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Several high profile firms are suggesting the indices may decline between 5% and 15% in the forthcoming months.  Their rationale is as follows.   Great uncertainty emanating from several areas.  First the upcoming Presidential election, a primary season few had remotely suggested would unfold.

Second, Fed policy.  The Committee has stated for over six months their intentions so recent pronouncements should not be a shock.  Many times I have commented about the disconnect between projected Fed policy and the prevailing market narrative.

Third, an interest rate increase should cause the dollar to rally hence negatively impacting multinationals profits and sales thus valuations.

Fourth, interest rates are the largest component of most valuation models as company’s cash flow is discounted by some interest rate.  The higher the rate, the lower the potential value.

Fifth, ownership.  Everyone owns the same 15-20 names as the vast preponderance of monies have gravitated to the largest capitalized momentum growth issues, issues that are priced at levels I think are bordering on extreme, leaving no room for error.

Sixth, three months of flat markets  following the sharpest rebound since 1933, a rebound that has occurred in names other than the “must own names.”

Seven, the markets have been co-opted by cross correlated HFT trading.  Everyone knows if interest rates rise, equities trade lower for many of the reasons listed above.

Against this back drop, it is no wonder why some of the largest firms/names are bearish.

While I agree with many of the points above, I think the markets will move sideways for a prolonged period of time, I reiterate my long held view monies should continue to gravitate into the lesser own companies.  Ownership and valuations of these entities are at levels not experienced since 1980.

Monetary policy is still expanding around 9%.  Commercial and Industrial loans are growing over 16%.  Such conditions are conducive for domestic growth, growth that may increase if monetary velocity accelerates, the result of potential meaningful fiscal reform.

Wishful thinking?  Two months ago did anyone suggest it may be the Democratic convention that could be contested and the Fed will not act until February 2017 at the earliest?

There is little I can write about yesterday’s market action.  It was a relatively quiet day with all focusing upon potential monetary policy. Perhaps of significance is the 90 day Treasury bill touching the highest yield since November 2008 on the growing view the Fed will act sooner rather than later.

What will happen today?

Last night the foreign markets were mixed.  London was up 0.80%, Paris up 1.46% and Frankfurt up 0.99%.  China was down 0.77%, Japan down 0.94% and Hang Sang up 0.11%.

The Dow should open nominally higher.  The dollar is at an eight week high oil is flat.  I rhetorically ask has the market narrative become so perverse that greater economic activity threatening crisis level monetary policy is now viewed as extremely negative?  Is not greater economic activity the primary objective?

The 10-year is off 2/32 to yield 1.85%.

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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.