MONDAY 6/16/14; Empire State; TIC Data; Industrial Production: Iraq Unrest; IMF Lowers US Growth Forecast; Russia Cuts off Natural Gas Supply to Ukraine; UTIL All-Time Record High

Dollar/yen 102.01. The NIKK loses -1.1%. The SSEC gains +0.7% as Premier Li says China’s growth target of 7.5% will be maintained. Other Asian markets are flat. India stocks trade lower as inflation rises more than expected especially food inflation. US futures remain weak. S&P -4. Dow -22. Nasdaq -6.

Migrant workers numbering in the hundreds of thousands, many from Cambodia, Myanmar and other neighboring countries, are mistreated, beaten and forced out of Thailand. The Thai Junta now in control of the country after the coup denies the charges. Human-trafficking and slavery charges are levied against sea food companies that imprison people on ships forcing them to work the fishing nets. Much of this sea food is consumed in the US.

Iraq is descending into civil war. Disturbing images are appearing on television showing the ISIS radicals killing Iraqi security forces and leading others away at gunpoint to be executed. The Iraq forces push back and kill nearly 300 ISIS extremists. ISIS remain in control of Mosul, the second largest city in Iraq, and Tikrit, Saddam Hussein’s home town, as well as partial control of the northern oil pipeline. A sharp divide is cut between Sunni (ISIS) and Shiite (Iraq government and Iran) which may foster hatred and civil war within Iraq for years to come.

Ukraine and Russia cannot reach agreement on energy payments for oil and gas. Russia wants advanced payment from Ukraine for future needs and may shut off or limit Ukraine’s gas supply starting today. Russia’s Micex is down -1.6% to 1477. Natty gas remains buoyant at 4.80. Brent crude oil drops under 113 despite the Ukraine-Russia tensions and Iraq turmoil.

European markets trade under the flat line with Spain down the most at -0.5%. Germany’s DAX drops under 9.9K moving away from the 10K euphoria last week. Euro 1.3534. The Alstom takeover drama continues with Mitsubishi and Siemens making a joint offer for the company. GE remains in the mix as the fickle French government plays the buyers against each other. Pharma company Actelion pops +14% on encouraging results for its hypertension and lung treatment drug. BNP Paribas is nearing an $8 billion to $10 billion deal to settle litigation with regulators.

Merger Monday is in full swing (M&A is typically announced on Monday’s more than any other day of the week) with Medtronic buying Covidien for $43 billion. COV catapults +31% higher and MDT is up +10%. The odd market behavior continues where both the target company and acquiring company move higher after a deal announcement. Typically, the target company will move higher and the acquirer lower. Traders are drunk on central banker wine so any M&A news is an excuse to buy both stocks with the easy money. Medtronic will now be based in Ireland and said it is not seeking the deal for the tax advantages but it is obviously making the deal exactly for Ireland’s tax advantages. The medical device sector is hot. Smith and Nephew drops -3%, however, since there is now one less suitor for its company. Miners and basic resource companies are winners in Europe today.

At 5 AM, S&P -4. Dow -30. Nasdaq -7. Dollar/yen 101.94. Gold moves higher to 1283. Copper is bid higher today up +0.8%. TGT experiences computer problems with the checkout systems which creates long lines and frustrated customers at stores over the weekend. A black cloud continues to follow Target.

At 5:30 AM, Russia cuts off the gas supply to Ukraine. Russia wants payment in full from Kiev before the gas will be turned back on. Futures weaken but are not yet down to the low levels from last evening. S&P -6. Dow -42. Nasdaq -11. Dollar/yen 101.88. The 10-year yield drops under 2.58%. WTIC crude oil drifts lower to the 107 level. Brent remains under 113.

Germany says that a disruption to energy supplies is not anticipated from the growing Ukraine-Russia energy payment dispute. Gazprom can send gas through other pipelines to Europe. The warmer than expected winter and summer months now on tap, and factories closed due to war and turmoil, create robust inventories of natural gas in Europe including Ukraine, so the payment dispute between Ukraine and Russia may continue into the Fall months when winter heating worries return.

The ISIS extremists take the town of Tal Afar and claim to have killed 1700 Iraqi Air Force recruits. Iraq is in civil war. Global markets are stable in the wake of the geopolitical turmoil. The Kurds are selling oil independently from the northern Iraq oil fields to the displeasure of the Iraqi government. 

The Kurds would be happy separating from Iraq using the northern oil fields to support a new direction forward and letting the Sunni and Shiite fight each other over the remainder of Iraq.

[Text is Redacted: Purchase June 2014-06 to Read the Complete Chronology]

Utilities are the big winner today with UTIL gaining +1.8% printing 558.97 a multi-year all-time intraday record high at the same levels as the late 2007 stock market top. The prior intraday high print for UTIL was 556.02 on 12/11/07. The stock market had already topped back then in October 2007. XLU gains +0.7% today remaining near all-time record highs. Traders, and especially Ma and Pa, are chasing into the dividend stocks believing they will provide safety and a steady return even if the stock market sells off.  A 3% divvy yield is not attractive if the dividend stock bubble pops destroying the capital price from -10% to -20%, or more.

The energy sector is on fire and the current favorite flavor for long traders. XLE gains +0.6% and is up from 81 to 99, 18 points, +22%, since February. Energy stocks are running about +5% higher per month. Traders and analysts believe in the global growth story and invest in energy to fuel a strong economy. The energy bubble grows and all is fine unless the economy is not as strong as forecasted.

The strong bullish sentiment and complacency remains in markets. Television economist Larry Kudlow says there are no signs of a recession. Interestingly, if you talk to nearly any analyst, trader or television commentator, the sky is blue and the economy is rosy with the US poised for great things. If they would actually abandon the leather chair and mahogany desk and take a walk outside to talk to Main Street, the story is far different. There are 25 million underemployed and unemployed people in the US.

The higher tuition, food, healthcare and gasoline costs are cutting into budgets and making life difficult for the middle class and poor mired in long-term structural unemployment. These inflationary forces are occurring against an overall larger back drop of disinflation where computers are taking over jobs and wages have been stagnant for years for the fortunate folks that are working. The social classes in the US, rich versus poor, continue to separate with the wealthy becoming wealthier due to the Fed’s Keynesian policies while the middle class and poor struggle. The Fed’s easy money is not used for capital expenditures and hiring, as intended, but instead to fund buybacks and dividends to pump stock prices higher and make the rich richer. The US poverty rate is 15% at record high levels. The poor become poorer.