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Time magazine wrote yesterday that two thirds of society is financially illiterate, a statistic that FINRA commented as “disturbing” and requires more investor education.  Gallup writes about 51% of society is involved in the markets, down from around 62% in 2000.

There has been a massive outflow from actively managed mutual funds into passive ETFs.  Moreover Roboinvesting has been introduced, a nascent industry which some are projecting will forever change the investment professional industry.

The key words in the above paragraphs are passive and illiterate.  In my view roboinvesting is synonymous to indexing which is synonymous to passive.  I also believe that passive investing relies upon the simple premise of past performance is indicative of future performance the inverse as to what we are told given the belief that past trends will continue and the big will continually get bigger and small smaller.

If making monies in the markets was only this simple.  If so we would all be gazillionaires.  Yes the past five years the big have gotten bigger.  An argument can be made that this has been the case since 2006 given the massive underperformance of almost everything expect large cap momentum growth.

As noted above, 66% of society is financial illiterate.  Fifty one percent of society owns securities directly or indirectly.  It is my firsthand experience Wall Street firms will create the products that can be marketed and sold to the public as The Street is the best marketer in the world.

It has often been stated the cheapest execution is the most expensive idea.  Can we be there today given that a majority of the society does not have a clue about the markets and the all markets are around or at their highs?

I reiterate my long held belief the Treasury market is priced beyond one’s most wildest expectations and the averages will mark time—albeit in a range—for the foreseeable future.

I do believe however the maligned and under owned small cap and value stocks should outperform as should the smaller fixed income issuances that have all but been forgotten given the ramifications and inefficiencies created by Dodd Frank.

Will these remarks become prophetic similar to my 2012 election comments that the results may be perhaps tectonic?

Commenting about yesterday’s market action, there was little response from the Beige Book which indicated the economy expanding at a “modest pace” and “slight” price pressure and some “softening” in consumer spending since mid-May.  Employment continued to grow “modestly” and wage pressures remained “moderate.”

What will happen today as several large financial post results?  Moreover the PPI and weekly jobless claims are released.  The Dow is up about 1,300 points in a week, an advance I think most will state is overdone leaving equities prone to a sharp retreat.

Last night the foreign markets were up.  London was up 0.50%, Paris up 0.45% and Frankfurt up 0.78%.  China was up 0.16%, Japan up 0.95% and Hang Sang up 1.12%.

The Dow should open moderately higher on increased stimulus bets and an earnings upside surprise from a money center bank.  The 10-year is off 9/32 to yield 1.51%.

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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.