole. As the helicopter flies over the hole the temperature change is so abrupt the pilot can lose a lot of altitude before managing to adjust the speed of the rotors. At the same time, the cool air pouring into the hole from all sides creates wind shear. If a helicopter loses enough lift to hit the stream of cold air it could easily be slammed into the side of the borehole. The airspace above the hole is now off-limits to helicopters after a “few accidents” due to being “sucked” into the hole.