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Friday was an ugly day; a trading day I believe that was again entirely influenced by HFTs. Friday the WSJ editorial page commented about the bifurcation between hedge funds/active management and passive investing.
According to the WSJ, the World MSCI index has surged 173% from March 2009 to October 2015. The index measuring hedge funds was only up 52% for the same period.
During the previous two bull markets, 1990-2000 and 2002-2007, the MSCI World index was up 238% and 156% versus the Hedge Fund index up 456% and 84%.
Comparing the MSCI Index to that of five Ivy League College endowments, from July 2009 through June 2015, the MSCI was up 112% and the endowments up 59%.
Wow! This bifurcation is incredible. Passive investing is crushing individual equity selection made by those who many believe are the best and brightest in the industry.
Is this about to change given the massive amount of funds invested in the largest capitalized issues of the world and to hell with all others? Is 1/100 of the market vastly overvalued and the rest is undervalued, as defined by ownership?
For anything to rally there needs to be more buyers than sellers. If the pathway to riches can be achieved passively, all would become famously wealthy.
About 12-14 years ago I sat through numerous hedge fund presentations that were offering this sophisticated trading strategy to the “masses,” privately commenting because of this mass acceptance and proliferation hedge funds are perhaps now on the verge of gross underperformance.
Wow! Were they not prophetic remarks?
Fast forward today. Passive ETFs are crushing everything else. Some believe “RoboInvesting” is wave of the future.
If one takes the axiom that once an investing strategy becomes available to the masses, HFTs/ETFs is on the verge of underperformance.
What is a possible catalyst for a transition to the typical stock?
I have commented many times the world has changed, the result of America abdicating its 70 year unspoken role of global policeman, a role to facilitate America’s political and economic interests.
What are the ramifications to trade and the impact upon the S & P 500 given that 52% of this member’s index revenues are derived from trade? Unfortunately only history will answer this question.
What will happen this holiday shortened week? Will it be a rehash of last week’s volatility? The economic calendar is comprised of several housing indices, the final calculation of third quarter GDP, personal spending/income, and several manufacturing statistics.
Last night the foreign markets were up. London was up 0.95%, Paris up 0.49% and Frankfurt up 0.80%. China was up 1.77%, Japan down 0.37% and Hang Sang up 0.17%
The Dow should open moderately higher as the averages are oversold following the largest two day drop in several months. The 10-year is unchanged at a 2.21%.

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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.