And another hurricane bites the dust!
This is turning into another disaster for natural gas traders, who ran up the price up to $14 just 4 weeks ago from $7 at the beginning of the year and now, 30 days later, it’s back to $7. Of course, as Secretary Paulson will tell you, this is due entirely to fluctuations in supply and demand as speculators play only a very small part in the futures market, but I’m not even sure we’re done going down yet.
The "demand" for natural gas futures at this time of year is based on the "supply" of people who believe there is going to be a hurricane or a war or something to cut off the very plentiful actual supply of natural gas, which we do not import from overseas and is (see Zman’s chart) drifting along at the upper end of the 5-year average storage levels, a little below last year, when we were bursting at the seams with natural gas in the US.
We won’t get into the scam that is LNG here, other than to remind you that this is a scheme to INCREASE imports of energy into the US of one of the only things we have plenty of. The key to the drive to build LNG terminals is that energy companies can store months’ worth of natural gas in the ground, rather than be forced to sell it at market prices as it’s produced. Recent failures to get a plant under construction on the Taunton river in MA were the last straw for traders, and gas prices fell almost 20% from the point the plant was essentially blocked (July 18th). Chesapeake Energy (CHK), who routinely have had to cut back production the past two years to prevent US storage from overflowing, have been in free-fall, dropping from $74 on July 1st to $44.92 yesterday.
Natural gas averaged $12 in Q2 and is already averaging less than 9 this quarter. Coupled with a mild summer, this goes hand in hand with falling oil prices to give consumers a huge break so far in Q3. I mentioned in last night’s post, most of the data we’ve been looking at is backward looking and we’re hitting the reports that show our economy with oil at $145 and natural gas at $14. It will take more than a month for us to get a picture any sort of recovery, but let’s look for early signs and take them seriously.
Meanwhile the market is, as I predicted yesterday morning, back in its depressive state and we’ll need to watch our levels to see how low we can go. I’ll be bottom fishing in the banking sector and Google (GOOG) is getting very attractive under $500 as will Apple (AAPL) be if they can test and hold $170 (the 50 dma). I’m expecting AAPL to test $170 as news is out of Japan that IPod Nanos are overheating while they are recharging.
We’ll be watching to see if the Dow can retake its 50 dma at 11,578 and we need a 100 point gain just to get there. The S&P is closer to the target at 1,286 but anything over 1,275 will make me happy. The Nasdaq finally gave up the 200 dma yesterday at 2,425 and has a big drop to the 50 dma at 2,350 if things turn sour in Techland. 2,410 is going to be the line in the sand for the Nas, if we don’t get a bullish bounce there, we are very likely to head to the lower test.
The NYSE never did get it together and has been drifting along between 8,300 and 8,500 for a month and it’s the NYSE I’ll be looking to for a clue on which way we go. That 8,300 mark is critical for the 2,764 companies the index tracks (Nas is bigger with 3,200) as we are looking for that sector rotation to drive us up through the 8,500 mark this month. Semis also face a critical test at 365 as do transports at 2,450. Losing these levels will be a very bad sign and very likely lead to a retest of the July lows.
Our PPI came in at a tragic 1.2% and is the same joke as last week’s CPI so I won’t waste time here telling you what idiots the "economists" were who were forecasting 0.6% for July as these are the same idiots with the same clueless forecasts. For those of you keeping score, PPI was 1.4% in May (oil averaged $127), 1.8% in June (oil averaged $135) and now 1.2% in July (oil averaged $130). Let’s see if clever econonomists will be able to figure out what will happen to the PPI with oil averaging $117 so far in August… They say the market is a forward looking mechanism and last Thursday we looked at the CPI numbers and decided to move past a very bad open and BUYBUYBUY into a 250-point rally. This morning the Dow is likely to open at the same 11,450 we tested on Thursday, but today we also have anemic Housing Starts and Building Permits to also weigh down sentiment even though lack of new housing allows us to burn off inventory, which is actually a good thing…
Nothing was good in Asia this morning as markets there fell to a 2-year low with the Nikkei falling 3000 points as the BOJ held rates steady at 0.5% but downgraded their assessment of the economy. The Hang Seng dropping 446 and Australia also hit the 2.5% rule to the downside and the Shanghai was a bright spot for a change with a 1.5% gain but really just a bounce off yesterday’s 5.3% drop. China Merchants Bank jumped 3.2% as first-half profits more than doubled and led a rally in the financials over there. Miners continued to fall, even BHP Billiton (BHP), who had very good earnings just yesterday.
Europe is down 2% ahead of our open, spooked by the financial sector, but German Investor Sentiment finally improved, rising from -63.9 to -55.5 (still awful) and was, of course, nowhere near "economists" expectations of -62 points. Current conditions hit a new low in the survey at -9.2, the worst level since February 2006, when it stood at -19.5 - the beginning of a year where the DAX climbed 25% so I’m actually more encouraged by the turn in outlook than I am discouraged by the drop in sentiment.
Like last Thursday, we’ll have to play this one by ear, but I’ll be a little quicker to remove covers and jump on some momentum plays today if it looks like we’re heading higher - if we can shake off today’s data, we should be looking more forward to a retest of 11,700 than backward to 11,450.
