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The Simple Fact of the Matter is that at Some Juncture Short Term Interest Rates will Rise.

Equities came under considerable pressure yesterday albeit the volume was not heavy.  It felt as the decline was the result of a lack of bidders versus heavy selling pressure.  The catalyst for the moderate sell off…interest rate jitters and stronger dollar that hit the multinationals and crude.  Was yesterday’s selloff also predicated upon last week’s activity was the quietest—defined by trading range—in six months?

In many regards yesterday’s activity was the inverse of the narrative of the proceeding 30 days albeit in my view little changed.

The simple fact of the matter is that at some juncture short term interest rates will rise.  Unfortunately there is an entire cadre of market participants that have not yet lived through a tightening cycle as short term interest rates have been around 0.00% for almost seven years.

I think I have been through seven or eight tightening cycles since 1985 and the impact of such tightening cycles was not remotely as bad as many pundits had suggested as to when monetary policy was first changed.  I must write the obvious however, short term interest rates were never this low.

Ten to fifteen years ago if todays’ data was posted with stated Fed policy, both Treasuries and equities would be crushed fearing the Central Bank is falling behind the proverbial curve.

And then there is Greece.  In most regards, the complacency around Greece is frightening.  While I too share this complacency for a myriad of reasons, I hope it is not misplaced. If today’s headlines were written four years ago, equities would be down 25% not 200 points.

Commenting about the Treasury market, Treasuries posted strong gains perhaps the result of the economic turmoil in Greece.  Volume was light thus suggesting yesterday’s gains were more of an oversold bounce given how quickly yields have risen.

There are no scheduled economic releases today thus suggesting trading will be dominated by the headlines.  I rhetorically ask how much longer can the markets ignore the chaos and anarchy in the Middle East?

Last night the foreign markets were up. London was up 0.59%, Paris up 0.49% and Frankfurt up 0.10%.  Japan was up 0.17% and Hang Sang down 0.60%.

The Dow should open quiet.  The 10-year is off 3/32 to yield 2.15%.

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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.