Equities and the Economy

Good morning. Not a good day folks. Not a good day at all. U.S. equities followed European stocks lower with the latter closing down between 2.12% and 2.76% while stocks here in the U.S. fell about the same. When the bloodletting was over the Dow lost 313 points, 1.92% closing at 16.002. All three major indexes are now in correction territory, or more than 10%, off their 52 week highs. Important to me, yesterday’s Dow close was below both the 9/4/15 close of 16,102 and the even lower 9/1/15 close of 16,058. These were short term support points and last week intraday we bounced nicely off the 9/1 close and rallied. Unfortunately, yesterday we didn’t get the bounce. This puts the August 25th “flash crash” low of 15,666 right in the cross hairs. As far as the downside, I don’t want to even really talk about it. I’ll just say that from a technical perspective applying the Fibonacci retracement of 32.8% to 50%, an often employed target range, to this big bull rally we’ve had which began at the end of 2011 and lasted until this past May it would take the S&P down to the 1,420 to 1,550 level. Not a comforting thought.

As bad as the Dow was, the S&P 500 and Nasdaq were even worse with the former losing 50 points, 2.57%, finishing at 1,882 and the latter off a whopping 143 points, 3.04%, to 4,544. For the Nasdaq it was once again the biotechnology sector which continued to get unadulteratedly pounded. This time is was Valeant which brought the whole sector down closing off 17% amid news that Democrats are pressing a Republican committee chairman to force the pharmaceutical firm to turn over documents tied to a price hike from earlier in the year. Remember now, this is after Hillary Clint’s tweet last Monday on drug company “price gouging.” The IBB, the biotechnology ETF, is down 20% in 7 trading sessions. That is more than a flesh wound! Folks panic is just starting to set into the global equity markets. CNN’s Fear and Greed Index has been and remains in the Extreme Fear region at 12 (out of 100). As I’ve said previously, this will not end until the retail investor capitulates.

Turning to the economic news yesterday, the Commerce Department reported consumer spending rose 0.4% in August which was very marginally better than estimates if 0.3%. Wages and salaries rose 0.3%. The core PCE (Personal Consumption Expenditures) Index, which excludes volatile food and energy prices, was up 1.3% for the year which is considerably less than the Fed’s target of 2% inflation and will give the “doves” on the FOMC ammunition to leave interest rates unchanged.

All the major Asian indexes got pounded overnight falling between 2.02% and 4.05% but this was just following the lead of U.S. equities. European equities, which got crushed yesterday, are trading mixed on either side of unchanged. Locally, U.S. equity futures are all in the green with Dow futures up 25 which is off from being up 81 earlier this morning. As Sargent Phil Esterhaus often said in the early 1980’s show Hill Street Blues, “Let’s be careful out there.”

Oil

Oil prices yesterday could not fight the tsunami of falling global equity prices falling in sympathy with the broader commodity market with both WTI and Brent closing lower. The former lost $1.27 settling at $44.43 and the latter dropped about the same, $1.25, ending at $47.34. That really is the bottom line. However, as I mentioned yesterday, WTI for the last month has pivoted within a couple of dollars of the $45.00 mark.

Saudi Arabia announced yesterday that it has pulled back $50 to $70 billion from U.S. and U.K. based fund managers needing the funds for financing fiscal shortfalls courtesy of a 50% decline in oil prices over the past year.

Royal Dutch Shell announced yesterday it was abandoning its long quest to produce oil in Alaska’s Arctic waters. After years of effort, Shell said it was leaving the region “for the foreseeable future.” Shell has spent $7 billion on Arctic offshore development including one well which Shell’s USA’s president stated was “…clearly disappointing.” Basically, they got a dry hole.

This morning WTI is bouncing up 56¢ and once again right near the $45 mark.

Courtesy of MDA Information Systems LLC

Natural Gas

The October Nymex natural gas contract expired yesterday with extremely little fanfare at $2.563, down $0.001/MMBtu from Friday’s close. If you recall, the contract started yesterday up over 4¢ which I believe was short covering due to the weather forecast which shifted to normal from above normal meaning more HDD’s. U.S. dry natural gas production is still in the 73 Bcf/d area and has not grown in 6 months. As of this morning the November contract is now the prompt, or front, month and is down 4.8¢ from its $2.670 close yesterday. Although the longer term weather forecasts are mixed, I believe folks are leaning to the El Nino/warmer upper Midwest scenario for the winter which is keeping a lid on prices. Today’s weather forecast is similar to yesterday’s showing normal weather for the Midwest and East for the beginning of October. Unless there’s a change in the forecast the next market mover for natty will be the EIA’s storage report on Thursday.

Elsewhere

We have all been taught that the Civil War began under the administration of Abraham Lincoln with the first shots fired on April 12, 1861 when the North attempted to reinforce Fort Sumter in Charleston Harbor. However, a closer look raises some doubts as to precisely when the war began, and who was president at the time. With the election of Abraham Lincoln in 1860, South Carolina seceded from the Union with six other southern states soon following. However, Mr. Lincoln as president-elect would not take office until March. The sitting president, James Buchanan, would have been very happy to have just let things be until the inauguration on the new president but he was backed into a corner. The recently occupied garrison of Fort Sumter was badly in need of supplies. In early January President Buchanan ordered the Star of the West, a merchant ship, to deliver much needed provisions to the fort and on January 9th it reached its destination. However, South Carolina was ready.

Buchanan’s Secretary of State, John Floyd, was a southern sympathizer and had warned the Rebel authorities the ship was coming. When the ship entered the Charleston Harbor the Rebels unleashed their guns with three cannon balls hitting the ship. The Star immediately retreated and returned to her home port. After Lincoln was sworn in one of his first acts was to re-order the provisioning of Fort Sumter. The second attempt was also repelled by the Rebels but this time there was no turning back. So although the war began in earnest on April 12, 1861, the first shots were actually fired months before while James Buchanan, not Abraham Lincoln, occupied the White House.

Have a good day.