One could not have envisioned 2020.  Many are now recognizing the massive amount of monies that are concentrated in a few names, perhaps the result that every trade other than indexing has imploded including the “fail safe” Treasury carry trade that collapsed in late March that almost destroyed all financial markets resulting in unprecedented Fed action.

Incredibly Apple is now larger than every stock market in the world bar the US, China and Japan.  Wow!

According to Bloomberg Tesla has raised more money in 2020 than the entire equity issuance by the oil industry during the past three years.  Tesla has also raised more money in 2020 than all its prior offerings over the last decade.

All must remember 2016 was the biggest equity issuance on record for the E & P sector when oil plunged below $30/barrel with the greatest minds on Wall Street believing that such was an aberration.

For the first time, oil is now the smallest component in the S & P 500.  The capitalization of Tesla is almost 2.5 times larger than Exxon.

In my view, and as noted above, perhaps the most significant event of 2020 was the implosion of the Treasury carry trade.  Simplistically speaking massive sums of borrowed monies were used to profit from tiny price discrepancies between futures and the underlaying cash Treasury.  The implosion of this trade was discussed at length in March and was the reason why the Fed indicated it would inject an unprecedented $5 trillion into the bond market on or about March 16.

March 2020 was Long Term Capital Management (LTCM) on steroids.

Fast forward to today.  The carry trade has fallen into hibernation, threatening the liquidity of the world’s largest debt market just when liquidity may be needed most.  Monday a Bloomberg headline read “A Vanishing Treasuries Trade Pose Threat to Largest Debt Market as $1 trillion in liquidity has evaporated.”

How will this unfold?

Historically the bond market dictates the direction of the stock market.

Today is the commencement of a two-day FOMC meeting.  As widely discussed the Fed has changed monetary policy, permitting inflation to run over its 2% speed limit for a period of time.  The issue at hand is how high and how long?  No one knows.

It is widely documented the massive discrepancy between value and growth, a discrepancy based on several indicators is at record proportions.  Value investors have been crushed.

Change is the only constant.  I can argue the change from growth to value  (aka contrarian)  will happen when the inflationary implications of negative real interest rates and an unprecedented 25% surge in money supply come to fruition, a view that is also shared by several bond market luminaries.

Commenting on yesterday’s market activity, equities gained on merger activity and signs of progress towards a vaccine.

Last night the foreign markets were up.  London was up 1.04% ,Paris up 0.50% and Frankfurt up 0.33%.  China was up 0.51%, Japan down 0.44% and Hang Sang up 0.38%.

The Dow should open moderately higher on European and Chinese data indicating the economic recovery is gaining traction.  The 10-year is off 2/32 to yield 0.68%.


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.