Equities and the economy

Last week and yesterday remind me of the memorable 1984 movie Karate Kid where Kesuke Miyagi teaches Daniel LaRusso karate with the training beginning with menial chores including waxing Miyagi’s car stating “Wax on. Wax off.” Well lately it’s been “Risk-off. Risk-on” in the global equity markets. Whereas last week it was massive risk-off, yesterday was massive risk-on as global stocks rose including the Dow closing 129 points higher, 0.73%, 17,805, the S&P 500 rose by 12 points, 0.58%, finishing 2,083 and the Nasdaq popped 37 points, 0.77%, ending the day at 4,837. One point of concern, stocks closed more than half off their session highs. Treasury prices (bond prices) tumbled yesterday as investors shifted out of safe haven assets with yields posting their largest daily increase in over a month. That being said, yields are still near historical lows with the 10 year Treasury last week falling to near a four year low. Remember, last week the 10 year German bund yield traded in negative territory which was the first time that’s ever happened.

It just wasn’t U.S. stocks which rose materially but Asian and European equities posted big gains as well. And all because of polls on the Brexit referendum. Last week the “leaves” were marginally leading which sent stocks falling 6 of 7 sessions. Yesterday when a poll over the weekend showed the “remains” were marginally winning money poured into riskier assets. Quite frankly, Britain leaving the EU would not be good for global economic growth, but if the referendum did pass it would take years to be implemented allowing officials time to dampen many of the negative impacts. What’s going on now folks are knee jerk reactions by money managers who are not having a good year and who are worried about being left behind. Remember, the S&P 500 is up only about 1% this year and because it’s been such a whip-saw year my bet is most money managers aren’t even posting that meager performance, and their investors aren’t happy. To take this market higher we need better corporate earnings.

There were no economic reports of a material nature yesterday so let’s get to today. Dow futures are up 32 points coat tailing on European equities which are up by about the same percentage. Today Janet Yellen gives her semi-annual testimony before the Senate Banking Committee and tomorrow she’ll give basically the same talk to the House Financial Services Committee. And Thursday is the Brexit vote.

Oil

Wax on, I mean risk-on and it was with oil prices rising in sympathy to equity prices. WTI closed $1.39, 2.9% higher at $50.41 and Brent settled up $1.16, 2.4%, at $50.41. Fundamentally oil prices got a boost from a report that contrary to expectations, Saudi Arabian crude exports declined in April. Also, the U.S. dollar was weaker which as you should know by now, supports all commodities priced in U.S. dollars.

This morning WTI is doing and about-face trading down $1.01. Folks, barring some exogenous event, I think WTI is finding equilibrium in the $47 to $50 price range. We’ve seen the oil rig count stabilize, and marginally increase, at this price level implying U.S. production might stabilize, or at least the rate of decline will slow. Other countries may be increasing production (Russia and Iran) but demand has also been growing, especially the demand for gasoline which is materially higher y-o-y, and we’re about to enter the peak driving season.

Courtesy of MDA Information Systems LLC

Natural Gas

As Sitting Bull might have said, natural gas is “Strong Like Bull.” The July Nymex contract popped a big 12.4¢ yesterday settling at $2.747 which is a 9 month high. The day cash market has been extremely strong trading as much as 6¢ greater than the July futures contract. Demand is very strong in the southwest with the area having record high temperatures. If there’s a single factor that will drive prices higher it’s when the fungible is higher than the derivative. Pieces have rallied nearly $1.15 from their 18 year low earlier this year in March. It will be interesting how these higher prices affect the amount of gas consumed for electric generation which has been at record levels. These higher prices have to be making electricity from coal generation more competitive.

This morning natty is up 2.2¢ holding at this firm level.

Elsewhere

John Chapman was born on September 26,1774 in Leominster, Massachusetts. Chapman was an eccentric frontier nurseryman who established orchards throughout the American Midwest. He traveled widely, particularly in Pennsylvania, Ohio and Indiana, buying land and planting orchards where he thought pioneers were going to settle in mass a few years after he planted his orchard. He’d find an area that was largely unpopulated, buy up land for cheap, then establish an orchard. Once he established the orchard, including fencing it in, he’d travel to a new area and do the same. Over the course of the year, he’d travel around visiting his orchards and maintaining them as needed as well as gathering seeds to plant new orchards.

Once the trees were a few years old, he’d then sell shares of the trees for 6¢ each or often he’d barter for goods. He was quite magnanimous being pretty lax on collecting as he didn’t believe in forcing people to pay if they couldn’t and trusted that if they could at some point, they would come up to him and pay. Given that he traveled around most of his life he became well known by a large number of people and he began to develop a legend. In fact, he became a legend in his own time. You see, John Chapman only planted one type of orchard: apples. By 1806 people already knew him as “Johnny Appleseed” and his fame grew over the next forty years as he continued to travel and plant new orchards.

This will be my last Blog for the week. I have a meeting out of town tomorrow morning and then am taking two days of long overdue vacation to the wonderful city of San Antonio. If you haven’t been there I strongly encourage you to visit. Great history with the Alamo and Teddy Roosevelt; the Texas Rangers; great culture; great food and entertainment at the River Walk.