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2015 is quickly coming to an end. For many the past year is one most will want to forget. In many regards, nothing made sense as the markets were entirely dominated by high frequency trading and ETFs. Quoting a SEC Commissioner, HFT has created an “unleveled playing field,” an environment amplified by the “unknown regulations of Dodd Frank.”
Perhaps one of most “crowded trade” of the year is going long the dollar. The “least crowded trade” is commodities and oil; trades amplified a gazillion degrees because of HFT and ETFs.
Such trading is based upon the simple premise that change will not occur, following momentum. The status quo will remain forever. In many regards today’s mantra is analogous to 2000 when we entered into a “New Paradigm” and the business cycle was dead.
To write the incredibly obvious, more buyers than sellers are required for an asset to rise in price. What happens if everyone owns the asset and selling commences? Obviously prices plummet. Conversely what happens if no one owns the asset and buying commences. Obviously prices surge.
A mental picture I have created is one of 10 companies on one side of an unbalanced scale and everything else on the other side of the scale with the 10 companies weighing more than everything else.
I think the odds favor a more aggressive Fed because of rising wage costs and greater than expected growth. The combination of the above and a strong dollar (I think further gains are limited), there will be pressure on US corporate profit margins, pressure that will impact “large cap growth” the most.
If this does occur, commodity/oil sensitive issues and smaller capitalized issues may begin to greatly outperform.
Is this a radical thought? No as it occurred when yesterday’s “New Paradigm” environment died an ugly death.
Most believe a “geopolitical premium” is absent in the markets, especially in the oil sector.
Typically markets discount all events six months into the future but as stated above this discount mechanism is broken given the total domination of HFT/ETFs, whose basic premise is that today will last into eternity, buying only the largest capitalized issues at the expense of all others.
I can clearly envision a scenario when the markets begin to overprice “geopolitical risks,” partially the result momentum monies.
No one knows the future but I am a firm believer in the creed of “It is not what you do but rather why you do it,” and that “It is never different this time there are just different people.”
Markets are people and people move markets.
The economic calendar is crowded this week culminating with the release of November’s payroll report. If this data confirms October’s strength, a change in monetary policy is all but assured in two weeks. Moreover if the data does reinforce last month’s data, the odds of more aggressive Fed and increased margin pressure rise considerably.
And then there is the OPEC meeting. At this juncture no change is expected in production.
Last night the foreign markets were mixed. London was up 0.08%, Paris up 0.79% and Frankfurt up 1.11%. China up 0.25%, Japan down 0.69% and Hang Sang down 0.33%
The Dow should open little changed ahead of a big data and meeting week. The 10-year is off 3/32 to yield 2.23%.

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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.