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Wow!  Who thought three months ago the Republican nominee would be known before the Democratic nominee?  Three months ago all thought Hillary Clinton would have clinched the nomination by Super Tuesday at the latest.   Four weeks ago the accepted wisdom was a contested Republican convention.

Continuing along the same logic, three months ago everyone thought oil would languish around $28-$30 barrel for the foreseeable future.  Two months ago energy related bonds were crushed sending the high yield market to lows not experienced since the financial crisis.  Less than sixty days later oil is up over 65% and the high yield complex led by energy is the top performing sector of the markets.

Further continuing, ninety days ago the dominating narrative was mega cap multinational growth companies would continue to outperform all other equity sectors.  Today values is crushing the over owned mega caps.

The conversation is rising to a crescendo about the demise of hedge funds which have morphed into closet indexers, chasing returns instead of focusing upon macroeconomic and geopolitical trends.

I reiterate I think the markets are entering into a tectonic transition where such analysis [geopolitical and macroeconomic] will be the driving force behind performance.

What will be the impact of the 2010 US abdication of its 75 year unspoken role of global policeman, a global policeman role that climaxed with the collapse of the Soviet Union permitting the rise of multipolarity and interdependancy.  Such permitted the massive outperformance of multi nationals.

Nationalism and patriotism has been around since the dawn of mankind and has been the genesis of all conflicts that has destroyed methods of production/economies and societies.  In my view such beliefs have been unleashed with no turning back to yesterday’s status quo.  There are an infinite number of outcomes.

Because the outcome is unknown, I will argue global trade and profits may suffer.   Can I suggest today’s underperformance of mega cap global issues are just a harbinger of things to come, partially predicated by America’s abdication?  Yes.

What will be the next major change in global narrative? Stronger US growth that generates demand pull and then cost push inflation that crushes an incredibly complacent Treasury market?  The pricing pressures in the ISM surveys are suggesting that demand pull inflation is accelerating.

Tomorrow April’s employment data is released.  The ADP Private Sector survey is suggesting the odds of a possible downside surprise but perhaps the consistency between the ADP and BLS survey is its inconsistency.

As noted many times, there are wage pressures at either end of the spectrum.  The non-skilled because of political pressure and the skilled because the dearth of qualified workers.

The lack of wage inflation has morphed into a dominant political issue.  I have several thoughts.  First most cost of living adjustments are tied to the CPI.  The CPI has shown little increase; partially the result of owners’ equivalent rent which is about 33% of the index is virtually nonexistent.

Second, the vast majority of purchasing decisions are extremely price sensitive, defined as cost is the only determinate.  Society has brought some of today’s non-inflationary environment upon itself; a belief evidenced by Wal-Mart now comprises over 10% of non-automotive retail sales.

The title of this morning’s commentary is The Prevailing Narrative is Often Wrong.  Tomorrow’s jobs data can offer further evidence of accelerating US economy (job creation is the primary indicator/catalyst for growth).  Three of the last four BLS reports have surprised on the upside.  Will tomorrow be the third consecutive upside surprise?  Will such an upside surprise permit value to continue to rally?  And then there are Treasuries…

Commenting upon yesterday’s market action, equities sold off on economic and profit concerns. Treasuries were essentially flat.

Last night the foreign markets were mixed.   London was up 0.07%, Paris up 0.04% and Frankfurt up 0.28%.  China was up 0.72%,  Japan closed for a holiday and Hang Sang down 0.37%.

The Dow should open moderately higher.  Oil is up on increased fighting in Libya further reducing the odds of any recovery in production.  Many think Iraq is on the path of a Libyan like political implosion, which if history is of any type of guide, will also impact all methods of economic production.  The wild fire in Canada is also influencing prices.  The 10-year is off 4/32 to yield 1.80%.

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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.