Equites and the Economy

Good morning. U.S. stocks ended August on a sour note with the Dow losing 115 points, 0.69%, closing at 16,528, the S&P 500 fell 17, 0.85%, to 1,972 and the Nasdaq was the big loser of the day falling 1.06%, 51 points, to 4,777. The month of August can be a pretty rough one for investors, but, unfortunately, this August earned a place in the record books with it being the worst August for the Dow in nearly two decades posting a 6.4% loss. Overall, it was the 6th worst monthly performance for the Dow and the worst since May 2010 when the Dow dropped 7.9%. The broader S&P 500 index didn’t fare any better posting a 6.3% loss in August, its worst monthly tumble in more than three years. Comparing only August’s, last month was the worst for the S&P in 14 years. The Nasdaq lost 6.9% for the month with the tech-heavy index marking its worst performance in 14 years as well as ringing up its worst monthly return in three years. As I’ve said so many times, you just can’t focus on what’s going on here in the U.S. Our economy is inextricably linked to the global economy. And last month is a good example for it was, and still is, concern over growth, or lack thereof, in China that resulted in selling and losses in equities as well as weighing heavily on commodity prices. By the way, the Shanghai Composite lost 12.5% for the month. Further feeding the bear is investors increasing belief that the Fed will raise interest rates in September, the first time in a decade, despite the performance of the equities market.

I’m glad the Fed hasn’t met yet, that will be September 16 & 17, because they need to consider what’s going on today for equities around the world are getting absolutely destroyed today. While China’s Shanghai closed down “only” 1.23%, Hong Kong’s Hang Seng and Japan’s Nikkei 225 got obliterated losing 2.24% and 3.84%, respectively. Driving the Asian markets lower today was bad news in the Chinese government’s official PMI report for August with it coming in at 49.7 and below the all-important 50.00 level which separates contraction from expansion. This is the lowest level this index has fallen to since the spring of 2009, the depth of the global recession!

The carnage has spread to Europe with all the major indexes currently showing big losses of between 2.74% and 3.14%. And we’re not escaping it here locally with the Dow down a huge 337 points, or 3.04%. Technicals are playing a part in this. You regular readers should remember that last week when we had the two big up-days I stated that this positive correction off the 1000+ point intraday loss a week ago took us right into the 50% – 62% retracement. There is a theory called Elliot Wave and per the theory you have three waves before the down move is completed. The waves are labeled A, B and C with the A move being the first move down. This would be the losses we had over four days culminating in last Monday’s big drop. Then you have a corrective B wave up whereby you capture back some of those losses, 50% to 62%, which was the two up days. Then you have another down move, C wave, and this is the scary point, the down C move ends at lower levels than where the A wave ended. This would take us to lows lower than the lows we saw last Monday. Those losses last Monday were 12% off the highs set in May. With yesterday’s losses after a bearish technical signal on Friday’s price action I fear the third leg down, the C wave, has begun. I realize this might all seem like mumbo-jumbo but bottom line, this could get really ugly folks.

Oil

Equites may be getting hammered but oil is running like greased lightning. Yesterday WTI rose for a third consecutive day and another $3.98, a whopping 8.8%, closing at $49.33 and Brent jumped $4.10, 7.0%, settling at $54.15. WTI prices have soared more than $10/bbl over this term erasing all of last month’s declines. The three day gain was a huge 27.5%, the biggest in 25 years! A rebound was due because the market was way oversold with traders having the largest number of bearish positions on last week near a record high and it didn’t take much to set off the buying with a number of small disruptions being the catalyst. Remember, we were coming off a 6 ½ year price low of $38.24 on August 24th. Yesterday’s big up move was fundamentally based with the EIA releasing its new survey-based data showing the U.S. pumped a hair below 3.9 million bpd day in June which is down by 100,000 bpd from a revised downward May figure. The figure was also nearly 250,000 bpd below what the EIA had estimated using its old methodology only a few weeks ago.

This morning, however, the huge losses in global equities is just too much for the bull’s yoke dragging WTI down $2.69

Courtesy of MDA Information Systems LLC

Natural Gas

Although surrounded by Armageddon natural gas continues to meander along. Yesterday it fell 2.6¢ closing at $2.689. Same old story here. Flat production with a ton of natty being consumed in the electric generation sector. And the lower natty goes the more coal fired generation it displaces thereby increasing demand. Not much more to say here. The October Nymex contract is up ½¢ as I write. Activity will pick up though in a couple of days when the EIA storage report is released.

Elsewhere

Ever wonder where the term “lynch mob” came from? It had its origins in the American Revolution. After forming an army and declaring their independence, the colonies prepared to take on Great Britain, the most powerful nation in the world. At the same time, however, they had to deal with enemies within for not every colonist supported the fight for independence. About one in four remained loyal to the king. They were called Tories and were generally despised with a vengeance by the rest of the population. One did not have to commit a crime in his neighborhood to be punished. All that was necessary was for one to be charged with being a Tory. Any person who was even suspected of being a loyalist was hauled before the magistrate and summarily deprived of land, houses and livestock. After the appearance in court the, local Patriot mobs would then plunder the Tory home and turn the booty over to the Continental army. This gave rise to the term “lynch mob,” and there was a good reason for that. The judge who opened up Tory homesteads to Patriot plunder was none other than Charles Lynch from Lynchburg, Virginia. His autocratic, legal pronouncements for the bench gave rise to the term “lynch law.” In time this was applied to any attempt by self-appointed guardians of the public good to administer justice. Within a decade or two the term was applied to any uncontrollable mob.

Have a good day.