Equities and the Economy
Good morning and happy National Meteor Watch Day. A meteor hit global equities yesterday like it is believed to have done to the earth 65 million years ago wiping out most of the dinosaurs. On the news over the weekend that there was no Greek deal and that Prime Minister Alexis Tsipras was calling for the Greek citizens to vote on the referendum on July 5th sent an earthquake through equities throughout the world. Yesterday I mentioned that all Asian markets closed 3+% lower as did the European markets. Wall Street got hit with collateral damage with the Dow losing a hurtful and very material 1.95%, 351 points, to 17,694, the S&P 500 closing down 43 (2.07%) to 2,058 and the Nasdaq just getting obliterated falling 2.41%, a huge 123 points, to 4,958 with all the indexes suffering their biggest single day declines in more than a year. Actually for the Dow it was its biggest point drop in two years! The CBOE Volatility Index. aka fear index, briefly jumped more than 35% (that’s intraday from Friday’s close!) to above 18.5. The surge is the largest one-day move this year. CNN’s Fear & Greed Index is now at 11 which is Extreme Fear. Yesterday S&P downgraded Greece’s credit rating to CCC-. The lowest level you can have as investment grade is BBB- so you can see this is literally and figuratively truly junk. You see, Greece has discovered that Socialism is a wonderful concept, until, as the wonderful Margaret Thatcher put it, “You run out of the other person’s money.” Greece has run out of the other person’s money.
And let’s not forget to “thank” our Puerto Rican friends who’s governor yesterday declared its debt “not payable.” This situation is also going to get real interesting as well because the white house yesterday afternoon said no federal bailout of the U.S. territory will be forthcoming and Puerto Rico cannot declare bankruptcy, as Detroit and other municipalities have done, until Congress acts to change the law.
The sun set and has risen and it’s a new day and markets are bouncing back. All the Asian markets closed higher with China’s Shanghai Composite climbing, drum roll please, a huge 5.53%! That equates to 978 Dow points! The European markets are not nearly as euphoric trading on either side of unchanged. Locally, the Dow is up 61 points but that’s materially lower than earlier today when it was up 95. As I’ve often said, the closes are much more important than the opens so let’s hope we have a positive close.
With equities much lower oil got hit hard on not only on the implicit associate lower energy demand but also as traders and investors had to liquidate what they could to meet margin calls. WTI lost $1.30, 2.2%, closing at $58.33. Brent fell $1.25, 2.0%, settling at $62.01. Iran is selling a lot of its crude to Asia (Japan, China, India, South Korea) with exports rising to 1.2 million bpd, the highest of the year. Speaking of Iran, today is the deadline for the West/Iran nuclear talks, which would relieve sanctions on Iran, and it looks like that deadline, like SO many lately, will come and go.
This morning WTI is up 37¢ as equities rebound, or at least stabilize, around the world. We’re once again back above $59 and my bet is we’ll head for that $60 level which has been such a huge magnet of late.
Natural gas gained 3.5¢ yesterday closing at $2.805. Like $60 WTI, the $2.80ish natural gas level is a price “black hole.” That’s where the market is finding an equilibrium between strong production and record consumption of natural gas in the electric generation sector. The amount of natural gas the coal market can “suck up” is way more than natural gas production so this is the floor. When I ran my natural gas and electricity trading company I told my traders “Do not short natural gas at the coal equivalent.” Yes, natty could, and sometimes did, trade lower, but it’s a bad risk/reward proposition. This morning natty is giving up what it rose yesterday being down 4.0¢. By the way, the weather forecast for the next couple of weeks is definitely not helping the bulls.
They called him “Tail Gunner Joe” in derision, claiming he was never in combat during WWII. They assailed his search for Communists in government as a “witch hunt” and columns were written about his alcoholism. For those of you old enough or who are history buffs you know I’m talking about Senator Joseph McCarthy. By the time of his censure by the U.S. Senate in 1954 McCarthy’s name had become synonymous with gutter politics. There was, however, a patriarch of one American family that took a shine to Joe McCarthy. The patriarch’s children were all highly educated and well-endowed with a fervent sense of noblesse oblige. One would have thought that if there was any place where McCarthy would feel uncomfortable, it would be in this family’s living room. Such was not the case. On a number of occasions Senator Joe McCarthy was invited to be a weekend guest of the family. McCarthy actually dated two of the patriarch’s daughters and one of the sons asked McCarthy to be godfather to his first child. America could just not figure it out. While most everyone was vilifying the senator and denouncing McCarthyism, his friends at Hyannis Port, Massachusetts were hopping to his defense. The patriarch was Joseph Kennedy Sr. and it was his family who so embraced him all the while he was creating havoc in the U.S. Senate. It was Eunice and Pat who dated him. It was RFK who asked him to be godfather to his first born, and JFK had called him an American patriot. Oddly enough, Joe McCarthy found a home at Camelot while the rest of the country was pushing him aside. Have a good day.