by Louis Navellier
August 13, 2024
The catalyst for last week’s stock market gyrations was mostly the Japanese carry trade. That’s a situation where investors sell the Japanese Yen to benefit from the U.S. dollar’s appreciation versus the Yen, as the U.S. dollar yields far more than the near-zero interest rates in the Yen. However, as U.S. recession fears mount, U.S. Treasury yields began to collapse and the Japanese carry trade became temporarily unwound, so the Nikkei 225 Tokyo stock index plunged 12.4% last Monday, only to resurge by 10.23% Tuesday.
Naturally, when Japan’s stock market trades dramatically lower overnight, U.S. stocks tend to open lower. Then, a retest typically follows, so trading volume usually has to dissipate after a reversion to the mean.
Right now, it is estimated that 75% of the Japanese carry trade has been unwound, so Treasury yields have firmed up in recent days, but U.S. yields are still substantially lower than they were just a few weeks ago.
I should add that this currency and market whipsaw comes on top of recession fears, as home prices are now falling at their fastest pace in the past two years, especially in popular regions like the Sunbelt, so as shelter costs (owners’ equivalent rent) start to fizzle, both the Consumer Price Index (CPI) and the Personal Consumption Expenditure (PCE) index should fall within the Fed’s 2% inflation target range.
All this has added fuel for perma-bear Jeremy Grantham to say on his “We Study Billionaires” podcast on Thursday, “This is the most vulnerable market there has ever-been.” Grantham pointed out that the Japanese asset bubble in the late 1980s, the dot-com bubble at the turn of this century, and the mid-2000s housing bubble were all followed by harsh downturns. What I find amazing is that Grantham has failed to point out the fact that: (1) we are now in the best earnings environment in the past two years; (2) the Fed is on the verge of cutting key interest rates; and (3) the breadth and power of the stock market is expanding.
The truth of the matter is that Grantham is a bond manager and bond guys favor weak economic news, since it causes a flight to quality that drives bond yields lower and improves the performance of their bond portfolios. That’s why Grantham is perpetually bearish, because it is good for his bond portfolios.
The economy is slowing down, for sure, but the economic indicators aren’t as dismal as Grantham fears:
The Institute of Supply Management (ISM) reported that its non-manufacturing (service) index rose to 51.4 in July, up from 48.8 in June. The business activity component surged to 54.5 in July (up from 49.6 in June), while the new orders component rose to 52.4 in July (up from 47.3 in June). Ten of the 18 service industries surveyed reported an expansion in July, but the eight ISM service industries that are lagging are important: (1) Agriculture, Forestry, Fishing & Hunting; (2) Real Estate, Rental & Leasing; (3) Wholesale Trade; (4) Retail Trade; (5) Professional, Scientific & Technical Services; (6) Information; (7) Educational Services; and (8) Other Services. So although the ISM service sector survey was stronger than many economists expected, the fact that eight vital service sectors are still contracting is concerning.
The Commerce Department also reported on Tuesday that the U.S. trade deficit declined by 2.5% to $73.1 billion in June, as exports rose 1.5% and imports rose 0.6%. Rising energy exports of crude oil, LNG and refined petroleum products helped lower the trade deficit for the first time in three months. This improvement in the trade deficit may result in an upward revision to second-quarter GDP calculations.
Libya shut down crude oil production at its largest oil field, which produces 270,000 barrels of light, sweet Brent crude oil. Interestingly, Libya cited this shutdown as “political blackmail.” Libya is now split between dueling administrations. There is a capital in the west, Tripoli, and a rival capital in the east. A civil war is not yet declared, but the rival in the east likes to steal crude oil and sell it on the black market. In fact, there are a lot of Libyan officials in Malta rumored to be laundering stolen crude oil proceeds.
Despite the Market’s Whipsaws, Most Earnings Are Still Powerful
Turning to earnings, Eli Lilly (LLY) has emerged as the new market leader as it blew by Novo-Nordisk (NVO) to become the new leader in weight loss drugs. In the second quarter, Eli Lilly’s sales rose 36% to $11.3 billion, and its earnings surged 68% to $2.97 billion. The company’s sales were 13.3% better than analysts’ expectations, and earnings were 43.1% better than analysts’ consensus estimates. Eli Lilly also raised its guidance well above analyst estimates. I should add that Lilly has invested heavily in making more weight loss drugs, so the shortage of these popular drugs should dissipate in the upcoming months.
In addition to Eli Lilly, Spotify (SPOT) also gapped higher. However, Novo-Nordisk (NVO) and Super Micro Computer (SMCI) both missed analysts’ earnings estimates but provided guidance significantly above analysts’ consensus estimate. I should add that SMCI is now trading at barely 11 times forecasted earnings, so I expect that Super Micro Computer will stage a big rebound due to its upbeat guidance!
In conclusion, the collapse in Treasury yields is very bullish and the Fed cannot fight market rates much longer. The U.S. manufacturing sector is clearly in a recession; the unemployment rate has risen from 3.4% to 4.3% in the past 15 months and mass layoffs are increasingly being announced by big companies like John Deere and Intel. These economic woes, plus stubborn consumer inflation in recent years, are going to be highlighted endlessly – until the Presidential election day. Fortunately, the Fed will be cutting key interest rates no later than September 18th, helping to provide the U.S. economy with a “turbo boost.”
Navellier & Associates owns Super Micro Computer, Inc. (SMCI), Novo-Nordisk A/S Sponsored ADR Class B (NVO), Spotify (SPOT) and Eli Lilly and Company (LLY), in managed accounts. We do not own John Deere (DE) or Intel Corp (INTC). Louis Navellier and his family own Super Micro Computer, Inc. (SMCI), Novo-Nordisk A/S Sponsored ADR Class B (NVO), and Eli Lilly and Company (LLY), via a Navellier managed account. He does not personally own John Deere (DE) or Intel Corp (INTC).
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Look to Japan for the Cause of the Latest Volatility
Income Mail by Bryan Perry
A Rotation into Corporate Debt is Underway
Growth Mail by Gary Alexander
The Perma-Bears are Roaring Again
Global Mail by Ivan Martchev
A Dramatic Increase in Yen Correlations
Sector Spotlight by Jason Bodner
August is Market Extinction Month
View Full Archive
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Louis Navellier
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