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The Volatility Suggests the Markets are in a Transition.

Equities closed considerably lower as monies began to exit the momentum names, perhaps the result of the rising dollar that may hurt profits.  Treasuries also declined in price even though the economic data was weaker than expected.

I think it is noteworthy that according to Fed officials yesterday’s five year Treasury note auction attracted the least demand since July 2009 on fears that monetary policy will be changed sooner than expected. Oil surged almost three percent.

Yesterday I quoted Bloomberg about the inability to string together consecutive up days.  Bloomberg writes today the S & P 500 has now gone 26 days without posting gains in back to back sessions, the longest stretch since 1994.


I would like to comment about oil.  The Middle East is on the verge of chaos.  Yemen’s leader who is supported by Saudi Arabia fled his beleaguered country imploring and begging the UN and the Arab League to mobilize air, ground and naval forces to fight the Iranian backed insurgents.

Saudi Arabia is amassing troops on the Yemeni boarder, reiterating earlier week comments that it will take any action possible to support the current leadership.

In my view, this is scary and in many ways reminiscent to June 1914. As all know, religious based nationalism was a major cause for the “War to Make the World Safe for Democracy.”

Austria Hungary, the site of the final catalyst for WWI, was born out of the initial dissolution of the Ottoman Empire in the 1870s, the empire that was completely dismantled at the conclusion of the “Great War” that led to the boundaries of today’s Middle East.

I rhetorically and cynically ask did the “War to End All Wars” seed a war 100 years later?r1

OPEC supplies about 50% of the world’s oil and 25% of the US needs.  Saudi Arabia is about 50% of OPEC’s production.

I ask rhetorically how much of yesterday’s 300 point decline was the result of Middle East anarchy; a decline primarily focused in the must owned momentum names.

Tomorrow initial estimates of first quarter GDP are posted.  As noted yesterday the momentum and inflation indicators will be closely scrutinized.  Like most, I believe the FOMC will err on the dovish side to ensure the economy has finally reached that elusive escape velocity point as to avoid the necessity of lowering rates at some future date.

Last night the foreign markets were down.  London was down 1.30%, Paris down 1.26% and Frankfurt down 1.50%.  Japan was down 1.39%  and Hang Sang down 0.13%.

The Dow should open considerably lower as Saudi Arabia commenced bombing of Yemen, supporting its President that fled the country.  Oil is up over 4% fearing possible supply disruptions. The 10-year is up 3/32 to yield 1.92%.

I have commented several times the volatility suggests the markets are in a transition.  Can I suggest guns and oil will be the market’s next market leaders where these issues be bid up to questionable valuations is a similar fashion as today’s momentum issues?

As I have opined so many times, it is not that change occurs but rather the velocity of change that is frightening.

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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.