Equities and the Economy:

U.S. stocks closed higher yesterday driven up by higher oil prices. The latter on Russian President Vladimir Putin’s comments that Russia is willing to join in on plans to curb crude oil production. The stronger oil market guided other commodities as well further bolstering equities. Commodities across the board were higher. In addition to energy, the precious metals grains, orange juice and base metals were all materially stronger. Only livestock prices were lower. And this was in the face of a stronger U.S. dollar for as you should know by now, a stronger U.S dollar weighs on commodities priced in the U.S. dollar. All I can say is “impressive!” The numbers are: Dow up 86 points, 0.49%, (it was up as much as 159 points) ending at 18,329, the S&P 500 finished up 10, 0.46%, at 2,164 and the Nasdaq gained 36, 0.69%, to 5,329. The S&P is up 5.9% y-t-d, which extrapolates to 7.9% for the year which makes for a good year. And the trend is upward.

The government was closed yesterday for the Columbus Day holiday hence no economic reports were released.

This morning the day is beginning somewhat lower with Dow futures down 82 points, but it’s early. It’s the season again! And I’m not taking about autumn. Third quarter earnings season began last night with Alcoa, as usual, being the first to report and their report was disappointing with both revenues and profits falling short of expectations. Alcoa’s shares were down as much as 4.2% in overnight trading which is what’s weighing on the general market. According to Thomson Reuters, overall earnings of the S&P 500 companies are expected to fall 0.7% in Q3, yet stock prices march higher. Haven’t figured that one out yet. I thought earnings were supposed to go up to drive stock prices higher.

Oil

The big story in both the energy and the equities market yesterday was Putin’s comments over the weekend of cooperating with OPEC, i.e. Saudi Arabia because they would be the only OPEC country that would curtail, on limiting production. His comments set off a surge of buying which sent WTI prices to their highest level since July 15 of last year. On the day WTI rose $1.54, 3.1%, closing at $51.35 and Brent was up $1.21 settling at $53.14. Brent’s settle price was the highest since last October. Yesterday an energy conference began in Istanbul attended by OPEC and Russia where it is expected informal discussions will occur to further solidify an output freeze. Ironically, yesterday at this same conference Mr. Sechin, the President of Rosneft the Russian oil company, said his company has no intention of reducing production. When asked why he said simply, “Why should we do it?” Sechin knows that every other OPEC and non-OPEC producer shall cheat on their production quotas. That being said, if I have to choose between Putin and Sechin, there is absolutely no question where my money goes. And apparently I’m not alone for WTI is down 17¢ as I write. This may be a “buy the rumor, sell the fact” scenario. There’s an awful lot of talk of cutting production, but no one has cut one drop yet. But hats off to OPEC, prices are up materially.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices continue to rocket higher. Yesterday natty closed up 8.2¢ at $3.275/MMBtu trading at an 18 month high. Prices have rallied 45¢ in a little more than a week and up over 27¢ just since Thursday. Folks, that’s a huge move. Now that we’re through the summer and looking to the winter traders are, despite very full storage, figuring on a much more balanced market due to increasing demand (LNG, Mexican exports, coal to gas switching and industrial demand) and flat production. This is especially true for prices at Henry Hub, LA which we all know is the Nymex futures contract delivery point. If you’re in PA that’s a different matter for in the Marcellus region gas is almost being given away.

The weather forecast is certainly not supporting the higher natty prices for above normal temperatures are forecast throughout the key natural gas consuming regions of the country which is almost taking us through the month of October. This morning I’m seeing some profit taking with natty down 3.4¢.

Elsewhere

Yesterday this years’ Nobel prize in economics was awarded to two U.S. based professors. British born Oliver Hart of Harvard University and Finnish economist Bengt Holmstrom of MIT will share the $930,000 award for their contributions to contract theory. Contract theory is the field of research that deals with incentives and risks involved with contracts drawn up between companies and employees, banks and lenders or insurance agents and their customers. In their research in the 1970’s, 80’s and 90’s the two created “new theoretical tools” that shed light on how contracts help people and companies deal with conflicting interests and the “potential pitfalls” that occur when contracts are poorly designed. Their work showed how a principal, for example a company’s shareholders, should design an optimal contract for an agent, such as the CEO. Their “information principle” showed how the contract should link the agent’s compensation to information relevant to his or her performance while carefully weighing the risks against incentives. An example of this is that it makes sense when a city can save money by contracting out trash collection services but it may not make sense when contracting out prison services to privately run companies where strong incentives to lower costs prevail which could result in drastically reduced services including prisoners not being fed.