Equities and the Economy
Good morning and happy National Donald Duck Day. U.S. equities continue to slip with all the major indexes ending lower yesterday. The Dow fell 83 points (0.5%), the S&P 500 lost 14 (0.7%) and the Nasdaq really took in on the chin losing 47 points (0.9%) to 5,022. The equity anchor was the technology sector with tech shares in the S&P losing 1.2% led to the downside by Intel and IBM which lost 1.7% and 1.2%, respectively. This is really getting old. Yesterday’s fall comes on the heels of 3 consecutive weeks of losses for the Dow and two for the S&P and Nasdaq. You may not have realized this but the Dow is now negative for the year and 3% below its May 19th record close of 18,312. Three things are really at play here. First, uneven economic growth. Q1 GDP was abysmal posting a negative number (yes, it may be the way its calculated but negative is negative), second, the anticipated rise in interest rates. Yes, the Fed has been loud and clear on this for a while but remember, it’s at the margin where prices move. It’s the new news. And raising interest rates, albeit even small, are negative for stocks. Let’s take the opposite of this. Remember a few years ago when economic data was lousy and we were just past the bottom of the Great Recession? Well stocks started flying higher with 2013 and 2014 yielding huge returns. A lot of that was due to the Fed making cheap money available. If the Fed takes the punch bowl away it makes other assets as attractive as equities. By the way, the amazing gains of ’13 and ’14 have made stock valuations high therefore making it much more difficult to find value. And three, the stronger U.S. dollar. You can think of a strengthening/rising dollar as a pseudo interest rate increase. It makes our exports more expensive. This mostly affects multi-nationals which are in the major U.S. equity indexes and you probably have in your portfolio. We’ve been in a bull market for a long, long time and at a minimum a pause is due if not a correction. Margin debt is extremely high and this needs to be reduced. By the way, a rise in interest rates will aid in doing that. Another issue is the Greek drama which although does not directly impact the U.S. does affect the European markets and don’t fool yourself, the contagion will be felt here albeit not at the levels seen across the pond. There are numerous important dates in this saga but the most important one is June 30th when a four loan bundled repayment of €1.5 billion due to the IMF.
This morning U.S. equity futures continue to erode with the Dow down 34. We’re at a really important point here, at least technically. We’re right on a strong support line dating back to December 2014. This support line has been tested repeatedly during this time frame and has always held. It needs to hold again. The Asian markets all closed lower and the European markets are all trading in the red with the latter being down for the 6th consecutive day.
By the way, fear is beginning to set in in the equities market. You can view the Fear & Greed Index here.
Black gold fell yesterday with WTI ending down 99¢ at $58.14 and Brent off 62¢ at $62.69. Traders sold on the report that Chinese demand was down in May relative to April but there were more refineries off line there in May which would suppress demand. The losses would have been even greater if not for the fact the U.S. dollar got really whacked yesterday falling 1.5% vs. the euro. You must understand that in the Forex market a 0.5% move in one day is material. A 1.5% daily move is absolutely huge.
Lower prices and the associated lower rig count is having a material effect on U.S. shale production. Yesterday afternoon the EIA noted in its Drilling Productivity Report that crude output in shale formations such as the Bakken and Eagle Ford will shrink 1.3% to 5.58 million bpd this month with a further drop expected in July to 5.49 million bpd, the latter being the biggest month-on-month drop since the shale boom began and the lowest level of shale oil production since January. The trend is expected to continue through at least the end of the year. That being said, we are coming off some really, really high production numbers with March’s production of 9.53 million bpd which was the most since 1982.
This morning the bears are scrambling to cover those shorts they put on yesterday with WTI popping $1.77 on the EIA’s report of lower oil production.
Yesterday’s warm weather forecast for this week rallied natural gas materially with it closing up 11.5¢ at $2.705. That forecast sparked some short covering after we hit a one month low last week just above $2.550 which came on the heels of a very bearish EIA storage report. Today’s forecast is similar to yesterday’s and I can just see the natural gas fired plants sucking on the natty. And it looks like they’ll continue to do so for the next couple of weeks. Although the range is about $2.50 to $3.10 the market seems to gravitate to the $2.75ish level with fluctuations up on the weather and down on bearish storage reports.
This morning the cash market is strong with the warmer weather and continuing to push natty higher, 11.5¢.
I bet most of you know little of our 27th president, William Taft, except for possibly two facts. One, he was the only man in history to hold the highest post in both the executive and judicial branches of the U.S. government, that being chief justice of the Supreme Court and, of course, president. The other fact, and possibly the one he’s unfortunately better known for, was the embarrassing episode when he got his 350 lb. frame stuck in the White House bathtub and had to wait for the fired department to rescue him. However, our President left much more of a legacy than those two facts. President Taft absolutely loved major league baseball with his favorite team unsurprisingly being the Washington Senators. On April 14, 1901 Taft slipped away to watch the Senators play the Philadelphia Athletics and the stands were packed that day. As the game wore on the rotund six foot two inch chief executive grew increasingly uneasy in his tiny wooden chair. With each inning he became more and more restless until finally he could stand it no longer. Seeking some relief from this throbbing legs he stood up to stretch and as he gazed around, he saw the crowd doing likewise. The crowd, thinking he was preparing to leave, rose to their feet to show their respect. When Taft sat back down to watch the remainder of the game, the crowd did the same. The next day the newspapers dutifully recorded his prolonged stretch, which had occurred in the seventh inning. Hence the inception of the now ubiquitous seventh inning stretch. Have a good day.