Equities and the Economy

Good morning. U.S. stocks bounced back from a really lousy Friday with the Dow gaining 139 points to 17,996, the S&P 500 adding 8 points to 2,079 and the Nasdaq closing up 15 at 4,942. Unfortunately these gains were less than half of Friday’s losses. There was no fundamental economic data released yesterday so let’s call yesterday’s price action a technical correction from the massive selling on Friday.

I bet you didn’t know this but yesterday marked the 6th anniversary of the bull market. Six years ago the S&P hit a bottom at 676.53 losing more than half its value from the peak in October 2007. It’s tripled since then! But let’s get back to the present. Let’s assume we are in a correction. If so, a reasonable target of the pullback basis the S&P would be 2,030 to 2,045. CNN”s Fear & Greed Index is at 58 which still indicates “greed” but it is very close to neutral. But is nowhere near “fear’ which means we could see more or a decline. And it sure looks like that’s the way the market’s heading for the Dow is getting massacred this morning down 190 points. Investors remain very nervous about a Fed rate hike which is pushing the U.S. dollar to fresh multiyear highs. Also hurting stocks this morning was a report out of China showing producer prices fell 4.8% year-on-year which was a surprise to the market. If this becomes a trend it translates into a central banker nightmare: deflation.

Oil

The Brent/WTI spread shrunk yesterday on word that Libya resumed exports, 2.0 million barrels, pushing Brent $1.20 lower to $58.53 while WTI remained steady adding 39¢ to an even $50. The declining rig count may be starting to have an effect. The EIA reported that although oil production continues to rise, it is doing so at a slower pace. Next month the U.S. will produce 300,00 million bpd more this month than last month but the growth is declining. Production in the Bakken and Eagle Ford has fallen 10,000 bpd. This is offset by production from the Permian which is up 21,000 bpd.

You might not know this but the battle lines are being drawn in the oil market. Both long and short positions are growing so buckle in for this sets the stage for volatility. The catalyst for a big move may be in June when OPEC meets and really has the first chance for the group, i.e. Saudi Arabia, to have a supply response. The end of June also happens to be the deadline for a nuclear deal with Iran. If Iran gets the framework for an agreement by the end of this month it can begin to ramp up production. With sanctions in place they’re currently producing 2.8 million bpd. They’d love to get it back to the 4 million bpd which they were producing in 2008. This is a big “if” for there’s a huge divide between President Obama and Republican senators with the latter sending a letter yesterday to Iranian officials warning them that without their approval any nuclear deal signed by the President will be null and void after he leaves office.

$50 continues to be the magnet with WTI down 53¢ this morning. Chatter.

Natural Gas

The cash market has been driving natural gas prices of late and with the 1-5 day forecast coming in warmer yesterday than Friday and cash gas prices got whacked sending the April futures contract plummeting with it closing 16.1¢ lower at $2.678. Although natty has been waffling around $2.85ish, yesterday both the April contract and the calendar 2016 strip closed almost exactly at the same price as it did on February 26th. So natty seems to be comfortable in a range from $2.70 to $3.00 right now.

Courtesy of MDA Information Systems LLC

The short term weather forecast is similar to yesterday’s with much enjoyed above normal temperatures across most of the nation. Some of that record snow in the Boston area is and will continue to melt. The 11-15 day forecast is showing more widespread below normal temps and on the colder forecast traders are pushing natty up 5.3¢. In the longer term natty prices are going to be determined how temperatures come in this summer.

Elsewhere

Of the many firsts Americans make, a new one was reached in January. Per the Census Bureau for the first time since the Bureau began tracking this data, 1992, Americans spent more money in restaurants and bars than on groceries. It’s been a trend for 20 years but it’s really accelerated in the last 5 or 6 months. It appears this is how Americans have been spending the money their saving on gasoline. More than 2 decades ago Americans spent $162 in groceries for every $100 they spent in restaurants. This past January they spent equal amounts in both places. It appears the role of the restaurant has changed in society. Whereas it used to be going to a restaurant was a “special occasion,” now restaurants have earned a role in society that is equal to “work” or “home.” This is especially true among millennials who are more likely to eat out than cook at home. I’ve got decades on millennials but definitely fall into this category when juggling volleyball, basketball and all the other demands we all have on our lives. Have a good day.