Market Roundup Dow-41.62
to 17,581.43 S&P-5.29 to 2,065.89 NASDAQ-4.56 to 5,030.15 10-YR Yield-0.03 to 2.03% Gold+$0.10 to $1,166.00 Oil-$0.80 to $43.18
Don’t look now, but natural gas is in free fall! Gas futures
plunged almost 10% yesterday, then knifed through $2 per million British
Thermal Units (BTUs) this morning.
That leaves natty at its lowest level since 2012. If it
loses another 15 cents or so, it’ll be the cheapest we’ve seen natural gas
since 1999.
What’s going on? Warm weather, for one thing. Temperatures
are running above average in many parts of the U.S. with the peak heating
season right around the corner. Natural gas prices continue to tumble.
The boom in shale gas drilling has also driven gas supplies
through the roof. We have more gas in storage for this time of year than we’ve
had in any year since 2006 — roughly 3.956 trillion cubic feet, according to
the Energy Information Administration.
As for crude oil, it topped out around $51 a barrel earlier
this month and has been falling ever since. It dropped through $45 two days
ago, $44 yesterday, then $43 earlier today. That leaves prices at a two-month
low.
One major issue here is supply. The Saudis continue to pump
full out. Other OPEC members can’t gain any traction on their push for
production cuts. Here in the U.S., crude oil inventories are running at the
highest level for this time since at least 1930.
What does this mean for markets? Well I find it incredibly
interesting that all the new easy-money talk from Europe and China isn’t doing
squat for commodities.
I believe the ongoing weakness in crude oil, natural gas,
agricultural commodities, and so on proves beyond a shadow of a doubt that
investors are no longer getting sucked in. They’re not buying “stuff” the way
they used to during previous rounds of global QE because they’ve seen in the
last few years that QE doesn’t do anything for the real economy and hence,
commodity demand.
“All the new easy-money talk from Europe and China isn’t
doing squat for commodities.”
The renewed weakness in energy prices is also weighing on
energy stocks, which haven’t been able to keep pace with the broader S&P
500 rally at all. The Energy Select Sector SPDR Fund (XLE) broke short-term
technical support yesterday, while natural gas-sensitive stocks and the Alerian
MLP ETF (AMLP) rolled over sharply.
Now I’m keeping a very close eye on junk bonds — including
ETFs like the SPDR Barclays High Yield Bond ETF (JNK) and the iShares iBoxx $
High Yield Corporate Bond ETF (HYG). They rallied somewhat on the latest
easy-money promises. But unlike the Nasdaq Composite or the handful of
large-capitalization stocks propping up the averages right now, they remain
far, far below the highs they set in 2013 and 2014 … much less the shorter-term
highs they set this spring.
I don’t care how much funny money the wizards in Frankfurt
or Beijing conjure up. If energy prices keep falling, it’s going to put much
more pressure on energy bonds and the junk bond market overall.
Bottom line: In the longer term, some tremendous bargains
are going to be had in the energy space. But now that the U.S. economy is
slowing at a time when many foreign economies have already tumbled into or
close to recession, it’s hard to load up on these stocks. I was clearly too
early with my bargain-hunting earlier this year.
As for the broader market, I don’t see how it can hold up if
energy joins everything else that’s already in the doghouse — from small-caps
to biotech to retail to transports and more. So I’ll say it again: Maintain a
cautious stance here when it comes to stocks.
I’d like to hear your thoughts on this topic while I’m at
it. Is the renewed weakness in natural gas and crude oil a reason for concern?
Or are falling prices a positive ahead of the holiday shopping season?
Will falling prices put more pressure on the junk bond or
equity markets? Or do you think the weakness in energy stocks will be offset by
strength elsewhere? Share your thoughts at the Money and Markets website if you
get a minute.
Our Readers Speak
I’m glad to see that my piece on the counter-intuitive
behavior of bonds and stocks got you talking at the website. I also appreciated
the feedback on real estate.
On the first topic, Reader David said: “Last week’s rally
was a few very large-cap stocks responding to surprisingly good earnings, a la
McDonald’s (MCD) and Amazon.com (AMZN). But corporate profits are falling and
will continue to fall for the next several quarters as global contraction works
its way through.
“So the broad market will trend down as that profit outlook
is factored in. This is also why long bonds did not change. Big events down the
road are further slowing in China, emerging market debt defaults, energy
company loan defaults at U.S. banks, China dropping out of U.S. debt buying,
sending rates higher despite Fed policies, and expanding global recession.”
Reader Richard G. suggested Fed policy may be playing a role
in the behavior of bonds: “Part of the problem with the bond markets is that
the Fed continues to roll over maturing debt, while the supply of Treasuries
diminishes. Sort of a behind the scenes QE.”
Finally, Reader Carla said: “I have observed when the equity
curve escalates with extreme vertical thrust, a correction or crash is just
around the corner. I guess we’ll have to wait and see. I’m personally very fond
of revenue muni bonds. They’ve done me very well as a long-term fixed income
vehicle.”
As for the issue of real estate, Reader Tommr said: “I
currently live in the Phoenix area. I have noticed a huge increase in apartment
construction all over the area. I mean, there are hundreds of large units going
up all over the place. I feel this may be an indication of a top in this
market.”
And Reader Mike M. said: “With regards to Mr. Zell’s move to
sell 23,000 apartments, I remember vividly back in 2007 when he sold his
commercial properties trust to Blackstone and saying to myself, ‘What does he
know that we don’t?’ What a prescient call, and I’m not betting against him
here either. I will be selling a few of my rentals as well.”
Thanks for sharing everyone. I continue to believe the stock
market is sicker than it looks on the surface, with weakness showing up in many
more sectors and capitalization groups than in any previous QE-driven rally.
The non-confirmation of this S&P 500 advance from bonds is another yellow
flag.
When it comes to real estate, I’ve seen a lot more
multifamily construction here in South Florida in the past couple of years,
too. I think the increase in supply will definitely help cool the sharp rent
increases we’ve seen in recent years. That tells me Zell may be on to something
here, too.
Didn’t get a chance to add your comments yet? Have something
else you’d like to add? Then go ahead and share at the website.
Other Developments of the Day
● Republicans and President Obama achieved a tentative
debt limit deal in overnight negotiations. The full House and Senate will need
to approve the accord, which boosts spending by $80 billion in the next two
years but reduces some Medicare and Social Security benefits.
The government will also sell millions of barrels of oil
from the strategic petroleum reserve to raise money between 2018 and 2025. That
planned liquidation of 58 million barrels over several years put some
additional pressure on oil prices today.
● The Federal Reserve has no clue what to do with
interest rates. That’s the bottom line apparent from multiple, conflicting
comments and speeches in recent weeks, and confirmed by the Wall Street
Journal’s “Fed whisperer” Jon Hilsenrath in an article today.
That should make the last two policy meetings of the year
very interesting. The first one concludes tomorrow, while the second two-day
gathering will wrap up Dec. 16.
What do you think of the budget agreement? The latest drop
in durable goods orders? Fed policy? I’d love to hear from you on those or
other topics online. Until next time, Mike Larson
Source: Money and Markets
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