Over the week-end a record breaking winter freeze enveloped much of Eastern North America. Here in Toronto temperatures dipped down to minus 25 degrees Celsius, with a windchill that made it feel like minus 35 degrees. Americans are often a little confused when we quote temperatures in Celsius, but it was so cold that the Fahrenheit equivalent is almost the same.

http://themacrotourist.com/images/Azure/celsiusFeb1715.png

The point where the Fahrenheit scale converges with the Celsius scale always reminds me of the Seinfeld episode where Cramer is dating a woman who moves downtown. He tries to make the “long distance relationship” work, but when they have a fight and he gets kicked out of the apartment downtown, he gets hopelessly lost. He phones Jerry to pick him up, and Jerry asks him where he is:

http://themacrotourist.com/images/Azure/CramerFeb1715.png

JERRY: Well, what street are you on?

KRAMER: Hey, I’m on first and first. How can the same street intersect with itself? I must be at the nexus of the universe.

That’s how I feel about the point where the Fahrenheit scale meets Celsius. It might as well be the nexus of the universe because it is too bloody cold.

There can be no doubt the weather is wreaking a little havoc. Even for us Canadians that are used to a little frigid temperatures. On Sunday, the ferry that shuttles residents between the mainland and the Toronto Islands became stuck in the ice when the waterway flash froze.

Canadians might be used to the cold, but as the system works its way south, it is causing problems for our American neighbours.

Heavy snowfall and ice moving from the Southern Plains eastward pounded Missouri, Arkansas, southern Illinois, Tennessee, Kentucky, Indiana and Ohio, the National Weather Service said. Freezing rain encased Nashville in ice, cancelling flights and closing Interstate 24, according to the Tennessee Department of Transportation.

About 50 million Americans were under wind chill advisories as the mercury plunged to new depths, breaking records in New York, where it was 5 degrees Fahrenheit (minus 15 Celsius) compared with the previous record for Feb. 16 of 9 F in 2003, and Washington, D.C., where it was 6 F compared with 11 F recorded in 1987, said Hurley.

The coldest spots in the nation were Watertown, New York, where it was minus 34 F but winds were calm and New Hampshire’s Mount Washington, where it was minus 35 F but the winds made it feel chillier, Hurley said.

Our favourite doomsdayer website Zerohedge, is quick to remind us that last year the Polar Vertex shaved 0.7% off of US GDP.

http://themacrotourist.com/images/Azure/GDPFeb1715.png

Although many pundits were quick to blame the weather for the first quarter of 2014’s poor economic performance, I am not sure if that wasn’t simply a convenient excuse. I have no doubt that cold weather affects the short term habits of consumers and businesses. But absent a truly damaging storm, I am skeptical that the effect can be this pronounced.

I think that the reason most economists were caught off guard from the 2014 Polar Vertex’s large effect is that this sort of weakness is unusual. Not that the weather was that unusual – the effect was unusual. The economy was most likely weak and susceptible to any small shock. The Polar Vertex was simply the trigger for the pullback.

Therefore I am hesitant to assume that 2015 will be a repeat of 2014. So far this year, the American economy has had a lot of bad news thrown at it, and although it is not exploding upwards, it has been surprisingly strong.

If the economy does roll over, it won’t be the result of a week or two of bad weather. The global economic slowdown is a much more important input than the 5 day weather forecast.

Maybe my Canadian-ness is shining through, but I don’t think you should be downgrading the US economy because of a little cold snap. Last year’s economic performance during the Polar Vertex was unusual – don’t assume it will be the same this year…

I know it’s cold, but it’s not that cold…

http://themacrotourist.com/images/Azure/EmpireFeb1715.png


Getting more bullish on natural gas

I was a little early getting bullish on crude oil, but I was lucky enough to stick with it, and have even managed to pull a little money out of that square lately. Although there is lots of talk about crude sinking to $30 or even $20, the action has been somewhat bullish. Crude, so far, found a bottom at $43. Since then we have rallied up to $53 and have been range bound between $48 and $53 for the past couple of weeks.

My original thought was that we would be rangebound between $55 and $70. I did not expect that final puke down to $43, but I still contend that a sideways market for a period of months is the most likely outcome. The bears are right that there is still a lot of crude out there, so absent a geopolitical accident, I don’t see how we rocket higher anytime soon. But at the same time, the bears are too pessimistic. We are way below the cost of production for most of the new supply that has been brought on during the past decade. We will get a supply response. It is going to be quicker than the bears believe.

Which is why I think that a sideways consolidation is the most likely outcome. I am adjusting it downward to between $48 and $58. As we rally, I am lightening up, and I will be there to catch the dips.

But I am becoming increasingly bullish on Natural Gas. Yes, I know that supplies are more than plentiful. Yes, I know that until the LNG terminals are operational, natural gas supply is landlocked in North America.

Yet we can’t forget that natural gas has already had its supply disruption. The price of natural gas has been in the dumpster for the past seven years. The fracking revolution’s first victim was natural gas.

http://themacrotourist.com/images/Azure/NatGasFeb1715.png

The energy industry’s crude oil miscalculation will result in billions of dollars of losses. Capital will be even less willing to venture into new projects. This will mean that the supply response to potentially higher natural gas prices will be slow.

Nothing fixes low prices like low prices. We have now had low natural gas prices for quite some time. Unlike crude oil where there are a bunch of offside energy companies ready to sell any decent rally, the natural gas market is not filled with nearly as many desperate producers. The hopes of higher natural gas prices have already been beaten out of the producers during the last half a dozen years of disappointment.

I am getting more bullish on natural gas by the day. The cold weather doesn’t hurt either…


Don’t look now…

Don’t look now, but the US dollar might (and I stress might) be rolling over.

http://themacrotourist.com/images/Azure/DXYFeb1715.png

Sentiment is still wildly bullish. Have a look at my homegrown CME currency speculator position report:

http://themacrotourist.com/images/Azure/FOREXFeb1715.png

The specs aren’t adding to their short currency positions, but they are sill sitting on a long of $45 billion US dollars versus the various currencies. This is still near a record large US dollar long position.

It wouldn’t take much for the late longs to panic. We have basically gone sideways for a couple of weeks now, and they have to be getting antsy.

I like short US dollars for a trade… The market often gravitates towards the “pain” trade, and I think that a declining US dollar would probably hurt the most right now…