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Thursday Morning June 2, 2011
Quote of the Day
This used to be a government of checks and balances. Now it's all checks and no balances.
Did I already say sell off to describe yesterday's market action? The bad macroeconomic data just keeps on coming and as much as the market tried to discount the bad economic data it just became a bit overwhelming by mid morning sending most everyone with any long risk asset positions to the sidelines. Yesterday looked like one of the May days we have recently experienced in that it was not only a risk off day but a session where once again anything with the word asset in it was pretty much up for sale. Most all quote screens were a sea of red.
After an absolutely horrible outcome with PMI data from around the world indicating that we may be entering into a global slowdown in the very important manufacturing sector the data only got worse when the US markets opened. First the report by ADP on newly created private sector jobs for the US for the month of May was absolutely horrible in that only 38,000 new jobs were created versus an expectation for 190,000 new jobs. The outcome of this report does not bode well for the main event on Friday morning when the US Labor Department releases the latest nonfarm payroll report. After the poor ADP report some analysts started to lower their expectations for Friday's number. Goldman Sachs lowered their projection from about 185,000 new jobs to only 100,000 new jobs. In addition to the negative ADP number the monthly ISM number just collapsed coming in at 53.5 versus last month's 60.4 level and below the expectation of 57.1.
This morning we get the weekly initial jobless claims which is the last warm-up for tomorrows nonfarm payroll data. If these two reports follow the pattern already set this week it may get even uglier as the rest of the trading week progresses. Simply put I have not seen anything encouraging on the economic front for the last several weeks and absolutely no reason why anyone should get very excited about owning any assets at this point in time. There is basically no place but cash to run for cover as we are once again in a systemic move where diversified portfolios mean nothing and everything moves in the same direction. The WTI breakout and settle to the upside did not even hold for a half of a trading session before the market dropped below the breakout/stop point signaling it is time to consider entering the market from the short side. I would certainly not rush to jump back in either direction as we are clearly now in an emotionally driven market that is very susceptible to intraday reversals and high volatility based on just about any 30 second news snippet that hits the media airwaves.
Overnight the selling in the global equity markets continued with the EMI Global Equity Index lower across all bourses as shown in the following table. The Index gave back all of its earlier week gains and now is 0.7% lower on the week. The EMI Index is now showing a loss of 3.6% for the year to date 2011. There are now half of the ten bourses in the losers column for the year with Brazil still at the bottom of the list and the US still holding the top spot. The global equity markets are back to being a negative for oil prices as well as the boarder commodity complex. The big question in the equity sector continues to be is the latest decline in values still just a correction or is the market about ready to give up on the bull market that has been in place since early 2009? The latest round of macroeconomic data from around the world coupled with the ongoing tightening by the emerging market countries suggest that the bull run if not over is certainly starting to be very mature and losing its momentum to recover.
In the US the big unknown is will the US Fed continue to stimulate the flattering US economy once QE2 expires at the end of June? We are setting up similar to last summer when the economy in the US began to sputter followed by a decline in both equity and commodity prices. The Fed then announced QE2 and the downside correction quickly ended. Assuming the macroeconomic data continues to underperform what will the Fed do at the upcoming FOMC meeting on June 21-22? Certainly there will be no change in their short term interest rate policy of keeping it near zero percent for an extended period of time. But how else may they stimulate short of announcing another round of quantitative easing...which does not seem to be very popular even within the FOMC committee? The thinking is they may keep reinvesting proceeds from maturing debt for a while or at least through the summer to see how the economic data evolves over the next several months. If this is the stance it could keep long term rates capped for the time being and possibly provide a bit of confidence in the market that the possibility of a double dip is not in the cards. If so we could see the sell -off that is underway possibly falling into the category of a steep correction within a long term bull market for both equities and commodities. This is still a big question mark that the market is currently trying to sort out as the bad economic data keeps hitting the media air waves.
The oil sell off that got underway yesterday had a bit more fuel thrown on the fire shortly after the API released their weekly oil inventory report late yesterday afternoon. The API report was mixed but mostly bearish on a big build in crude oil and a modest build in gasoline stocks. The API reported a crude oil inventory build of about 3.5 million barrels even as refinery utilization rates increased by 0.5% to 84.0% of capacity. The API reported a big build in crude oil stocks in PADD 2 of about 1.2 million barrels even though there have been ongoing pipeline problems feeding this region of the US. They showed a surprise decline in inventory for distillate fuel and a surprisingly large build in gasoline stocks in eh midst of a long holiday weekend in the US that kicks off the summer driving season. The market was expecting a small decline in gasoline stocks and a modest build in distillate fuel inventories this week. On the week gasoline stocks increased by about 1.5 million barrels while distillate fuel stocks were lower by about 1.4 million barrels. The results of the API report are summarized in the following table. So far the reaction to the API report has been bearish for RBOB and crude oil and modestly positive for HO. If Thursday's EIA report is in sync with the API report I would view it as mildly bearish especially for gasoline and it is likely to result in an extensions of the selling that is currently in place.
At the moment with all of the financial uncertainty permeating around the global markets it is difficult to say when this week's report will impact the market (if at all). The more widely watched EIA data will be released this afternoon at 1 PM (EST). My projections for this week's inventory reports are summarized in the following table. I am expecting mixed report with a modest decline in crude oil stocks as a result of an increase in refinery utilization rates. I am even expecting a decline in gasoline inventories for the first time in three weeks while we should see the first build in distillate fuel stocks of the season. I am expecting crude oil stocks to decline by about 1.0 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil would come in around 6.7 million barrels while the overhang versus the five year average for the same week will widen to 25.2 million barrels.
Even with refinery runs expected to increase by about 0.5% I am expecting a modest decline in gasoline stocks as demand likely increased (due to the holiday weekend in the US). Gasoline stocks are expected to draw by about 0.5 million barrels which would result in the gasoline year over year deficit hovering near the 9.8 million barrel mark while the deficit versus the five year average for the same week will switch back to a surplus of about 1.5 million barrels. All eyes will be focused on the gasoline number once again this week after last week's surprise build in stocks for the second week in a row. Gasoline demand is definitely on the defensive even as last week's implied demand number increased marginally as retailers got ready for the long holiday weekend in the US.
Distillate fuel is projected to increase modestly by 0.4 million barrels on a combination of minimal weather demand as well as an increase in production. The weather forecasts are a neutral for heating oil especially for this time of the year. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 11.5 million barrels below last year while the overhang versus the five year average will be around 10.7 million barrels.
Net result the US continues to remain well supplied but the deficit versus last year for the main refined products is still mildly supportive but this could be changing if the destocking pattern that has been in place begins to change.
The following table compares my projections for this week's report (for the categories I am making projections) with the change in inventories for the same period last year. As you can see from the table last year saw across the board declines in inventories versus this week's projected mixed report. In fact the declines last year are much greater than this week's projections so in general the fundamentals are going to lose ground versus last year.
As usual do not overreact to the API data which will be released later today as more often than not it is not in line with the more widely followed EIA data. If the EIA report is within the projection I would expect the market to view the results as neutral to marginally bearish. However, whether or not the market reacts at all to the inventory report will be dependent on what is going on in the financial markets and the direction of the USD.
The Colorado State University hurricane forecast team today maintained its earlier season hurricane forecast, calling for 16 named storms in the Atlantic basin for the 2011 season as the hurricane season gets under way today.
Above-normal sea-surface temperatures and expected reduced vertical shear in the tropical Atlantic along with near-neutral El Nino-Southern Oscillation (ENSO) conditions will likely contribute to an above-average season. The team held to its April prediction of 16 named storms with nine of the 16 becoming hurricanes in the Atlantic basin between June 1 and Nov. 30. Five are expected to develop into major hurricanes (Saffir/Simpson category 3-4-5) with sustained winds of 111 mph or greater.
"We are predicting the same levels of activity that were forecast in early April due to favorable atmospheric and oceanic conditions in the tropical Atlantic," said William Gray, in his 28th year of forecasting at Colorado State. "We continue to anticipate an above-average probability of United States and Caribbean major hurricane landfall."
Klotzbach and Gray estimate the 2011 season will have roughly as much activity as was experienced in five similar years: 1951, 1981, 1989, 1996, and 2008.
The team also updated its U.S. landfall probabilities, which are calculated based on historical landfall statistics and then adjusted by the latest seasonal forecast.
"Based on our historical analysis along with our current forecast, the probability of a major hurricane making landfall along the U.S. coastline is approximately 72 percent," said lead forecaster Phil Klotzbach. "These probabilities are based on the idea that more active seasons tend to have more landfalls, but coastal residents should prepare the same way every year for landfall, regardless of how active or inactive the forecast might be."
Other probabilities for a major hurricane making landfall on various portions of the U.S. coast:
- A 48 percent chance that a major hurricane will make landfall on the U.S. East Coast, including the Florida Peninsula (the long-term average is 31 percent).
- A 47 percent chance that a major hurricane will make landfall on the Gulf Coast from the Florida Panhandle west to Brownsville (the long-term average is 30 percent).
-A 61 percent change of a major hurricane tracking into the Caribbean (average for the last century is 42 percent).
Interesting that the National Weather Service is now monitoring two weather disturbances. One that has currently passed over Florida and is now hovering in the Gulf of Mexico and another one over the southwestern Caribbean Sea. Both weather patterns are a low probability of turning into something to be concerned over. But it certainly does raise all of our awareness that is it time to start watching the tropical weather as part of our daily routine.
My individual market view is detailed in the table at the beginning of the newsletter. Coming into yesterday WTI had broken out to the upside and was solidly trading above the technical triangular consolidation pattern that was in place for a few weeks. On Tuesday the market closed above the $101.50 level thus increasing the probability that WTI may work its way to the broader range high of $104/bbl. That said the market just collapsed by mod morning on Wednesday and is now trading well below the breakout level. In fact it seems to now be in breakdown mode. For today I am going back to neutral for my oil view and bias until the dust settles a bit.
I am keeping my Nat Gas view and bias at neutral. I am looking at the technical breakout point if the market settles above the $4.70 to $4.71/mmbtu level. When it does I will start to get a bit more positive in the short term outlook for Nat Gas prices moving to a test of the next significant point of $5/mmbtu. In the meantime I remain sidelined.
Currently asset classes are marginally higher after yesterday's strong sell-off as shown in the following table.
Dominick A. Chirichella
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.