Equities and the Economy
Good morning and happy National Crouton Day. U.S stocks closed lower yesterday for the second consecutive day with the Dow off 37 points to 18,068, the S&P 500 closed down 6 to 2,099 and the Nasdaq shed 17 to 4,876. And you should take that loss and go home. Why? Because at the open the Dow was down 170 points! As I mentioned in yesterday’s report the turmoil in the bond market with rising yields put pressure on equities however as the day progressed bond yields backed off boosting stocks. For example, yesterday morning the 10 year Treasury yield traded over 2.3%, a 5 month high. You may be wondering what the relationship is between bonds and equities. Well it’s all about yield. The higher the yield on bonds the less attractive equities look on a risk adjusted basis. Remember, the amount of capital involved in the bond markets dwarfs the amount of capital in the equities markets. The bond market is expected to continue to be volatile for a while as people try to get their arms around when the Fed will hike interest rates. It’s amazing what a ¼% interest rate increase can do which is what is expected when the Fed does make its move.
I have to bring you the latest on Greece which remains a material influence on economic events in Europe. Greece had a loan payment due to the IMF recently in the amount of 750 million euros ($839 million) and the world was watching to see if she would make the payment. Indeed, she did. Here’s how. Greece “paid” the IMF loan by borrowing from the IMF on a line of credit it still had intact to pay the IMF back on yet another line of credit. In more vernacular terms, Greece borrowed from one credit card to pay off another! Greece effectively used the IMF’s own funds to repay the IMF! However, despite the audacity of the move it worked putting at bay the panic regarding a Grexit.
The U.S. Treasury reported its balance for April and it almost always runs a surplus in April for that is tax payment month. The consensus going into the report was or a surplus of at least $135 billion with a max of $155 billion. The number was actually $157 billion with tax revenue inflows much stronger than expected. Individual income taxes were up 12.9% vs. a year ago while corporate taxes were up 11.8%. This is very impressive and a further indication of an improving economy for never in history has anyone paid taxes on business they hope to do or hours they hope to work. Taxes are only paid on business actually done and hours actually worked.
This morning the European markets are all trading nicely in the green but we’re getting a little love here locally with the Dow up 54.
Crude oil prices continued to march higher yesterday with WTI adding $1.50 settling once again over $60 at $60.75. Brent added more, $1.95, settling at $66.56. Both oil settles match 5 month highs. The API released its crude inventory report yesterday after the close stating U.S. crude stocks decreased 1.5 million barrels with expectations of an increase in inventories of 100,000 barrels. In addition, stockpiles at Cushing dropped 336,000 barrels. Definitely fodder for the bulls. The only thing that’s going to stop the price of WTI from going up is data showing production is once again on the rise. WTI prices are now at or very close to where U.S. shale oil E&P companies can economically drill for and produce shale oil. Let’s keep an eye on the rig count for that is where the actions of the E&P companies will manifest themselves. Although the rig count continues to decline, the of the rig decline has been slowing and is almost at zero. The DOE releases its report today. The API data is pushing prices higher this morning with WTI up 65¢ and over $61/bbl
Natural gas tacked on 9.5¢ yesterday closing at $2.897. Natty prices the last couple of days have been driven higher by both planned and unplanned outages of 3 nuclear plants in the northeast. Planned outages are always in the spring and fall when A/C load is lower however it does increase gas consumption. Add on unplanned outages and the above normal temperatures the Midwest and east are currently experiencing and you get some pretty decent natural gas load supporting the cash market.
The weather forecast is little changed from yesterday showing above normal temperatures in the eastern third of the country. This is the result of the jet stream buckling forming a ridge in the east and giving some relief to the west where they’ve relentlessly experienced above normal temperatures. Now if only they can get some precipitation. This morning natty prices are quiet flat to yesterday.
Kudos to Anthony Brutto. Brutto is a student at West Virginia University and is set to graduate college next week. Nothing of note, except it took him 75 years to graduate! When Brutto enrolled to earn a degree in engineering in 1939 tuition was $50 a semester. Three and a half years into his studies, he was drafted into WWII, serving in the army. Upon his return from active service, Brutto began life as a machinist in various factories providing for his wife and family. Determined to finish his degree, he re-enrolled in classes in the 80s and has worked ever since to obtain his degree. When interviewed Mr. Brutto joked saying, “I will take a break before pursuing my master’s degree.” Have a good day.