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Although Weeks Leading Into Labor Day Are Typically Quiet, The Last Three Weeks Have Been The Opposite.

The weeks leading into Labor Day are historically quiet.  To write the obvious, the last three weeks have been the opposite of quiet.  The must owned names are imploding.  Oil was crushed then staged a 3 day 27% rally, the greatest since the Kuwaiti invasion, only to trade 8% lower on the fourth day.

Yesterday’s selloff was blamed on poor Chinese PMI data which can be explained away via the port explosion and in upcoming two day holiday commemorating the end of WWII. Markets however had no interest in explanations and sold off considerably, a decline I believe was amplified by HFT and ETF selling.

Some have commented that yesterday’s ISM data spooked the market but I will write the market had already achieved its morning lows before the data was posted.  The ISM Manufacturing Index did post a two year low, the result of the ongoing impact of the dollar’s rapid appreciation and softening global demand.  The data is consistent with GDP growth between 1.5% and 2.0%.

However, the markets ignored the continued strength in construction spending as July’s data was stronger than expected and June’s statistics were revised higher.  On balance, auto sales were also stronger than expected.

Tomorrow the ISM non-manufacturing index is posted. It is expected this data will suggest the economy is growing in the 2.5% to 3.0% range.

What happen today?  How will the markets interpret the Beige Book or the statistical compilation utilized at the upcoming FOMC meeting?  Many have relied upon information that has been spoon fed to them by the FOMC.  I think it is correct to write the Committee has sent mixed messages.

Perhaps the only concrete statement to make is the Federal Reserve will err in some regards as this massive stimulus is unwound given that never has there been $2.5 trillion in excess bank reserves and a $4.4 trillion Fed balance sheet.   The question at hand will these errors be of great significance.

Last night the foreign markets were mixed.  London was down 0.01%, Paris up 0.16% and Frankfurt up 0.16%.  Japan was down 0.39% and Hang Sang down 1.18%.

The Dow should open moderately higher as prices in China stabilized. The 10-year is unchanged at a 2.14% yield.

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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.