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Stocks fell over concerns about faster inflation, lackluster earnings, and rising US dollar.

Commenting about inflation, are inflationary expectations beginning to rise, the result of climbing oil prices?  As penned many times inflation has two components; monetary and psychological.  Inflationary expectations have continued to diminish over the last five years and such is a major variable for monetary policy.

Briefly speaking, inflation is defined as too much money (monetary) chasing too few goods fearing (psychological) higher prices tomorrow.

As rhetorically asked, are inflationary expectations beginning to rise as oil is at a 15 month high, partially the result of shrinking inventories and a potential cut in production?  If expectations are rising, sovereign debt would be crushed given current yields.  Few have discounted the possibility of such, an environment that will be amplified given the lack of regulatory induced illiquidity and cross correlated technology based trading.

As widely known, equity markets are extremely sensitive to any real or perceived changes in monetary policy.  Any hints of higher rates send equities lower.

And then there are earnings and the dollar.  Higher rates theoretically dictates a higher dollar and lower earnings given the multipolarity of trade.

Speaking of earnings, equities were also spooked by a disappointing profit report from Alcoa. Analysts are expecting a 2.5% decline in quarterly results, its sixth consecutive decline.  I am expecting earnings will again exceed expectations for the gazillioneth quarter under the simple guise of under promising and over delivering, but I think unless earnings growth turns positive, equities will mark time at best.

What will happen today?  The Minutes from the September Fed meeting is released.  How will this release affect market psychology?

Last night the foreign markets were down.  London was down 0.09%, Paris down 0.12% and Frankfurt down 0.12%.  China was down 0.22%,  Japan down 1.09% and Hang Sang down 0.60%.

The Dow should open little changed before the Fed Minutes.  Pundits have already declared this is one of the worst starts to earnings season in over 7 years.  I ask how are such assessments made given only one company has posted results??  Is this hyperbole with attribution based upon how many times the story is clicked upon?

The 10-year is off 6/32 to yield 1.79%.  Oil is nominally higher.

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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.