SP Weekly Chart

Natural Gas and Crude Oil: An Interesting Spread to Watch

The spread between Natural Gas and Crude Oil is now at an 18 year record low.

Nat gas has fallen from $13 to $3 while Crude Oil soared to $70.

Either crude is incredibly frothy, or natural gas represents an outstanding bargain.

A few years or so ago I published a fairly comprehensive study of the seasonality of natural gas, and some relative relationships with demand and supply. I will look for it, and see if I can update it. Since I no longer trade the futures I have not looked at this in some time. But I do remember the spreads and saw this one grown shockingly wide.

My first thought is that oil has been driven higher by monetary inflation and speculation, which are in some ways the same thing. Hot money craves beta and drives the prices of real assets to extremes.

Keep in mind that if enough people get in on this trade, the market makers who can see your aggregate holdings will use it to skin the speculators, without regard to fundamentals in the short term.

It's never easy.

SP Hourly Futures Chart at 2:30 PM

The SP futures are climbing the trellis of a reflationary ramp on thin volumes.

Although we would not suggest stepping in front of it, and certainly not seriously shorting it until the trend is broken, nevertheless the move has all the feel of artificiality and will meet its test when earnings start coming out for Q2.

From what we have seen on the fundamentals of earnings, stocks seems very fully valued here, and would not be looking for a great deal of upside, particularly when the banks finish their price manipulation to support their equity offerings to pay back their TARP funds.

"There is something wonderful in seeing a wrong-headed majority assailed by truth." John Kenneth Galbraith

Non-Farm Payrolls Trend Mismatch

Here is our usual chart comparing the seasonally adjusted and actual payroll numbers from the Bureau of Labor Statistics.

Two things are worth noting.

The first is that the recent uptrend in the seasonally adjusted 'headline' number is conspicuously at odds with the actual numbers, which are still in the same downtrend.

The second is the usual observation we make, and that is to remind people that the adjustments that are made to the actual numbers for seasonality are enormous, and subject to significant revisions after the fact.



About 220,000 of those jobs in the actual number are due to the birth death model 'plug' which is a real howler when you look at the specifics that the BLS attributes growth in the new / small business segement of the economy.



We will get a little more optimistic when the longer term trend turns higher. Granted, it will miss the bottom by a few months, but it is an important signal to confirm any uptrend in the economy that seems to be highly reliable.



The level of unemployment is still a major impediment to the economy despite hopes for a bottom to the economic contraction. Economists will say that this is a lagging indicator, and we will say yes, but we would say that it is the standard by which a bottom will be judged.

Our take on these numbers is that they are at best a short term uptick in response to historically unprecedented monetary stimulus and at worst a false recovery fueled by dangerous levels of monetization and some disappointing short term statistical razzle dazzle.