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About a week ago following the release of Alcoa’s disappointing earnings most had pronounced the current profit season as an utter disaster.  One week later, most are stating the opposite.  Results are now expected to rise about 0.6%, ending five consecutive quarters of decline.  Revenues are expected to increase around 2% according to Bloomberg.

Why the radical shift stating the earnings’ recession has ended?  Of the 80 S & P 500 companies that have thus posted results, 83% have exceeded dumbed down expectations.

Many times I have commented about the undue influence social media and the 24 hour news cycle that fosters unfounded conclusions have upon the markets.  There is no attribution on most posts, writing for a specific purpose of conclusion.

Moreover with the markets now dominated by high frequency trading where speed is the utmost of importance over substance, where there are a gazillion examples of shooting first and then maybe later asking questions.

Will this change?

I don’t know.

What I do think is significant is a loud minority of participants are beginning to echo my long held fear about ETFs, stating few understand their composition, ETFs are only comprised of derivatives and futures, fostering the unfounded belief past performance is indicative of future performance with the big getting bigger and small getting smaller.

All of the above creates a very imbalanced and illiquid market. As noted several times, I believe the proliferation of these investment vehicles amounting to more than the number of listed companies, has the potential to make the fiasco in CDOs, CMOs, etc. as a picnic.

Wow do I hope that I am wrong in this observation.  However in my thirty years of experience I have not observed the proliferation of bulge bracket firms suggesting the averages could easily decline between 10% and 25% in quick order because of cross correlated technology based trading.

Completely changing topics, what will be the impact of the Philippines denouncing its 80 year alliance/friendship with the US and is now a Chinese ally?  How will this impact global trade and the multipolarity/interdependence philosophy that many of political elite and establishment has championed?   Is such a “separation” a harbinger of things to come or will it be just a footnote?

As written many times, 55% of S & P 500 earnings and 50% of its revenues is from global trade.  If multipolarity/interdependence is over, how will such impact valuations and subsequently ETFs where megacapitalized growth issues dominate such vehicles?

There is little I can write about yesterday’s market action.  Equities were quietly and Treasuries essentially unchanged.

Last night the foreign markets were mixed.  London was up 0.24%, Paris down 0.22%, and Frankfurt down 0.08%.  China was up 0.21%, Japan down 0.30%  and Hang Sang up 0.30%.

The Dow should open moderately lower on a reassessment of earnings releases.  Consensus now thinking projects will decline by 1.40% for the period.  Interest rates are also at the center. The 10-year is unchanged at a 1.75% yield.


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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.