Equities and the Economy
Good morning and happy National Lobster Day. Nobody on Friday could justify having lobster for dinner with all three indexes getting pounded. The Dow lost 140 points (0.78%) to 17,898, the S&P 500 fell 15 (0.70%) to 2,094 and the Nasdaq dropped 32 (0.62%) to 5,051. European stocks got hammered even harder and the only reason I mention that is because the negative effect of the worsening Greek negotiations diminished as it crossed the Atlantic. Friday’s losses wiped out most of the gains for the week with the Dow eking out a 0.28% rise, the S&P ending flat and the Nasdaq falling 0.34%. It’s was all about Greece which began on Thursday when the IMF said “Sayonara” and walking out the meetings and continued on Friday with Germany announcing they’re making precautionary preparations in case of a default. I’m betting you don’t own the Greek stock market index and be glad you don’t. It fell 6% on Friday. That’s a death blow of 1,074 Dow points.
Now a lot of the citizens of the western world are fed up with Greece’s ways but bear this in mind, and I’m sure western Europe’s leaders have but are not publically discussing. Greece is NATO’s most southeastern country. To the south is the Islamic State and even more importantly, Russia encroaches to the north. Greece’s Prime Minister Alexis Tsipras has already been to visit Vladimir Putin (January) raising eyebrows in Berlin and Washington to discuss a natural gas pipeline deal which included Russia giving Greece a big, up-front, lump sum of cash for allowing Russia to build a natural gas pipeline through the country. And Mr. Tsipras is schedule to attend an economic forum in St. Petersburg on Thursday, the same day as the euro finance ministers meet. Harry Truman told Congress back in 1947 “Should we fail to aid Greece and Turkey in this fateful hour, the effect will be far-reaching to the west as well as to the east.” Now a lot’s changed in 68 years but I guarantee you Mr. Putin will not pass up an opportunity. Just look at Ukraine.
The Greek drama continues to wreak pain on the market with equities around the world falling. All the major Asian indexes closed lower with both Hong Kong’s Hang Seng and China’s Shanghai Composite materially down and all the European indexes are trading significantly lower with Germany’s DAX getting hammered down 1.82%. The U.S. economy, while doing much better, cannot escape events like this and is being pulled lower with Dow futures down a very material 158 points. Over the weekend the Brussels Group (IMF, ECB and European Commission) and Greece met with no progress made. Apparently things went so badly the meeting only lasted 45 minutes before being terminated. Here are the next three deadlines you need to watch. June 18th which is when the eurozone finance ministers meet. This is supposedly when a deal must be made so it can be taken back to the various parliaments and voted on for implementation July 1. June 25th which is when the European Union leaders summit meeting is in Brussels. June 30th which is when Greece is due to make a 1.6 billion euro payment which is a bundle of four individual payments that were/are due this month. All I know though is this isn’t working for my portfolio. By the way, Greek banks are down 10% over the weekend.
The FOMC meets tomorrow and Wednesday. Don’t expect an interest rate increase this meeting for a post-meeting press conference is not scheduled. The Fed usually makes material moves when they have a press conference so they can explain the reasoning for their actions
Oil prices backed off on Friday with WTI falling 81¢ closing below $60 at $59.96. Brent lost more, $1.24, settling at $63.87. That being, oil prices did close higher for the week with WTI posting a 1.4% gain. Gasoline prices rose 4.5% for the week. Interestingly, traders seem unfazed by the Baker Hughes rig count report on Friday which showed the number of rigs working in the U.S. falling by 7 to 635 as of June 12th. This was the 27th week in a row the rig count has declined. The rig count is now down a huge 60% over the last 6 months.
This morning WTI is down 49¢. The dollar is pretty flat to other currencies so it’s no doubt that we can point to lower equities as the culprit. Today is the 5th consecutive day oil prices are lower.
An important milestone in the oil industry was recently reached. In March production in the Permian Basin oil fields of West Texas surpassed 2 million bpd and has reached that level every month since. This is the first time any U.S. oil field has produced at the 2 MM bpd level. Prudhoe Bay in Alaska peaked at 1.7 million bpd in 1979. Mexico’s Cantarell Field peaked at 2.1 million bpd in 2003. The big daddy of all oil fields is the Ghawar Field in Saudi Arabia, which encompasses 2,000 square miles, produces a whopping 5 MM bpd. So the Permian Basin joins an elite group of possibly only two other fields in the world to produce at least 2 MM bpd.
Natural gas fell 7.5¢ on Friday closing at $2.750 with the EIA storage report, and more importantly, the implied level of U.S. production, weighing on the bulls. Last Thursday’s storage report was the 10th consecutive report with injections were above average. That being said, we’re coming into the meat of the summer A/C load and natural gas burns in electric generation are at record highs sucking up natty like a dry sponge. And the lower prices go, the more sucking there will be.
The weather forecast is Ground Hog Day with both the western and eastern thirds of the U.S. showing above normal temperatures and the central third normal temps. Natty prices are up a material 13.1¢ this morning which may be driven by the cash market but I also believe the tropical disturbance in the Gulf, which will bring a deluge of rain to south and east Texas, is supporting prices. 10 years ago this event would have popped natty prices at least 20¢ but since a lot of natural gas production has moved on-shore, it’s having much less of an effect. 10 years ago offshore natural gas production represented 10% of U.S. production. Now it’s only 5%.
Speaking of the Fed, it noted in a report recently that the total wealth of American families is at a record high. It said U.S. household net worth rose to almost $85 trillion. It’s being driven by a rise in stock market and home values. People are feeling wealthier but incomes have not increased much and typically income increases is what increases spending. Unlike 2006 and 2007, banks are not allowing consumers to use their home like a piggy bank, i.e., taking second mortgages. For most Americans it’s their savings that increased in the form of retirement accounts and that money, albeit growing, is locked up. Maybe this isn’t such a bad thing.
Have a nice day.