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Expect the Unexpected to Occur but Only on Steroids.

Markets were relatively flat yesterday even as a large technology firm posted disappointing fourth quarter results.  The decline was muted because the ECB said it will propose 50 billion euros of asset purchases a month through 2016 and from a rebound in oil prices.

OPEC’s Secretary General El Badri stated “oil prices will rebound rather than extend their decline as low as $20 barrel because a collapse since June is not merited by global supply and demand….prices will stay where they are at now and should slowly rebound.”

Will this happen?  As noted several times, there have been five major oil declines since 1990 sending crude down an average of 48%.  Six months after prices bottomed, oil had recovered about 52% of the decline.  Past performance is not indicative of future performance however there are a preponderance of oil producers— producers including Russia, Norway and England—who’s cost of production is over $70/barrel.

Perhaps the theme of 2015 will be “Expect the unexpected to occur but only on steroids.”  In my view there have already been five major shocks in just the first three weeks of the New Year.

First is the rebound in gun sales.  In mid-December the major gun manufacturers warned of sluggish sales.  The inverse has occurred (and should have been expected given the increase in FBI gun checks which have been rising about 30% per month since August).   While this is not a macroeconomic event, it is an indicator of nervous sentiment given the lack of an obvious catalyst.

Second the abandoning of the caps on the Swiss Franc for only two days before the announced policy change, the Swiss National Bank said caps would remain in place for 2015.

Third is the strong advance of gold, up over $100/ounce since December 31, 2014.

Fourth, the huge drop in the 10 and 30 year Treasury bond yields, the strongest start ever for these pivotal benchmarks.

Fifth, the global change in attitudes towards Islamic extremists, a change led by France.

Will oil rebound?  As I have commented several times, we are not talking about the survival of companies but rather the survival of countries.

Some might comment the above remarks are from one who is long both guns and oil, which I am.  However I am firm believer in the creed “that it is not what one does but rather why one does it.”

If one makes investment decisions via macroeconomic, geopolitical and geostrategic perspectives/outlook, 2015 will be challenging with fortunes made based upon the correct assumptions.  Following the herd and the dominating narrative could be dangerous.

Last night the foreign markets were mixed. London was up 0.51%, Paris down 0.08% and Frankfurt down 0.38%.  Japan was up 0.28% and Hang Sang up 0.70%.

The Dow should open nominally higher ahead of expected  ECB QE. There are also 16 S & P 500 companies posting results today, results to date that have been mixed. The 10-year is off 15/32 to yield 1.93%.

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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.