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What does the Rapid Decline in the Dow Jones Utility Index Suggest?

Stocks fell moderately over fears of the details of the ECB stimulus, profit taking and concerns of the content of the Beige Book and the upcoming jobs data that could challenge the accepted monetary timetable. Oil advanced as it appears Libya’s daily production has been greatly reduced because of ISIS induced civil strife.  Moreover Saudi Arabia raised its benchmark price thus suggesting demand is firm.

What I find of interest and of concern is the lack of attention to the 25 day 10.8% decline of the Dow Jones Utility Index.  What is this rapid decline suggesting?  Historically utilities are a market indicator.

According to Bloomberg, there has only been two times since 1929 that the utilities have declined more than 10% while the Dow was reaching a new milestone; April 1972 and January 1994.  In both times the Dow lost more than 5% in the next three months.

Will the Dow decline as in past episodes?  Perhaps but I will also write the “utility trade” is extremely crowded with many reaching for yield given today’s monetary policy.

When everyone owns an asset class, who is left to buy when selling commences?

Speaking of concern, much has been written about the illiquidity of the bond market given the regulatory changes mandated by Dodd Frank.  The bond market is at record size, about ten times greater than the equity markets, but is very illiquid given that most major brokerage firms are owned by banks.  Because of regulations, bond trading inventories are 78% lower than a year ago according to Bloomberg.

There is no back stop if selling commences, a frightening scenario given the vast size of the market and the current level of interest rates.

The 10.8% 25 day decline in the “super conservative” utilities will be nothing compared to possible bond market carnage.

What will happen today?  The ADP Private Sector Employment report, the ISM non-manufacturing index and the Beige Book are released.  How will the markets react?

Last night the foreign markets were down.  London was down 0.36%, Paris up 0.13% and Frankfurt down 0.17%.  Japan was down 0.59% And Hang Sang down 0.96%.

The Dow should open moderately lower ahead of the ADP report and Beige Book.  The 10-year is off 1/32 to yield 2.12%.  Oil is up about $0.50/barrel.

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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.