03/22/17

CAN ANY CONCLUSIONS BE MADE FROM YESTERDAY’S DECLINE, THE GREATEST SINCE OCTOBER 11?

By: Kent Engelke | Capitol Securities

Equities, led by the financials and technologies, fell by the greatest amount since October 11th over concerns that the Trump agenda may become stalled. House Republicans warned failure to a pass a healthcare bill could imperil tax and spending reforms.

Such delays and politicking should be expected, especially with an agenda as radical as Trump’s that wants to greatly reduce the size of the administrative state.

Most would agree the markets are over extended and profit taking should be expected at any juncture. The question at hand is will this profit taking morph into something of more significance?

I am concerned that the 10-year Treasury yields considerably more than the S & P 500 dividend yield. I am also concerned about the intense concentration of funds in a handful of names, the result of ETFs. I am also fearful about technology/algorithmic based trading that can cause great short term volatility.

However, consumer and business sentiment has not waned, monetary velocity is accelerating and outside of a handful of widely owned names, valuations are reasonable.

For a myriad of reasons I believe growth will surprise on the upside, partially the result of an increase in monetary velocity and rising home values. This will in turn support Main Street over Wall Street with the smaller capitalized names outperforming the mega capitalized growth issues, a nomenclature in itself is oxymoronic.

Because of the above backdrop, I think monetary policy will evolve into a more hawkish stance, the first such evolution in over 10 years.

All of the above should support the vast majority of names not mentioned a gazillion times a day in the financial media. Will this view materialize? Unfortunately, only history can answer this question.

What will happen today?

Last night the foreign markets were down. London was down 0.82%, Paris was down 0.43% and Frankfurt was down 0.47%. China was down 0.50%, Japan was down 2.13% and Hang Sang was down 1.11%.

The Dow should open nominally lower as questions are arising as to whether or not President Trump can enact his pro-growth policies. As stated above, such uncertainty should be expected given his plans to gut the proverbial administrative state, a gutting that has a high probability of being met with great bureaucratic resistance. The 10-year is up 3/32 to yield 2.41%.

03/21/17

A CONFLICTING ENVIRONMENT

By: Kent Engelke | Capitol Securities

For many, things are not making sense. President Trump’s approval ratings hit a new low, but both personal and corporate confidence is surging, the result of Trump’s anti-tax and anti-regulatory attitude. It is obvious many are celebrating the possible demise of the administrative state.

According to the WSJ, for the first time in many years, the 10-year Treasury is now yielding considerably more than the S & P 500 dividend yield… 2.5% of the 10-year versus 1.9% for the S & P 500. For many, this too does not make sense, suggesting that either yields or the S & P 500 is poised to tumble.

Speaking of tumbling, the S & P 500 yesterday did not tumble, but did slip about 0.20% while the other indices were essentially unchanged. The accepted reason… trade concerns.

Continuing with the “conflicting theme,” there are divergent statements from FOMC officials regarding monetary policy. I have little concern about opposing views for typically crises occur when there is “group think” and differing opinions are not voiced fearing political and other ramifications.

What will happen today?

Last night the foreign markets were mixed. London was down 0.17%, Paris was up 0.26% and Frankfurt was up 0.01%. China was up 0.39%, Japan down 0.34% and Hang Sang was up 0.37%.

The Dow should open quietly higher. Three Fed officials speak today. Oil is up about 1% on the belief that inventories contracted for the second consecutive week. The market is now suggesting a 57% chance of an another interest rate hike by June. The 10-year is off 6/32 to yield 2.49%.

03/16/17

NO CHANGE IN THE MONETARY TIMETABLE

By: Kent Engelke | Capitol Securities

As expected, the Federal Reserve raised its benchmark lending rate a quarter of a point and continued to project two more increases this year. A minority had thought that the committee would suggest three increases as possible in 2017 given sentiment and employment levels.

Because the monetary timeline was left unchanged, stocks advanced and Treasuries surged. The dollar fell and oil rallied.

Commenting on the Treasury market, was the advance fueled by short covering, the result of the committee leaving its 2017 and 2018 forecasts unchanged? All must remember that over 90% of the trading in the Treasury market is the result of algorithmic or technology based activity.

One can make the case because of the strong advance in Treasuries, more than a minority expected the Fed to change its monetary policy timetable and expectations.

As also indicated, oil gained over 2.25%, the result of a falling dollar and inventory levels. Inventories have been growing over the preceding weeks, growth I believe was the result of OPEC’s decision to pump all out in the months leading to the January 1 production cut.

I had verbally commented that inventories may be on the verge of declining because it historically takes about 45-60 days to ship the oil once pumped, thus suggesting the current production glut is in its final hours. The International Energy Agency (IEA) echoed a similar view Tuesday evening.

I also verbally remarked about falling super oil tanker rates, down about 45% from January 1, the result of empty tankers sitting idly with no charter rates. For about 30 months, tanker rates were achieving consecutive record highs, the result of strong demand from OPEC countries. Are falling tanker rates a harbinger of falling inventories? Logic and history suggest yes.

What will happen today?

Last night the foreign markets were up. London was up 0.92%, Paris was up 0.67% and Frankfurt was up 0.84%. China was up 0.84%, Japan was up 0.07% and Hang Sang was up 2.08%.

The Dow should open nominally higher. Oil is up on inventory drawdowns, the FOMC’s dovish message and a pro-European victory in the Netherlands. The 10-year is off 8/32 to yield 2.52%.

03/15/17

NO ONE CAN MAKE UP TODAY’S NARRATIVE

By: Kent Engelke | Capitol Securities

Where to? Today can be a significant day given the Netherlands referendum, the Fed meeting and the continued diplomatic issues between two NATO allies — The Netherlands and Turkey.

Regarding Fed policy, the markets are expecting a 0.25% increase in the fed funds rate and have fully discounted an additional 0.50% increase by year end. Will FRB Chair Yellen suggest policy that may become more hawkish during the press conference? Yes, if the data suggests that such policy is appropriate.

What are the odds of such? Many times I have mentioned surging consumer and small business sentiment. Yesterday, Bloomberg reported that optimism from CEOs jumped by the greatest amount since the end of 2009. I think this is significant.

The largest companies have fully supported the globalist environment. As inferred above, globalism can be on the cusp of yet another setback and thus begets the question of why the surging optimism by the largest companies?

According to Bloomberg, these leviathans are encouraged by Trump’s plays: cutting taxes, reducing regulations and investing in infrastructure. Jamie Dimon, CEO of JP Morgan, stated the animal spirits after being caged for the past eight years have been released.

Several times during the campaign, I referenced a NYT article indicating not a single CEO of an S & P 100 company endorsed Donald Trump. Have attitudes changed?

If so, and if sentiment continues to remain robust by both the consumer and small business owners, I would expect more hawkish comments by the FRB Chair in the intermediate future.

What will happen today? Will trading be muted until the 200 PM Fed announcement?

Last night the foreign markets were mixed. London was up 0.19%, Paris was up 0.13% and Frankfurt was up 0.02%. China was up 0.08%, Japan was down 0.16% and Hang Sang was down 0.15%.

The Dow should open nominally higher. Oil is up about 2% on an unexpected drawdown in inventories. The 10-year is up 5/32 to yield 2.58%.

03/10/17

JOBS DATA AT 8:30 AM

By: Kent Engelke | Capitol Securities

The February BLS employment report is released at 8:30 am. Most are expecting the data to be robust for a myriad of reasons including the generational low in weekly jobless claims, the ADP employment report and the strongest consumer and business sentiment in over 15 years

Most believe this report will be the basis for a rate increase next week and some are suggesting the data could be the catalyst to a more hawkish monetary policy position.

Analysts are expecting a 4.7% unemployment rate, a 200k and 210k increase in nonfarm and private sector payrolls, respectively, a 0.3% increase in hourly earnings, a 34.4 hour workweek and a 62.9% labor participation rate (LPR).

I believe the most important components of the report will be the LPR and hourly earnings. To date, earnings growth has remained subdued, perhaps the result of a generational low LPR.

I think if the LPR and hourly earnings surprise on the upside, a considerably more hawkish monetary policy stance will evolve. By every benchmark, even if the overnight rate is increased by the consensus view of 0.75% during 2017, monetary policy will still be regarded as very simulative.

Commenting about yesterday’s market action, oil fell below $49 for this first time this year almost sending equities to its fourth consecutive decline if it were not for a late recovery. Treasuries sank a ninth consecutive day as the ECB expressed optimism on global growth and inflation. The 2-year treasury, or the instrument most sensitive to monetary policy, rose to the highest yield in seven and half years.

Last night, the foreign markets were up. London was up 0.50%, Paris up 0.52% and Frankfurt up 0.57%. China was down 0.12%, Japan up 1.48% and Hang Sang up 0.29%.

The Dow should open moderately higher ahead of the jobs data, but this could change radically if the statistics differ greatly from the consensus view. The 10-year is unchanged at a 2.60% yield, oil is up about 1%.

03/7/17

TRUMP VERSUS MONETARY POLICY…WHAT IS THE MARKET CATALYST?

By: Kent Engelke | Capitol Securities

To date, the Trump administration has positively influenced equity markets. Will the opinion soon change? Typically, “Presidential Issues” are equity negative.

Like most, I do not know what is true and what is not true.

With the above written, from firsthand experience whenever a power base is threatened, the environment becomes extremely toxic with intense vitriol.

Several weeks ago, I opined the President is the “Master of diversionary politics,” utilizing meaningless events (size of inauguration, Ivanka’s clothing line, etc.) to deflect attention from his real intentions. This is nothing new as every national leader has utilized such tactics.

I also opined President Trump has utilized social media more efficiently and effectively than President Obama. To remind all, according to both the WAPO and the NYT, President Obama’s “adroit” use of social media utilizing dubious ads was a major reason for his reelection in 2012.

Several weeks ago I wrote it is going to get uglier before it will get better.

Personally, I do not think the President is trying to create some authoritative police state for one simplistic reason. Trump is trying to reduce the size of government and government regulations/interference. What the President is attempting directly contradicts what some are suggesting.

At this juncture, the markets are focused upon Trump’s tax and regulatory reform agenda, not the vitriol, perhaps transitioning to monetary policy as a March increase is now largely anticipated.

As asked above, will attention change to “issues” surrounding the Administrative branch? Only history can answer this question.

Returning back to monetary policy, the current market catalyst, the Fed’s inaction next week will now be a surprise. I believe if there is no change in policy, all markets will respond negatively for many will interpret Yellen as extremely dovish, which then raises inflationary expectations. If inflationary expectations become unanchored, yields can rise considerably more than most expect.

Last night the foreign markets were mixed. London was up 0.07%, Paris down 0.32% and Frankfurt up 00.5%. China was up 0.26%, Japan down 01.8% and Hang Sang up 0.36%.

The Dow should open quietly lower. The 10-year is unchanged at 2.50%.

03/2/17

IS DONALD TRUMP MORE POWERFUL THAN THE FEDERAL RESERVE?

By: Kent Engelke | Capitol Securities

Are the equity markets now rewarding tighter monetary policy? About 14 months ago, following the first increase in interest rates in about eight years, I opined the Federal Reserve just gave the “all clear signal.” Equities however were crushed during the following eight weeks, a rout that ended in mid-February 2016.

I had postulated a major reason for the considerable selloff was cross correlated and algorithmic trading as interest rates are a primary component of most valuation formulas. I also stated that any time since 2010 when there was any hint of a change in monetary policy, equities fell.

Fast forward to today. According to Fed fund futures, there is now an 80% chance of an increase in interest rates at the March FOMC meeting and for the first time since at least 2007, the market has fully discounted proposed Fed policy which is three interest rate hikes for the year.

As evidence to this view, I point to not only Fed funds futures, but also to the two-year treasury or the instrument most sensitive to monetary policy. The two-year treasury at a 1.31% yield is at the highest level since 2009.

There are several reasons for the radical change in the market’s expectations of monetary policy. Foremost is the PCE deflator, or a primary inflation indicator of the Federal Reserve. Currently it is at 1.9%. The FOMC’s mandated speed limit is 2.0%.

In every dimension monetary policy is extremely simulative, suggesting the overnight rate should be between 2.75% and 3.25% versus today’s current rate of 0.5%. Stating the overnight rate can rise to 1.25% is not superlative. In fact, such a level is still considered extremely simulative.

Equities have been strong since the election, predicated upon tax and regulatory relief, smaller government and infrastructure spending. I will also add I believe there is a complete breakdown of cross correlated trading which caused many sectors of the markets to plunge from June 2015-February 2016.

At some juncture, higher interest rates will impact the markets, especially the largest capitalized momentum issues that everyone owns because of the proliferation of ETFs and index funds. Moreover, the valuation of these issues can further become challenged because of the change in the geopolitical and macro-economic environment from globalism to nationalist economics.

What will happen today?

Last night the foreign markets were mixed. London was down 0.05%, Paris up 0.24% and Frankfurt up 0.05%. China was down 0.52%, Japan up 0.88% and Hang Sang down 0.20%.

The Dow should open flat. The 10-year is off 5/32 to yield 2.48%.

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%.