What Energy Crisis?

Stocks gapped up at the open today, but then quickly fell back. The Dow is currently down 180 points and the S&P 500 is down .3%. The reversal seems to be due to a couple of reports on the economy (see below). Commodities are mixed in early trading. Copper is down 3% this morning, primarily on concerns of persistently weak Chinese demand. The world’s second-largest economy is reopening, but no one knows how fast it will recover. On the other hand, WTI crude oil is back up to $75/barrel today. Remember last summer when it was trading over $120/barrel? Bonds are catching a modest bid. I’m not sure there’s a really good reason why, except that enough is enough after a serious drubbing. Bond prices move inverse to bond interest yields, so the bond market takes a hit when the Fed talks tough about raising interest rates.

Today’s haul of economic data was mixed. On one hand, the volume of new filings for unemployment benefits remains unexpectedly low. Here again is corroborating evidence that the labor market is very tight despite recent layoff announcements. On the other hand, the Bureau of Economic Analysis (BEA) revised down its initial estimate of fourth quarter US economic growth to 2.7% from 2.9%. That’s not terrible, but the primary reason was slower than expected consumer spending. And at the same time, BEA upwardly revised its estimate of inflation during the quarter to 3.9% from 3.5%. This witches’ brew of slower growth but higher inflation left traders cold this morning. My takeaway is that we’re sort of stuck in no-man’s land between signs that the economy is stable & resilient, and fear that the Fed will react by continuing to tighten financial conditions.

Netflix (NFLX) announced lower subscription prices in over 100 countries where it has a limited presence. Lower prices will impact only about 4% of the company’s subscriber base, so this really is an attempt to attract more subscribers in places like India, Croatia, and Kenya. The stock fell more than 5% on the news, and competitors like Disney, Comcast and Google saw their stocks fall in sympathy. I think traders got this all wrong. They cry about all the risks—increasing competition, the high cost of creating content, the move to prevent subscribers from sharing passwords—but gloss over the fact that Netflix is the only streaming service making real money. Disney+, for example, is unprofitable. Further, overseas markets are key to the growth story because the US is saturated. Netflix is being proactive overseas and lower prices will create a problem for its competitors.

This may come as a surprise, but US natural gas prices are plummeting. According to Bloomberg News, natural gas futures are down 75% since peaking last August. The Wall Street Journal notes that gas inventories recently “flipped to an unseasonable surplus after being at a significant deficit to normal levels this summer.” Natural gas drillers are now cutting production and “parking drilling rigs.” And it’s not just here. A week ago CNN reported European natural gas prices at an 18-month low. I suppose all that talk of a Russia-driven global energy Armageddon was premature.