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Earlier in the week I used the word “Pollyannaish” to describe my 2016 economic outlook, an outlook predicated upon the initial release of fourth quarter GDP. This outlook is perhaps in stark contrast to the outlook that is becoming the primary market narrative which is bad “stuff” is about to happen globally.
Morgan Stanly published a report yesterday stating if one eliminates oil from the economic and earning landscape, the economy is actually performing “well”. Specifically, industrial production is no longer contracting, neither are earnings. In fact Morgan Stanly wrote ex oil, profits are up 5% in the US and 4% in Europe.
The Bank also stated the US consumer is “healthy” with after tax income adjusted for inflation is rising at 3.5%, the greatest pace since 2006, a point that I made Monday.
Late yesterday afternoon a FOMC voting member made similar remarks.
As written above, there may be a massive disconnect in the narrative versus reality.
What can change this perception? A stronger than expected labor report, as been the case since September? However, if the jobs report is too strong will this again alter the monetary time table thus sending equities into a further tail spin?
As noted an infinite number of times, equity trading is dominated by high frequency trading…aka computer or algorithmic trading. Virtually all trading on the NYSE is done by computers. Eighty five percent of total trading is done by computers, trading based upon cross correlations and the like.
What I find frightening, according to the SEC 96% of all orders entered are never executed thus creating an “environment that may be prone to manipulation,” quoting a SEC official.
If the jobs data is too strong will there be a selloff under the simple premise higher potential interest rates lower the value of projected cashflows. But, will not cashflows increase given greater employment?
Speaking of cross correlations, equities plunged yesterday as crude continued to its decline. There was no data or headlines acting as a catalyst for yesterday’s drop.
I ask however, is not the implosion in energy infrastructure spending ultimately bullish for the energy sector given that supplies will ultimately decrease? Over $365 billion in spending cuts outside of OPEC has occurred in the last 15 months, the greatest amount on record.
It is highly unlikely a similar reduction in capital expenditures will occur again in 2016. As noted above, these massive reductions are a major reason for the decline in industrial production and the negative economic narrative. If these spending cuts are not repeated and if everything else remains constant, will growth not accelerate?
Maybe such analysis is meaningless in today’s age of computer based trading where the immediate is extrapolated into forever and to hell with any type of investment thesis or rationale.
Last night the foreign markets were down. London was down 0.34%, Paris up 0.02% and Frankfurt down 0.68%. China was down 0.38%Japan down 3.15%, and Hang Sang down 2.34%.
The Dow should open moderately higher ahead of a labor report, earnings from more than two dozen S & P 500 companies and a rebound in oil. As noted several times the correlation between oil and the markets is the greatest since at least 2011. Bloomberg reports that 80% of companies have exceeded estimates. The 10-year is off 9/32 to yield 1.87%.

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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.