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About a year ago oil, value and small cap stocks were plunging.  The prevailing narrative was that these issues had absolutely no upside, no access to capital and will be forever forgotten because of HFTs and ETFs.

Fast forward one year, oil has more than doubled, energy debt has over a 100% total return, value and small cap issues have greatly outperformed, as the latter is up about 22% after plunging more than 26% from their 2015 highs from January 1 February 12, 2016 according to the WSJ.

There are a number of reasons for this great over performance.  Some had to do with extreme undervalueness.  Last year around this time Goldman stated small caps and value shares were the most undervalued and least owned as compared to their large capitalized brethren since 1980.

I also believe the unexpected geopolitical change have also had a large impact.  It was evident the Democratic party was entirely convinced that it will win the White House, the Senate and make huge inroads into the House.  In 2014 the Democratic leadership changed Congressional rules that ended the Filibuster.  I will argue such moves were either out of arrogance or stupidity.  I do not know what is worse.

Will the Republicans use these Democratic sponsored rule changes against the Democratic Party?  I naively hope not but…

Regardless, there will be at least a moratorium of new regulations with many hoping of a potential roll back of the more onerous rules that had strangled all but the largest capitalized entities.

Continuing with this theme, Globalism has died an incredible sudden and ugly death not only in the US but also in Europe.  China, Russia, Iran, North Korea are acting extremely belligerent.  This change from a globalist to a nationalist view is more beneficial to Main Street as opposed to Wall Street.

As noted above, small cap issues are retracing their early 2016 plunge.  I think this advance is in its nascent stage given the entire change in the geopolitical environment.  Change is the only constant and more things change the more things remain the same.

Commenting about yesterday’s market activity, Treasuries rose in price amid uncertainty over Brexit and security concerns in both South Korea and Turkey.  Oil fell for the first time in four days.  Equities were nominally lower.

What will happen today?


Last night the foreign markets were mixed.  London was up 0.46%, Paris up 0.14% and Frankfurt up 0.21%.  China was down 0.30%,  Japan down 0.79% and Hang Sang up 0.83%.

The Dow should open quiet.   The 10-year is off 6/32 to yield 2.39%.

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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.