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 nat 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 (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; here’s the link.

Until next time,

Mike Larson