Equities and the economy

U.S. stocks closed out a difficult week on a modestly lower note Friday as investors continued to shed risk over concerns about the Brexit vote and whether or not Britain would leave the European Union. The Dow closed down 58 points, 0.3%, at 17,675, the S&P 500 fell 7 points, also 0.3%, to 2,071 and the Nasdaq finished 45 points lower, 0.9%, at 4,800. Anxiety of the Brexit vote dominated trading the entire week. For the week the Dow and S&P each lost 1% and the Nasdaq gave up 2%. For the year the S&P is up more than 1%.

The only economic report of importance released on Friday was the Commerce Department’s housing starts report for May which was -0.3% compared to April coming in pretty much at expectations. Applications for building permits rose a nice 0.7% which is modestly supportive of the economy in general.

This morning the Brexit vote continues to dominate the equity markets, only in the complete opposite way as last week. Over the weekend a new poll was released with the “remains” leading 45-42. This was exactly the same margin by which the “leaves” were leading last Thursday, before the pro-remain MP Ms. Jo Cox was murdered by a pro-leave madman which appears to have brought out the pro-remain vote. The global equity market really likes the results of this new poll for stock markets around the globe are skyrocketing higher today. It began in the Asian markets with the Hang Seng and Nikkei closing up 1.69% and 2.34%, respectively and spread to Europe with the major indexes there currently trading up a huge 3.27% to 3.66%. Following the rest of the world’s lead Dow futures are up a whopping 219 points as I write.

The Brexit referendum vote is this Thursday. Before that we get to hear Dr. Janet Yellen who is speaking before the Senate tomorrow and the House Wednesday fulfilling her semi-annual requirement.

Oil

For a second consecutive day on Friday the oil/equity correlation was uncorrelated with WTI closing up $1.77, 3.8%, settling $47.98 and Brent climbed $1.98, 4.2%, closing at $49.17. Similar to stocks, it was not a good week for the oil bulls with WTI 2.2% lower chalking up its biggest loss since the week ended May 6th. Brent lost 2.7% for the week, the biggest weekly decline in 6 weeks. Many are pointing to the weaker U.S. dollar as the reason for the rebound but I also believe this was a bounce from the big losses oil took on Thursday.

The bulls are going to have to fight some head winds. The bulk of the oil sands operations in Canada have restarted bringing about 1.2 million bpd back on line. Additionally, it appears that at least some exploration and production companies can make some money at current prices for the 3rd consecutive week the number of oil rigs working in the U.S. increased. Last week was the biggest jump with Baker Hughes reporting an increase of 9 oil rigs and 1 gas rig. The total oil rig count is 337 which is still down about 70% from the high but the fact the rig count has stopped falling gives investors and traders an idea of the price range where equilibrium is.

As mentioned above, risk-on is the order of the day and that includes commodities like oil and WTI is up 83¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices advanced on Friday closing 4.3¢ higher at $2.623. After hitting an 18 year low this year in early March prices have rebounded and are up 66%. With the decline in the rig count and steep shale gas well production decline curves U.S. production has come off about 2 Bcf/d from its February highs. Add in a weather forecast of normal to above normal temperatures and record consumption in the electric generation sector and you get stronger prices. The only reason prices aren’t even higher is because of the high storage levels we had coming out of last winter. This morning natty is up 3.4¢ closing in on 9 month highs. Per the CFTC’s data, net-short positions held by money managers is at the lowest level since March, 2015.

Talk about hot. Phoenix hit a record high temperature of 120 degrees over the weekend (the all-time record high is 122 degrees). If it gets too hot airplane flights can get cancelled. In 2013, 18 US Airways flights out of the Phoenix’s Sky Harbor Airport were cancelled because of the heat. Serious heat can damage a plane’s internal components but the heat also makes it more difficult for the plane to get off the ground. Hot air is less dense which impacts the output of the engines as well as the plane’s aerodynamic capabilities increasing the required runway distance and reducing climbing performance. How much of an effect there is depends on the temperature, airport elevation and the length of the runway.

Elsewhere

Did you know that Uncle Sam was a real person? Samuel Wilson was born on September 13, 1766 and died on July 31, 1854. In 1789, Wilson and his brother, Ebeneezer moved to Troy, New York where they set up a counting house. Sam later died and came back to haunt his brother on Christmas Eve trying to get him to change his tight fisted ways. Wait! Wrong story. The two ended up setting up the business E.&S. Wilson which among other things dealt in meat packing. By the war of 1812 the business had grown to be quite prosperous and during the war E.&S. Wilson won a contract with the U.S. government to provide the army with beef and pork. They shipped the beef in barrels and because the meat was now the property of the U.S. government, the barrels were marked with a “U.S.” The teamsters and eventually soldiers took to saying the “U.S.” on the barrels stood for “Uncle Sam,” referring to the co-owner of the of the supply company, Samuel Wilson. Eventually, they took to referring to all U.S. branded property as “Uncle Sam’s” even though E.&S. Wilson only had supplied the beef and pork. This evolved into call the federal government itself “Uncle Sam.” Widespread use of this anthropomorphic figure of the U.S. government later became popular among the masses through various political cartoons; often squaring off against the English equivalent “John Bull.”

Congratulations to the Cleveland Cavaliers on winning the NBA championship this year! The Cavaliers made history yesterday being the first and only team to come back from a 3-1 series deficit and win the championship.