Equities and the Economy

U.S. stocks took a small step backward yesterday. The Dow fell 123 points, 0.73%, to 16,517, the S&P 500 ended off 16, 0.82%, to 1,932 and the Nasdaq fell 0.71%, 32, to 4,558. Really just a flesh wound. Looking at the indexes from a longer term perspective, which is how most of us manage our portfolios, the Dow posted its first monthly gain in two months ending up 0.3% in February. Unfortunately, the same could not be said for the S&P and Nasdaq with the former logging a 3rd consecutive monthly loss at 0.4% and the latter losing 1.2% for the month. We seem to be in no-man’s land right now. On the bullish side the U.S. economy is doing better and employment is solid but global economic growth is anemic and corporate earnings tumbled in the fourth quarter and guidance for Q1 2016 is negative. Also, even with this recent pullback the S&P 500 P/E is not flashing value. It’s definitely not high but it’s not low either.

The Chinese government continues to try and shore up its economy as it shifts from being export driven to consumption driven. China’s manufacturing sector shrank for the 7th consecutive month in February while the services industry expanded at its slowest pace since late 2008. In response to this and other data the government cut the reserve requirement required by banks (the amount of money needed to be held against loans outstanding) which has the immediate effect of the banks having more money to lend. The move is expected to inject an estimated $100 billion worth of long-term cash into the economy.

Domestically, the National Association of Realtors reported yesterday that its index of pending home sales fell 2.5% in January 10 to 106.0. This was a very clear disappointment for the consensus was for the index to rise 0.5%. The good news is that for the 12 months ending January 31st the index rose 1.4%. It’s the same old story of low inventory and rising home prices, all to the chagrin of the millennials.

This morning we’re trying to capture back what we lost with the Dow up 117 points. We’re getting some momentum from the Asian markets which closed higher as well as the European markets which are currently up 0.58% to 1.55%. As I’ve said numerous times, we’re up at resistance, basis the S&P, and investors are waiting to break through before adding on more positions.

Here’s one for you. The Bank of Japan auctioned off $2.2 trillion in 10 year bonds today and the auction was three times covered. That means demand was strong. No big deal right? Get this. For the first time ever, the yield was negative! The most heavily indebted government in the G7 is charging investors to pile on more debt!

Oil

Oil prices continue to grind higher with WTI adding 97¢ to $33.75 and Brent closing up 87¢ to $35.97. For the month WTI was up 3.5%. Newswires yesterday reported that Saudi Arabia has agreed to work with other producers to curb oil price fluctuations, though this may be another attempt by the Saudis to talk up prices. However, a more fundamental reason was the move by the Chinese government of lowering reserve requirements with implications that demand for energy will increase. Additionally supporting the market is that traders are finally starting to see that the drop in the rig count is impacting U.S. production. You bulls out there be careful. The commitment of traders report is showing that in the week ending February 23rd, hedge funds and money managers increased their bullish bets in oil to their highest in at least 5 years. This morning WTI is down a nickel. Chatter.

Iraq may be in a horrible civil war, but it’s not stopping their oil production. Per the EIA, next to the U.S., in 2015 Iraqi oil production rose more than any other country, in its case 700,000 bpd. Not bad for the second largest OPEC producer.

Courtesy of MDA Information Systems LLC

Natural Gas

Things were a little whacky in the natural gas market yesterday. While the front month April contract fell 8.0¢ to $1.711 and a new 16 year low, the back contracts blew up with the Calendar 2017 through 2021 strips closing up 5.0¢. The word from our wholesale side of the company is that a large hedge fund liquidated some large spread positions. It’ll take a few days for the spreads to get back in line. Remember, liquidity drops precipitously the further out you go.

Today is beginning quietly with natty flat to yesterday’s close. The weather forecast is the bear’s friend with much above temperatures forecasted for the 6-15 day time frame. Next Tuesday and Wednesday Chicago is forecasted to have high temperatures of 25 and 21 degrees above normal. That’s downright balmy!

The rig count is beginning to impact natural gas as well. In its latest Monthly Natural Gas Production Report the EIA stated lower 48 natural gas output in December decreased by 430 MMcf/d (0.5%) to 81.2 Bcf/d. Y-o-y though production increased 1.7 Bcf/d, 2%.

Elsewhere

When is 12 inches not 12 inches? When it’s not a foot, as in Subway’s Footlong sandwiches. A judge last week granted final approval to a settlement of a class action suit filed against Subway after an Australian teenager in 2013 posted an image of this sandwich on Facebook that was only 11 inches long. The image garnered international media attention with the New York Post writing that it found 4 out of 7 Footlongs it purchased in New York “measured only 11 or 11.5 inches.” As part of the settlement, Subway agreed to institute practices for at least 4 years to ensure the bread was at least 12 inches long. The judge approved $525,000 in attorney’s fees but only $500 each for the 10 individuals who were representatives of the class. No monetary claims were awarded to potential members of the class. Per the co-lead attorney for the class, monetary damages were difficult to prove because “everybody ate the evidence.”

Lynn Adelman, the presiding judge, wrote in the final approval that the plaintiff’s attorneys realized their claims “were quite weak” after an initial mediation session. Adelman wrote the plaintiffs’ attorneys learned that Subway makes its bread with “dough sticks” that weigh all the same when they arrive frozen at the stores. The dough is then thawed and stretched before baking, a process that can lead to variability in the size and shape of the resulting bread. Additionally, she noted that 1) the meat and cheese are premeasured and are independent from the length of the bread and 2) the sandwiches are made in front of the customer who can ask for more toppings. “Thus, the plaintiffs learned that, as a practical matter, the length of the bread does not affect the quantity of food the customer receives.” All this said, Subway said it will begin requiring franchisees to “use a tool for measuring bread.”