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Interest Rates are Expected to Rise for the First Time in Nine Years.

I received considerable feedback with my comment that it feels as though a major change is about to occur.  Is this really a radical statement?  Interest rates are expected to rise for the first time in nine years.

Additionally, if the last four weeks are any indication, according to Citicorp the momentum trade is approaching a threshold where rotations have occurred in the past. Virtually nothing has worked during the past year except this trade of buying only the five or six mega capitalized issues believing share prices will continue to rise because of momentum.

I can cite many examples as to what happens when any trade becomes “too crowded,” defined as all are involved in a particular strategy and when selling commences, buyers are scarce and shares fall more than rationally expected.  I will argue today’s momentum trade is on steroids given the amplified influence of ETFs and indexing where benchmarks no longer reflect the markets but dictates the markets.

Incidentally the last major momentum trading era (1999-2000), the 6-8 names that then dominated trading are still down today over 50%.

Speaking of momentum, crude fell again as inventories rose more than expected.  Oil is now down almost $19 or 32% since June 30.  Wow!

RBC validated some of my views yesterday detailing the absolute carnage that the decline in crude has upon OPEC’s budgets/ economies, worsening political turmoil.

Some OPEC members may start asking whether the pain has been worth it.

Commenting further about momentum, the Saudi Arabian stock market which just opened to foreign investors two months ago is now in bear market territory, the result of falling crude.  I rhetorically ask is the sharp decline the result of western momentum monies shorting the market?

Change is the only certainty.  The pain and the carnage is rising exponentially.  Will OPEC alter course and cut production or will the decline in crude be the catalyst for even more radical political change in a region that has already experienced considerable anarchy?

Obviously the answer is unknown however nine months ago I opined the existence of countries of several countries could be in question because of OPEC’s strategy, a view that perhaps will now become mainstream.  All must remember survival is the most basic of all instincts which then suggests a cut in production is plausible.

Yesterday was a volatile day.  Because of the drop in oil, energy shares may have capitulated for the second or third since June.  Volume was over 50% higher than normal which would then suggest cathartic selling.  It is dangerous if not impossible to suggest whether or not the sellers have been exhausted, a view that I espoused in the prior capitulation days.

Regarding the FOMC Minutes, the Minutes indicated the Committee has little conviction in raising rates in September as any such decision will be data dependent.  A lot of data is released in the next 4 weeks which can change perceptions.

Last night the foreign markets were down.  London was down 0.55%, Paris down 1.29% and Frankfurt down 1.27%.  Japan was down 0.94% and Hang Sang down 1.77%.

The Dow should open considerably lower on global growth concerns and the continuing rout in emerging markets.  It has been reported that over $1 trillion has fled emerging market double the amount that left these markets in the financial crisis of 2008-09.  A major reason for the rout; the proverbial race to the bottom relating to currencies. Vietnam and Kazakhstan have abandoned their currency peg, following China to stimulate growth via exports. The 10-year is up 8/32 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.