Equities and the Economy

Good morning and happy National Nutty Fudge Day. After a spectacular Friday U.S. equities retreated somewhat yesterday with the Dow falling 86 points (0.47%) to 18,105, the S&P 500 dropping 11 (0.52%) to 2,105 and the Nasdaq hanging in there slipping only 10 (0.19%) to 4,994. Volume was very light being the 5th lowest of the year. You regular readers know this but volume is an important indicator. Moves on light volume lack the conviction of moves on large volume. On Sunday the People’s Bank of China cut its benchmark lending and deposit rates by ¼% but neither the U.S. nor European markets got any love from the QE move. As I mentioned yesterday, U.S. stocks really haven’t gone anywhere since mid-February. We had a really rough Q1 with GDP of 0.2% (which may be revised to below zero) with the Fed contemplating raising interest rates. Neither of these are consistent with equity markets breaking higher into uncharged territories.

The Asian markets closed mixed overnight but the European markets are getting knackered this morning with Germany’s DAX leading the way down almost 2% which is sucking U.S. equities lower with the Dow down a material and unfortunately 144 points. The impetus for the move is the continuing sell off in the bond market which started two weeks ago in Europe, specifically Germany, and caused the meltdown in stocks early last week. The yield on the 10 year benchmark German bond, known as the bund, increase 12.3 basis points today and European peripherals, such as Spain Italy and Portugal, saw their yields jumped between 10 and 13 basis points. The malaise could not be contained to the Continent and U.S Treasuries sold off this morning with the benchmark 10 year Treasury up 5.9 basis points to 2.331%, the highest since November 21st. In a domino effect, U.S. equities are being yanked around by the bond markets pushing them lower.

Oil

Oil had another lackluster day yesterday with WTI off 14¢ to $59.25 while Brent lost a tad more, 48¢, settling at $64.91. Oil prices are heading higher today with WTI up 55¢. Price support is coming from the EIA’s latest Drilling Productivity Report which forecasts that crude oil output from the seven major shale plays in the U.S. in June will drop nearly 86,000 bpd to a 5 month low of 5.56 million barrels. Also stoking oil prices this morning is a weakening U.S. dollar. For the year the WTI price has risen 11% and Brent is up 13%. This is all in the face of what Goldman Sachs says is a market that is oversupplied by 1.9 million bpd with them forecasting lower prices. Can you guess who has a short position on???

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices eased off yesterday closing at $2.802, down 7.8¢. At the 10,000 foot level natty prices have found an equilibrium between higher production offset by greater burns in the electric generation sector with daily price changes being driven by the cash market. Temperatures in the eastern 1/3rd of the country have been and are forecasted to continue to be above normal which will keep natty burns healthy for electric generation which will support cash prices. This morning natty is up 8.0¢ being pushed higher on the same EIA report that is pushing oil prices higher as well as the aforementioned above normal temperatures forecast for the end of May.

Elsewhere

Ever heard of the Air Pod? Well search it on You Tube it because Robert Herjavec while on Shark Tank just invested $5 million into the project. The Air Pod is an air-powered car with a weight of just over 600 lbs with a top speed of 50 mph and an 80 mile range. The vehicle runs on cold air compressed in tanks to 300 times atmospheric pressure. The air is then heated and fed into the cylinders of a piston engine. The manufacturer says the car can be refilled from a compressed-air station in about 3 minutes for less than $3. The plan is to make the vehicles in “turnkey micro-production factories” and sell them for $10,000 each in the same areas. Hawaii has been rumored as the location of the first factory.  Have a good day.