Equities and the Economy

Good morning and happy National Don’t Fry Day (which is always the Friday before Memorial Day. Sounds like the grill manufacturer lobby’s been at work!). For the fourth consecutive day equities meandered although the Nasdaq got a nice pop climbing 19 (0.38%) to 5,091. The Dow closed flat to Wednesday at 18,286 and the S&P 500 added 5 ending at 2,131 which by the way is a new high. All three indexes continue to trade in a narrow range.

The economic data of the day included the regular release on Thursday of first time unemployment claims, a manufacturing index and sales of existing homes. Unemployment claims rose by 10,000 last week to a seasonally adjusted 274,000 which is the highest level in a month. The good news is we’re still at 15 year lows. Markit stated its manufacturing PMI came in at 53.8 for May which was below expectations of 54.5. The initial read showed slowing growth for the 2nd straight month with new orders at their slowest pace since January 2014.

As you regular readers know I like to discuss the housing market because for many, many folks it is the largest “ticket item” on their personal balance sheets. Yesterday the National Association of Realtors reported that existing home sales fell 3.3% in April to an annualized rate of 5.04 million units. The numbers came in less than expectations but the good news is that the driver behind the number is that small inventories are weighing on sales in addition to strong and rising prices. Very frustrating time I’m sure if you’re a first time buyer. This “imbalance” in inventory very probably will change within the next 6-12 months because if you recall and as I wrote in Wednesday’s report, housing starts were up 20.2% in April vs. March and building permits were up 10.1%.

This morning the chop continues with Dow futures down 16 points. Overnight the Asian markets closed mixed although China’s Shanghai closed at a 7 year high with investors banking on, you guessed it, more QE from the government. I wish I sold printing presses. Seems like every country is running their presses overtime printing money.

Oil

Oil prices got some follow through yesterday from Wednesday’s bullish DOE crude and products report. WTI gained $1.74 closing back over $60 at $60.72. Brent jumped $1.51 to $66.54. Oil prices are once again at their highest levels of the year on the back of fresh unrest in the Middle East, increasing Asian demand and declining, albeit marginally, U.S. production. Regarding the Middle East, ISIL, unfortunately, continues to make gains in Syria and Iraq. This week they had a significant victory capturing the town of Ramadi as Iraqi regulars fled their battle stations in fear. Additionally, the ancient city of Palmyra has been captured and now the last remaining border crossing between Syria and Iraq has been captured and closed. It is believed that ISIL now controls 50% of what was Syria. Now most of the territory ISIL controls does not contain oil “assets” but there is no doubt that ISIL’s gains are increasing the “fear premium” in oil, especially Brent.

You might ask, with the Iraqi government’s backing and support from western European countries and the U.S., both monetary and physical (i.e., sorties), why is ISIL making such impressive gains? The reason is because no one in Iraqi has any sense of nationalism. All the Iraqis are much more loyal to their tribes than to any central government. In my opinion, the Iraqi regulars are simply collecting a paycheck. Have you noticed that ISIL has made no progress against the Kurdish Peshmerga which are the military forces of Iraqi Kurdistan? The Kurds have forever wanted their own country and the Iraqi civil war is creating an environment where they can cordon off and defend their territory. And they do it vehemently, unlike Iraqi regulars.

This morning WTI is retreating being down 83¢. The U.S. dollar is stronger this morning and combine that with oil prices currently at or near their highs for the year and you have an excuse for traders to take some chips off the table.

Courtesy of MDA Information Systems LLC

Natural Gas

The EIA released it weekly storage report yesterday noting the U.S. injected 92 Bcf of natural gas into the ground last week. This was slightly less than expectations of 94 Bcf. Traders took the report as “supportive” and came out buying natty and the June contract closed up 3.4¢ at $2.949. The last two storage reports have both come in marginally bullish relative to expectations and I guarantee this has not gone unnoticed by traders. My belief is it’s a combination of production, which has flattened, and demand which is being supported by nuke plant maintenance and above normal temperatures. Hey team, if you haven’t noticed the rig count is down 50% in 6 months. Duh!

The jet stream pattern is entrenched with a ridge in the eastern pacific and western Atlantic with a trough in the western U.S. plains which is resulting in above normal temperatures for the west and east boosting natural gas demand. This morning things are quiet with natty down 3.3¢.

Elsewhere

Some of you may be heading to Las Vegas or Atlantic City this weekend (let luck be your lady!) with all their impressive venues. Well move aside Las Vegas. Saudi Arabia is building the world’s largest hotel, an engineering spectacle that will contain 10,000 rooms. The hotel at Abraj Kudai is just two kilometers away from the site of Mecca which attracts about two million Muslim pilgrims a year for the annual Hajj. Made up of 12 separate towers, the hotel will also include 70 restaurants, rooftop helipads, a food court, shopping mall, and a full-size convention center. The grand masterpiece is due to be completed in 2017. Did I forget to mention that gambling is illegal in Saudi Arabia?
Have a great holiday weekend and amongst all your BBQ’ing and imbibing please take a second and think about what the holiday weekend is commemorating. Memorial Day was originally known as Decoration Day and originated after the Civil War to commemorate the Union and Confederate soldiers who died in the war.