Equities and the Economy

Good morning. It was an ugly day for U.S. stocks yesterday. The Dow fell 254 points, 1.44%, ending at 17,448, the S&P was off 29, 1.40%, to 2,046 and the Nasdaq closed down 62, 1.22%, at 5,005. The S&P closed lower for the 6th time in 7 sessions. As I’ve been mentioned more than once, a confluence of factors have come into play. First, we’ve had a strong rally that’s lasted 6 weeks, second, the market lost momentum beginning last week when we were hitting previous highs, and thirdly, Chinese economic data has been disappointing. Also, the Fed’s very clear signal that a December interest rate hike is on the table is not supportive of equities. You may ask why an interest rate hike is detrimental to equities? Aren’t rising interest rates indicative of a strengthening economy? It’s not, because it takes cheap money away from corporations, and countries, particularly emerging markets. Think back in the recession. The Fed pumped enormous amounts of cheap money into the system and equites skyrocketed (S&P was up 20% one year!) but main street lagged. Bottom line, rising interest rates are a drag on equities.

I never discuss it, but Canada’s main stock index, the Toronto Stock Exchange’s S&P/TSX composite index, closed yesterday at its lowest level in 6 weeks being dragged lower by falling energy stocks as crude oil prices are at 2 ½ lows.

Fundamentally, the Labor Department released its weekly unemployment claims report which came in flat to last week and although a tad disappointing, claims are still at multi-year lows. Another Labor Department report, the JOLTS report (Job Openings and Labor Turnover Survey), was quite good showing job opening postings by companies rose from an already heady 5,370 million to 5.526 million. Quite positive. I’m certain the Fed sees this data.

The Asian markets got hammered overnight which was on the coattails of falling U.S. equities but more importantly, this morning European markets continue their descent with the three major bourses trading between 0.88% and 1.23% lower. The driver of the latter was German Q3 GDP data which although rose 0.3%, it is less than Q2’s 0.4%.

I’m also seeing the technicians at play. Major support trend lines of U.S. and European stocks have been broken. Add in the fact that commodity prices around the world have veritably collapsed (oil, copper, precious metals, grins, livestock, coffee, sugar, lumber) which is indicative of weak demand, and you get, at a minimum, profit taking, if not outright short positions. Fortunately, here in the U.S. equity futures while lower, Dow down 42, are not nearly as bad as across the pond.

Oil

Oil prices have been getting crushed lately tumbling to 2 ½ month lows yesterday with WTI losing $1.18, 2.75%, settling at $41.75 and its lowest settle since August 26th. Brent closed down $1.75, 3.8%, settling at $44.06 and not far off its August low of $43.80/bbl. The DOE released its weekly crude and products report a day late due to holiday, and it was materially bearish. On an aggregated basis (crude + gasoline + distillates) the 5 year average is a decline in inventories of 3.260 million barrels. Yesterday’s number, an increase in inventories of 2.5 million barrels.

Per the IEA, global oil stockpiles are currently at 3 billion barrels, a new record. Although comforting for folks around the world for it means the world can sustain a geopolitical shock, it’s certainly not bullish.

OPEC is upbeat on demand next year saying in a report global demand should increase 1.2 million bpd. It is hopeful that non-OPEC production (primarily U.S. and Russia) production has seen its peak and will fall 130,000 bpd next year. Take it from an ex-trader, hope is a very bad partner.

This morning WTI is off 37¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices took another day off yesterday closing down $0.003/MMBtu at $2.260. The calendar strips were marginally higher settling up about half a cent. The November cash market is very weak trading about 30¢ less than December futures which will a ball and chain on futures. That being said, November vs. December nat gas loads are hugely different. Today the EIA releases its weekly storage report, a day late due to the holiday, and the market is looking for a 48 Bcf injection. This compares to 47 Bcf last year at this time and the 5 year average of 23 Bcf. Whatever the number is, it will set an all-time record for natural gas storage levels. This morning I’m seeing some short covering ahead of the storage number with natty up 5.2¢

Elsewhere

Last week Mr. Gunter Schabowski passed away. I would be amazed if any of you know of him, but he played a key role in history. Mr. Schabowski lived in East Berlin, Germany before the fall of the Berlin Wall. He was a rather low level apparatchik living in Communist East Germany and responsible for meeting the press and detailing them on the goings on of the Communist Party and its plans for east Germany. On the evening of November 9, 1989 he went into the press room and read from his written script that the party decided it was time for East Germans to be given passports enabling them to leave the country. He was subsequently asked when this new law was to go into effect. Not having a date in hand and without proper vetting, he off the cuff said “Ab sofort.,” which in English means “Immediately and without delay.” Seeing this on national television the people of East Berlin stormed out of their homes flooding the streets, overcame the guards at the Berlin Wall and pulled it down in what is now an iconic “picture” of the crumbling of Communism. Only a year or so later the Soviet Union collapsed.

When you ask someone who is responsible for the Berlin Wall coming down the most likely answer you’ll get is Ronald Reagan. However, it was Mr. Gunter Schabowski that changed history by misspeaking and unknowingly unleashing a tsunami of people intent on running for their freedom.

Have a good weekend.