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Today is the commencement of the 2 day FOMC meeting. No change in monetary policy is expected. I am certain the central bank will know the fourth quarter growth rate. Analysts are expecting a 0.8% increase for the period, the slowest pace since the 0.6% gain registered during last year’s weather induced first quarter slowdown.
The major reason for the slowdown…trade and inventories. Commenting about inventories, the previous four years producers entered the first quarter fully stocked. Growth slowed, partially the result of winter weather. Today inventories have been pared thus impacting fourth quarter growth but perhaps creating an environment for growth later in the year.
Regarding trade, it is a combination of slowing foreign growth and the dollar. Some have estimated that the surging dollar has subtracted about 0.2% from growth.
Core GDP, which is GDP less inventories, trade and government spending—or the GDP data the Federal Reserve relies heavily upon—is expected to rise by 1.9% for the quarter. For 2015 “core GDP” is expected to increase by 2.7%. Currently analysts expect core GDP to be around 2.5% in 2016.
This data does not suggest the economy is falling off the proverbial cliff. Nor does it reflect the environment consistent with recent stock prices.
Speaking of which, the S & P 500 fell over 1.5% as oil declined over 7.5%. The narrative is rising about the impending financial collapse of many oil producing countries and the subsequent calls for a reduction in production.
The narrative is also rising about the short positon in crude. According to Bloomberg, the amount of derivatives/futures on oil is about 80 times greater than production, a proportional amount of script that was bought when gold spiked to over $1,900 an ounce in September 2011.
Gold collapsed to around $1,000 in the following months, contrary to “expert” forecasts. Last night gold closed around $1,100/ounce.
As noted many times, there is a record short interest in oil and a record number of puts purchased on oil. The amount of “script/derivatives” outstanding on oil is at a record 80x greater than production with Barclay’s reporting there is a record number of “unhedged short positons.”
Currently there is little spare global capacity as investment in the oil sector has been slashed $1.8 trillion between now and 2020 from 2014 levels. Currently spare capacity is 2% versus 8% five years ago and 30% in the 1980s, also according to Barclays.
What happens to prices if there is a supply disruption or if demand is stronger than expected as was the case in 1999, the last major oil bear market? In 1999 prices jumped over 50% in 20 days.
As noted, I don’t think domestic growth is as weak as the market may be suggesting.
What will happen today?
Last night the foreign markets were down. London was down 0.37%, Paris down 0.07% and Frankfurt down 0.26%. China was down 7.32%, Japan down 2.35%and Hang Sang down 2.48%
The Dow should open flat as oil’s decline has stopped for the moment. I think it is significant that China was crushed last night and the US markets appear to be opening unchanged.
Regarding, was yesterday the capitulation day? I don’t have a clue for prices always go lower or higher than anyone would expect. The 10-year is up 2/32 to yield 2.0%.

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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.