Equities and the Economy

Friday was not a good day for our 401K’s folks. The Dow lost a material 203 points, 1.16%, ending at 17,245, the S&P 500 fell 23, 1.12%, to 2,023 and the more volatile Nasdaq was the laggard closing down 1.54%, 77 points, at 4,928. The S&P marked a 7th loss out of 8 sessions and is back in the negative for the year (1%). The major indexes were down more than 3.5% for the week, their worst since the week ending August 21st and breaking a 6 week streak. We can call the driver of Friday’s selling on the report released that day showing sales at U.S. retailers rose just 0.1% in October with analysts looking for a 0.4% increase. Also, U.S. producer prices, which is looked at for inflation expectations, fell 0.4% in October with economists’ expectations for a 0.3% increase. This shows demand is weak. On the positive side, the University of Michigan’s consumer confidence sentiment index rose to 93.1 in November from October’s 90.

In summary, with it looking like the Fed will increase interest rates in December, bad news is being treated as bad news leading to a shift to “risk off,” which means capital exits riskier assets and equities are in that category. Additionally, the commodities market is shouting there’s a lack of demand with not just oil but primary metals, grains, livestock, etc. hitting multi-month or multi-year lows. Technically, it doesn’t look good for major support trend lines have been broken for multiple major indexes including the S&P 500 and EUR STOXX 50. I’m not wise enough to know if we’re entering a bear market (actually I don’t believe so) but certainly we’ve got a correction presently.

This morning Dow futures are down 35, and you should be happy. Why? Because global markets could be knee jerking on the horrific events in Paris and a bad economic report out of Japan this morning. Regarding the former, if the attacks in Paris had occurred during the week days I believe we would have seen a big spike down in equities prices, but investors had all weekend to digest the event. France’s CAC 40 opened down 1.1% but has recovered a lot of all that currently being down only 0.49%. Germany’s DAX is hanging in there trading down 0.10% and London’s FTSE are actually up 0.142%. Japan this morning released Q3 GDP data showing the world’s 3rd largest economy shrank 0.8%. The significance of this is that it follows a 0.7% contraction in Q2 putting the country officially into recession.

Oil

Oil, like so many other commodities, continues to be under pressure with WTI falling $1.01 on Friday closing at $40.74. Brent lost 45¢ settling at $43.61. Both benchmarks are close to their last August lows. It was a bad week for producers with oil prices down 8.5%. Similar to equities, oil traders have had ample time to digest the effect the Paris attacks and based upon the price action this morning, WTI down an immaterial 27¢, traders are not bidding up the geopolitical fear premium. Fundamentally the market is weak. The EIA in its monthly report noted that oil inventories in developed nations are at record levels. Additionally, Baker Hughes late Friday in its rig report noted that even in the face of low prices the oil rig count actually increased by 2, which is the first time in 11 weeks the rig count has increased.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices rocketed higher in Friday closing up 10.1¢ at $2.361. The impetus was the noon weather update which showed a very material shift to colder weather in the forecast. Also, remember I told you the market was egregiously oversold and you saw a big short covering on Friday. The cold theme continues with today’s 6-15 day forecast and very materially increasing natural gas demand for space heating. Most of the below normal temperatures are in the Midwest and west with normal temperatures forecasted for the Appalachians and eastward. For example, St. Louis will from 15 degrees above normal tomorrow to 5 degrees below normal this Sunday. It looks like traders covered all they wanted to cover on Friday for natty is up only 1.0¢ despite the colder forecast.

Elsewhere

Chief Sitting Bull was a hero to his people, but in time he became a pawn to others. After defeating George Custer at Little Big Horn the chief went to Canada for awhile then returned to the U.S. to work for Wild Bill Coty in his Wild West Show. The proud chief remained stoic to the end, and when he died he was buried in a rather obscure grave outside Fort Yakes, North Dakota. That’s where he remained until one night in 1947 when a group of admirers from Mobridge, South Dakota with the help of a back hoe stole his bones to give him a monument befit their hero. After years of ridicule and degradation, it finally appeared that Sitting Bull would be treated with respect. But then the folks in Fort Yakes lobbed a bombshell stating Sitting Bull was still right there in their city! Apparently the Mobridge people had made a grave (pun definitely intended) mistake. The bones they absconded were not the remains of the great warrior chief, but of his horse.

Have a good day.