Equities and the Economy:

• Dow snaps eight day losing streak.
• Consumer confidence and home sales drive equities.

After closing lower for 8 straight sessions the Dow had a big up day yesterday rising 150 points, 0.73%, ending at 20,702. The S&P 500 and Nasdaq had good days too with the former closing up 17 points, 0.73%, at 2,359 and the latter adding 35 points, 0.60%, finishing at 5,875. The impetus for the move came from the fundamentals. First, and the most important data point yesterday, was the Conference Board reported its index for consumer confidence rose to 125.6 in March up from February’s 116.1 The significance? This is the highest this index has been since December 2000! The data came in way over Wall Street’s expectation of 114. Consumers are having much greater optimism about their business prospects, jobs and personal income. Remember that consumer spending is 70% of GDP and confidence drives spending.

Second, consumer optimism is being felt in the housing market. Standard & Poor’s reported its CoreLogic Case-Shiller 20 city index for home prices rose a huge 5.7% in January which is the largest rise in home prices in 2.5 years and well above economists’ expectations. The biggest price increases were in Seattle, Denver and Portland. It appears buyers are watching the news, more specifically the Fed, and are expecting mortgage rates to rise and are trying to buy before rates rise even further. Not only do you have buyers “getting off the fence” increasing demand, but supply is shrinking. Per the NAR, there were just 1.75 million homes listed for sale in February, 6.4% lower than a year ago. Those are very bullish fundamentals amigo!

Lastly, and this is parochial rather than catholic, the Richmond, Virginia Fed released its Composite Manufacturing Index for March rising to +22 from last month’s +5. The index hasn’t been this high since early 2004 and again in mid-2010.

This morning we’re starting a little on the defensive with the Dow down 35 but the Nasdaq is up 7.

An historic event happened today. On this day Prime Minister Theresa May sent a letter to European Council President Donald Tusk invoking Article 50 of the Treaty of Lisbon stating Britain will be leaving the European Union, aka Brexit. This marks the beginning of the two year period for the EU and Britain to negotiate Britain’s exit. The outcome of the of the negotiations will shape the future of Britain’s $2.6 trillion economy, the world’s 5th largest. One of the major repercussions may be that Scotland holds a referendum, its second, to leave Britain and remain in the EU. In the first referendum in 2014 Scottish voters voted 55% to reject independence. However, this was before the Brexit vote in which Scotland and Ireland voted to remain in the EU but were outnumbered by voters in England and Wales. I’ve been writing this blog for 8 years and have often said the EU was a tenuous entity due to the many different cultures and interests developed over the centuries, but I never expected Britain to be the first to leave. I expected it to be Greece.

Oil

• Oil prices settle at one-week high.
• Libyan crude production interrupted.

An armed Libyan militia shut in pipelines there over a wage dispute disrupting about 250,000 bpd of production. That in conjunction with a strong equities market yesterday pushed oil prices higher yesterday with WTI logging a 64¢ gain closing at $48.37 and Brent added 58¢ settling at $51.33. The wage dispute is expected to be short lived. More importantly is that last week Libya announced plans to raise production to 800,000 bpd by April from its current 700,000 bpd. Remember, Libya is exempt from the OPEC production cut agreement.

Yesterday the API released it weekly crude and products report noting crude inventories rose 1.9 million barrels but this was offset by a decrease in gasoline and products inventories of 3.1 million barrels, so the report was mildly bullish. With no fundamental data to move the market and equities flat WTI is meandering up 14¢.

Courtesy of MDA Information Systems LLC

Natural Gas

• Natural gas prices continue to creep higher.
• Prices trading at 6 week high.

Most of the country is now into spring, save the New England states, but the natural gas price action isn’t telling you that. The April Nymex contract, which expires today, squeezed out another 4.4¢ gain closing at $3.096. Prompt month prices have risen 25% over the past 6 weeks to a 6 week high just below $3.15. In trading we called this the “unexpected Spring Rally.” That’s where everyone expects prices to fall but they continue to grind higher. U.S. production, or lack thereof, continues to be the story of the market. $3.00 now looks like a pretty solid floor. This morning on expiration day natty is grinding higher up 4.9¢.

Elsewhere

I mentioned above that housing prices are on fire. Well guess what? As Yogi Berra would say, “It’s déjà vu all over again.” With affordability getting tougher and tougher borrowers are turning to shorter term, adjustable rate loans offering lower interest rates. Boy are memories short! That’s what led to the housing bust in 2008 and 2009 that caused the Great Recession! (You’ve got to read the Big Short by Michael Lewis. He has written a number of very entertaining, non-fiction books about Wall Street and the stock market). Home prices are rising faster than incomes forcing buyers who want a home into variable loans. The share of adjustable rate mortgages has doubled to 9% since the election. That is the highest level since October 2014, which is as we all know, before The Crash. In all candor, things are different now. New regulations prohibit many types of ARM’s that were prevalent then and the average credit score for borrowers in Q3 2016 rose from Q2. However, the latter could change as mortgage rates rise further, which is expected.