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Good Riddance 3Q

Today is the last day of the third quarter, a quarter that most would like to forget as the S & P 500 staged its largest 90 day decline in four years. The Russell 2000 is in its longest slump since 2006 and is down 14% for the period. Commodities have been crushed falling to their lowest levels since 2009.

The carnage beneath the surface is worse than averages suggest as some “must own stocks” are down over 30% for the period. Perhaps the NASDAQ biotech index can be used as a proxy when sentiment suddenly turns. At one time yesterday, this index was down about 28% from its mid-July all-time high. There are many companies that are now down 40% YTD.

About three months ago I was referencing the intense volatility occurring beneath the surface suggesting the markets will perhaps undergo a radical change, opining monies may soon exit the must owned momentum names. Wow! I did not know how prophetic my remarks would become!

What will happen during the next 90 days? Like most I wish today I have a copy of the 12/31/15 WSJ. Based upon the FRB direction, the markets have become data dependent and unfortunately data is interpreted via one’s preconceived bias.

I think the domestic economic data will continue to surprise on the upside. I also think China is not the train wreck most fear. Moreover I think European data will also be stronger than expected.

I am fearful however Middle East unrest may become the major geopolitical/market narrative. Four months ago the geopolitical narrative was all about Greece. That changed to China in mid-July. Will the geopolitical narrative now switch to OPEC, e t. al. given the events of the last two weeks?

Even though I am long oil and hypothetically would profit from such a transition, a negative Middle East narrative is exponentially more dangerous than the recent/current Greek and Chinese diatribe given the perceived lack of the value for life by some in that volatile region. Many political scientists and military officials have stated we are battling an adversary unlike anyone that we have battled before.

What about politics? Three months ago few would have suggested the anti-establishment Republicans would be leading in the polls. Moreover I am not aware of anyone suggesting the Speaker would resign. Additionally few had expected Hillary Clinton to implode in the manner that she has.
Ninety days from now who will be the perceived front runners? How will markets interpret such an environment?

I have written many times that the velocity of change in numbing. The third quarter was one of incredible volatility and change. Hopefully the fourth quarter will be the inverse of third. All must remember seasonal strength commences around the middle part of October.

What will happen today? The ADP Employment Survey is released. As written almost every month, even though the correlation back to the BLS report is spotty, the Survey can offer some insight as whether or not there will be an upside or downside surprise in Friday’s data.

Commenting on yesterday’s data, there was little reaction to a stronger than expected reading in September’s consumer confidence data, confidence that is at the second highest level since 2007.

With the above written, markets were bifurcated as the Dow was up about 0.30% while the NASDAQ fell about 0.60% as there was selling in some of the must own technology and biotech names.

Last night the foreign markets were up. London was up 2.34%, Paris up 2.91% and Frankfurt up 2.68%. Japan was up 2.70% and Hang Sang up 1.41%.

The Dow should open considerably higher on the belief that worst is already discounted. As noted this is the worst quarter in four years wiping almost $11 trillion off the value of global shares. The 10-year is off 12/32 to yield 2.10%.

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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.