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Oil Prices and Treasury Bond Yields Both Fell Again Yesterday.

Oil prices and Treasury bond yields both fell again yesterday.  The drop in both will end when all least expect as the momentum is great.  In my view there is indiscriminate selling in one and indiscriminate buying in the other as the market narrative is totally myopic.

It is often written the most obvious conclusions as those which are ignored.  Many times I have commented about the massive cash balances earning almost nothing.  Sometime this money will be utilized in a more efficient manner.  It is not a question as to if but rather when.

In my view the decline in oil prices is a major consumer boon causing massive fiscal unrest in many unstable countries such as Nigeria, Libya, Venezuela, Iran, Iraq and Russia.  The drop in oil is now starting to greatly impact Norway, one of the nine remaining AAA rated sovereign countries remaining.

Production will drop either by corporate/government action or civil unrest similar to what is occurring in both Libya and Nigeria.

A major component of all inflation indices –approximately 32% to 35% depending upon the index–is OER (Owners’ Equivalent Rent) or what someone thinks one can rent their house.  OER is closely correlated to apartment rents and home values.  OER is still inching along its bottom.

Apartment rents have sky rocketed.  Home owner values plummeted in 2008-09 but according to Bloomberg are now only 17% below their 2006 peak.  Prices have recovered about $4.8 trillion.

What happens to inflationary statistics if OER suddenly rises, a rise accompanied by increased spending by corporations and consumer alike, the result of rising home prices and the stimulatory impact of falling oil amplified by the more efficient use gargantuan cash balances?  It is generally accepted most in the US gauge their net worth (and confidence levels) by the value of the house not their stock portfolio.

A key component to economic activity and confidence levels is jobs.  Friday the December labor report will be released.  Will this data suggest the economy is still expanding by a “four handle,” perhaps the result of falling crude?

This is the first of major events that could dictate the immediate direction of the economy and the markets.

I will then argue the week of January 19 will become the next focal point.  1/19 trading in the markets will be thin because of MLK Day but China announces a ton of data.  1/20 is the SOTU Address.   What tone will the President set for the next two years?  1/22 is the ECB meeting.  1/25 is the Greek election.

Wow!  If this not enough there is then the week of January 26 as 1/28 is the FOMC meeting and 1/30 is the release of fourth quarter GDP.

What conclusions will be made and how will the market respond to them?

As humbly noted several times, very few suggested the major events of 2014 which include plunging oil and treasury yields.

However one aspect that I did not miss was the dis satisfaction of the American voter, the negative impact that Washington has upon the economy/society and the outcome of the 2014 midterms.   Gallup announced yesterday for the first time since its 1935 inception, Washington is the greatest issue facing the economy and largest concern of society.

What happens to confidence levels if Washington actually does something?  Perhaps the 1/20 SOTU address is more important than many think.

Last night the foreign markets were up.  London was up 1.14%, Paris up 1.19% and Frankfurt up 1.08%.  Japan was up 0.01%and Hang Sang up 0.83%.

The Dow should open moderately higher following the worst start of a new year since 2008.   The ADP Employment Survey, Trade Deficit and Minutes from the December 16-17 FOMC meeting are released today.  Al three can impact trading.  The 10-year is off 10/32 to yield 1.98%.

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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.