Equities and the Economy

Good morning and happy No Diet Day. It was a very lousy day on Wall Street with the S&P 500 suffering its biggest one day percentage decline in six weeks falling 25 points (1.2%) to 2,089. The Dow stunk it up too losing 142 points (0.8%) and once again below 18,000 to 17,928. Not to be left behind the Nasdaq purged closing down a very material 78 points (1.6%) and under 5,000 at 4,939. As I’ve been stating, investors are really jittery with mixed corporate earnings and the end of the Fed’s bond buying and the talk of a rise in interest rates. Feeding that jitteriness was the Commerce Department’s trade report yesterday showing a March trade deficit of $51.4 billion and well above expectations and the largest since 2008. The bigger issue is the widening deficit suggests that Q1 GDP may be revised from an already anemic 0.2% to negative territory. The conclusion therefore is the U.S. was in recession in Q1 2015 which is, and it should, weigh on the U.S. dollar’s value relative to other currencies. I must add a caveat here. The trade deficit data encompasses the time frame when the labor standoff at West Coasts ports ended which allowed piles of imported goods to be processed and shipped to domestic customers. This would obviously increase the import side of the equation.

Ok now for some positive news. Yesterday the Institute of Supply Management reported that its index of service sector economic activity rose from 56.5 in March to 57.8 in April, a 5 month high and better than expectations.

Today is a big day for investors for ADP releases its private payroll data today. Investors look at this as a precursor to the Labor Department’s Employment Situation Report for April which will be released on Friday. The correlation between the reports has been good over time although occasionally individual data points can be markedly different.

Speaking of today, the Asian markets closed flat to lower with China’s Shanghai getting materially whacked for the second consecutive day. Fortunately the contagion did not spread to Europe where all the markets are trading decently in the green. Not nicely. Only decently. Here in the states stocks are set for a rebound with Dow futures up 56. One statistic I must pass on, and that bothers me, is the Russell 2000 has broken a major support line dating back to mid-October. The S&P and Nasdaq haven’t. But they’re on or very close to support.

Oil

Oil prices leapt yesterday, especially WTI which climbed $1.47 (2.5%) closing at $60.40 and Brent added $1.07 settling at $67.52. Yesterday was WTI’s first close over $60 and Brent’s first close over $68 since December. The catalyst for yesterday’s price gains were 1) reports that a major pipeline that exports oil from Libya had been closed due to protests and 2) the aforementioned weaker U.S. dollar. The API released its weekly inventory data although they only released data on crude inventories. There are rumors it may suspend reporting its product (diesel, heating oil, jet fuel) and gasoline data. API’s crude data came in was bullish showing crude inventories fell 1.8 million barrels when history has shown a rise in inventories for this week of 1.5 million barrels. Traders are jumping on this data, boosted by a weaker dollar this morning, with WTI up $1.36. Folks, we’re getting into the range when E&P companies can make drilling work. Now I know each oil play has unique economics but at the macro-level the numbers are beginning to work. The last couple of years the number to make drilling for shale economic was $70, that number is now $60 to $65. Why? Because oil and gas service costs (rig cost, fracking, etc.) have declined 20% to 33% over the last 6 months. This obviously lowers the breakeven point. Keeping a close eye on the rig count for that is where we’ll see it.

That being said let’s keep in mind what Harold Hamm, Chairman and CEO of Continental Resources which is one of the largest leaseholders and largest producers in the Bakken, said which was that he could let rigs and crews go much faster than he could ramp them up.

Courtesy of MDA information Systems LLC

Natural Gas

Natural gas gave back some of its recent gains falling 4.1¢ yesterday closing at $2.780. On the wide the market has been very comfortable for months in the $2.50 to $3.00 range with the pivot point around $2.75. Today’s weather forecast is little changed from yesterday’s with some outstanding weather through Mother’s Day followed by some “nice” weather. It’s getting to be the time of year when we need to focus on the weather in the south and Texas for that is where natural gas demand fluctuates for cooling needs. The forecast is showing pretty much normal to slightly below normal temperatures for the next couple of weeks. This morning natty is moribund, up 0.5¢

Elsewhere

The Hubble telescope recently celebrated its 25th anniversary. The data and discoveries Hubble revealed by Hubble were a leap frog in astronomy’s advance. Here are just a few of the thousands of discoveries from Hubble:

The fact the rate the universe is expanding is growing, not shrinking
A key role in the discovery of dark energy (a mysterious force that causes the expansion of the universe)
There’s a Black Hole at the center of every galaxy
The age of the universe (13 to 14 billion years)
The discovery of gamma-ray bursts (strange, incredibly powerful explosions of energy)

More than 10,000 scientific articles have been published based on Hubble’s data. But here is one astounding fact that Hubble’s existence provided. There are more stars in the heavens than grains of sand on all the beaches and deserts of the Earth combined. Think about that! That is mind boggling! Have a good day.