Equities and the Economy

Good morning and happy Pina Colada Day (Google Rupert Holmes). On the heels of a big rebound in Chinese stocks and a continued strength in European stocks U.S. equities bounced back from Wednesday’s horrific sell-off with the Dow closing up 33 points, the S&P 500 adding 5 to 2,051 and the Nasdaq gaining 12 to 4,922. And I don’t feel very good about it. Why? Because the price action was horrible. Just after the open the Dow was up a hefty 242 and at its intraday high and the S&P was up as much as 1.4% with both only to erode as the day progressed. That’s not the way bull markets act. Bull markets open and climb throughout the day closing on their highs. U.S. markets of late have been driven by international headlines and because markets are not rational some headlines have greater impact than others. For example, although it’s been Greece that’s been capturing the proverbial front page for the last month or so, the Chinese stock market crash is probably having a bigger impact in U.S. equities than events surrounding Greece. So the Chinese equities bounce yesterday, the biggest daily gain in 6 years, was the biggest driver of U.S. equities. If your recall, the day before, Wednesday, European equities closed up but Chinese equities got crushed and our markets got destroyed.

Turning to domestic economic news, which has been dwarfed of late by international events, the Labor Department released its weekly report on frits time jobless claims reporting that claims rose by 15,000 for the week to 297,000 and, disturbingly, to the highest level since February 28th. Additionally, economists were expecting 275,000 claims so on the surface this was not good news. However (isn’t there always one!), things get squirrelly this time of year because of the annual shutdowns of auto plants for retooling. You can see that drilling down in the data. Unadjusted claims more than doubled in Michigan and rose by 50% in Ohio. So one must take the data with the proverbial grain of salt.

D-Day (Sunday) is rapidly approaching for Greece and its creditors and while you were resting at home last night Greece presented a set of new proposals that reportedly have moved closer to creditors demands. However, there’s been no word on whether it’s enough. Here’s the timetable. Today at 8AM EDT: the Eurogroup, ECB and IMF will make a first assessment on the proposals on a conference call which they will send along to eurozone finance ministers ahead of an emergency Eurogroup meeting. If the proposals are deemed sufficient, the Greek parliament will meet this afternoon and late this evening and vote on the proposals. This is no slam dunk for Greek Prime Minister Alexis Tsipras faces big headwinds from the anti-austerity factions within his own party. Saturday 9 AM EDT: The Eurogroup finance ministers meet for an emergency summit to discuss Greece’s reform program and loan request. Sunday 10 AM EDT: Eurozone leaders meet in Brussels. Sunday at 3 PM EDT: All 28 EU member states convene for the vote.

U.S. markets have opened up much higher this morning with the Dow up 147 points which is off from being up 189 points earlier. There are two drivers. First, Chinese stocks soared with the Shanghai closing up a huge 5.9% amid the government’s recent drastic actions to stem the rout. Side bar on investing in China, be extremely wary. I’ve closely followed this market for years and the past couple of weeks I’ve come to the conclusion the Chinese stock market is not an open market but one manipulated by the government. I don’t have the space here to go into all the reasons but here’s just one. This week the government ordered that brokers buy stocks. Additionally, the Chinese security regulators have requested all the listed companies to submit today specific plans on how to support their stock price. I’ve previously dabbled in Chinese indexes but won’t go there now even with your money!

Global stocks are also encouraged by the events surrounding Greece which is especially translating into materially higher European equities with Germany’s DAX up 2.50% and France’s CAC up a whopping 3.15%.

A final comment on this whole Greek thing. Apparently the latest Greek proposals include higher taxes on luxury items, an increase in taxes for eating at restaurants, tax breaks for some offshore islands eliminated and increased taxes on the shipping industry among other measures. Here’s the problem. You can impose all the taxes you want but the Greeks don’t pay taxes because the Greek government doesn’t put much effort into collecting them! Tax cheating is a high art in Greece. Zorba may dance but he doesn’t pay taxes.

Oil

Oil prices staged a big rally yesterday for the first time in 6 sessions on higher equities as well as the passing of the Iranian nuclear talk deadline with no agreement. WTI gained $1.56 settling at $52.78 and Brent climbed $1.59 to $58.61. That being said, WTI has lost 13% in the previous 5 days, the steepest decline over a 5 day period since August 2011. What we had recently was the Four Horsemen of the Apocalypse: Greece, Iran, China and unexpected expansion of U.S. production. Goldman Sachs believes WTI prices will hit $45 this October. I’ve seen Goldman right. I’ve seen Goldman wrong. This morning WTI is very quiet down 20¢. Chatter.

Courtesy of MDA Information Systems LLC

Natural Gas

Although the EIA natural gas storage report was marginally bearish showing a 91 Bcf injection last week with an 85 Bcf injection expected, the bulls reigned yesterday with natural gas closing up 4.1¢ at $2.726. Traders are closely watching the cash market which is being driven by demands in the electric generation sector, and those demands are very healthy. As I’ve said numerous times this summer, natural gas burns by electric generators are at record levels this summer driven by coal plant decommissions and EPA requirements. Getting back to storage, the U.S. now has 659 Bcf, 33%, more gas in the ground than this time last year and 29 Bcf more than the 5 year average. Pay more attention to the 5 year number if you’re doing comparisons. This morning natty prices are up 5.61¢ on a warmer forecast.

Elsewhere

Here’s some very sobering information. Yesterday the U.S. Office of Personnel Management reported that hackers have stolen sensitive personal information, including social security numbers, from 21.5 million people. This is in addition to the previously reported 4.2 million current and former Federal workers. The last hack was of people who have undergone background checks for security clearance since 2000. Those exposed included 19.7 million people who applied for clearances plus 1.8 million non-applicants, mostly spouses and co-habitants of applicants. Think about this. This means about 7% of the U.S. population’s personal information has been stolen! The U.S. government says the culprits are Chinese hackers. China has responded saying its “absurd logic.”  Have a good weekend.