Five weeks ago the recessionary narrative was at the point of being hyperbolic.  A major issue at hand was the data at that time did not fully support this theme.  Five weeks later little attention has been focused upon concrete data that is suggesting a first quarter growth rate anywhere between 2.1% and 2.9%.  The Atlanta Fed is now projecting a 2.4% 1Q growth rate vs. 0.2% five weeks ago.

I reiterate my long standing view economic growth will continue to surprise on the upside and the greatest risk is that this growth again challenges monetary policy assumptions.

Many times I have discussed the lack of liquidity in the bond market.   FINRA—the primary regulatory body—stated that volume in the corporate bond market is about double than it was in 2003 but the amount of outstanding corporate debt has tripled.  The vast majority of the years since 2003, interest rates were falling or at multigenerational lows.

The NY Fed stated primary dealers’ holding of corporate bonds has plunged to around $10 billion today from more than $200 billion in 2007.  Historically money center banks bought bonds, held in their inventories to resell at a later date.  Many times the banks were a buyer of last resort hence enable to profit from market inefficiencies brought upon by fear or shock.

The vast majority of trading today is done by directly matching up buyers and sellers.  This works great until the expected environment changes.

Anyone can sell you a bond but will happen when the customer wants to sell the bond and there are no ready buyers?  To write the obvious, prices fall.

I believe interest rates are the greatest determinate to equity valuations.  Equity valuations—as defined by the popular indices which are dominated by the mega sized technology companies—are greatly over extended.   Bloomberg reports the ratio of the NASDAQ 100 to the S & P 500 has only been higher one time history…the tail end of the bubble of 2000.

Profit margins which are near a record are perhaps at an inflection point, are poised to turn lower because of increased labor and input costs amplified by potentially higher interest rates because of the massive amount of debt that must be refinanced over the next three years.

Historically the next crisis is partially the result of actions taken to avert a similar crisis of yesteryear.  I believe the next crisis will be a liquidity crisis, the result of regulatory fiat, one that challenges equity and fixed income valuations.

Is this a radical view?  No, it is the view of several iconic Wall Street firms and is partially that of the US Treasury.  Hopefully there will be changes in the mechanics of fixed income trading before such a crisis unfolds, a crisis perhaps the result of greater than expected economic growth.

Last night the foreign markets were mixed.   London was down 0.10%,  Paris up 0.26% and Frankfurt up 0.50%.  China was down 0.40%,  Japan down 0.84% and Hang Sang down 0.54%.

The Dow should open mixed ahead of a three day weekend.   The 10-year is up 9/32 to yield 2.57%.

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. 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. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.