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It was a volatile day as the S & P 500 rose as much as 1.1% and falling 0.8% closing essentially unchanged. Volume was about 30% above the 30 day moving average. The accepted reason for the volatility was the volatility in commodities, specifically oil.
Speaking of oil, the International Monetary Fund (IMF) stated that if oil remained around current levels, Saudi Arabia will be bankrupt by 2020. Russia’s foreign reserves, which are the primary collateral for its international debt, will be exhausted by the end of 2016.
Many times I have opined Saudi policy threatens the existence of countries and social order. It appears that such an environment is occurring. The Middle East is unraveling, facing the greatest anarchy since the dissolution of the Ottoman Empire over 100 years ago.
Will “An Arab Spring” arise in Saudi Arabia, the result of planned austerity? If so, would oil production be affected?
Earning season accelerates this week. The S & P 500 trades at 15.2 estimated earnings, in line with index’s four year average. According to Bloomberg, fourth quarter results are expected to decline by 6%, the third consecutive decline.
Many would think hiding in dividend paying stocks is a conservative strategy. Bloomberg writes the 50 stocks in the S & P 500 with the highest dividends have declined an average of 11.3% since the start of the year. The S & P 500 is down about 8%.
Is this a function that some believe dividends will not be covered by earnings? Perhaps as the S & P 500 is paying out approximately 41% of its earnings, the most since 2009. However cash is also a record level.
Can I argue the proverbial alternative income trade is long in the tooth as many have embarked in this trade during the past seven years where buyers are now scarce as everyone already owns these shares? Yes.
What will happen today?
Last night the foreign markets were sharply lower. London was down 3.19%, Paris down 3.56% and Frankfurt down 3.11%. China was down 1.03% Japan down 3.71%and Hang Sang down 3.82%
The Dow should open sharply lower because of oil’s continued rout. There are reports that Hong Kong may end its dollar peg to spur exports. Saudi Arabia was said to halt in selling of options used to bet its currency peg.
As noted many times, will Saudi Arabia’s decision to flood the market with oil rank as one of the worst economic decisions in modern history, a decision that will have massive geopolitical and socio economic impacts? At this juncture this thought may prove to be prophetic.
The 10-year is up 20/32 to yield 1.98%.

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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.