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Will the Arab Spring be Nothing as Compared to the Potential Arab Winter?

The two day FOMC meeting concludes today with a 2:00 P.M. statement.  Will the phrase “considerable time” be omitted?  I will argue no given the impact of the collapse of oil prices is not yet known.  Speaking of which, will the Central Bank comment about the sudden implosion of oil?

I reiterate we are not talking about companies failing but rather countries.  How much longer can Venezuela and Russia remain current on their obligations?  Will social unrest occur leading to production outages and possible regime change occur?

Is this a radical thought?  Maybe in Russia but not in many underdeveloped countries such as Venezuela, Iran, Iraq, Nigeria, Syria and Libya where unrest is already bordering on anarchy.  Will the Arab Spring be nothing as compared to the potential Arab Winter?

I believe the odds are around 60% the market will shift emphasis to country risk rather than corporate event risk.  The vast majority of the west’s technology is light years ahead of most of the developing world’s technology thus suggesting the West (i.e.  Canada and the US) are the lower cost producers.

Some are beginning to compare today to 1997-98 and the collapse of Long Term Capital Management (LTCM), the spectacular hedge fund implosion because of leverage bets on Russian debt.  Russian debt and currency collapsed partially because of the plunge in oil prices.

Oil prices in 1998 collapsed about 45% in eight months and then rebounded 85% in the next six months and by 185% in 12 months.

Will today follow yesterday’s precedence?

Perhaps the only concrete statement to make is the longer crude remains at current levels the more damage will occur, the outcome of which is infinite and unquantified.

Equities were volatile yesterday alternating between triple digit losses and gains.  The averages ended about 100 points lower.  All must remember that Friday is quadruple witching hour which may have added to the volatility.

Last night the foreign markets were down.  London was down 0.69%,  Paris down 0.38% and Frankfurt down 0.60%.  Japan was up 0.38% and Hang Seng down 0.37%.

The Dow should open moderately higher on belief the Fed will not  change its post meeting statement because of the calamity in the oil markets which is effecting the economies and bond/currency markets of many of the emerging markets.

As noted many times, the global economies are multipolar and interconnected  The question at hand will Russia, Venezuela, et.al. implode, descend into some type of xenophobic isolationist country?  Capital flight in both countries is huge and the risk of such flight accelerating in many developing countries whose economies are tied to commodities is considerable.

The 10-year is off 11/32 to yield 2.09%.

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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.