Equities and the Economy

Although U.S. equities closed lower on Friday with the Dow down 92 to 17,664, the S&P 500 falling 10 points to 2,079 and the Nasdaq off 20 to 5,054, the month of October 2015 was the best month for stocks in four years! For the month the Dow gained 8.5%, the S&P 8.3% and the Nasdaq popped 9.4% with the S&P booking 5 consecutive weeks of gains. One of the big drivers was the recovery in commodity prices, particularly oil. Stocks have now captured back 100% of the losses experienced at the end of August and is close to new highs.

I bet you forgot but this is earnings season. 68% of the S&P 500 firms have reported so far with 72% beating estimates for earnings. The drag has been revenues with only 42% of companies beating their revenue forecast.

The news of the weekend was from China where the Caxin/Markit Purchasing Managers Index fell again in October to 48.3 and below the all-important 50 level which separates expansion from contraction. This is the 8th month in a row the index has been below 50. While China may be slowing down, Germany is doing well for the same index coming in at 52.3 for last month, up from 52.0 and well above expectations. On the bearish PMI news from China the major Asian indexes closed weaker this morning while the European markets are currently trading mixed. Here in the U.S. investors and traders are taking a wait and see attitude with Dow futures up 31.

Oil

Oil prices rose on Friday with WTI posting a 53¢ gain closing at $46.59 and Brent adding 76¢ settling at $49.56. As previously mentioned, oil prices posted a nice recovery for October with WTI logging a 3.33% gain for the month and hitting its highest price since July at $50.92 per barrel. The higher oil price translated into stronger stock prices for energy companies which helped push the major stock indexes higher last month.

We can see the effect of lower oil prices. ExxonMobil reported quarterly results and although earnings came in better than expectations, profit is down a whopping 47% from Q3 2014. Even with the weak earnings ExxonMobil has not announced any layoffs, which cannot be said of Chevron. The San Ramon, CA based company said on Friday it was cutting 10% or its workforce, 6,000 to 7,000 workers, and reducing it capital spending by 25% for next year.

Baker Hughes reported in its weekly rig count report that 16 less oil rigs were drilling last week than the previous week marking the 9th straight week of declines. Interestingly, Baker Hughes reported an increase of 4 natural gas rigs for the week.

This morning WTI is trading 43¢ lower.

Courtesy of MDA Information Systems LLC

Natural Gas

After a week of getting bludgeoned natural gas prices rebounded somewhat on Friday closing up 6.4¢ at $2.321. Let’s call it short covering ahead of the weekend Friday’s cash market was no support trading below $2.00 for the weekend. That hasn’t happened since April 2002. The warm weather forecast just continues to pressure natty prices with it giving up all its gains from Friday, and more, being down 8.2¢ as I write.

First it was coal plants being shut down. Now we have nuclear power plants. Entergy announced over the weekend that in late 2016 or early 2017 it will be closing its nuclear power plant in Scriba, NY. This comes on the heels of the company’s announcement last month that it was closing its nuclear power plant in Massachusetts no later than June 2019. In both cases the company stated that significantly reduced plant revenues due to low natural gas prices was the reason. Remember, this comes on top of the Yankee nuclear power plant in Vermont which was closed earlier this year.

Elsewhere

Last week China changed a policy that was 36 years old. It was not an economic policy but one much more personal. It was back in 1979 when the government of the now 1.4 billion people introduced the one-child policy as a “temporary” measure to curb the then-surging population and limit the demands for water and other resources. Last Thursday the Chinese Communist Party announced it will start allowing all married couples to have two children. Over the 36 year term an imbalance has developed between the male and female populations with the males materially outnumbering the females due to the Chinese strong preference for boys. The imbalance has made it difficult for some men to find wives and is believed to fuel the trafficking of women as brides. Couples who broke the rules are forced to pay a fee in proportion to their income. A statement from the party’s Central Committee said the decision to allow all couples to have two children (there were exceptions to the rule) was “to improve the balanced development of population” and to deal with an aging population. The one child only policy has pushed up the average age of the population and demographers foresee a looming crisis because the policy has reduced the number of the young in the labor pool that is needed to support the large baby boom generation as it retires. Now one might reasonably expect an impending baby boom, but many analysts are not forecasting this to happen. Fertility rates are believed to be declining even with the one child only policy because many of China’s younger generations see smaller family sizes as ideal.