Equities and the Economy

Good morning and happy National Brisket Day. U.S. equities rallied nicely yesterday from the catastrophe on Tuesday with the Dow gaining 121 points (0.67%) ending at 18,163, the S&P 500 added 19 (0.89%) to 2,123 and the Nasdaq was the leader of the day closing up 74 (1.48%) at 5,107. That’s all good but here’s my concern. Yesterday’s gains in the Dow and S&P were much less than the losses from Tuesday. On that day the Dow fell 190, the S&P lost 22. On the positive side yesterday the Nasdaq did recoup all its losses from Tuesday, 56 points and closed at a new record high. Thus we enter a period where the highs are lower than the previous highs. Hopefully, the lows will higher than previous lows. This means we’ll be in a consolidation phase and being that I believe we’re in a bull market, we’ll be bivouacking before going higher.

Helping stocks yesterday were some positive comments surrounding the negotiations on Greek debt as well as the U.S. dollar stabilizing. There wasn’t any economic reports of significance released so let’s call yesterday’s move a correction from Tuesday’s move which I believe was a bit extreme. If you recall, it was on Friday that Janet Yellen mentioned an interest rate hike was highly likely coming this year which was the excuse for Tuesday’s drop. Come on. The Fed has been taking great effort to manage it’s communications and has unequivocally and clearly saying for months now that an interest rate hike is coming. This should be no surprise. But you need to understand a trader’s mentality. They want to be first off the boat, not the last. Call it trigger happy. Add in computerized trading, which represents as much as 50% of daily trading, and you have a recipe for volatility, which is why last week’s lack thereof was so anomalous.

Let’s move on to this morning. The Dow is down 53, and you should be delighted! Why? Because overnight China’s Shanghai fell 6.5%! That equates to the Dow losing 1,180 points! I guarantee you if that happened the first thing you’d be doing this morning is checking your 401K! Chinese stocks fell the most in four months as a selloff swept through the financial sector after a Chinese sovereign wealth fund (that would be the Chinese government!) cut its holdings in state-owned banks for the first time. European stocks are being sucked down by the vortex created by the Shanghai but are wearing buoyancy vests for they’re down only about 0.4%. Let’s see how the day progresses.

Oil

Oil continued its pullback with WTI falling 52¢ settling at $57.51 and Brent down a material $1.66 closing at $62.06. Both WTI and Brent are feeling the weight of the U.S. dollar’s strength. Brent posted its biggest two day drop since March 16th. Brent prices are falling on the report from Iraq saying it plans to raise exports (shipments) 26% in June. How it manages to do that with a civil war going on is beyond me. Iraq is the second largest OPEC producer and wants to increase exports by about 800,000 bpd. Note however that for the last 3 of 4 months exports have fallen short of scheduled shipments. OPEC is now pumping the most oil in more than two years as it fights to defend its market share all at the expense of U.S. shale oil producers. According to Goldman Sachs, the world is currently oversupplied by 1.9 million bpd. So where is all this oil going? It’s floating. On supertankers. Spare capacity on supertankers for this May is the lowest since the survey began which was 2006. And shipping companies are cashing in with daily rates the highest since 2008.

OPEC’s production is increasing but the U.S.’ has been decreasing the last few weeks. We’ll get more insight into this when the DOE releases its crude and products report today. This morning WTI continues to slip being down 70¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas started out the day trying to rally on reports of a material decrease in production (5%) due to maintenance on various pipelines. However, the rally was short lived and by day’s end prices were flat to Tuesday with the June contract closing down 0.7¢ at $2.815. Chatter. Although there are some minor changes to the weather forecast it’s pretty much the same as yesterday with varying degrees of above normal temperatures forecasted for the next couple of weeks in the Midwest, MidAtlantic and northeast.

Today the EIA releases its natural gas storage report which always makes Thursday’s exciting. The market is expecting an injection of 101 Bcf. Traders are expecting something bearish for natty is down 6.2¢ as I write. Over my 30 years in the natural gas markets I’ve seen many necks broken due to storage report whiplash.

Elsewhere

Ever since the invention of the automobile there have been stories of people making dramatic improvements to fuel efficiency. Most are bogus (remember the “gasoline pills”?!) but every so often one comes along that’s more believable. In the 1970’s (remember the Arab oil embargo?) a man named Tom Ogle developed a new type of carburetor that pressurized gasoline into a vapor and injected it into the firing chambers. After installing it on his Ford Galaxie the car was measured to get 113 miles per gallon. Ogle suffered some licensing setbacks and during that time kept his secret design to himself. Unfortunately, while trying to sort through all that he died taking the carburetor design to the grave with him.

Have a nice day.