A “Flat” Market Year

A “Flat” Market Year Delivered More Volatility than Usual

by Louis Navellier

December 29, 2015

*All content in the Marketmail Introduction is the opinion of Louis Navellier of Navellier & Associates, Inc.*

We finally saw a broad mini-Santa Claus rally last week, with the S&P 500 rising 2.76% for the week, bringing its year-to-date track record barely above zero, at +0.1%.  The market’s breadth improved last week, aided by a short-covering rally in the beaten-down energy and commodity-related stocks (see Bespoke Investment Group, December 23, 2015: “Lumps of Coal Become Diamonds for a Week”). I remain encouraged that the crème de la crème continues to rise steadily. The flight to quality has continued as institutional investors scrambled to realign their portfolios in order to get a strong start in the New Year.

The biggest news last week was that crude oil prices continued to steadily decline, hitting an 11-year low early last week before rising on a Wednesday report by the American Petroleum Institute that crude oil inventories declined 3.6 million barrels in the latest week.  Subsequently, crude oil prices rallied in thin market conditions and many energy-related stocks rallied on the hope that a definitive bottom may have been reached.  But in my opinion, this rally in energy stocks was just another short squeeze; so do not get sucked into these fake energy rallies, even if some “lumps of coal” become “diamonds for a week.”

Donkey Head Pump ImageLong-term, the OPEC nations are expected to continue to boost their energy production, even though global oil production is running close to record highs and demand naturally declines in the winter.  Brent crude oil is down almost 19% so far in December, the steepest monthly decline since October of 2008, when economic growth plunged.  This time around, China’s decelerating growth has been a major factor contributing to the growing global glut.  Overall, crude oil prices are not expected to begin recovering significantly until February at the earliest, when seasonal demand starts to rise. Deflation reigns supreme, at least at the gas pump, boosting consumer spending by putting more money in consumers’ pockets.

I believe this combination of events will provide a Happy New Year for alert investors and consumers!

In This Issue

Ivan Martchev’s Income Mail will focus on the crude oil market as it interacts with geopolitics, China’s slowdown, and the fate of Master Limited Partnerships (MLPs).  Gary Alexander’s Growth Mail will review the movie “The Big Short” and make the case for the far less stressful and more profitable “Big Long” strategy.  Jason Bodner will compare exploding supernovas to market declines, with a focus on the energy sector; and then I’ll return with a diagnosis of the impact of the strong dollar on the U.S. economy.

Income Mail:
The Oil Surplus May Grow in 2016
by Ivan Martchev
MLP Repercussions
The Worst Performing Currency of 2015

Growth Mail:
Any “Big Short” is a Big Gamble
by Gary Alexander
Was the “Housing Bubble” Really Unexpected?
“The Big Long” is a Better Bet

This Week in Market History:
Market Milestones near Year-End
by Gary Alexander
December 30: A Big Day for Gold, Commodities & Currencies

Sector Spotlight:
When You See Stars Explode, it’s Already Old News
by Jason Bodner
The Oil Market “Blew Up” 18 Months Ago

Stat of the Week:
A Strong Dollar Hurts U.S. Manufacturing
by Louis Navellier
2015 Growth Will be under 3% for a 10th Straight Year

Income Mail:

*All content in "Income Mail" is the opinion of Navellier & Associates and Ivan Martchev*

The Oil Surplus May Grow in 2016

by Ivan Martchev

In the first half of 2015, global oil production averaged 95.7 million barrels a day, while average daily consumption came in at 93.8 million barrels, according to IEA (See November 5, 2015, Bloomberg: “Iran Oil Goes Back on the Market”). But the oil market managed to stage a rebound in the first half as oil demand is seasonal in nature and tends to pick up in the spring. Still, even with that spring pickup in demand, the market was in a surplus by nearly two million barrels per day.

We don't have the complete numbers for the second half of 2015, but I doubt that they are that different as the price of oil completely unwound the rebound from the first half and made fresh multi-year lows. It is in that environment that Iran is about to join global oil markets as an exporter. Economic sanctions can be lifted as early as January, since there are indications that Iran is proceeding with the dismantling of their nuclear program faster than expected.

How much oil will Iran dump onto global markets that are already in surplus? Will it be 500,000 barrels a day or more like one million? While sanctions have been in place since 2012, causing the Iranians to reduce production as much as practically possible, they have been preparing for this day since summer. Their fleet of crude tankers has been floating full of crude oil anchored in the Persian Gulf.

No one has any precise answers to these questions other than to say that it is probable that today’s global oil market surplus will likely add a lot more oil at precisely the wrong time.

Crude Oil Prices West Texas Intermediate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The surplus in the oil market can be seen in the disappearing Brent/WTI spread, where storage in Europe (where Brent is the benchmark futures contract) is running out while the U.S. still has some available storage. Previously, the WTI/U.S. benchmark contract traded at a discount to Brent as U.S. production surged due to the development of shale oil and the ban on U.S. oil exports, which is now being repealed. (see December 22 Forbes: “In Rare Occurrence, Oil Tanks Are Reaching Capacity As Prices Keep Falling”).

West Texas Intermediate - Monthly Nearest OHLC Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

How low can oil go? I doubt that anyone knows the precise number ahead of time; but as long as the world consumes less oil than it produces, the price can keep falling. China is the #1 consumer of oil and as best as I can tell its economy is still decelerating. We have not had a recession in China in 25 years, but one is coming sooner rather than later. The price of oil hit $10 at the end of the Asian Crisis in 1998 and it is possible that oil can go below $20 in 2016 if China keeps slowing down.

MLP Repercussions

This bear market in crude oil has created quite a challenge for the U.S. master limited partnership (MLP) sector which has more or less imploded in 2015. It used to be that if the MLP was midstream or downstream the stock was spared as its business was further away from the oil well and therefore one or two degrees of separation away from the falling oil price.

As best as I can tell, the weakness has now spilled over to storage and pipelines as the market seems to be making the bet that the oil price decline will finally hurt volumes of oil stored and transported. The last MLPs standing are those in the refining sector where margins are expanding as the price of oil is falling.

Kinder Morgan - Daily OHLC Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

A good example of wealth destruction in the MLP space is the share price collapse of industry leader Kinder Morgan (KMI), which ironically isn’t an MLP anymore as it merged its MLP subsidiaries into its corporate structure in a move that was aimed at doing deals more easily as a single entity. As the industry was reeling from the collapse of the oil price in early 2015, Kinder Morgan was hitting all-time highs as the thinking went that surging oil volumes would mean more money for the largest US pipeline operator. The other well-known investors’ bet, in my opinion, was that Richard Kinder, the founder and CEO, was such an expert on the industry that he was bound to pick up some diamonds in the rough in today’s lean times and emerge even stronger when the inevitable oil business turnaround comes.  By the action in KMI stock I can only conclude that the vast majority of investors have underestimated how low oil can go and how long it can stay low as the oil price hasn’t even stopped falling – last week’s dead-cat bounce in oil notwithstanding. KMI priced its IPO in 2011 at $30; upon news of the dividend cut it hit $14.22 earlier in December. (Please note: Ivan Martchev does not currently hold a position in KMI. Navellier & Associates does not currently own a position in KMI for any client portfolios).

I am sorry to see this happen to KMI stock as the company was started by the takeover of Enron Liquids Pipeline by the former Enron President Richard Kinder who was adamantly opposed to Enron’s then-new “asset light” strategy which ended up in a dramatic collapse.  In many respects, Kinder Morgan ran an asset-heavy anti-Enron strategy from day one and it was spectacularly successful until the current bear market in oil pressured its finances and forced the dividend cut.

In the end, this is a lesson in finance for many investors as at last count KMI lists $44.7 billion in debts with a present market value of $35.9 billion. So it is fair to say that debt holders have a bigger say in what happens to KMI than stockholders, when assigning a monetary weight to their votes.

I don't think KMI will fold, but I do think that before this bear market in oil is over, the voice of KMI debt holders could grow (monetarily) stronger.

The Worst Performing Currency of 2015

While the year is not yet over, the worst currency may very well turn out to be the Brazilian real. The USD/BRL cross rate started the year around 2.70 and at one point it was changing hands above 4.20.

United States Brazilian Real Exchange Rate - Weekly OHLC Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The trouble with calling a bottom in the real, or “reais” as the Brazilians call it, is the situation in the commodity market which may yet deteriorate. Currencies have no intrinsic value, and as long as the Brazilian balance of payments deteriorates as commodity prices fall, the value of the real can fall further.

Brazil Balance of Trade Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Brazilian balance of payments has stopped deteriorating courtesy of the recession which has curbed imports as well as commodity-dependent exports, so in that sense the lower USD/BRL rate has done its job. But currencies can also go into a tailspin, where a weaker currency means more inflation, which begets an even weaker currency. Brazil has had a couple if those situations over the years and I sure hope we avoid that scenario in this economic cycle. I don't think we have hit the ultimate low for commodity prices, so that may mean that we have yet to hit a low in the USD/BRL exchange rate.

Growth Mail:

*All content in "Growth Mail" is the opinion of Navellier & Associates and Gary Alexander*

Any “Big Short” is a Big Gamble

by Gary Alexander

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

– Mark Twain

Mark Twain’s quote (above) is plastered on the screen at the beginning of the entertaining new movie adaptation of Michael Lewis’ book, “The Big Short,” which was released to nationwide screens last Wednesday, December 23, the day I viewed it.  Even though the movie contains several misconceptions, in my view, it provides an excellent popular introduction to the arcane subject of leveraged debt.

The best teachable moment is when noted behavioral economist Richard Thaler and singer Selena Gomez explain that a “synthetic CDO” is basically a bet on a better making bets.  One of the kinkiest of all Wall Street inventions, the synthetic CDO is a derivative priced to a package of complex mortgage securities which contains no mortgages!  Thaler explains how the belief in a “winning streak” (or a “hot hand” in sports) leads to a belief in momentum trading in some of these bizarre side-bet vehicles on Wall Street.

House In Bubble ImageThe core of the movie – the middle 80% – revolves around a wide array of contrarian teams coming to the conclusion that the secondary mortgage market is doomed to fail; so they bet against it by creating and then overloading their portfolio with insurance against the collapse of those debts.  Four teams, led by Dr. Michael Burry (played by Christian Bale); Mark Baum (a fictionalized Steve Eisman, played by Steve Carrell); Jared Vennett (a clone of Deutsche Bank’s Greg Lippmann, played by Ryan Gosling); and Ben Rickert (a fictionalized Ben Hockett, played by Brad Pitt) make their outsized bets and then watch as they keep failing, making their logic look foolish to their mainstream critics. Each trader was almost ruined, as their costly insurance premiums pushed them near bankruptcy as they kept anticipating their big payoff.

In the film, these brilliant, anti-social loners mostly came across as disheveled misanthropists – while the evil establishment looked GQ-sharp in their expensive suits.  In one such encounter, the shoeless, T-shirt-wearing, rock ’n’ roll-loving hedge fund manager Dr. Michael Burry told a well-dressed investor in his office: “I may have been early, but I’m not wrong.” His big investor shot back: “It’s the same thing!”

How true! I have said the same thing about perma-bears who have been predicting the Greater Depression for the last 40 years.  They were right in 2008, but they were wrong for decades and in the last six years.

Was the “Housing Bubble” Really Unexpected?

In the early 2000s, at investment seminars around America, I heard several analysts warn about a housing bubble. According to Neil Irwin (writing in The New York Times, “What the Big Short gets right and wrong about the housing bubble,” December 22, 2015), warnings about a “housing bubble” were rife in 2005:

“It was in August 2005 that the number of Google searches for that term hit its peak, according to Google Trends, fully two years before the crisis began. That year alone, there were 1,628 articles in major world publications included in the Nexis database that used the term ‘housing bubble.’ ‘The worldwide rise in house prices is the biggest bubble in history,’ The Economist said in a 2005 article.”

Google Search Trends Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In the last few minutes of “The Big Short,” director Adam McKay shares his Bernie Sanders-like view that the greedy Wall Street professionals – he doesn’t identify who, or for what – should go to jail.  He instead predicts that the establishment will “blame the poor and the immigrants” for the housing bust.

When the director uses the words “immigrant” and “poor,” he shows us a homeless Florida family of four living in their car. Earlier in the movie, we saw the father at home. As Mark Baum’s team surveyed his large home, there were at least 10 wet or yellowed newspapers on the porch. A large, sleepy, slovenly man finally answered the doorbell and wondered why they were asking him about his home since his rent was up to date. Baum’s team explained that the home’s owner bought a mortgage in the name of his dog (!) and he is three months overdue in payments. The man says, “Don’t blame me. I’m only the renter.”

I have three questions about this strange scene: (1) If he is a good renter, then he has a good credit rating and can rent again, so why is he later shown to be homeless? (2) Why doesn’t he pick up the newspapers on his porch, or clean the yard, or wake up before noon?  (3) Why does a man with a small family making low wages rent a huge detached home? Why not adjust the size of your home or rent to your income?

There’s a throwaway line in the movie about the thin distinction between stupidity and criminality (“Tell me the difference between stupid and legal and I’ll have my wife’s brother arrested.”) However, the film recommends criminal indictments – without naming names or crimes. Even though there was plenty of stupidity to go around, what are the criminal acts? Among the stupid folks who sowed the seeds of crisis:

  • In the federal government sector, Presidents Bill Clinton and George W. Bush encouraged nearly every American to own a home as their birthright in “the Great American Dream.” Also, Alan Greenspan’s Federal Reserve kept interest rates ultra-low, encouraging lower-cost mortgages.
  • Following the President’s playbook, lenders (federal and private) competed to put the weakest credit risks into homes they couldn’t normally afford or earn (through credit scores) with teaser rates and no money down, followed by punitive Adjustable Rate Mortgages (ARMs) later on.
  • Many homeowners bought bigger homes than they could afford, with little or no money down, ignoring the ARM provisions, while refinancing their homes as prices went up, using their houses as personal ATMs, or flipping the houses for a profit, until prices finally, inevitably, began to fall.

Investors in The Big Short knew this house of cards would collapse, but they were premature in making their big bets.  Housing prices peaked in 2005 or 2006, but most debt vehicles didn’t collapse until 2008.

Here are some benchmarks in how the housing crisis became a credit crisis, long after housing peaked.

  • 2007: On August 9, three investment funds managed by French bank BNP Paribas suspended redemptions due to subprime debt. The three funds accounted for only 0.5% of assets managed by the bank but this was the first shot of the financial crisis of 2008.  The S&P 500 peaked on October 9.
  • 2008: On March 16, Bear Stearns failed (as dramatically portrayed in the movie); but it was soon bailed out. Then, on September 15, 2008, Lehman Brothers also failed; but it was not bailed out.

The three-year lag between the peak in housing prices and the stock market’s panic response almost bankrupted the Big Shorts, since making money on the short side is very difficult, even if you are right.

The “Big Short” closes with a claim that $5 trillion in wealth was “destroyed” in 2008; but this wealth was quickly rebuilt, as U.S. Household Net Worth has grown $30 trillion (+53%) in the last seven years.

Household Net Worth Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

“The Big Long” is a Better Bet

In short, “The Big Short” was a big gamble because it hinged on two very risky words – Big and Short.  The Bigness of their bet drove them to the edge of bankruptcy. If they had been more moderate in their bearish wager, they would not have engendered such panic in their investors and the near death of their firms. Their second big gamble was going short. Most stock markets rise most of the time. To go short is to bet against the positive arc of history, and the market doesn’t offer very favorable odds for going short.

If you are Big Long, however, making a moderate amount of money over time is much more likely. If you buy and hold and then buy more – selling some weaker stocks in favor of better stocks – you will likely make money over time, without the need of following every market move, losing sleep or sanity.

Standard and Poor's 500 Gains Table

“The Big Short” is a movie worth seeing. One of its nicest touches is when an actor looks directly at the camera (addressing the viewer), saying something like “what you just saw didn’t really happen that way, but the following scene is true, so pay attention.” I certainly wish more films would be as candid about what they make up for dramatic purposes, and what is actually based on fact. That would have been very helpful in similar investment-based films, like “The Wolf of Wall Street” or Oliver Stone’s “Wall Street.”

My advice?  See the movie if you wish, but for more accuracy, read The Big Short by Michael Lewis first. Either way, I advise investing in your own version of the Big Long: Bet on a positive future for mankind.

This Week in Market History:

*All content in "This Week in Market History" is the opinion of Navellier & Associates and Gary Alexander*

Market Milestones near Year-End

by Gary Alexander

On December 29, 1867, the first telegraph ticker was used by a Wall Street broker, Groesbeck & Co. Since brevity was essential, stock “symbols” soon replaced the full names of listed companies.

December 31, 1933 marked the end of William Woodin’s brief, tension-laden 10-month term as our 51st Secretary of the Treasury. A high-profile industrialist, his first act in March 1933 was to close America’s banks, followed by a new set of bank regulations. Then, the Treasury demanded American citizens surrender their gold at $20.67 per ounce in May. By year-end, FDR wanted to devalue the dollar to gold (which he did in January, 1934). All this strain took a toll on Woodin, age 65, who suffered a nervous breakdown in December, 1933. After 10 months in office, he was forced to resign. He died in May, 1934.

On December 31, 1955, General Motors announced profits of more than $1 billion ($1,189,477,082), becoming the first American corporation to earn more than one billion dollars in profits in a single year.

On December 31, 1961, the Dow Jones Industrials reached a record high of 734.91, but in the first half of 1962, the index fell 200 points (-27%) in the largest post-war correction to that date.

On Monday, December 28, 1987, the DJIA opened within a whisker of 2000 (it closed at 1999.67 the day before Christmas), but then it fell 56.7 points (-2.8%), to 1942.97 and closed 1987 at 1938.83.  Even though 1987 was mostly remembered as a “crash year,” the DJIA actually rose 2.3% in 1987.

On Friday, December 28, 1990, the U.S. government reported that the Index of Leading Indicators was down 1.2%, the fifth monthly decline in a row, suggesting that the nation was entering a recession, even while preparing to launch a Gulf War in January, 1991. The DJIA ended 1990 at 2633.66, down 4.3%.  The S&P 500 fell 6.3% in 1990, and NASDAQ fell 17.8% in 1990, the worst market year of the 1990s.

On Tuesday, December 31, 1991, the DJIA average closed at a record high of 3168.83. After a dismal 1990, the S&P gained 26.3% in 1991, the DJIA rose 20.3%, and NASDAQ rose by a phenomenal 56.9%.

On Monday, December 27, 1993, the DJIA hit a record high of 3792.93. The next day, it hit a new record high of 3793.49, less than one point higher. The next day, it set a new record at 3794.33: Three records separated by only 1.4 Dow points (0.037%), but then it began to take off, tripling in the next six years.

December 30: A Big Day for Gold, Commodities & Currencies

1854: Pennsylvania Rock Oil Co, became the first oil company incorporated in the U.S.

1861: U.S. banks stopped all payments in gold in defense of Lincoln’s paper “Greenbacks.”

1958: Charles de Gaulle devalued the French franc in terms of both gold and the dollar.

1963: Congress authorized Kennedy half-dollars to be clad in partial silver and alloy.

1974: Gold ownership was finally legalized for Americans, after 41 years of gold prohibition.

1982: The U.S. Assay Office in New York was finally closed.

Sector Spotlight:

*All content in "Sector Spotlight" is the opinion of Navellier & Associates and Jason Bodner*

When You See Stars Explode, it’s Already Old News

by Jason Bodner

If you look up at the night sky, one of the most recognizable constellations is Orion. The left shoulder of Orion is the 9th brightest star in the sky, Betelgeuse, a red supergiant that burns its fuel fast and furious. Betelgeuse fluctuates in size somewhere between 700 and 1,000 times the size of our sun. It’s currently over a billion miles in diameter. If we replaced our sun with Betelgeuse, it would stretch out beyond the orbit of Jupiter! It has a quick life span compared to our sun, which should last almost 10 billion years.

Just 10 million years old, Betelgeuse is near the end of its life. Scientists say it will go supernova in the next million years. What’s fascinating is that when it does, supposedly it will be as bright as the moon for several weeks, and could possibly even be visible during the day. It’s highly unlikely that any of us will see that. At 642.5 light years away, even if it exploded 500 years ago, we’d have to wait another 142.5 years to see it. The light we see from Betelgeuse today left 120 years before Columbus found America.

Betelgeuse Star Image

Light speed is just about as fast as we humans can conceive, but when light takes so long to get here from so close within our galaxy, it makes light speed seem almost glacial. Big trends in the market can also seem to move slowly. They may seem fast and furious when they get here, but the events that set them in motion happened long ago. By the time the story of “why” a move happens is on the lips of investors, it is usually too late to act. It’s almost certainly too late when it’s the topic of discussion with your barber.

The Oil Market “Blew Up” 18 Months Ago

Did anyone else notice that energy is the top market topic for pretty much everyone at the moment? It’s very possible that now that everyone is talking glut, with more glut in the pipeline, we are approaching a bottom. I am not saying energy’s bear run is over, but merely pointing out that it’s everywhere you look.

Let’s quickly look at how this life cycle is taking place. We have all read how global demand for oil has slowed, causing an oversupply and pressure on prices. Production continued and now, as the media headlines say, we’re “drowning in oil.” So naturally, even when no one was really talking about oil’s precipitous fall from over $100 to the $60’s, now people are talking about how oil could go to $20 or lower, as profit margins can be made even on single-digit dollars per barrel. But now that the physical commodity has been hotly debated all the way down, we see the energy stocks taking on fresh selling pressure. As the first few large companies are slashing dividends, the outlook seems grimmer than before.

Now we are seeing fresh reactions to events set in motion 18 months ago. It’s like oil was the Betelgeuse that went supernova and took 18 months for the light to get here. When markets decide to re-price, we see this lag effect often. The housing crisis spreading to the financial crisis was, in fact, a fairly sustained trip downward, taking place over three or four years, from 2005 to early 2009.

West Texas Intermediate And Standard and Poor's 500 Utilities Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As if on cue, energy is again leading the direction of the market. Energy was last week’s winner, with the largest positive percentage move both for a single day and for the truncated week. On Wednesday the S&P 500 Energy Index finished +4.25%, and it finished the week +4.60%. Materials and Industrials finished the week strong with a +4.28% and a +3.19% performance respectively. In fact, the S&P 500 Materials Index is quietly the strongest sector of the past three months. In that time it has posted a +9.15% return! The Consumer Discretionary Index was the week’s weakest with a solid +1.35% performance.

Standard and Poor's 500 Sector Indices Table

When looking at an inspiring performance like that of equities in general last week, it’s easy to get swept up in yuletide cheer. Energy is on the lips of many as prices continue to plummet. Many are celebrating as prices at the pump leave consumers with more cash, but even with all the blame of dragging the market down, the three-month return for the Energy Index, albeit the weakest of the sectors, is still +0.4%.

The real picture emerges as we widen our time horizon. The six-month return for energy is now down over 21% and the last nine months are down almost 31%. The pressure energy is exerting on the equity market is palpable. From this vantage point, one can understand why energy has everyone so captivated.

Standard and Poor's 500 Consumer Sector Indices Table

One thing is certain: We continue to see significant volatility. A few weeks ago I was hopeful that this skittishness in the market would be waning but clearly this has not come to pass. We see violent moves in the market accompanied with liquidity that can be characterized as challenging. Snap-back rallies are swift for punished equities. Last week’s performance was good to see, but in the wake of pressure on equities the two prior weeks, it’s too early to tell if this recent uptick has the potential to continue. Ideally, one would want to see stable leadership emerging, but recently leadership has been punished shortly after it emerges.

Market cycles come and go, and there will be a constant stream of booms and busts. They come to our attention and intensify when everyone is busy talking about them. By that time, however, the move has been long underway. Think of this the next time you look up at the night sky and find that bright red star, or the next time you find everyone talking about what’s moving the markets today.

It was Beetlejuice who said: “Go ahead, make my millennium!”

Beetlejuice Image

Stat of the Week:

*All content in this "Stat of the Week" section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

A Strong Dollar Hurts U.S. Manufacturing

by Louis Navellier

The strong U.S. dollar continues to hinder U.S. manufacturing. Last Wednesday, the U.S. Commerce Department announced that durable goods orders were unchanged in November, despite a large increase in orders from the Pentagon (up 44.4%) and a healthy auto sector (up 1.5%). Excluding robust defense orders, durable goods orders declined 1.5% in November. For the first 11 months of 2015, durable goods orders have declined 3.7%. Boeing continues to fight a strong U.S. dollar, since orders for commercial jets declined 22.2%.  Business investment has fallen 1.8% in the past 12 months and remains a major concern, indicating a very troubled manufacturing sector and cautious business spending.

2015 Growth Will be under 3% for a 10th Straight Year

On Tuesday, the U.S. Commerce Department revised third-quarter GDP to an annual pace of 2%, down a tick from its previous estimate of 2.1%. The primary reason that third-quarter GDP was revised down was that exports rose only 0.7% (down from 0.9% previously estimated) and imports rose by 2.3% (up from 2.1%). Although this downward revision was not significant, it reinforced the fact that the U.S. economy has decelerated dramatically from its 3.9% annual growth rate in the second quarter.  For the first three quarters of 2015, GDP has grown at a 2.2% annual pace and is projected to grow at a similar pace in the final quarter. This means that overall 2015 GDP growth will be less than 3% for the tenth year in a row.

The primary reason that GDP growth is so slow is that manufacturing in the U.S. is contracting due to a strong dollar hindering U.S. exports. The bright spot in U.S. manufacturing is a strong automotive sector as truck and SUV sales remain strong due to low gasoline prices. Construction activity is also strong and spending on home construction was revised up to an 8.2% annual pace in the third quarter, up from 7.3%.

Consumer spending is growing at a 3% annual pace and remains the primary driver of GDP growth. The Commerce Department announced on Wednesday that consumer spending rose 0.3% in November. In the past 12 months, consumer spending has risen 2.5%, while after-tax incomes have risen faster, 3.5%. The remainder goes primarily to savings, and the savings rate remains at 5.5%, near a three-year high.

Consumers ImageAlso on Wednesday, the University of Michigan’s final consumer sentiment survey for December was revised up to 92.6, from 91.3 in November. Richard Curtin, the survey’s chief economist said, “The December gain was largely due to lower inflation, which bolstered real incomes and brightened buying plans for household durables.” Curtin also said the survey shows that consumer purchases are contingent on low prices. In other words, consumers spend when they think they are getting a good deal. Since there have been a lot of promotions this holiday shopping season, I suspect that overall consumer spending will rise accordingly which we will soon learn when the retailers announce their December same-store sales.

Interestingly, on Tuesday, the National Association of Realtors announced that existing homes sales declined 10.5% in November to an annual pace of 4.76 million. In the past 12 months, existing home sales declined 3.8%, the first annual decline in existing home sales since September 2014. This was a big surprise, since abnormally warm weather for much of the U.S. should have boosted existing home sales.  The median home price was $220,300, up 6.3% in the past 12 months. The supply of existing homes for sale remains at 5.1 months (tighter than normal), so median home prices are expected to rise steadily.


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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 performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Blue Chip Growth, Louis Navellier’s Emerging Growth, Louis Navellier’s Ultimate Growth, and Louis Navellier’s Family Trust, are not based on any actual securities trading, portfolio, or accounts, and the newsletters reported performances should be considered mere “paper” or proforma performance results. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. As noted above, there are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC, newsletter portfolios. In most cases, Navellier’s Investment Products have materially lower performance results than the InvestorPlace Media, LLC newsletter portfolios and advertising materials claim to have. The InvestorPlace Media, LLC newsletters and advertising materials typically contain performance claims that can significantly overstate the performance results compared to actual results for similar Navellier Products.

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.

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