In my view, I think today it is paramount to have a macroeconomic/geopolitical thesis to make investment decisions as I believe the markets/economy are at a major crossroads. Either the market has it correct and the environment is miserable or the Federal Reserve/PIMOC/Goldman has it correct and the economy is positive.
What I believe is different this time around is the total market domination of HFTs and ETFs. Eighty five percent of total volume is done via HFTs. Approximately 96% of all orders placed are never executed thus creating “an environment conducive to manipulation” according to the SEC. Today there are more ETFs than listed stocks, ETFs that few know how they are constructed and are essentially momentum followers.
This environment has created the most unbalanced market since at least 1980 according to JP Morgan.
Warren Buffet once commented portfolios could decline as much as 50% for no basis except market inefficiencies that will be corrected over time.
I think—which are perhaps two of the most dangerous words—the markets/economy are at an inflection point where growth will exceed expectations, inflation will accelerate and there will be a massive transition from momentum growth to value.
I can present a strong case for such views, a case that is similar to that of the Fed, et.al. Unfortunately only history will dictate if such is true.
I could write volumes about the upward revision in fourth quarter GDP but will only state wow! Growth was supposed to be revised down to 0.4% from 0.7% but instead rose by 1.0%.
I rhetorically ask is this why the utilities were hammered Friday, down 3%, the greatest drop since 2009 according to Bloomberg? Conversely oil rose last week by the greatest amount since 2009.
This is a major data week that could confirm or deny an accelerating Economy. There are a host of manufacturing and employment statistics. If the data is consistent with statistics recently released, the odds increase the economy has avoided a downturn and the apocalyptic narrative was only that—apocalyptic narrative.
Last night the foreign markets were down. London was down 0.22%, Paris up 0.04% and Frankfurt down 0.96%. China was down 5.37% Japan down 1.0% and Hang Sang down 1.30%.
The Dow should open flat. Oil is also flat. The 10-year is up 3/32 to yield 1.76%.
IS A MAJOR TRANISTION AT HAND?
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.
