03/1/17

HOW WILL THE MARKETS INTERPRET TRUMP?

By: Kent Engelke | Capitol Securities

How will the markets interpret the President’s remarks? Yesterday’s trading was one of caution with many asking can the President remotely accomplish any of his proposals especially in today’s hyper polarized environment.

I ask a different question. Is today really different than the polarization faced at other major turning points? Is the only difference that of social media, the news source for about 68% of society according to Facebook?

I vaguely recall the riots of the late 1960’s and early 1970’s and the animosity of that time, an animosity and bitterness discussed in my high school years of the mid to late 1970’s. Generally speaking, society has been rather quiet.

Today is more vitriolic than yesterday, but perhaps not as much as it was a generation ago.

Last night the foreign markets were up. London was up 1.14%, Paris was up 1.68% and Frankfurt was up 1.41%. China was up 0.16%, Japan was up 1.44% and Hang Sang was up 0.15%.

The Dow should open considerably higher on the tone of the President’s speech. Fed fund futures contracts are now suggesting over a 80% chance of a March increase. The 10-year is off 10/32 to yield 2.44%.

02/28/17

THE PRESIDENT PROPOSED SOMETHNG RADICAL YESTERDAY…WHAT ABOUT TODAY

By: Kent Engelke | Capitol Securities

Will the President disappoint? Equities advanced on the premise of tax reform, the details that may be released today. As noted many times, the averages have been buoyed by great expectations of a Trump presidency that lowers regulations, simplifies the tax code, increases infrastructure spending and reduces the size of government.

Commenting on the above, increased infrastructure spending has bipartisan support. What about reducing the size of government?

Yesterday, the President announced his dictum that government agencies reduce their budget, but not in the Washington sense. For most organizations a 10% reduction in spending is a 10% reduction in spending. In Washington a 10% spending cut is historically a 10% reduction in the rate of growth. In other words, it is largely ceremonial.

The President’s spending cut is radical for Washington. He has proposed an actual reduction in spending, not a reduction in the the rate of a spending increase.

How will the bureaucracy respond? Probably disdainfully.

As stated above, many are expecting Trump today to announce his tax reform plans.

I have commented many times that globalism is on death’s bed. Yesterday it received another direct hit as Scotland stated it will vote to leave the United Kingdom. A similar referendum failed in September 2014. I will argue if this plebiscite is passed and if Le Penn is victorious in France, both of which is a distinct possibility, globalism has died a traumatic and swift death. Wow! Talk about the unexpected occurring.

If this does occur, the investing landscape has radically changed where yesterday’s rules no longer apply. Economic nationalism will dictate sovereign’s policies.

This implosion of an economic order coupled with perhaps the ending of a 30-year bull market for sovereign debt has and will continue to create uncertainty. How will such uncertainty be manifested in the markets?

Historically negatively, but again expect the unexpected where growth may exceed forecasts.

There is little to write about on yesterday’s market activity. Equities were flat, treasuries fell, the dollar erased losses as the odds of an interest rate next month rose past 50% and oil advanced to the highest level since July 2015.

Last night the foreign markets were mixed. London was up 0.03%, Paris down 0.05% and Frankfurt down 0.19%. China was up 0.40%, Japan was up 0.06% and Hang Sang was down 0.77%.

The Dow should open quietly lower. The 10-year is unchanged at a 2.36% yield.

02/27/17

WILL THE PRESIDENT PUT FORWARD HIS TAX PLAN IN TOMORROW’S ADDRESS?

By: Kent Engelke | Capitol Securities

President Trump addresses a joint session of Congress tomorrow. It has been about 3 weeks since the President stated that there will be “massive tax reform,” the precursor for the recent advance. Will Trump put forward his tax proposals?

As stated many times, the averages have advanced believing the President will be able to pass his legislative agenda, a tall order given the utter rancor in Washington. Business and consumer confidence has also surged because of Trump’s pledge to roll back taxes and regulations.

To write the obvious, the current advance may be the epitome of “buy on rumor and sell on fact” or “averages priced to perfection” for as stated last week, the rally since Trump was elected is the greatest since LBJ’s election. Wow! This is in the face of an Administration that is in total chaos according to The Establishment.

Speaking of confidence, the University of Michigan Confidence Survey dropped from January’s level which was the highest since 2004. February’s level still exceeded the consensus view and is regarded as “very optimistic,” an environment I think is incredible given the utter rancor in the media, politics and in society overall. As inferred, confidence levels are still higher than they were before the election.

There is little I can write about Friday. Markets are vastly overbought, perhaps searching for a catalyst for some much needed profit taking.

What will happen this week?

Last night, the foreign markets were mixed. London was up 0.12%, Paris down 0.06% and Frankfurt up 0.16%t. China was down 0.54%, Japan down 0.91% and Hang Sang down 0.17%.

The Dow should open flat ahead of tomorrow’s speech by the President. The 10-year is off 4/32 to yield 2.32%.

02/23/17

THERE IS NO GROUP THINK AT THE FED

By: Kent Engelke | Capitol Securities

In my view, the Minutes from the February 1 FOMC meeting were largely a nonevent. The Committee “expressed confidence” that they can raise interest rates gradually while a hike “fairly soon” might be appropriate to avoid the risk of an overheated economy.

The Minutes revealed a tension between participants who are worried about foot dragging at a time when economic reports report solid versus those who want more clarity and still have some concerns about downside risks.

Perhaps the only certainty is today is different than yesterday, the result of the election, an uncertainty that is weighing upon monetary policy. If rising confidence and reduced regulations/tax reform increases monetary velocity, I reiterate the odds of greater than expected growth increases exponentially.

The corollary is if Trump’s proposals do not become policy, further economic atrophy may occur.

Markets were little changed on the release.

What will happen today?

Last night the foreign markets were down. London was down 0.03%, Paris up 0.19% and Frankfurt down 0.19%. China was down 0.30%, Japan down 0.04% and Hang Sang down 0.36%.

The Dow should open flat. The 10-year is up 5/32 to yield 2.40%.

02/21/17

A POSSIBLE ALTERNATIVE EXPLANATION OF THE CURRENT ADVANCE

By: Kent Engelke | Capitol Securities

Bloomberg writes the Dow has had its largest advance under a new president since LBJ. Many are suggesting the market is priced to perfection and if Trump stumbles, so will the markets. I ask however, based upon many press accounts, Trump is already stumbling badly with the worst approval ratings of any early presidency.

Perhaps there is a different reason, one alluded to Friday and one that is perhaps difficult to quantify or give attribution. Last week the WSJ reported the cross correlated trade that has worked for the last 8-10 years has collapsed. There is attribution for this view, thus this statement should not be viewed as rhetoric or conjecture.

The question that cannot be definitively answered is why it has collapsed. Consensus declaratively stated a Trump victory would be horrific to the markets. I vividly recall futures plunging over 10% late in the evening of November 8th when it was all but assured Clinton lost.

Many times I have commented about the impact of algorithmic and cross correlated trading which represents about 90% of the volume according to the SEC. I also referenced an SEC study that stated 96% of all orders entered were never executed. I further stated there are about 10-12 electronic firms that have replaced the hundreds of “specialist firms,” electronic firms that use the same rules of the hundreds of former specialist firms to maintain market order.

Specialist firms are permitted to take naked short positions to maintain market integrity. Twenty years ago it would be close to impossible for one firm to dominate the market. Today there are 10-12 trading firms, replacing the hundreds of specialist firms, that can take naked short positions, thus suggesting the market “can be prone to market manipulation and imbalances,” quoting a late 2015 SEC study.

Can I suggest the reason for such a strong advance in the face of “accepted turmoil” of the Trump administration is that these naked shorts are now being covered because of economic necessity? Is this the reason why cross correlated trading strategy that has worked almost flawlessly for the past 8-10 years has completely collapsed?

Perhaps. About 14 months ago, I referenced a Federal Reserve report that contained a question that is now asked by regulators about the loan portfolios of the largest money center banks. Does your institution lend money to algorithmic or electronic trading firms?

It was against this backdrop last January that Barclays Bank wrote perhaps one of the greatest risks to the markets is a potential “melt up” because of unreported naked shorts that creates a liquidity crisis for a mega-sized financial firm.

I will readily acknowledge this is very Michael Moorish, perhaps stretching for a reason to explain why “the fail-safe” cross correlated trade has collapsed and to explain the strongest equity advance since LBJ as the Establishment has declared the Administration is operating in total chaos. Uncertainty and chaos normally creates negative market volatility.

Returning back to information that is quantifiable to explain the advance, data that I have already discussed at length, both business and consumer confidence is surging, optimism on earnings calls is high, growth proxies are humming, all of which has already caused a jump in retail sales and rising inflationary expectations.

In my view there is no question the political environment comes up in every discussion and to ignore such is equivalent to ignoring the impact of interest rates to valuation formulas.

What will happen this week?

Last night the foreign markets were mixed. London was down 0.18%, Paris up 0.36% and Frankfurt up 0.62%. China was up 0.41%, Japan up 0.68% and Hang Sang down 0.76%.

The Dow should open nominally higher on economic optimism as the economic activity in the euro area unexpectedly rose to an almost six-year high. The 10-year is down 10/32 to yield 2.46%.

02/15/17

WAS FRB CHAIR YELLEN’S TESTIMONY A NONEVENT?

By: Kent Engelke | Capitol Securities

If one uses fed fund futures, which are a gauge of market sentiment, FRB Chair Yellen’s testimony was almost a nonevent. Before she began testifying, the market was suggesting a 30% probability of a change in monetary policy in March. Now it is 34%.

Yellen said the Fed panel’s outlook for a “moderate pace” of growth is based on continued stimulative monetary policy and a pickup in global activity. She did not mention Trump administration proposals as a key element in the central bank’s forecast.

The Chair stated that consumer spending has continued to rise at a “healthy pace,” supported by gains in household income and wealth, favorable sentiment and low rates. The Fed chief said changes in fiscal and economic policies could affect the outlook, though she declined to speculate how, adding it is “too early to know” what policy changes will be put in place.

The longer dated Treasury market however had a different view of Yellen’s remarks. The 10-year increased in yield to around 2.50%. Last week, it was yielding about 2.32%. Will yields climb to December’s peak of 2.60%? The 30-year Treasury rose to 3.09% versus last week’s level of 2.92%. In December, the 30-year hit a 3.18% yield.

Did yields advance because of Yellen’s remarks suggesting a gradual increase in the overnight rate, which then may suggest the central bank could fall behind the proverbial inflationary curve?

Speaking of which, wholesale prices jumped in January by the most since September 2012, led by higher gasoline costs, thus suggesting inflation is beginning to stir. The 0.6% gain in the PPI followed a 0.2% advance in the prior month. Consensus called for a 0.3% rise.

Equites led by the financials, staged an advance on economic optimism.

Last night the foreign markets were up. London was up 0.49%, Paris up 0.50% and Frankfurt up 0.10%. China was down 0.15%, Japan up 1.03% and Hang Sang up 1.23%.

The Dow should open quietly lower assessing Yellen’s comments. The 10-year is off 3/32 to yield 2.49%.

02/14/17

FINANCIAL STOCKS DOMINATED YESTERDAY

By: Kent Engelke | Capitol Securities

Financial stocks led the markets higher as the reflation trade continues to dominate activity. The averages are now at the highest valuation since 2004 according to Bloomberg, partially the result of economic optimism via the Trump victory. I think it is noteworthy that to date there are no policies implemented much less proposed, only statements of decreased regulation and taxes.

Is the “Mother” of “buy on rumor and sell on fact” trade on hand? What happens if the Trump proposals become stalled, lacking any significant legation, the result of the hyper partisanship in Washington?

Bloomberg writes volume is anemic, thus suggesting this is a convictionless advance, thus suggesting it can be prone to a sharp pull back.

All must remember nothing is ever linear and there will be ebbing and flowing.

Today, FRB Chair Yellen testifies on Capitol Hill. Will her remarks alter the monetary time table? As noted above, the recent advance has been led by the financials predicated upon a strengthening economy and higher interest rates.

How will her remarks be interpreted?

Last night the foreign markets were mixed. London was up 0.07%, Paris up 0.09% and Frankfurt up 0.01%. China was up 0.03%, Japan down 1.13% and Hang Sang down 0.03%.

The Dow should open flat ahead of Yellen’s testimony; a testimony which is expected to be oblique, defined as no one knows the possible implications and ramifications of a Trump presidency which is challenging the established world order of globalism. The 10-year is off 2/32 to yield 2.45%.

02/13/17

DID FITCH RATING AGENCY MAKE A MOMENTOUS STATEMENT?

By: Kent Engelke | Capitol Securities

The ratings agency Fitch stated the Trump administration has increased the risk to international economic conditions and global sovereign debt markets because of potential changes in trade and other polices.

My translation… Fitch is the first ratings agency that is stating the obvious. The world has dramatically changed and yesterday’s rules may no longer apply. Globalism is dead, replaced by economic nationalism that may alter/harm sovereign economies.

I was flattered that some thought I invented the term economic nationalism, but it was an economic philosophy I studied in a geopolitical/socioeconomic class in 1983. It was over 30 years ago when I was first introduced to the concept of globalism/interdependency versus the then waning status quo of economic nationalism.

For simplicity, economic nationalism is defined as “a body of policies that emphasizes domestic control of the economy, labor and capital formation even if it requires the imposition of tariffs and other restrictions on the movement of labor, goods and capitol.”

I cannot emphasize enough the significance of this geopolitical/socioeconomic change, especially as the vast preponderance of investing dollars has gravitated to the mega capitalized momentum growth companies, primarily the result of the globalist/interdependent/multipolar environment.

This huge flow of capital has vastly influenced the averages, an influence amplified by the proliferation of ETFs that by their very basic composition suggests past performance will be indicative of future performance, defined as the big get bigger and the small get smaller and fundamental economic and security analysis is regarded as potentially meaningless.

Has a radical change occurred, but are most fighting this change because trillions may now be regarded as “sunk costs?” In other words, is the Establishment fighting a battle that may not be won given the radical change that has occurred in the demands from the electorate?

I have commented many times Main Street may outperform Wall Street for the first time since around 2004. According to one study by Alpha Research, only 46% of individual stocks outperformed the S & P 500 from 2007-2016, the result I believe is the result of indexing and ETFs. A mere 10 companies have accounted for 26.2% of all wealth in the market since 2007.

Perhaps Fitch has offered more evidence to this view that Main Street will outperform Wall Street as I believe 2007-14 was the apex of the globalist environment.

Commenting about Friday’s market, the averages led by the energy and financial sectors ended higher. Regarding oil, it was reported that OPEC has achieved a record 90% compliance with the production cut accord while demand grew faster than expected. Perhaps more significant, Saudi Arabia reduced production even more than it had committed.

I ask was the kingdom forced into this action because of huge demands for monies… monies that this oil rich sheikdom does not have because of gargantuan transfer payments and fighting a war? Saudi Arabia requires $90 oil to balance its budget. Its sovereign wealth fund has dropped from around $735 billion in 2014 to about $430 billion today. Two years ago, Saudi Arabia forecasted a $700 billion fund.

The Treasury market was relatively quiet as oil rose. There were also further talks about upcoming tax cuts, specifics announced in two to three weeks.

What will happen this week? Several inflation indices are posted, retail sales, numerous housing statistics and manufacturing data points.

Last night the foreign markets were up. London was up 0.13%, Paris up 1.10% and Frankfurt up 0.91%. China was up 0.63%, Japan up 0.41% and Hang Sang up 0.58%.

The Dow should open quietly. The 10-year is off 8/32 to yield 2.44%.

02/12/17

A POSSIBLE REASON WHY THE TECHNOLOGY COMPANIES ABHOR DONALD TRUMP’S TRADE AND IMMIGRATION PROPOSALS

By: Kent Engelke | Capitol Securities
From: 2/9/17

President Trump may soon label China a currency manipulator. While I will skip the obvious notion that all countries manipulate their currencies either overtly (devaluation) or covertly (monetary policy), such a declaration may have wide ranging implications.

China is an export dominated country, defined as its economic wellbeing is dependent upon the financial health of its trading partners. A dated Commerce Department statistic suggested about 45% of Chines production is slated for export, exports dominated to Western Europe, Japan and the US. In other words, China is in a position of inherent weakness.

I reiterate a reason why electronic equipment and many other products are so inexpensive is because of trade policies, permitting exports from regions where labor is extremely cheap as compared to western wages. If the cost of production rises, either margins contract or prices go up. Either scenario may create more uncertainty.

If these increased production costs are unable to be passed onto the consumer, margins will drop, hence stock valuations will also drop.

If these higher costs could be passed on, inflationary pressures may accelerate.

The loudest protesters of Trump’s trade (and immigration) proposals are the technology companies, companies dependent upon cheap labor costs which permit greater access to their products via low prices.

Regarding stock valuation, in my view the technology companies are overvalued, representing about 24% of the capitalization of the S & P 500, eclipsing 2000’s record level which was then viewed as an absolute mania.

What happens if technology margins erode because of higher prices and inflationary pressures accelerate that forces a more hawkish Federal Reserve? Technology companies would get killed from lower than expected future cashflows discounted at a higher risk free rate, amplified by lofty valuations suggesting there is no room for error.

Against this backdrop, it is no wonder the technology companies are ardent detractors of the Trump administration, falling under the guise there is no interest like self-interest.

For the record, I think a trade war between the largest and second largest economies will end poorly… albeit I am in favor of free trade, whatever this may mean, for such will support the common man and Main Street versus a few.

We do live in interesting times where life is indeed stranger than fiction. So much for last year’s mantra that Donald Trump was behaving in such a manner to enable or permit Hillary Clinton to win the presidency for Trump then was also viewed as an elitist entrenched in the Establishment.

Last night the foreign markets were up. London was up 0.30%, Paris up 0.78% and Frankfurt up 0.55%. China was up 0.53%, Japan down 0.53% and Hang Sang up 0.17%.

The Dow should open nominally higher. The 10-year is off 9/32 to yield 2.36%.

02/12/17

WILL ECONOMIC NATIONALISM REPLACE GLOBALISM IN ITS ENTIRETY?

By: Kent Engelke | Capitol Securities
From: 2/8/17

Some are commenting there is a lack of direction in the markets as most are now looking for more details from the Trump Administration on promised tax cuts, reduced regulation and increased infrastructure spending.

For the immediacy, the averages will trade on the perception of policy success. I must write success will be defined differently regarding on what side of the aisle one sits.

To write the obvious, if The Trump Administration delivers 3.5% to 4% growth, a lot of today’s resistance would collapse. Vice versa, if growth collapses, Trump’s vision of economic nationalism would then collapse.

Regardless, yesterday’s globalist agenda is on life support and depending upon the success of Trump’s agenda, and the upcoming elections in both Germany and France, globalism may cease to exist in anything but name.

Wow! It is no wonder the Establishment, defined as anyone who is at the pinnacle of today’s power structure, is fighting so hard. Trillions are at risk in this potential change of global order to economic nationalism.

Yesterday was another quiet day as confusion is starting to grow over the direction of the young Trump administration…growth and regulatory repeal versus trade and immigration.

Last night the foreign markets were up. London was down 0.03%, Paris up 0.40% and Frankfurt up 0.05%. China was up 0.44%, Japan up 0.51% and Hang Sang up 0.66%.

The Dow should open flat. The 10-year is up 8/32 to yield 2.37%.