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With Auto and Housing Sales Up, What Will be the Results of July’s FOMC Meeting?

What will the Minutes from July’s FOMC meeting suggest scheduled for release tomorrow?  A lot has happened since the late July meeting including further declines in oil, a Chinese devaluation and strong home and auto sales.

Historically homes and cars lead the economy out of a recession.  Auto sales are on a pace to post record annual sales amounting to 17.5 million units eclipsing the 2000 peak of 17.4 million sold.

The National Home Builder’s Sentiment Survey (NAHB) was the greatest in 10 years.  Home affordability is the greatest on record and home ownership is at the lowest level in almost 50 years.  Mortgage delinquency rates are at the lowest on record (circa 1999) according to the NY Fed.  Conversely rental rates are at a record.

Regarding oil, crude is down almost 30% since June, the sharpest decline in history.  Such a sharp drop in crude is hypothetically bullish for the consumer albeit such an increase in retail sales did not occur when crude declined sharply in the November-March period.

And then there is China.  Is the devaluation bullish or bearish?  Will the devaluation stimulate demand or is it a mark of desperation?  I can make an argument that the entire industrialized world has devalued its currency via the various stimulus programs enacted so why would China be different.  It is the proverbial race to the bottom.

I can also argue the major reason for the rise of the US dollar is the constant banter as to when not if the US will increase interest rates, the result of greater economic growth than the rest of the world [and growth stimulated by housing and autos].   As stated above all China is doing is playing catch up with everyone else for the exception of the US.

Last week I used words that I had never publically had written, words such as “manipulated” or the “market stacked against all but a few.”  My view has not changed even though I will now write most hedge funds are languishing and there is now at net outflow of funds from equity ETFs.

I think a strong argument can be made that there is a vast pool of money controlled by a small number of institutions decimating one sector while bidding up another.  For example the shorting oil while going long the dollar.

While I cannot definitively write “there are a small number of institutions” I can definitively write short and long interest on both oil and the dollar, respectively, are around or at record levels according to the Commodity Futures Exchange.

What will happen today?  Yesterday equities rose nominally on the housing data.  There is more housing data posted today.

Last night the foreign markets were mixed.  London was down 0.13%, Paris down 0.14% and Frankfurt up 0.02%.  Japan was down 0.32% and Hang Sang down 1.43%.

The Dow should open quietly lower.  The Yuan traded lower last night but at this juncture the decline is not weighing heavily upon US equity futures.  Some of the largest retailers are posting results today, results that are mixed and are offering evidence the drop in oil is not translating into higher retail sales.   The 10-year is up 3/32 to yield 2.16%.

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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.