Equities and the Economy:

Consolidation was the name of the game yesterday for U.S. stocks. The Dow closed down 55 points, 0.3%, at 18,868 snapping a 7 day win streak. The financial sector, i.e. big banks, were the losers on the day falling 2% pulling the index down. This was just profit taking for that sector has risen 10% since the election. The S&P 500 shed 3 points to 3,177. The Nasdaq actually posted a gain of 19 points, 0.4%, finishing at 5,295. It looks like the big rotation from tech to the Dow companies has run its course and we may be getting back to a more “normal” type of price action. It’s not just U.S. equities that have posted gains over the last week. Stocks around the world have risen buoyed by the prospect that the Trump presidency and Republican congress will adopt a pro-growth, pro-business and less-regulation agenda.

Regarding the fundamental data, The Federal Reserve reported that industrial production came in under expectations being unchanged in October from September. Additionally, manufacturing output, while up 0.2% for the month, also failed to meet expectations. However, the latter’s weakness can be directly attributable to the fact that utilities’ production fell 2.6% as warmer than normal weather prevailed. Apparently good weather is bad. The Labor Department reported that its producer price index was flat in October which was well below economists’ forecast of a 0.3% increase. Core PPI, which excludes the more volatile food and energy categories, fell 0.2%. This was a disappointing report. The Fed doesn’t want to see core inflation falling. That being said, this index isn’t the index they really look to for measuring inflation.

Speaking of the Fed, its Chair, Janet Yellen, will be speaking before the Joint Economic Committee this morning. Her prepared remarks have already been released which included that she believes and interest rate hike would be appropriate “relatively soon.” The market certainly believes it. Fed fund futures are pricing in a 90% chance of a 0.25% rate hike next month.

I need to take a second and talk about the U.S. dollar. It has skyrocketed since the election and reached a 13 year high vs. a basket of six currencies yesterday. As you readers well know by now, this puts material downward pressure on commodities priced in U.S. dollars, i.e., oil. But there are much bigger implications here. Donald Trump campaigned on bringing jobs, specifically manufacturing jobs, back to America. The high value of the dollar is going to make U.S. manufactured products more expensive in the global market. Now it’s still very early and a lot could happen over the next couple of months but with the Fed being the only central bank in the world (at least the important ones) raising interest rates which strengthens the dollar, Mr. Trump is going to have his work cut out for him. And oh, thought you’d like to know the dollar hit an 8 year high vs. the Chinese yuan. I can see Trump’s face turning red right now!

This morning it’s a yawner with the Dow up 10 points.

Oil

Oil prices didn’t do much yesterday with WTI closing down 24¢ at $45.57 and Brent off 32¢ to $46.63. Actually, oil’s strength is impressive given the dollar’s strength, and yesterday’s EIA weekly crude and products report which was decidedly bearish. Crude inventories rose 5.3 million barrels last week, more than 6 times expectations, and gasoline supplies rose by 750,000 barrels counter to expectations of a 850,000 bbl. drop.

Earlier this week our U.S. Geological Survey issued a report that was nothing less than stunning. They reported that the Wolfcamp Shale formation in the Permian Basin in west Texas was the largest continuous oil reserves they’ve ever mapped containing 20 billion barrels of oil and 16 Tcf of associated natural gas of technically recoverable reserves. Putting this in perspective, this is nearly three times that of the reserves in the Bakken formation! All I can say is “Wow!” I’m old enough to remember the ‘70’s when many people, including well respected experts, said that for all intents and purposes the world was going to run out of oil at the turn of the century! Not!

This morning WTI is up 80¢ primarily on, and I warned you about this, headlines surrounding OPEC with the Saudis saying they’re closer to reaching a production agreement. Yeah, yeah, yeah.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices rallied yesterday with the December contract closing 5.5¢ higher at $2.764. Although the forecast continues to show above normal temperatures on average but with each passing day we get deeper into winter average temperatures are declining and we are intermittently getting some cold snaps which is popping the cash market which is what’s driving futures prices. This morning forecasters have backed off the cold forecast a little bit which is pushing natty lower to the tune of 6.6¢.

The EIA releases its weekly storage report this morning. Traders are looking for an injection of 28 Bcf, which will push inventories further into record territory.

Elsewhere

For a second I thought I was reading something from Dukes of Hazzard. Last Saturday an Oklahoma highway patrol officer clocked a one Hector Fraire, 19, going 84 on the Kilpatrick Turnpike. Upon recognizing he was being chased by the office he proceeded to do his best Dale Earnhardt, Jr. impression turning off his headlights and tail lights and putting the pedal to the medal on his modified 2011 Ford Mustang. The officer gave chase and subsequently clocked him at 176 mph. And then at 204 mph! Mr. Fraire eluded the original officer but that officer in his wisdom radioed ahead and a Canadian County Deputy sitting in a parking lot spotted the car and intercepted it. Mr. Fraire now has a nice couple of pictures for his holiday card for sending to his relatives and friends: a head shot and profile.