Advisor Login Contact Us


Equites advanced yesterday on “relatively” light volume as data indicated consumer spending buoyed the economy in the third quarter. Oil halted its decline for a second day on the prospect of greater stimulus from China.
Most are happy 2015 is coming to an end as nothing appeared to work. Personally 2015 is perhaps one of the most difficult years in my 30 years of experience as nothing appeared to make sense.
In my view, a view that is now becoming more accepted, the markets were/are overly influenced by algorithmic or technology based trading, or a strategy based upon cross correlated momentum. To hell with analysis and forward looking thought.
I also believe 2015 trading was overly influenced by ETFs. As most know, ETFs are capitalization weighted indices, where the proverbial snowball gets bigger and bigger at the expense of everything else.
SEC data indicate 70% of the volume in the “typical stock” is the result of indexing, thus suggesting analytic work is not meaningful. There are now more ETFs than listed securities.
I reiterate that 2016 may be a transitional year where the typical stock outperforms the indices, the first such occurrence in about 4 years. My rational is simple. Stronger than expected growth that hampers profit margins of the largest capitalized growth companies via higher interest rates and labor costs.
Paraphrasing a commentary from JP Morgan, large cap growth is now only about 10 companies. If everyone owns a security, who is left to buy when selling commences?
A possible catalyst for greater than expected growth is increased bank lending. Based upon Federal Reserve data, bank loans grew by 8% in November and at a 7.8% rate over the last nine months. The average growth in bank loans from 2005-2014 was 4.9%. From 1960-2014, bank loans grew at an average rate of 5.5%
Bank lending is high powered money which increases monetary velocity (the turnover of money) which is stuck at a record low of less than 4x versus the historical average of 12x per annum according to the Chicago Fed.
The Chicago Fed hypothesized that if monetary velocity accelerated to its historical average, GDP would be over 12% given the massive amounts of excess bank reserves. As noted many times excess reserves are over $2.5 trillion versus the historical average of $1 to $2 billion.
Today is the last full trading day before the Christmas holiday and I am certain activity will further wane as the day progresses.
I would like to take this opportunity to wish all a Merry Christmas and Happy Holidays. I further would like to express my gratitude for everyone’s confidence and business, especially in a very trying year. It is greatly appreciated
I look forward to a prosperous 2016 for the only constant is change as in many ways today’s environment is similar to that of 2002-2003 when the individual security began to greatly outperform the indices.
Last night the foreign markets were up. London was up 1.84%, Paris up 1.87%, and Frankfurt up 1.71%. China was down 0.43%, Japan closed for a holiday and Hang Sang up 0.96%
The Dow should open little changed ahead of numerous economic reports including new home sales, durable goods orders and personal spending. The 10-year is off 3/32 to yield 2.25%.

Return To Index Page
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.