Equities and the Economy

Good morning. It was a subdued day of trading yesterday with the Dow closing down 24 points at 17,623, the S&P 500 falling 4 to 2,071 and the Nasdaq actually climbing 3 to 5,035. The combination of big gains last Tuesday and Friday and the two day FOMC meeting, which begins today, turned investors cautious. That being said, and I know we still have 4 days of trading left in the month, the S&P’s October performance is poised to record its best month since 2011 led by gains in commodity producers as well as industrial and tech shares. It was these very same sectors which ignited the August sell-off amid Chinese/global growth concerns.

Regarding economic reports, the Commerce Department reported that new home sales fell 11.5% in September to an annualized rate of 468,000, which was very disappointing. This is the lowest rate for new home sales in nearly a year. That being said, I believe this is more a function of lack of supply than falling demand. Builders continue to express frustration in finding lots to build on. The median price of a new home rose 13.5% y-o-y to $296,000, up from $261,500 from September 2014.

In other news, the Dallas Fed noted the Manufacturing Index fell for the 10th month in a row in its area to -12.7. Interpretation: the Oil Patch is in recession.

Overnight the Asian markets closed mixed which was actually good for Hong Kong’s Hang Seng and China’s Shanghai Composite were trading materially negative but rallied in the last hour of trading. All the European indexes are in the red on a preliminary estimate of Q3 GDP coming in slightly below expectations. U.S. stock futures are being pulled lower by their counterparts across the pond but to a lesser extent with Dow futures down 44.

Returning to the FOMC, the bet is that interest rates will not be raised after this meeting.

Oil

Oil continues to get bludgeoned. WTI lost 62¢ closing at $43.98 and Brent closed down 45¢ at $47.54 remaining under pressure after two . Goldman Sachs helped push the market lower yesterday with its report indicating that crude oil storage is reaching capacity adding to concerns of a supply glut. U.S. crude inventories are at their highest level for this time of year since 1930. Add the El Nino and its expected above normal winter temperatures in the U.S. and there’s not much for the bulls to run with. This morning WTI is getting whacked down $1.16. It’s early so let’s see if this early move holds.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices got unadulteratedly and unabashedly destroyed yesterday. The November Nymex contract lost 22.4¢, a whopping 9.8%, yesterday closing at $2.062. Natty prices have now dropped 25%, or 63¢, in less than two weeks of trading and are within a nickel of 2012’s ten year low of $1.902. Ample supply and, like oil, forecasts for an El Nino are really pressuring prices. I think some of yesterday’s move was exacerbated by option traders delta hedging, which basically means they had to sell futures to hedge the put options they sold. This is particularly pertinent being November options expire today. Our and my research indicates a big growth in natural gas demand for the next few years beginning next year so just maybe you should think about all this.

Overnight the bears came out in force pushing natty down 11.7¢ but it has rebounded to trading up 1.3¢ from yesterday’s settle. Weather forecast is pretty much the same as yesterday’s with much above normal temperatures predicted for the eastern 2/3rds of the country in the 6-10 day time frame.

Elsewhere

I saw that regular gasoline at a major national brand station was $1.759 per gallon, if paid with cash. $1.75!!!! Holy Toledo!