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Stocks slipped amid disappointing earnings for several “must” own growth entities even as crude advanced on the growing belief the oil market will be “balanced” sooner rather than later.

In my view, the current rotation to value from momentum growth could emerge into a tectonic change given the proliferation of momentum based trading, HFTs, ETFs and the “Johnny come lately” roboinvestors.  Is passive investing on the verge of underperformance?

The fascination with passive investing over the past five years has exceeded the infatuation with concentrated strategies from 2003-07, evidenced based upon the massive amount of funds directed towards ETFs and indexed type funds.

As asked above, is this changing?  To reiterate most are too passively invested, over weighted in the same large capitalized companies that dominate the nameplate indices.

However the best investors the world has ever known—Stanley Druckenmiller, Warren Buffet, Julian Robertson, George Soros, to name a few, have greatly outperformed via concentrated portfolios.

The legendary investor Warren Buffet has 65% of his holdings in five companies, companies that he has held almost forever.  Druckenmiller is even more concentrated; five issues comprise 68% of the portfolio.

The best tract records in the industry have been accomplished by value investors versus growth investors.  Small cap investors are second.  Currently small cap investors have underperformed by a whopping 37% as compared to growth as measured by the Russell 2000 ETF during the past five years.

As noted above, the funds flow into passive ETFs over the past five years, strategies based upon capitalization, has dwarfed flows into almost every other style by a gargantuan amount.

The last six weeks have been incredible as large capitalized momentum growth issues have struggled (JP Morgan stating down about 20% YTD) as compared to value.  Friday was no exception as the NASDAQ was off almost 0.80% while the Dow and The S & P 500 were almost unchanged.

Is a tectonic transition in its infancy?  Unfortunately only history will answer this question.

What will happen this week?  All FOMC meetings are significant albeit no change in monetary policy is expected at the conclusion of Wednesday’s meeting.  First quarter GDP, trade gap, several housing statistics and regional manufacturing indices are released.  How will the market interpret the data?

And then there are earnings as over 150 companies post results in the next 5 days.  How will the markets respond?

Last night the foreign markets were down.  London was down 0.66%, Paris down 0.42%,  and Frankfurt down 0.55%  China was down 0.41%,  Japan down 0.76% and Hang Sang down 0.76%.

The Dow should open quiet ahead of a busy earnings week, Fed meeting and GDP data.  The 10-year is up 4/32 to yield 1.88%.

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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.