Equities and the Economy

Good morning and happy Cellophane Tape Day. After a week of choppiness with new highs for equities, albeit on below average volume and barely above old highs, conviction returned to the markets yesterday and unfortunately it was of the negative variety. In fact “negative” does not do justice to the destruction seen in equities yesterday for the S&P 500 and Dow suffered their biggest one day declines in three weeks. The Dow lost 190 points (1.04%) closing at 18,042, the S&P fell 22 (1.04%) to 2,104 and the Nasdaq closed 56 points (1.11%) lower at 5,033. The strength of the U.S. dollar, which hit an 8 yeah high vs. the yen and a one month high vs. the euro, is being blamed for the selling. A strong dollar hurts multi-national corporations and U.S. exports. If you recall, Janet Yellen said last Friday an interest rate hike is likely sometime this year and her comments boosted the dollar. Now various central bankers including Yellen, Fed Vice Chair Stanley Fisher and ex-Fed Chairman Ben Bernanke, state the first rate hike is good news because it means the U.S. economy is doing better but it sure seems that investors still might have a bit of adjusting to do as they get prepared for a Fed looking to “normalize” an economy not yet in obvious re-acceleration mode. Remember too, and as mentioned above, the highs set last week were without conviction and on light volume so the market was primed for a pullback and the strong dollar was the igniter.

There was a cornucopia of economic data released yesterday. The Commerce Department reported yesterday Durable Goods orders fell 0.5% in April from March and although this was the headline drilling down into the report there was good news. First, March Durables were revised up to 5.1% from 4.4%. Second, orders for nondefense capital goods excluding aircraft, which is viewed as a proxy for business investment, were up 1% following a 1.5% rise in March.

The Conference Board reported its index of consumer sentiment increased from a downwardly revised 94.3 in April to 95.4 in May with economists’ expectations of 94.9. Let’s say this came in at expectations.

The Commerce Department also reported that April new home sales were up a very strong 6.8% to an annualized rate of 517,000. This also came in expectations.

Finally, Standard & Poors reported yesterday that in March its S&P/Case-Schiller 20 city home price index rose 5% from March a year ago and rose 0.9% compared to February. This is more data indicating fewer and fewer homeowners are underwater on their mortgages.

This morning Asian markets have closed mixed and the European bourses are all firmly in the green. The positive sentiment is traversing “the pond” with buyers entering the markets here “buying dips” as the Dow is up 98 this morning.

An update on Greece. I haven’t written about Greece lately but follow it every day. Greece has a big payment due June 5th with additional payments due over the remainder of the month. The negotiations have been and are intense and have contentious. Don’t expect an announcement until 11:59 PM June 4th.

Oil

Oil prices have been getting whacked the last couple of days including yesterday when the July contract, the prompt month contract, fell $1.69 closing at $58.03. Brent lost a tad more settling down $1.80 at $63.72. You bulls can blame the fall on the dollar’s strength. Quite frankly though, WTI has been fairly stable of late trading in a range of $57 to $62 over the last 19 sessions. Additionally, the Brent/WTI spread has found stability trading in a range of $5.90 to $6.20 over the last few weeks.

Traders are keeping a close eye on Iraq’s oil production. According to shipping program schedules there, Iraq plans to boost its crude oil exports by 26% to 3.75M bbls/d next month. The planned increase in exports amounts to around an 800,000 bbls/d increase or nearly the same amount of oil that OPEC member Qatar currently exports. To meet its new export goal, Iraq intends to ramp up exports thru Shiite dominated areas of Southern Iraq and thru the Kurdish controlled area of Northern Iraq. I wouldn’t go to the bank on this one. Civil wars tend to disrupt the best laid plans.

This morning WTI is up 2¢. Total chatter.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas continued to pull back from its high last week yesterday falling 8.5¢ to $2.822 which is a two week low. After being down for maintenance some nuclear power plants have come back on line and this will continue through June reducing the need for natural gas. However, materially above normal temperatures and high humidity in the east this week will definitely bring on natural gas fired peaking plants so we might see a little lower than expected natural gas injections into storage next week’s report. The extended forecast continues to show above normal temperatures for the Midwest and east but only a few degrees above normal. No one’s got an ax to grind this morning natty down 1.7¢ as I write.

Elsewhere

Many tales of antiquity describe wonderful inventions. However some amazing and wonderfully beneficial ideas never made it to society for various reasons. Flexible glass was one of them. As the story goes, during the reign of Emperor Tiberius Caesar a glassmaker came to his court with a drinking bowl. Unimpressed, the Emperor threw the bowl to the stone floor and instead of shattering it simply bent. The inventor then picked up the bowl and easily repaired it with a small hammer. After the inventor swore to the emperor that he alone knew the technique of manufacture Tiberius proceeded of have the man beheaded for the emperor feared this flexible glass would undermine the value of gold and silver. Some speculate this tale presages the development of tempered glass but even that doesn’t bend, so the truth is lost to the ages.  Have a good day.