Good morning. Horrible, horrible start to the year for equities. Yesterday stock markets worldwide got absolutely clobbered in an indiscriminate sell-off triggered by a renewed plunge in crude oil prices and a surging U.S. dollar. The Dow lost a stinging 331 points (1.86%), the S&P 500 closed down 37 (1.18%) and the Nasdaq fell 74 (1.56%) to 4,653. The Dow and S&P had their worst losses since October. The selling was driven when the WTI oil price fell below $50 falling more than 5% yesterday. You’re probably sitting there thinking “Why are equities falling when oil prices are lower which is a big boost to the consumer ?” Because oil prices below $50 make investors jittery. They start questioning their research. They know oil prices are elastic relative to global economic activity and when oil prices get to current levels they start asking themselves “Why is the oil price so low?” and then they ask themselves the big question “What are we missing?” When investors ask themselves this question they get conservative and start moving capital from riskier assets (equities) to safe havens (treasuries). Yesterday the 10 year Treasury leapt 7 basis points to 2.03%. The 30 year Treasury bond yield was 2.604%, the lowest since August 2012 (that should translate into cheap mortgages!). Also pressuring oil prices is the euro which fell to a 9 year low vs. the U.S. dollar yesterday. The euro is falling because investors are hearing Mario Draghi, the ECB President, tell the world the ECB will be doing some sort of QE in the near future because of the weak Eurozone economy and is also obviously bearish of oil prices. By the way, the S&P 500 energy sector is down almost 20% over the last 2 quarters of 2014. Not helping us at all is the Greek situation with elections set for January 25th and a very left wing government is expected to be voted in with real concerns about Greece defaulting on some of its massive debt and possibly leaving the eurozone bringing back the drachma. So there’s lots of concerns on investors plates but remember this, no major trend lines have been violated which means we’re still in a bull market.
This morning stocks in Asia closed mostly lower but this was a hangover from the price action in Europe and the U.S. yesterday. Today in the latter two regions equities have stabilized with the Dow up 45 points, that being said, we have to be cautious because WTI is once again lower this morning, down 1.13¢, which is a good segue into the discussion of oil.
WTI got destroyed yesterday losing $2.65 closing at $50.04. Brent lost even more, $3.31 (5.9%) settling at $53.11. Oil prices are now at 6 year lows. Forgive the redundancy but flat to falling demand with no change in supply is basic economics meaning prices will fall until supply is uneconomic to produce. Remember, all markets get overdone to both the top (bubble) and the bottom. Oil and oil related equities are going to be a raging buy, but I don’t think we’ve seen the bottom yet. I don’t believe we’re far off, but not there yet.
The low oil prices are translating into lower gasoline prices having fallen for more than 100 days bringing retail prices to the lowest level since early May 2009 which was when we were in the middle of the Great Recession. AAA says the national average price of gas has dropped for a record straight days since they started keeping track of prices in January 2000. The national average prices is now $2.20/gallon, about $1.12 less than last year, and drivers in 40 states can find at least one gas station selling gas under $2.00. And prices are expected to continue to fall. It is estimated that for every 1¢ the price of gasoline drops for a year’s time equates to drivers saving $1 billion.
Very cold weather is blanketing the eastern 2/3rds of the country and I came in yesterday with natural gas futures screaming higher trading as much as 17.3¢ over Friday’s settle. And then the bears came out of their caves and began selling the heck out of it and pushed prices way down with the February contract closing 12.1¢ lower at $2.882. Traders are looking at production which has hit record levels on a daily basis but production has backed-off this week with well freeze-offs shutting in production in a few regions of the country.
Natural gas prices may be falling in the Gulf region but they ain’t in the Northeast. Cash prices are high and have been trading over $10/MMBtu with it trading $15/MMBtu today. This is bringing in LNG cargos vessels with global LNG pricing below $10 for January and February delivery. The good news is the LNG should fend off cash price blowouts like the one experienced last winter when cash prices reached $78/MMBtu! This morning natty is calm being up an immaterial 0.4¢. Chatter.
With it being a brand new year I thought I would pass along to you one of my favorite quotes which is from the iconic Mark Twain who said “The two most important days in your life are the day you are born and the day you find out why.” Have a nice day.