Equities and the Economy

Good morning and happy National No Dirty Dishes Day. Carry on Wayword Son! No, I’m not talking about Kansas. I’m talking about the S&P 500 which on Friday closed at a record high for the second straight day. I know it barely did so (+2 points to 2,123) but I don’t care. It’s a new high and that’s what counts. The S&P sister indexes, the Dow and Nasdaq, closed mixed with the former up 21 to 18,273 and the latter off 3 to 5,048. Everything was a squeaker on Friday including the weekly gain which for the S&P was 0.3% but officially it did post its first back-to-back gains in more than a month.

It appears the adage “bad news is good news” ruled the day Friday for the fundamental data was anything but stellar. The University of Michigan reported in its closely followed report that consumer confidence fell in May by the most in more than two years with the index dropping to its lowest level since October. A separate showed factory production stalled in April following a 0.3% gain in March that was revised higher from the previous report. Bottom line is the data is adding to some previous reports suggesting the rate the economy is growing is slowing and you know how investors interpret that: a delay in an interest rate hike by the Fed.

This morning we’re starting out generally weaker with Dow futures down 12 following European markets with the latter beginning the day nicely positive but now trading negative on the news of a downgrade on Lloyds Bank.

Oil

Oil prices closed mixed on Friday with WTI closing down 19¢ at $59.69 while Brent actually closed 11¢ higher at $66.81. WTI made a tremendous intraday recovery for at one point it was trading $1.46 lower than Thursday’s settle. Baker Hughes released its weekly rig count report on Friday noting that U.S. oil and gas companies for the 23rd straight week shed rigs with last week falling by 8 rigs. This was the smallest decline since the week of December 5th and shows the effect of higher WTI prices. As I’ve mentioned previously, the point at which E&P companies can make some money drilling for oil is somewhere between $60 and $65. Now this is a general number. Each hole a company “punches” has its own economics but when discussed at the macro level you can use the aforementioned numbers. Costs charged by the service companies (drilling rigs, fracking) have dropped 25% to 33% over the last 8 months lowering the break even cost for oil and gas exploration companies.

OPEC is not letting up on the oil production pedal. Saudi Arabia’s production is the highest in at least three decades. Global crude oil supply was a staggering 3.2 million bpd higher in April than a year earlier. OPEC’s production in April rose by 160,000 bpd to 31.21 million, the most since September 2012. With the falling rig count U.S. production has dropped marginally and is now at 9.37 million bpd after reaching 9.42 million bpd the week of March 20th the latter being the most since at least January 1983.

This morning WTI is flat to Friday being up a meaningless 3¢. If you’ve been feeling that gasoline prices have been rising your instincts are correct. Per AAA, the average price of regular gasoline rose 0.3¢ last week to $2.702/gallon which is the highest level since December 4th. Still, that’s a cheaper than we saw a year ago.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices rose above $3.00 last week and didn’t back off Friday with the June Nymex contract closing basically flat to Thursday up 0.8¢ at $3.016. Multiple nuclear power plants are down, some planned, some not, and coupled with a shot of warm air east of the Mississippi has pushed natural gas consumption for electric generation not only to its highest level of the year but impressively, even greater than 2012 when natural gas prices in April of that year hit a low of $1.92. Consumption has been especially high in the Southeast. Also supporting prices are natural gas exports to Mexico which have hit yearly highs last week of 3.0 Bcf/d and averaging 2.8 Bcf/d month to date and a whopping 1 Bcf/d more than last May. A new pipeline, the NET pipeline, began operation a few months ago increasing flows to Mexico by about 500 mmcf/d. Most of the natural gas exported to Mexico is used for electric generation.

This morning natty is starting out the week quietly but not backing off being down 1.6¢

Elsewhere

I’ve often talked about how volatile the natural gas and electricity markets are which indeed make the S&P 500 chart look like a flat line but I ran across an article on a stock on the Chinese Shenzen Stock Exchange worthy of discussion. The stock is Beijing Baofeng Technologies. And its price action is the definition of a bubble! Beijing Baofeng became public a bit more than a month and a half ago and in the course of the past 35 trading sessions it has traded the exchanges 10% “limit up” 32 times! Baofeng in the process has gone from a market cap of just under $200 million to now just over, are you ready?, over $4 billion!. This puts its market cap equal to that of U.S. Steel! Presently Baofeng is trading at or near 500 times last year’s earnings! That my friends is the text book definition of a bubble. Tulips anyone? Have a good day.