Equities and the Economy

Investors sighed a breath of relief as the world averted a Grexit increasing their appetite for risk buying riskier assets and pushing stock prices around the world higher. Oh, and Chinese stocks rose as the government continues to manipulate the stock market there. The day’s gains were broad with the Dow jumping 217 points (1.22%), the S&P 500 added 23 (1.11%) to 2,010 and the Nasdaq popped 74 (1.48%) back over 5,000 to 5,072. This was the 3rd straight session of gains and the Dow has advanced more than 200 points per day for the last two. The Greek deal must now be approved by national parliaments including Greece’s before formal negotiations can begin. A formal pact is expected by the end of the week. The can has been kicked. Folks, Greece cannot service its debt. This was confirmed recently by the IMF, one of its lenders. I know it goes against many of our tenants but some of Greece’s debt must be forgiven. Bond holders, of which Germany is a big one, must take a haircut. If Greece was not in the Eurozone it would have already defaulted just like Brazil has done 9 times, yes 9, over the last 200 years, and investors always come back and buy their sovereign bonds. Mark my words, in 12 to 24 months Greece’s debt problems will be back on the front page. What we have now is “pretend and extend.” Zorba is singing and dancing again.

Overnight Asian shares closed mixed with Japan’s Nikkei rallying nicely while China’s Shanghai and Hong Kong’s markets closed over 1% lower. European shares are pulling back after three strong days. Here in the U.S. the Dow is up 9. It’s almost like that after a week angst with risk off then risk on investors are taking a breath.

Oil

The big news, which I’m sure you’ve heard, is that Iran and the six global powers, led by the U.S., have reached an agreement whereby Iran will cease its nuclear program in exchange for a relief in sanctions. Congress now has 60 days to review the agreement. It will take many months for Iran to ramp up its export capacity following the easing of sanctions but even a modest increase will weigh on prices being the market is estimated to already be over supplied by about 2.5 million bpd. Sanctions on Iran have almost halved its exports to a little over 1 million bpd. It’s quite amazing how warfare has changed. 100 year ago World War I was fought with guns. World War II was fought with tanks. World War III is being fought with banks!

It’s hard to imagine Saudi Arabia surrendering any market share to its arch enemy. And boy does it need the cash. No it’s not anywhere close to being a Greece for it has a big war chest but low oil prices are seriously hurting the kingdom. For the first time since 2007 the kingdom had to tap into the bond market this year raising $4 billion. The Saudi government has been dipping into its large foreign reserves, which peaked at $737 billion last August, to sustain spending on wages, special projects and the war in Yemen. It’s estimated Saudi Arabia needs an oil price of $105/bbl to meet planned spending requirements.

So I bet you’re thinking “Oil prices must be getting hammered this morning.” Well you would be incorrect. WTI is actually up 13¢ and Brent a little bit more. Why? Because the agreement is already built into the market. WTI prices are down about 14% over the last couple of weeks. The agreement was announced today but I’ve got a strong feeling, just a gut feeling, that over the past week or so somebody talked to somebody who talked to somebody that a deal was imminent.

Courtesy of MDA Information Systems LLC

Natural Gas

On the heels of increasing temperatures the natural gas cash market has been supporting natural gas futures prices with yesterday closing another 9.4¢ higher at $2.864. Since last Wednesday’s close natty has risen 17.9¢, 6.7%. I call the weather forecast over the next two weeks as “supportive” for although there’s no heat waves temperatures will be above normal in the south which will keep those natural gas fired peaking generators burning.

Per the EIA, U.S. natural gas production from shale plays is projected to fall for the 4th consecutive month in August dropping 0.26 Bcf/d from a total output of 45.1 Bcf/d. The fall is due to, this is a revelation, reduced drilling due to capital expenditure cuts beginning in Q1 2015.

This morning natty is up 2.3¢, down from 5.5¢ earlier this morning.

Elsewhere

Solar scientists, armed with the best data yet regarding the activities of the sun, say the Earth is headed for a “mini ice age” in 15 years, something that hasn’t happened for 300 years. Professor Valentina Zharkova of the University of Northumbira presented findings at the National Astronomy Meeting in Wales. Researchers, saying they understand solar cycles better than ever, predict that the sun’s normal activity will decrease 60% around 2030 triggering the “mini ice age” that could last a decade. Scientists say there are magnetic waves in the sun’s interior that fluctuate between the body’s northern and southern hemispheres resulting in various solar conditions over a period of 10 to 12 years. Based on that data, researchers say they are now able to better predict the sun’s activity which led to Zharkova’s team prediction. Zharkova said that with his methodology his predictions have been 97% accurate. If the “mini ice age” does indeed arrive it will be accompanied by bitter cold winters.

I shared with you that report because we are bombarded daily with climate change, the more politically acceptable term for global warming. Now we have this. My point is how much do we really know? If the life of the universe were a calendar of 365 days man appeared at 11:45 PM on December 31st. Again, how much do we really know?

Have a good day.