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Will the Fed be Dovish or Hawkish?

The two day FOMC meeting commences today.  Much has changed since its last meeting held in October and their mid-September forecasts.   Oil has been crushed, the dollar has rallied and more Americans have jobs than expected.  Will the Fed be dovish or hawkish?   The sharp drop in oil can create a strong argument for either case.

I will argue the Committee will be dovish, perhaps waiting until January to see how this plunge in oil will affect the global economies and the geostrategic/geopolitical landscape.

I have opined the sharp decline in crude is now threatening the existence of countries.  How will ISIS respond?  The Administration stated ISIS’s revenue is down sharply in the last 30 days, facing “considerable and devastating financial distress.”   AP reported Saturday ISIS is now selling oil on the black market between $25 and $40 barrel.

AP also reported in ISIS controlled areas; there is rampant inflation and shortages.   The populace who once viewed ISIS as a liberator, an organization that was able to deliver goods and services, is now viewing ISIS as an oppressor and occupier.

Will ISIS act to curtail production to boost prices, perhaps the objective of the failed Libyan port attack?  ISIS controls large swaths of oil production in Iraq, Syria, Libya and Nigeria and is generally opposed to the governments of Iran, Saudi Arabia and Kuwait.  Desperate and irrational organizations/people are prone to act radically.

What about Russia whose debt and currency has been crushed? Or Venezuela?

Obviously the cost of production is pivotal in determining what company or country will survive if oil remains at current levels.  Even though there is considerable information about costs; this information is inconsistent at best.  I can cite several sources costs are around $70 to $75 for the countries facing the greatest threat.

The simple fact of the matte the longer oil stays at current levels, the more carnage will occur especially for those countries/companies that have little financial flexibility.

Selling will end when all least expect.

Returning to the markets, the markets are myopically focused upon oil.  There is only one narrative…prices are going lower.  Markets can remain oversold or overbought for a prolonged period of time.  Only history will tell us where the bottom emerges.

For what it is worth department, today’s bearish oil comments and price action are almost the mirror image of the bullish comments/price action in July 2008 when oil spiked to over $140 barrel.  The bullish comments then to justify $200 oil are the inverse of today’s remarks to justify $50 oil.

Commenting about yesterday’s market action, equities were down about 100 as oil fell yet again.  Treasuries were also down ahead of the Fed meeting.

Last night the foreign markets were down.  London was up 0.11%, Paris down 1.21% and Frankfurt down 0.69%.  Japan was down 2.01% and Hang Sang down 1.55%.

The Dow should open moderately lower following the failed Russian intervention to support the Ruble which has plunged to a record low.  Will Russian announce capital controls to slow the exodus of funds from the country, the proverbial Hail Mary?  As widely known Russia derives about 50% of its revenue from oil.

The 10-year is up 26/32 to yield 2.02%.

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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.