by Louis Navellier

February 9, 2021

Eagle versus the Dragon Image

Last Tuesday, Eurostat announced that the eurozone contracted at an annual pace of 2.8% in the fourth quarter and its GDP contracted 6.8% in 2020. By comparison, the U.S. economy grew at a preliminary annual pace of 4% in the fourth quarter and China is now leading in worldwide economic growth.

CNBC reported last week that while China’s GDP grew by 2.3% in 2020, U.S. GDP contracted by 2.3%. Even more provocatively, CNBC showed charts that China’s GDP was growing faster than U.S. GDP and pointed out that China’s GDP would likely exceed the U.S. GDP sooner than previously forecasted. China is now expected to exceed U.S. GDP by 2026, up from economists’ previous estimate of 2028

The Wall Street Journal reported that while Britain and the U.S. have vaccinated 14.4% and 9.6% of their populations, respectively, France, Germany, Italy, and Spain have only vaccinated 2.3% to 3.4% of their populations, and China has only vaccinated 1.7% of its vast 1.4 billion population. Although Britain plans to vaccinate 60% of its population by June, the eurozone is lagging far behind Britain in vaccinations.

This may explain why vaccine and Covid-19 testing stocks have been so hot in recent weeks.

U.S. Economic Statistics are Still Mixed in this Spotty Recovery

The Institute of Supply Management (ISM) announced last week that its purchasing managers index (PMI) declined to 58.7 in January, down from 60.5 in December. This is still a very high PMI reading, since any reading above 50 signals an expansion. The ISM new orders component declined to 61.1 in January, down from 67.5 in December, while the production component slipped to 60.7 (down from 64.7 in December). These two components were largely responsible for the January PMI decline. Overall, 16 of the 18 manufacturing industries reported an expansion, so the manufacturing sector recovery persists.

On Wednesday, ADP reported that 174,000 private payroll jobs were created in January, and December’s private payroll was revised up to a 78,000 loss (vs. a 123,000 loss originally reported). The January ADP private payroll report was a surprise, since economists were expecting only 70,000 private payroll jobs to be created. Another encouraging note was that small businesses added 51,000 jobs in January, according to ADP. Now that the number of Covid-19 cases is peaking, and more people are getting vaccinated, many small businesses seem to be able to create more new jobs – now and in the upcoming months.

On Thursday, the Labor Department reported that weekly unemployment claims declined to 779,000 in the latest week vs. a revised 812,000 in the previous week. This was a nice surprise, since economists expected to see 830,000 claims. Unemployed workers seeking extended benefits rose by 197,000 to 1.7 million in the latest week, which signals a possible structural long-term unemployment problem. Continuing unemployment claims declined to 4.592 million compared to a revised 4.785 million in the previous week, so long-term unemployment appears to be improving – slowly, but surely.

On Friday, the Labor Department reported that only 49,000 new payroll jobs were created in January, which was slightly below the economists’ consensus expectation of 55,000. However, even more disappointing was the December payroll report, revised down to a 227,000 job loss, from an initial estimate of a 140,000 payroll decline. November’s payroll gain was also revised lower to 264,000, down from 336,000 previously reported, so in the past two months, payrolls were revised lower by 159,000 jobs.

Despite the downward December and November revisions, as well as a disappointing January report, the unemployment rate declined to 6.3% in January, down sharply from 6.7% in December. This decline is due largely to the workforce shrinking, which may have been adversely impacted by severe winter weather, as well as the fact that many parents cannot return to work until schools fully reopen. The leisure and hospitality sector lost 61,000 payroll jobs in January, after a massive 536,000 decline in December, so clearly it is critical that Covid-19 restrictions be lifted before there can be any meaningful job creation.

If you are looking for some good news, the Commerce Department reported on Friday that factory orders rose 1.1% in December after rising 1.3% in November. A strong housing and automotive sector continue to boost factory orders, which remain 6.6% below pre-pandemic levels. Ford announced last week that it is cutting the production of its popular F-150 pickup at two plants in Missouri and Michigan due to the global shortage of semiconductor chips for LED and OLED screens. GM, Nissan, and VW Group have also been forced to curtail their vehicle production due to a shortage of semiconductor chips. As a result, I expect that factory orders will remain strong in the upcoming months due to a tight inventory of vehicles.

The other good news is that the Commerce Department on Friday announced that the U.S. trade deficit narrowed to $66.6 billion in December compared to a revised $69 billion in November. Exports surged 3.4% in December to $190 billion, while imports increased by 1.5% to $256.6 billion. A narrower trade deficit many cause economists to revise their fourth-quarter GDP estimate a bit higher. Speaking of GDP estimates, I should add that the Atlanta Fed on Friday revised their first-quarter GDP estimate down to a 4.6% annual pace, down from its previous estimate of a 6% annual pace. Despite this downward revision, the U.S. is expected to avoid falling into a recession, unlike the EU, despite our still-weak labor market.

Our Stocks are Resisting any Hedge Fund Attacks

Our stocks have been typically benefitting from positive quarterly announcements that trigger subsequent news articles. Additionally, sometimes positive analyst revisions and upgrades also trigger these favorable articles. The bottom line is that companies that (1) post positive quarterly results, (2) exceed analyst consensus sales & earnings estimates, and (3) provide positive guidance, typically create wave after wave of persistent buying pressure that overwhelms the stock pricing algorithms on Wall Street.

In other words, just like Reddit caused an incredible surge of retail orders to “squeeze shorts” and target inefficient pricing on Wall Street, our expanded following of thousands of readers is helping to ignite persistent buying pressure that is obvious in many small-cap and international ADRs in recent months.

The decimalization of Wall Street has squeezed bid/ask spreads and caused trading algorithms to control security transactions with tighter bid/ask spreads. However, Reddit has exposed the limitations of these trading algorithms, which can temporarily cause extreme security valuations. In the case of our stocks, our growing following is causing much more persistent buying pressure and, due to our obsession with stocks that offer superior fundamentals, our stocks can maintain their value with less extreme volatility.

We are happy to be profiting from these trading algorithm anomalies and expect that many of our stocks will continue to post strong performance at least through May, since the underlying fundamentals will likely continue to generate wave after wave of favorable press for many of our stocks!

In the meantime, beware of those regulators who may have vested interest in some of the players. The new U.S. Treasury Secretary Janet Yellen reportedly got $1.5 million in fees from Melvin Capital and Citadel before she became Treasury Secretary. She called for a meeting with the Commodity Futures Trading Commission (CFTC), the Federal Reserve, and the Securities & Exchange Commission (SEC) to discuss the recent trading volatility caused by Reddit. I suspect that “circuit breakers” or other trading restrictions may be implemented. The fact that Melvin Capital and Citadel were victims of the GameStop short squeeze just made this meeting more interesting. Any trading restrictions will likely be framed as a way to “protect the individual investor,” even though they may protect Yellen’s hedge fund friends more.

Navellier & Associates does not own General Motors (GM), Ford (F), GameStop (GME), or Volkswagen (VW), in managed accounts. Louis Navellier does not own General Motors (GM), Ford (F), GameStop (GME), or Volkswagen (VW).

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The Junk Bond Index is “Inside 400”

Sector Spotlight by Jason Bodner
The Winning Outliers vs. the Scheming Sea Otters

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About The Author

Louis Navellier
CHIEF INVESTMENT OFFICER

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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