Equities and the Economy:

Yesterday the Dow clawed back from biding in the red intraday to close at a new record high. The blue chip index rose 54 points, 0.3%, closing at 18,923. The S&P 500 finished up 16 points, 0.8%, at 2,180 led by a 2.7% jump in energy stocks with oil popping. The Nasdaq, which has been under pressure as investors have rotated out of technology stocks, had a very nice day closing up 57 points, 1.1% at 5,276. The massacre of bonds, which has been going on since the election, took a respite yesterday with a lot of foreign investors buying. With U.S. Treasuries getting whacked, which means their yields increase, folks we’re selling the bonds in countries with negative interest rates, i.e. bonds high priced, like Japan, and buying the cheaper U.S. bonds. It’s going to be interesting how major corporations deal with the more expensive debt (more expensive borrowing) as interest rates rise. Ever since the recession with the Fed’s accommodating monetary policy corporations have been issuing debt and buying their stock back making their earnings per share number look better. Now that debt is more expensive. Speaking of bonds, yields and interest rates (the two the same), the market is pricing in a 94% probability that the Fed will increase interest rates by ¼% at their meeting next month.

Turning to the fundamental news, the Commerce Department reported that retail sales rose 0.8% in October, which was stellar. Wall Street was looking for a 0.5% increase. Core retail sales, which excludes the automobile, gasoline, building materials and food categories, also rose 0.8% which was even further above expectations. These are really strong figures folks and is further proof the economy is improving. And importantly, 70% of GDP is consumer spending so one can draw the conclusion GDP is looking better.

I want to mention something that warrants your attention. Commodity prices, as measured by a basket of commodities, have risen materially in the last week posting a 3.2% gain just yesterday. Importantly, this has been done in the headwind of a rising U.S. dollar. Now we’re still well below the year’s high made in June but we’re way off February’s low. It’s important to pay attention to commodities for in good economic times commodities are in demand and command higher prices. And again, this is in the face of a higher U.S. dollar. Are we on the verge of a new bull market in commodities? I’m not sure but my antennae are raised.

This morning stocks are retreating a bit with all the major indexes down including the Dow by 49 points. It’s early.

Oil

Oil prices skyrocketed yesterday with WTI closing up a big $2.49, 5.8%, higher at $45.81 snapping a three session losing streak and finishing at its highest level in 2 weeks. Headlines drove prices higher with Bloomberg reporting several OPEC members were engaged in a last minute push to overcome divisions. OPEC’s meeting is November 30th and expect volatility as the price is driven by more and more by headlines as we get closer and closer to November 30th. Another factor was the technicals. WTI has been trading in a range of $40 to $50 since early spring and just this past Monday we touched $42.40 so from a trading perspective it wasn’t a good place to sell so the market was vulnerable to a bounce.

Yesterday the API reported that U.S. crude inventories rose 3.7 million barrels last week which was more than four times expectations. Additionally, the gasoline and products inventory declines were less than expected so the report was definitively bearish. However, as always, it’s the price action that’s most important and impressively WTI is down only 5¢ this morning. Interestingly, and I haven’t discussed it this week, the contango in the price curve has been narrowing all week signaling that the “informed money,” the money involved in the real movements of crude oil into and out of storage, is moving away from its bearish stance. Maybe not time to be bullish but definitely moving away from the bear.

Courtesy of MDA Information Systems LLC

Natural Gas

The weather and weather models have been driving the market and yesterday’s overnight model showed cooler weather in the forecast and natural gas prices were up as much as 7¢ in the morning but the noon update shifted to warmer and took the wind out of the bulls’ sails and natty ended 4.0¢ lower on the day closing at $2.709. That being said, natty prices have rallied more than 25¢ from last week’s three month low. This has been primarily driven by much higher cash prices in the Marcellus (PA) region which have rallied 89¢ since the end of October. Although temps in the region are averaging above normal, on a daily basis temperatures are coming in normal boosting load, demand and prices.

The forecast this morning is about the same as yesterday and the market is reacting accordingly with natty up 3.6¢, which is pretty much chatter. The southeast is going to be nippy next week.

Elsewhere

We’re entering the winter and just about all the crops have been harvested. Per the USDA, 93% of the nation’s corn crop has been harvested, 97% of the soybean crop, 90% of the sorghum and 61% of the cotton crop with the corn and bean crop harvests at record levels. What’s amazing is how crop yields year after year hit record levels while the percentage that farmers making up the labor force inexorable shrinks every year. In 1790 farmers were 90% of the labor force. Fifty years later, in 1840, they were 69% of the labor force farming an average of 203 acres of land. Another 50 years later, in 1890, farmers were 43% of the labor force and farming an average of 136 acres, and although that was a sizeable decline in average acres farmed from 1840, food production rose. In 1940, fifty years further on, farmers made up only 18% of the total labor force but their average farm size rose to 175 acres. By 1990 the percentage of farmers of the total population fell to only 2.6%, however the average farm size rose to 461 acres. By the year 2000 the number of farmers approached just 2% of the labor force. The point here is that even though the percentage of farmers of the total labor force has fallen relentlessly and the number of farms has fallen sharply over the last 116 years, farm production keeps rising. This is an amazing tribute to both the productivity of the American farmer and the advancement of technology in man’s oldest occupation.