Equities and the Economy:

Another pretty boring day on Wall Street yesterday. The Dow closed down 13 at 18,269, the S&P 500 added a single digit to 2,161 and the Nasdaq fell 10, 5,307. Look at the 3 month S&P 500 chart. It’s making a “pennant” formation with the high in early September and the low in mid-September. Ever since then the S&P has been trading in a tighter and tighter range with resistance being a downward sloping line from left to right off the high and support being an upward sloping line from left to right off the low. This is consolidation. This is “bivouacking.” A break-out is coming. Probably somewhere between the end of the month and after the election. So the million dollar question is, will it break up or down? My bet: up. Although higher interest rates are definitely coming, which are negative, the labor market and consumer confidence is in good shape. By the way, for the record, the S&P is up 5% for the year and if you extrapolate that it makes for a pretty darn good year.

Regarding fundamental data, the Labor Department released its regular Thursday first time unemployment claims report noting claims fell 5,000 last week to 249,000. Wall Street was forecasting between 255,000 – 260,000. Claims are down 7% from this time last year. In all it was a positive report.

It’s the first Friday of the month and that means it’s time for the Labor Department’s employment report. While the report is indeed very closely followed by investors, it’s influence on equities is considerably less than a few years ago because the labor market is in much better shape than then. Basically, the U.S. is pretty much at full employment, which is why the Fed is looking at raising interest rates. The only reason they already haven’t is because inflation has been stubbornly below their 2% target. Additionally, this is a dovish Fed and they are going to err on the “accommodating” monetary policy side.

The Labor Department just released the jobs report stating 156,000 new jobs were added in September. This is another sold gain. I’ll discuss the report more on Monday. It’s not impressing investors for the Dow is down 20 as I write.

Oil

Impressive! That’s all I can say about oil prices. Impressive. Oil prices continue their march higher with WTI closing up 61¢ yesterday and over $50.00 at $50.44. Brent added 65¢ settling at $52.51. And that’s even as the U.S. dollar has strengthened vs. other currencies. The OPEC production freeze announcement of between 200,000 and 700,000 bpd got the bears scrambling for cover but it’s been the decline of U.S. production that is juicing prices. As I mentioned yesterday, U.S. crude oil production has fallen for 5 consecutive weeks. Technically, we’re getting into substantial resistance. WTI has traded in the $40 to $52 dollar range since April. From today’s price to $52 longs will be taking profits and new short positions will be initiated. I still remain skeptical of the price upside. Today we’ll see Baker Hughes weekly rig count report. I’ll bet anyone the rig count went up last week.

Overnight Russia’s oil minister stopped the recent bull stampede stating he was skeptical a production cut agreement would be reached at OPEC’s meeting next month. This could be posturing and take it from a seasoned trader, there’s going to be a lot of that between now and the OPEC meeting. I think it’s going to be tough for prices to rise much from here. That doesn’t mean we couldn’t see another couple of bucks but rising oil prices are like a tractor pull event. The farther you go the harder it is to go farther. Why? Rig count goes up and production goes higher. Think about this. Chevron recently said that at $40/bbl it will drill a stunning 1,300 wells in the Permian. It added that if the price were to rise to above $50 it may drill 4,000 new wells! From experience I can tell you if one producer is doing this others are as well.

WTI is down 21¢ this morning. Chatter. Actually it’s surprising it’s not even lower considering the Russian announcement and expected profit taking ahead of the weekend.

Courtesy of MDA Information Systems LLC

Natural Gas

The EIA released its always much anticipated storage report yesterday stating 80 Bcf was injected into storage last week. This was materially greater than the 68 Bcf the market was expecting, but surprisingly it didn’t push prices lower. Natty closed basically flat on the day up 0.8¢ at $3.049. When bearish news doesn’t push prices lower it’s a clear signal. And my antennae are receiving it! The calendar 2017 strip is now up to $3.22. That matches the high in July which is the highest of 2016!

Returning to storage, inventories are currently 74 Bcf, 2.1%, above last year at this time and 2.05 Bcf, 5.9%, above the 5 year average. Quite a difference from the 188 Bcf we were higher than last year at the beginning of April!

Despite a bearish weather forecast showing above normal temperatures for the Midwest and east, particularly in the 6-15 day forecast, natty this morning is continuing to grind higher being up 3.5¢. Also impressive!

Elsewhere

I like the way Persians’ decision making process, at least the way they did it hundreds of years ago. The culture deeply valued the wisdom that comes from being drunk. At the time they would make sure that particularly important arguments were debated both while sober and drunk. Only the ideas that made sense in both states were truly worthwhile. The process went both ways: Arguments originally had while drunk would be debated again the next day in soberness, and dry arguments would be followed up with discussions over wine. This makes for a great visual of a corporate boardroom!

Bob Shiring