Equities and the Economy

Good morning. U.S. equities continued their rally from their test last Friday of the August 24th “flash crash” low with the Dow adding another 122 points, 0.73%, closing at 16,912, the S&P 500 added 16, 0.81%, finishing at 1,996 and the Nasdaq climbed 43, 0.90%, to 4,791. Yesterday’s higher close was impressive because earlier in the day the three main indexes dipped into negative territory. The Dow has now posted gains for four consecutive sessions matching its longest winning streak since July14 and the S&P is now at a seven week high. The rally has been spurred been a recovery in commodity prices which have been destroyed over the last few months. For example, copper a couple of months ago hit a six year low. The leader in this recovery has been the energy sector which has risen dramatically over the past few days spreading optimism to the broader markets. Yesterday even the healthcare and biotechnology stocks, which continued to fall last Friday and earlier this week even though everything around them were rising, finally joined the party. The Biotech ETF popped 2% yesterday.

This morning Dow futures are correcting a tad being down 28 points, which should really be no surprise to anyone after the multiple days of gains we’ve had recently. We’re in resistance territory with the 2,000 level basis the S&P 500 being the technical number we need to get through. Fundamentally some really good news just came out this morning. The Labor Department released its weekly unemployment claims report stating that initial claims dropped 13,000 to a seasonally adjusted 363,000 for the week ending October 3rd. That number itself probably means nothing to you but this will. That’s the lowest number of initial claims since July 1973, 42 years ago! This is even more remarkable considering that the U.S. workforce has grown considerably since the 1970’s. Today’s number was also the 31st straight week that claims remained below 300,000 which is the number usually associated with a strengthening labor market. This data points to a tightening or the labor market which is a key factor the Fed looks at when discussing interest rate levels. By the way, put on your calendar that the FOMC meets October 27th and 28th.

Oil

Oil prices slipped a little yesterday with WTI falling 72¢ settling at $47.81 and Brent down 59¢ at $51.33. This was the first lower settle for oil in 4 days. Yesterday the DOE released its closely watched crude and products report. It showed a huge rise in crude inventories but this was offset by a big decline in distillates (mostly diesel) so the most important number, the aggregate number, came out pretty close to expectations. Given that fact that 1) crude oil has rose nearly $3/bbl on Tuesday, 2) we’re up at resistance of $50ish, the previous high which was in late August, and 3) one year forward WTI is near $55/bbl and that the banks financing E&P oil companies will be arm twisting the oil companies their funding to get some hedges in place we should not be surprised to see selling coming in at this level.

This morning WTI is working on capturing all it lost yesterday being up 60¢. Traders are definitely fearful of being short this market, at least WTI, on continuing reports that U.S. production is declining.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices rallied early in the day trading over $2.50 but couldn’t hold onto the gains closing basically flat to Tuesday, up 0.4¢ at $2.474. The calendar strips were also basically unchanged. Chatter. Today is the always exciting Thursday with the EIA storage report coming out. Expectations are for a an injection of 98 Bcf which compares to last year’s 106 Bcf injection and the 5 year average of 92 Bcf. This morning natty is up 1.7¢ pushed a tad higher on the morning weather forecast which turned slightly cooler. The eastern third of the nation is forecasted to be normal for the 6-15 day time frame whereas it was above normal yesterday.

I knew that the U.S. was burning a lot of natural gas for electric generation this summer but I didn’t realize it was as much as it was. For only the second time ever, in a single month, July 2015, the monthly natural gas share of total U.S. electricity generation surpassed the coal share. Natural gas captured 35.0% of total generation that month to coal’s 34.9% share. Compared to July 2104, coal generation fell in every region of the country while natural gas fired generation rose in every region. Earlier this year, in April, natural gas fired generation surpassed generation from coal for the first time.

The MidAtlantic region had the largest decline in coal fired generation (I’ve been telling you about all those coal plants retiring there!) followed by Texas while the Southeast and Central regions had the largest increase in natural gas fired generation. The average wholesale price of natural gas in New York City during July was below the average price of Central Appalachian coal, and that is even before accounting for differences in fuel conversion efficiencies between coal and natural gas fired generators. Prior to this year the last time that happened was April 2012 when we exited the warmest winter east of the Rockies in 30 years.

Everyone always asks “What is the nat gas/coal equivalent?” One can make broad conclusions but these decisions are complex and reflect the delivered cost of coal and natural gas, emission costs, heat rates, supply availability and other factors in the fuel market.

Elsewhere

Many of us have knowledge of the emotional status of Mary Lincoln, the wife of our great 16th president, Abraham Lincoln. The president is always viewed as having been the much more stable of the two. Such a comparison, while possessing a modicum of truth, is patently one-sided. Mary may have had her emotional problems but Honest Abe had issues as well, at least when it came to “tying the knot.” Abe and Mary met in Springfield, Illinois and their acquaintance blossomed into a friendship and soon he was courting her. When he proposed, she accepted and was elated. Abraham and Mary decided to have the shortest engagement in the history of Springfield. They would announce it at the beginning of the 1841 New Year’s Day dinner and exchange vows after dessert.

On January 1st, 1841, guests filled the house and champagne filled the glasses. By prearrangement, Lincoln was to make his appearance at preciously 1:30 PM to announce his engagement to Mary Todd. At the prescribed time, everyone stood holding their glasses and waiting. Five minutes passed and no Abe. Ten missed passed and still no Abe. At 1:45, the assembled guests raised their glasses and toasted to the New Year. At 2:00 pm Mary went upstairs and buried her face in her pillow while everyone else had dinner.

Abraham Lincoln never did show up that night, nor the next, not the next. In fact, it was an entire year and eight months before Mary saw Abe again! The reunion was arranged by mutual friends in August of 1842. When they met they eyed one another for a few moments and then fell into each other’s arms. Abraham could only say that he had been scared and Mary did not press him for further explanation.

Mary and Abraham were finally married on November 4, 1842, and it was only when they were alone that night that Mary found out the reason for Abraham’s leaving her stranded on what was supposed to be their wedding night two years before. It turns out that Mary Todd was not the first woman Lincoln has asked to marry him. A few years before he had sought the hand of another woman, who coincidentally was also named Mary, only to his amazement to turn him down. Because of this rejection Lincoln developed such a complex that he didn’t want to chance experiencing it again!