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2018 is quickly coming to an end. As noted the other day, this has been the worst year in the financial markets in over 100 years for, as according to Deutsche Bank, 89% of assets are down anywhere between 10% and 60%. Societe General wrote yesterday 52% of companies in the MSCI world Index is down more than 30% down and 62% down over 20%.

Wow! It is widely recognized the indices (i.e. S & P 500) would be sharply lower if it were not for the over performance of several mega capitalized firms such as NFLX, AMZN, MSFT and GOOG. The four names above are still posting YTD gains of 43%, 41%, 23% and 10% respectively but are down over 50% from their earlier highs.

What happens to the indices if these companies “roll over” in a similar manner as FB and to lesser extent AAPL?

Speaking of rolling over, oil has been crushed falling about 30% in two months, rebounding little from the announced production cuts. According to industry data, crude short interest is almost at an all-time high. If one is a contrarian, this is bullish. To write the obvious, the market is highly skeptical that there will be any compliance.

Is this view shortsighted? Venezuela’s production is continuing to fall and then there is Iran. The combination of the two, assuming 50% of Iranian exemptions expire, OPEC’s production cuts could potentially double leaving the oil market sharply under supplied.

A major reason why I believe Saudi Arabia will reduce its production is because it requires $75 oil to balance its budget. Funding costs for Saudi Arabia has spiked about 150 bps during the past two months. Moreover, GCC banks (the banking system for Sunni countries) is at 110% loan to deposit ratio. In other words the monies to fund its deficit are either unavailable or quickly rising in expense.
Saudi Arabia tried to cut social spending but such cuts were quickly abolished because of potential rising social unrest.

Comparatively speaking, markets yesterday were relatively quiet. The S & P 500 was essentially unchanged and the NASDAQ fell about 0.5%, the result of continuing trade fears.

Last night the foreign markets were down. London was down 0.69%, Paris down 0.99% and Frankfurt down 0.80%. China was down 1.53%, Japan down 2.02% and Hang Sang down 1.62%.

The Dow should open moderately lower on growth concerns on the basis of lackluster Chinese data. All must remember that China is an export dominated economy defined as their economic well-being is greatly influenced by trade policies. The economic impact of the “Yellow Vests” is beginning to be scene in France’s data. The 10-year is up 8/32 to yield 2.89%.


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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.