Equities and the Economy

Good morning and happy National Bubba Day. U.S. stocks eked out gains yesterday with the Dow closing 29 points higher at 18,040, the S&P 500 adding 5 to 2,112 and the Nasdaq climbing 13 to 5,083. Economic data was mixed starting with consumer spending flat in April. This zero growth followed a 0.5% increase in March and thus fell to a 3 month low. Of note, personal savings jumped to 5.6%, much higher than forecasts. A trend in the American consumer has developed. While personal income is increasing, it was up 0.4%, it’s not being spent. It is being saved. American’s are trying to repair their balance sheets which got hit hard during the Great Recession. This may hold back GDP but it certainly is a good long term investment. Some really good news came from the Commerce Department yesterday. Construction spending rose 2.2% in April to just over $1 trillion and this is the highest level in such spending in six years. The increase included 0.6% increase in residential construction and a 3.1% gain in non-residential construction.

Arguably though the most important data released yesterday was the Institute of Supply Management’s manufacturing index for May which rose to 52.8 from April’s 51.5. This indicates manufacturing activity is accelerating. Drilling down into the report it was noted that new orders have climbed since December and manufacturers have added jobs over the last month. Three cheers!

I must mention an important data point I Can across regarding U.S. equities. The amount of equities on the NYSE purchased with margin is at 20 year highs. This means people are borrowing money to buy stocks. And if margin to buy U.S. stocks is high it is probably quite high globally. A bull market must be fed. All a bear market needs is the buying to stop. If margin accounts are being fully exploited there is no “fuel” left to feed the bull. Now the key is when the amount of margin sums decline for that is when the “food” is taken away from the bull. Now history does not necessarily repeat itself, as the saying goes, but it does rhyme. The bottom line is the public is in fact “in” the markets and is “in” using borrowed money.

This morning both Asian and European equities are mixed while the three major U.S. equity future indexes are down with the Dow down 88 points.

By the way, all international eyes are still on Greece. This morning there’s a report from Athens that Greece’s creditors have reached a consensus on the terms of a proposed deal to put to the Greek government. Supposedly the deadline is Friday when a payment to the IMF is due but history has shown that similar to labor negotiations when someone stops the hands of the clock at 11:59, games can be played. Things are most definitely serious for the leaders of the IMF (Ms. Christine Legarde) and the ECB (Mr. Mario Draghi) are joined by Germany’s Chancellor Angela Merkel, France’s President Francois and European Commission head Jean-Claude Junker along with, of course, Greece’s Prime Minister Alexis Tsipras for talks in Berlin. You can’t get more European political capital in one spot!

Oil

After leaping higher Friday WTI took the day off falling a dime to $60.20. Brent lost a little bit more closing 68¢ lower at $64.88. Very interestingly, the price term structure of WTI (the shape of the curve) is moving bullishly, i.e., the contango is narrowing. WTI is not as aggressively bidding for storage. The elephants play in the term structures and attention must be paid. This morning WTI is 72¢.

OPEC meets Friday for its big meeting. It’s widely expected the cartel will not change it’s 30.00 million bpd quota, although they are, as usual, producing more. Even the normally hawkish Iran seems intent on holding that line.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas did nothing yesterday closing up 0.7¢ at $2.649. It was a choppy day with new lows made overnight but there was no follow through. Natty seems to be taking a breather at this level after falling to $2.50 on April 28th and then jumping to $3.10 about 3 weeks later. Weather forecasts have turned cooler to near normal for the 6-15 day time frame and short term traders are taking that as a signal to sell natty with the July contract down 1.4¢, but that really is chatter. Remember, the cheaper natty gets the more it will displace coal and we’re already burning record amounts of nat gas for electric generation.

Elsewhere

Don’t ever “short” American technology, especially in the oil and gas sector which brought us horizontal drilling and hydrofracking as well as increases in efficiency. With respect to the latter and although natural gas production in the Rockies is declining, the producers in the Denver-Julesburg (DJ) basin have managed to raise production. This can be attributed mostly to increases in efficiency. Whereas in 2012 the average time to drill a horizontal well in the DJ was 14.5 days today it takes just 7.5 days. This is a stunning reduction of 48% in just 3 years! Due to these efficiencies and despite a drop in rig count of 35 rigs from Q1 2104 to Q1 2015, natural gas production on the DJ is expected to grow 1.3 Bcf in May. As our friends down under say “Good on ha mate!”  Have a very nice day.