Equities and the Economy
Good morning and happy Eat Your Vegetables Day. Vegetables are all I’m going to be able to afford if this keeps up. The Dow fell 108 points (0.6%) to 17,791, the S&P 500 lost (0.48%) to 2,084 and the Nasdaq declined 21 (0.42%). The headlines continue to be dominated by events surrounding Greece with investor fear increasing and yesterday really being the first bout of serious contagion suffered by the financial markets globally this year due to the Greece matter with the Asian and European market also closing materially lower. See the Fear & Greed Index here. In fact, both Greece and its creditors hardened their stances yesterday after talks failed over the weekend. Greece’s Prime Minister Tsipras blames the creditors for the breakdown in talks saying his government has a responsibility to defend Greece’s dignity and would resist further pension cuts which has been a major sticking point. Why insist on pension cuts? Pensions and wages account for about 75% of primary spending with the other 25% already being cut to the bone. Greek workers retire younger on average than in other European countries and collect pensions close to German levels that require unaffordable government subsidies.
Athens now has just 2 weeks to find a way out of the impasse before it faces a 1.6 billion euro repayment due to the IMF, potentially leaving it out of cash and unable to borrow. But I think there may be a snake in the grass and his name is Vladimir Putin possibly giving Greece’s Prime Minister Tsipras at least a perceived “ace in the hole.” Despite the deepening crisis, Tsipras is going ahead with a planned visit to Russia on Thursday, the day the euro zone ministers hold a crucial meeting to review the standoff with Greece. He is scheduled to stay until Saturday, attend an economic forum in St. Petersburg and meet President Putin. The discussions include giving Greece a huge up-front, lump sum payment in exchange for allowing Russia to build a natural gas pipeline through Greece.
Overnight the carnage continues with the Asian markets closing down. Japan’s Nikkei hung in there closing down only 0.64% but China’s Shanghai got obliterated losing, are you ready, 3.46%! That’s 616 Dow points. The European bourses are faring better than yesterday and bouncing back from their worst levels this morning but they’re all still in the red.
So why is a country with a GDP the size of Louisiana such a big deal? Think Lehman Brothers. It’s about confidence in the market, in this case the European Union (EU). The worry lies in that the credibility of the EU. Should Greece go into cardiac arrest will Portugal and Spain follow? Now for the record, all the other PIIGS are coming out of their respective recessions. Greece is the only one remaining.
The adage “confusion breeds contempt” is apropos this morning with Dow futures down 27 which also is much better than earlier this morning. By the way, the FOMC meets today and tomorrow.
For the record, there has been some economic reports released here in the U.S. the last couple of days but they’re being more than trumped by events surrounding the Greek debt negotiations.
In a day of volatile trading oil prices were attached to the equities anchor and closed lower with WTI losing 44¢ settling at $59.52 and Brent fell materially more, $1.26, ending at $62.61. Obviously, the Greek mess affects European oil demand than the U.S. demand. Looking at the forest and not the trees, WTI continues to waffle around the $60 level.
With WTI prices 40% lower than last summer I thought I’d convey some data from Baker Hughes reflecting rig counts. Since October 10, 2014 here are percentage reduction in working rigs in various basins. Bakken, rig count down 61%; DJ-Niobrara, rig count down 55%; Mississippian (Oklahoma/Kansas border) down 71%; Eagle Ford, down 58%; Permian, down 59%. Now I’m sure that although you might not have known those statistics, they didn’t surprise you. But I bet this will. Over the last 8 years oil exploration companies have done a fantastic job of improving rig productivity. Back in 2007, before horizontal drilling and hydrofracking ramped up, the average new well production per rig was approximately 75 barrels/day. In 2012 rig productivity rose to 100 bpd. In 2014 that number became 200 bpd. Currently it is, drum roll please, an astounding 500 bpd! That is a 1000% increase over the last 8 years. In the interest of full disclosure these statistics are for the Permian Basin but I suspect the same gains in productivity apply to other oil producing basins. Three cheers for U.S. exploration companies.
This morning WTI is quiet this morning down a nickel.
Natural gas prices jumped a big 13.9¢ yesterday (4.6%) closing at $2.899. Prices have been rising due to the high heat and humidity engulfing much of the eastern seaboard. Additionally, U.S. dry gas production is down about 3% from its high so we obviously have a double whammy going on. I know we have a couple of weeks left in June but the forecast does go out for 15 days and based upon current forecasts June 2015 is looking like one of the 10 hottest June’s on record based upon population weighted cooling degree days.
The weather forecast is getting boring to report on for the jet stream is entrenched with above normal temperatures in the east and west which will keep those natural gas fired peaking plants running and supporting natty prices. This morning traders are taking the day off, which is strange for it’s only Tuesday, with the July Nymex contract down 2.5¢ with many of the other contracts without a single trade.
I’m sure most of you know that the man who created Tom Sawyer, Becky Thatcher and Huckleberry Finn was born with the name Samuel Clemens. Now when he began to write he tired a number of pen names one of which, and thankfully he didn’t continue to use, was Sieur Louis de Conte. Thankfully he settled on Mark Twain. So how did Clemens come up with the pseudonym by which the world would come to know him? Samuel Clemens loved paddleboats and in the late 1850’s got a job on a Mississippi riverboat as a leadsman. A leadsman’s job is to keep the pilot appraised of the water’s depth. As the leadsman, Clemens would stand on the bow of the boat with a thirty foot long line attached to a pipe. The line had markings woven into the strands which represented various depths. The job entailed heaving the line out, letting the pipe sink to the bottom and then yelling out the depth. The process was called “heaving the lead” and “singing the mark.”
When Clemens threw out the lead and the water reached the first mark he would yell “Mark one.” That meant the water was six feet deep. If the pilot heard him yell “Quarter one” the depth was seven and a half feet. “Half one” signaled nine feet of water. “Quarter less twain” meant a depth of thirteen and a half feet. Now there was a specific depth that brought relief to the pilot for he then knew he was in “safe water.” That depth was twelve feet. And the yell was “Mark twain.”
On a logistical note, I will be travelling the remainder of this week and this will be the final blog of the week. I will intermittently be checking my emails and am available on my cell phone. Have a great day and rest of your week.