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Typically bond investors and economists have little difference of opinion. Today the gap is huge. According to economists surveyed by the WSJ, the Fed Funds rate should climb to 2% in a two year period. Ten year treasury investors with a yield at 2.04% do not share this view.
Some would argue the discrepancy is the result of the false starts regarding a change in monetary policy. If the economists are correct, a view I favor given that Federal Reserve economists set the target for the overnight rate; there is considerable risk in treasuries.
To write the obvious there is a global growth scare. What will change this dominating perspective, a perspective amplified by HFT?
As written many times, the global economies are inundated with liquidity, liquidity sitting idle for a myriad of reasons. Monetary velocity is virtually nonexistent as the proverbial animal spirits are absent for a plethora of reasons including regulatory concerns and the impact to a company’s value if the firm misses profit expectations.
As written many times, productivity is considerably past the proverbial inflection point where capital expenditures should be rising. As noted above, I believe a reason for the lack of expenditures is any such costs may impact profits (hence share price) and increases the probability of regulatory overview.
At some juncture corporations will invest in more plant and equipment to increase productivity. Based upon economics 101 it is not if but rather when.
Change and the velocity of change is the only constant. Change will occur when all least expect, the catalyst of which is so obvious that it is overlooked and why I believe the economists are correct versus 10-year treasury investors.
Commenting upon yesterday’s activity, the Dow was relatively quiet albeit the NASDAQ fell about 0.80% as selling in the biotechs resumed. Today the markets will be faced with several key earnings and economic reports, an interpretation of such may vary greatly.
Last night the foreign markets were down. London was down 0.57%, Paris down 0.30% and Frankfurt down 0.53%. China was down 0.93%, Japan down 1.89% and Hang Sang down 0.71%
The Dow should open flat as earnings released to date have been mixed. Additionally the inflation data from China signaled possible more weakness. There is also a data dump today including retail sales, the PPI and the Beige Book, all of which could impact trading. The 10-year is up 3/32 to yield 2.04%.

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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.