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In My View the Headlines are Ugly.

In my view the headlines are ugly.  Ebola. Ukraine. ISIS. Eurozone. Japan. China. Emerging markets.

The question at hand is if the headlines are so ugly why the advance in the S & P 500 and Russell 2000?

I must write other markets are not feeling the love.  Commodities have been crushed.  Non-investment grade bonds are ugly.  Many small capitalized companies are vastly underperforming.

Will the popular averages soon roll over?  I will argue the opposite—those markets that have been crushed may soon outperform.

Year-end tax loss selling typically reaches its apex the week before Thanksgiving and those issues that have been crushed historically outperform going into the New Year.

I think the odds favor the economic advance in the US will continue at the expense of the rest of the world.  But a major reason why 3% growth does not feel like 3% growth is from the lack of stated inflationary pressures.  Nominal and real GDP are around the same levels.  Typically 3% real GDP occurs when nominal GDP is around 6% hence growth feels stronger.

As noted many times, the US economy is awash in liquidity.  Ultimately monies gravitate to the sectors with the greatest potential return with the least amount of risk.

The entire developed world is or has experimented with QE.  The US Federal Reserve has publically stated a 2% to 4% inflation rate is desirable to “inflate” general asset values.

The US economy which is about 3x bigger than its closest competitor and represents 23%-24% of global production, operates on a “just in time” inventory and production basis.  This environment suggests if demand suddenly accelerates, spot shortages could quickly emerge that could cause price spikes.

If this were to occur, I would argue any commodity sensitive bonds or equities should advance and treasuries should trade lower in price and the S & P should continue its advance albeit not at the rate of those vehicles that are “asset” backed.

Wishful thinking for those that are long such issues?  Many of the commodity backed issues have been crushed with the decline in oil.  Why should the inverse not be true?  It has in times past.

Yesterday’s market activity was muted with many commenting OPEC will not lower production at its November 27 meeting.  Yesterday’s data was a non-event.  Today the NAHB and the PPI are released.  How will these statisitcs be interpreted?

Last night the foreign markets were up. London was up 0.50%, Paris up 0.75% and Frankfurt up 1.20%.  Japan was up 2.18% and Hang Sang down 1.13%.

The Dow should open little changed as many are asking are valuations to stretched and has the averages rebounded to far to fast.  The 10-year is unchanged at a 2.33% 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.