September 11, 2018

All bull markets climb a “wall of worry,” but last week CNBC reported that JPMorgan’s top quantitative analyst, Marko Kolanovic, is predicting a “Great Liquidity Crisis,” triggered by flash crashes and social unrest. Kolanovic said that the trillion-dollar shift to passive investments, computerized trading strategies, and electronic trading desks would cause and then exacerbate a series of sudden, severe price drops.

Kolanovic has a PhD in theoretical physics and is essentially an algorithm expert. He said, “Right now, you have large groups of investors who are purely mechanical…. They sell on certain signals and not necessarily on fundamental developments, such as increases in the VIX, or a change in the bond-equity correlation, or simple price action. Meaning if the market goes down 2%, then they need to sell.”

Frankly, I agree with part of what Kolanovic is saying. My white paper (co-authored with Jason Bodner) discusses the contagion risk from all the RoboAdvisors trying to sell at the same time. Check out this link to our report, “How the Robo Advisor Revolution May Be Leading Up to an Impending Disaster.”

Where I disagree with Kolanovic is on his comments on social unrest. Specifically, Kolanovic said, “The next crisis is also likely to result in social tensions similar to those witnessed 50 years ago in 1968.”  That was the peak year in the Vietnam War as well as the assassinations of Dr. Martin Luther King Jr. and Senator Robert Kennedy, plus the protests at the Democratic National Convention, a truly horrible year.

Kolanovic talked about how the internet and social media are radicalizing Americans and said, “If they (central banks) don’t manage to (stabilize asset prices), then you’re spiraling into depression, social unrest and a lot more disruptive changes that can negatively affect returns for a very long time.”

Fortunately, the overall situation today is a lot different than in 1968. The upcoming mid-term elections will be a big test of whether American voters care more about economic prosperity or the social unrest Kolanovic is talking about. Since most of TV news is dominated by pundits and talking heads rather than real news, I suspect the media may be wrong in their predictions for the second election in a row. Much of the outrage that you see on TV is that of the media itself, including CNBC, trying to distract you from the economic prosperity and the biggest surge in GDP in decades. In conclusion, Kolanovic may be a very smart math guy, but I suspect that his social views have nothing to do with his algorithm expertise.

If anything, market cycles are being increasingly compressed. As the flash crash on August 24, 2015 proved, investors can lose 35% intraday in big liquid ETFs even though prices can be close to unchanged by the end of the day. The real risk to the stock market is that ETFs can trade at big discounts to net asset value (NAV) during flash crashes (as I have documented in multiple articles and white papers), but these NAV discounts on ETFs can also trigger buying pressure to quickly emerge, pushing the market back up.

Unlike 2008, We’re Nowhere Near a Recession Now

Unlike 2008, the economic statistics tell us we’re nowhere near a recession. On Tuesday, the Institute of Supply Management (ISM) announced that its manufacturing index surged to a 14-year high of 61.3 in August, up from 58.1 in July. This was a big surprise, since economists expected a decline to 57.9. The new orders component surged 3.2 points to 65.1 and the employment component rose two points to 58.5.

On Thursday, ISM announced that its non-manufacturing (service) sector index rose sharply to 58.5 in August, up from 55.7 in July. A surge in the components for new orders, production, and employment were largely responsible for the rise. All but one of the 17 industries improved in August. Overall, the robust ISM manufacturing and service sector indices bode well for robust third-quarter GDP growth.

The biggest news was Friday’s announcement that 201,000 payroll jobs were created in August, better than economists’ consensus estimate of 192,000. Average hourly earnings rose 0.4% (10 cents) to $27.16 per hour. In the past 12 months, average hourly earnings are up 2.9%. The unemployment rate remained unchanged at 3.9%. The average work week was revised lower to 34.5 hours. Due to rising wages, the Fed is now certain to raise rates 0.25% at its Federal Open Market Committee meeting on September 26.

I should add that on Wednesday, ADP reported that 163,000 private payroll jobs were created in August, led largely by mid-sized businesses adding 111,000 new payroll jobs. The service sector added 139,000 jobs. Overall, the labor market remains healthy and there continues to a shortage of qualified workers.

Finally, there was shocking news last Thursday that Tesla’s CEO Elon Musk was videotaped on the “Joe Rogan Experience” podcast smoking pot and drinking whisky. Another big problem is that Tesla’s new chief financial officer, David Morton, resigned within a month of starting, raising questions about the company’s financial situation. But the biggest long-term problem for Tesla is its competition.

On Tuesday, Mercedes revealed its electric SUV, the EQC, which will be sold in the U.S. in 2020. On September 17th, Audi will reveal its electric SUV, the e-tron, in San Francisco. Jaguar has already announced its electric SUV, the I-Pace, and is accepting orders, plus Porsche’s “Tesla killer,” the Taycan, is also accepting orders. Since the competition is becoming formidable, I expect Tesla’s stock price will continue to collapse. I predict that within 18 months Tesla will be removed from the Nasdaq 100 (QQQ). I then expect that Geely, which owns Volvo, could buy what is left of Tesla after the stock price collapse.

(Please note: Louie Navellier does not currently hold a position in Tesla. Navellier & Associates does not currently own a position in Tesla for client portfolios)

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.*

Disclosures

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives