Equities and the Economy:

Kind of a strange day yesterday. Taking their que from fairly strong European markets, U.S. stocks were markedly higher in the morning and up as much as 132 points an hour after the open but they then began to fade and in early afternoon were even negative on the day by as much as 30 points but then clawed their way back to end basically unchanged. The Dow closed down 4 points at 18,120, the S&P 500 ended flat to Friday at 2,139 and the Nasdaq was off 10 ending at 5,235. Normally I would say this was horrible price action but what I believe is going on here is the markets are treading water until both our FOMC and the Bank of Japan’s monetary policy council meetings end, which will both be tomorrow. Regarding the FOMC, the market is pricing in only a 20% probability of an interest rate increase.

Regarding fundamental data, there was only one report of significance yesterday and that was the National Association of Homebuilders NAHB/Wells Fargo index of homebuilders sentiment. That index rose from 59 in August to a very strong 65 in September and the highest the index has been in nearly a year and much greater than Wall Street was expecting. The housing sector has been and continues to be the brightest sector of the U.S. economy.

This morning the Dow futures is up 85 points once again taking their direction from the overseas markets with the major European indexes up between 0.5% and 0.8%. Trading 101: unless there’s a fundamental reason not to, follow the momentum.

Oil

Similar to equities, oil prices were up in the morning posting a gain of $1.12 over Friday’s close but it didn’t last long and the reality of bloated supply dynamics pulled prices back down with WTI closing up 27¢ and Brent settled up 18¢ at $45.95. Oil prices have been under pressure and are down about $5.00 over the past couple of weeks. OPEC and Russia jawboned prices higher last month on talk of a production freeze but 1) being discussion of a production freeze is not on the agenda at the OPEC meeting in Algiers next week and any freeze talks will be “on the sidelines”, and 2) all the oil producing governments are focused on funding their deficits, traders are not buying into bullish talk. Add in that the U.S. shale producers are beginning to make current oil prices financially “work” due to cost cutting and technological improvements (evidence by the marginally increasing rig count), it doesn’t look bullish for oil prices. Now that doesn’t mean would couldn’t see $50 again, but barring some exogenous fundamental or political event, the bull’s yoke is heavy.

This morning WTI remains under pressure trading down 21¢. Note that oil is lower and equities are higher.

Courtesy of MDA Information Systems LLC

Natural Gas

As Tonto might say, “Strong, like bull.” I’m talking natural gas prices. Although natty fell 1.4¢ yesterday closing at $2.934, it’s up 30¢, 12%, over the past 2 weeks. Late summer cooling demand in conjunction with record demand by the electric generation sector as well as record exports (all of which I’ve been talking about to my clients for months!) are finally manifesting themselves after being masked by the lower prices this past spring due to the record warm winter caused by the El Nino. The evidence in the strength is the cash market which began trading over futures at $3.00 last week. The high pressure ridge remains over the eastern U.S. bringing along with it much above normal temperatures and the cash market continues to power forward pulling futures up with it. The October contract, a “shoulder month” I might add, is up a material 7.9¢ this morning. Impressive!

For you readers in Texas, yesterday the U.S. Bankruptcy Court approved the deal for NextEra Energy Inc. to buy Energy Futures Holdings (EFH), including EFH’s 80% stake in Oncor Electric Delivery Co. LLC which is the utility serving north Texas and a large part of West Texas. NextEra is a very large energy company whose assets include 45,000 megawatts of generation, including 8 nuclear plants at 5 sites, and the utility Florida Power & Light. 2015 revenues were $17.5 billion and they have 14,300 employees in 27 states and Canada. In Texas NextEra is also known as Gexa Energy.

Elsewhere

This morning North Korea “successfully” tested a new rocket engine. It was not actually a launch but a test on a stand on the ground. The North Korean news agency said the rocket engine would propel a satellite into orbit. This comes on the heels of recent underground nuclear missile tests. Am I naive to believe that satellites are not on North Korea’s agenda?

Bob Shiring