Many times I have commented about the lack of liquidity, primarily the result of regulatory fiat, trading mechanics and passive investing.  Considerable attention has been focused on the liquidity issues of the repo market, liquidity that is being provided by the lender of last resort—the Federal Reserve.

Several times I have discussed the implosion of several high profile and prolific European (and now South Korean) money management firms, the result of liquidity issues.  These names are synonymous to American names such as Doubleline and Blackstone.

Yesterday Bloomberg remarked that equity market liquidity is still hovering around annual lows.  Wow!

I would like to comment about the performance of the S & P 500 Energy sector….horrible, horrific, career ending.  The WSJ writes crude has dropped about 25% for the year but energy shares are down about 54%.  Liquidity in the sector is virtually absent, essentially creating a vacuum.

Will this change?  Are conditions as dour as a share prices suggests or is the environment in the energy sector the inverse of the “greater fool theory,” the prevailing theory that I believe exists in some parts of the technology sector?

It is widely accepted there is no geopolitical premium in oil prices.  I ask should the premium be around the greatest in history given the total implosion of the 70 -100 year old geopolitical environment in the Middle East?

Moreover the leading Democratic candidate shares the same view as the President…leave the Middle East.  Additionally all Democratic presidential candidates are advocating a ban for the exploration of oil.

I believe if any of the above continues to materialize oil supplies—which are already at the lowest since September 2007—could massively contract sending crude sharply higher.

Fanciful thinking?  This is the first time in my 33 years of experience that geopolitical and macro-economic and security specific analysis is regarded as totally meaningless.  It is my first-hand experience, when extremes are achieved the inverse occurs.

For what it is worth department, historically when there is a big shift in sentiment, all deny the possibility of yet another change.  For example five years ago everyone believed oil would never trade lower than $90/barrel.  Funds for exploration were readily available and to heck with any traditional financial metrics.

Today because of the last five years, and the greatest oil implosion in about 2 generations, confidence and capital is at a multigenerational low.  Today psychology is abysmal, an outlook perhaps amplified by the change in information delivery.  The psychology will change but the question is when.

Last night the foreign markets were mixed.   London was up 0.19%, Paris down 0.26% and Frankfurt up 0.16%.  China was down 1.32%, Japan up 0.18% and Hang Sang down 0.48%.

The Dow should open flat on mixed Chinese economic data and earnings.  The 10-year is off 4/32 to yield 1.77%.


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.