Equities and the Economy

Good morning. After last week’s big gains U.S. equities began the week on a quiet note with the Dow closing down 31 points at 17,793, the S&P 500 falling 2 points to 2,087 and the Nasdaq slipping 2 to 5,102. Chatter. While M&A activity usually gives a boost to the equity market it didn’t happen yesterday with Pfizer and Allergan announcing a mega-merger valued at $160 billion dollars. Youza! The driver of the merger is to avoid paying U.S. taxes. Allergan is a Dublin, Ireland based company and this would be the global headquarters and Ireland’s corporate tax rate is lower than the U.S.’. This is called an “inversion” and these two companies are not the first to do it. By the way, this whole inversion thing of avoiding paying U.S. corporate taxes is getting attention both in Congress and the White House. There are bills in both the House and Senate to stop inversions but neither have made it out of committee yet.

Regarding fundamental data, Markit Economics reported yesterday that its purchasing managers’ index for the U.S. manufacturing sector fell to 52.6 for November from October’s 54.1. Disconcertingly, this is the lowest this index has been in 2 years. However, it’s still above 50 separating growth from contraction so although disappointing, it’s not catastrophic.

The major report today will be release of the revision to Q3 GDP. The initial report was that Q3 grew 1.5% and expectations are for a revision for the positive in the order of 2.0%.

The U.S. equity futures market is getting hit a bit this morning. Dow futures were down 111 points earlier but the market has rebounded now trading in the red only 46 points. The news rippling around the world this morning is the downing by Turkey of a Russian jet. Turkey said the Russian fighter ignored 10 warnings over 5 minutes ordering it to return to Syrian airspace. Vladimir Putin responded that the Russian jet was carrying out strikes on ISIS militants and posed no threat to Turkey. He said the downing was “a stab in the back carried out by accomplices of terrorists.” He added, “Today’s tragic incident will have serious consequences for Russian-Turkish relations.” Unfortunately, this is the kind of thing that can happen when numerous countries throw a lot of armament in a small space.

Oil

Saudi Arabia’s announcement yesterday they would work with both OPEC and non-OPEC oil producers in an effort to stabilize oil prices initially popped the market but the bears viewed it as a selling opportunity. WTI closed down 15¢ at $41.75 while Brent closed up 17¢ at $44.83. Oil prices continue to see pressure from the strong U.S. dollar which is adding fuel to all commodity price declines. Here’s how bad a year it’s been for commodities: crude oil is down 40%, copper is down 24%, iron ore down 37%, all while the U.S. dollar is up 11%. That’s a tough environment to succeed in if you produce a commodity priced in U.S. dollars. Some commodities are at 13 year lows.

Back to Saudi Arabia, they are playing a dangerous game here. If they don’t deliver on their rhetoric WTI prices could trade down to $35. My bet is Saudi Arabia isn’t going to do anything this week, instead waiting until OPEC”s regularly scheduled meeting on December 4th.

This morning oil prices are much higher as geopolitical tensions rise over the downing of the Russian fighter jet with WTI up $1.48.

Courtesy of MDA Information Systems LLC

Natural Gas

After trading down 10¢ in the morning to a one month low natural gas prices rallied in the afternoon closing up 6.5¢ with traders doing some short covering in an egregiously oversold market. The always important weather forecast is showing some really warm weather for the next 2 weeks for the eastern half of the nation which is giving the bears a nice fat meal and they’re pushing prices 5.8¢ lower this morning. I did some research folks and natural gas prices are now deep in the coal stack meaning it’s cheaper to burn natty than coal in many parts of the eastern U.S. With storage levels at a record high and above normal temperatures present this needs to happen. No other place for the gas to go, until winter kicks in.

The province of Ontario, Canada made a profound statement yesterday, both literally and figuratively. Officials there announced they are permanently banning coal-fired electric generation. The province stopped burning coal in power plants operated by Ontario Power Generation Inc. last year. This will force the plants that were burning coal to convert to other fuel sources such as natural gas.

Elsewhere

If you’re driving over the Thanksgiving holidays you’re going to have a few extra Washingtons in your wallet. Gasoline prices are the lowest for the holiday in 7 years! The average U.S. retail price for regular gasoline has fallen for 17 straight days and is now $2.072/gallon, 75¢ less than last year. More than half of U.S. gas stations are selling gas for less than $2.00/gallon, per AAA. Midwestern drivers have seen the largest price drop as Midwestern refineries have come back on line after both planned and unplanned maintenance. The least expensive gas in the U.S. is in Indiana ($1.92), Ohio ($1.83) and Oklahoma (1.85). You can pretty much guess where the most expensive gas is: Hawaii ($2.83), California ($2.73) and Nevada ($2.59).

Have a nice day.