Good morning. Our stock portfolios and 401K’s took another pounding yesterday with U.S. equities once again getting hammered. The Dow closed down 130 points (0.74%) at 17,372, the S&P 500 lost 18 (0.9%) to 2,003 and the Nasdaq fared the worst dropping 60 (1.3%) to 4,593. It was the 5th straight losing session for both the S&P and Nasdaq. The Dow is having its worst start to a new year since the 2008 financial crisis and the S&P is now off more than 4% from its high on December 29th. Once again, it was falling oil prices that are scaring the heck out of investors. The energy sector has now sustained losses of 22% since June 30th and the S&P Small Cap 600 energy sector has lost almost 50% in that time. Adding fuel to the fire, there were a couple of disappointing economic reports released yesterday. The Institute of Supply Management non-manufacturing sector came in at 56.2 for December with November’s at 59.3. Further the Commerce Department reported factory orders fell 0.7% in November with Wall Street expecting a 0.5% decrease. Disconcerting was the orders for non-defense goods, which excludes aircraft and is viewed as a proxy for business investment, which fell 0.5%.
Investors have been flocking to safe havens such as utilities and U.S. Treasuries pushing yields to their lowest level since October 15th. Those of you with amazing memories will remember that date to be the mini-flash crash. Unsurprisingly, CNN’s Fear & Greed Index has swung into the extreme fear range whereas one week ago it was neutral and a month ago it was in the “greed” area.
We’re at a critical juncture folks. Basis the S&P 500, there’s a support line dating back to mid-October coming in at very near the 2,000 level. I call this support one of “moderate” strength because the time frame is not long enough to be considerate “strong” support but it is definitely not in the “short term” support category. Bottom line, it’s important 2,000 holds or it will bring in a rash of new “technically based” selling.
Fortunately we’re seeing a nice rebound in equities this morning with “green” around the world starting in Asia where all the major indexes closed higher and European stocks currently trading even better than the Asian stocks closed. Dow futures are up a hefty 147 points. We could be getting a pop off ADP’s employment report for December which showed employment in the private sector increasing by 241,000 jobs which is marginally better than estimate of 235,000. Very importantly, ADP revised upward November’s employment a substantial 69,000 jobs from 208,000 to 277,000. You regular readers know I put a lot of stock in revisions for revisions are for the better in good times and vice versa. Investors view the ADP report as a window into the Labor Department’s employment situation report which comes out Friday. It’s great we’re starting out nicely after 5 bad days. Let’s see how we close for closes are more important than opens.
What can you say about oil? It just continues to get materially bludgeoned. Yesterday the slick stuff lost another $2.11 (another 4.2%) closing at $47.93. It’s foreign cousin, Brent, dropped $2.01 (3.8%) settling at $51.10. It’s hard to be bullish when you hear the UAE oil minister, Suhail bin Mohammed al-Mazrouei, say in an interview with The National the oversupply of oil may last months, or even years. “Depending on the actual production growth from non-OPEC countries, this problem [oversupply] could take months or years” to be resolved. He did add though that if non-OPEC producers “act rationally” prices would recover sooner. Well I’d like to tell him that after being in the energy markets since 1980 there’s one thing I’ve learned and that is U.S. oil and gas exploration companies act very rationally!
WTI has stabilized this morning being up 71¢. Sure doesn’t seem like much when you’ve lost $50! And don’t forget, the WTI price of oil I discuss each morning is at Cushing, OK. Those producers in the Bakken are taking a $15/bbl discount off Cushing putting their price at the wellhead at about $31! Ouch!
Natural gas was all over the board yesterday starting out high then falling below Monday’s settle and finally closing at $2.938, up 5.6¢. Many of you are freezing your keisters off this morning with temperatures 8 to 15 degrees below normal and please don’t shoot the messenger but you’re not going to see any relief for about 5 days. Fortunately, unlike last year, this time utilities are much better prepared for the cold. For example, there are two LNG tankers off the coast of Boston unloading. Now I didn’t say it was cheap with the cash market trading in the $15/MMBtu range but it sure beats the heck out of $40 which was the average for last January. There is a light at the end of the tunnel my friends and it’s not a freight train! Take a look at the 11-15 forecast. Very nice! This morning natty is just chattering around being up 1.4¢.
This afternoon the FOMC will release the minutes of their last meeting and the English majors will be called in to parse every word. This is a new year which means it’s time for the FOMC to rotate. Four regional presidents will lose their voting privileges and four others will gain the privilege. I’m not going to go into the details of the actual rotation but here’s the very important point. The “new” FOMC will be considerably more dovish than the previous one and may indeed be the most dovish in several years. Now no one knows exactly what this means but it could translate into interest rates being raised longer than one would think. Have a nice day.