Good morning. Things sure have been choppy lately. After a horrible day last Thursday and a decent rebound Friday stocks once again turned for the worse yesterday with the Dow losing 42 points to 17,071, the S&P 500 fell 5 ending at 1,978 and the Nasdaq slipped 6 to 4,506. Be thankful. It was much worse intraday for the Dow was down 179 points at one point. Ugh! Whereas just a few months ago investors were confident and all “bulled up,” they’re getting a little skittish now that part of the Fed’s QE program is ending (next month the asset purchase part ends). Additionally, there’s a lot more discussion when the Fed will raise interest rates and whereas last year that was “way off” in the future it is now on the radar with “bets” as soon as Q1 or as late as Q4 with the majority thinking next summer.

Helping turn equities up from their nadir yesterday was the Commerce Department’s report that consumer spending rose 0.5% in August and that personal income rose 0.3%. Both were nicely in line with economists’ expectations. More importantly, though, it was the fact the Department revised upward its numbers for July with consumer spending raised to unchanged from down 1% (a material revision!) and personal income revised upward an additional 0.2%. And we all know how important consumer spending is being it makes up about 75% of GDP.

I like to report on housing for its so near and dear to most of our balance sheets. Yesterday the National Association of Realtors (NAR) reported pending home sales fell 1% in August from July which was greater than the 0.5% expected. The NAR’s pending home sales index fell 2.2% over the last 12 months which is a bit disconcerting. Forecasts are now for sales to be 4.94 million for this year which is a 3% decline from last year. The bottom line is the housing market continues to struggle with tight credit conditions for the all-important first time home buyer as well as those same folks being burdened with student loan debt. That being said, we’re in a heck of a lot better position than we were 5 years ago. (You need to read The Big Short by Michael Lewis. Great book about the housing and credit default swap bubbles. The book also highlights people and companies who got crushed such as Howie Hubler who lost more than $9 billion in one trade which is infamously known as the largest single loss in history!)

This morning Dow futures are down 28 which is disturbing being futures were up 57 when I first came into the office. Although the Asian markets closed mixed Hong Kong’s Hang Seng continues to get unabashedly hammered as mass protests continue in the city. Although China supposedly rules its “special administrative region” under a “one country, two systems” formula, the “formula” accords a very limited degree of democracy. For example, China grants Hong Kong elections. Nice except that all the candidates must be approved by Beijing! I mean, come on. One can’t be that naïve. Hong Kong went from British rule and freedom of elections to Communism. Did anyone really expect anything different?! My prediction. It’s only a matter of time before the Chinese army comes in to “restore order.” And you don’t mess with the Chinese army. Remember Tiananmen Square 1989?!

WTI continues to gain on Brent with the former closing up $1.03 at $94.57 while the latter only rose 20¢ settling at $97.20. That spread is now down to only $2.63 which is the lowest in over a year. Libya’s output continues to rise and Europe’s economy is flat, at best, while domestically our economy continues to grind for the better and folks work out the transportation constraints around Cushing, the Nymex contract physical delivery point. This morning WTI is following equities trading down a material $1.09¢. WTI has been pressured recently by the strength of the U.S. dollar, which hit a new high yesterday, but all things considered WTI is hanging in there although producers may not agree with me being WTI was trading $108 back in June.

Traders must be focusing on the prospects of a colder than normal upper Midwest (which is the forecast) for natty just continues to grind higher. Yesterday it closed up 12.5¢ at $4.154. Not an immaterial increase. That’s a 3 month high amigos. My take is prices were driven higher on yesterday’s 11-15 day forecast which showed a cold air mass dropping into the States from Canada. Today’s 11-15 day forecast is little changed from yesterday with the jet stream keeping the cold to the west of the heavily populated areas of the upper Midwest but typically weather moves from west to east across North America so I expect this cold shot to progress east. The only question is when and how cold it will be. The longer it sticks around the less potent it will be. This morning natty is down 2.6¢. Chatter.

When I talk to clients, and friends, they often bring up the “large” amount of natural gas production here in the U.S. which they read and hear about on the news. But as usual, it’s important to read beyond the headlines. And, yes, oil production continues to increase here in the U.S. As a matter of background, back in the old days before shale when we were producing oil from “conventional” plays decline curves were on the order of 10%-20%. That means that each year you would lose 10%-20% of your production each year (the curve isn’t perfectly linear but grant me a pass for this discussion). Look at the chart below which shows the decline curve for shale oil production. Over the past 5 years initial production (first full month) has been increasing each year reaching a new high this year. But look at what that average well produces after only one year. Only about 26% of the initial production! And it tails off from there with the production rate at 24 months only half of what it was at 12 months! So the oil and gas producers of this country are on a massive treadmill trying to replace this production to not only supply America but also increase their balance sheets. So before production can grow, you have to replace what has been produced! Not an easy task. Have a good day.