A Weak Jobs Report

A Weak Jobs Report Reflects Widespread Business Uncertainty

by Louis Navellier

May 10, 2016

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

From the tenor of Friday’s jobs report and other economic indicators (which we will profile below), the probability of a recession is rising, so bond yields are falling again. Job growth is clearly decelerating as the uncertainty in this Presidential election year is beginning to impact business spending and planning.

Due to weak worldwide economic growth and re-ignited deflation fears, central banks around the world are likely to remain accommodative.  For example, the Reserve Bank of Australia lowered its key interest rate 0.25% to 1.75% last Tuesday. Australia is trying to lower its rates to be more in line with competitive currencies after the Australian dollar rallied this year due to a temporary recovery in commodity prices.

Kangaroo Image

Speaking of commodity prices, crude oil prices softened in early May as traders took profits after an almost 20% rise in April.  There is a growing fear in the crude oil market that the supply glut could get even larger, especially if more marginal wells come back on line at these higher prices.  However, in the interim, the massive wildfire around Alberta’s tar sands there has temporally disrupted production. This has diminished supply fears a bit, but the truth is that crude oil inventories continue to rise steadily.

As I have said here repeatedly, crude oil prices tend to rise in the spring and go down in the fall due to the wide swings in seasonal demand.  The real test for crude oil prices will be in September, when seasonal demand usually ebbs.  Only then will we know how low crude oil prices will fall. That’s why I do not recommend buying any money-losing energy stocks now, as they are far from being out of the woods.

In This Issue

In Income Mail, Bryan Perry highlights a specific high-income opportunity in this low-income world, namely mortgage REITs.  In Growth Mail, Gary Alexander will compare today’s scare stories to the similar (mostly false) alarms in previous Mays.  In Global Mail, Ivan Martchev will expand on the repercussions of oil price seasonality as well as a bold prediction in the currency markets. In his Sector Spotlight, our staff astronomer Jason Bodner will compare single stocks to specks (like Earth) in a vast cosmos.  Then, I will return with a look at why trying to front-run economic statistics is a fool’s game.

Income Mail:
Softer Payroll Data Fuels Lower Rates
by Bryan Perry
Mortgage REITS Provide a “Swing Vote” for the Bond Market

Growth Mail:
Are the Good Times Really Over for Good?
by Gary Alexander
Most “May Day” Crises Were False Alarms
Are the Good Times Really Over for Good – Again?

Global Mail:
Crude Oil Reflexivity in Action
by Ivan Martchev
A Yen-Ruble Rendezvous at 100?

Sector Spotlight:
Looking Beyond the Obvious for Hidden Opportunities
by Jason Bodner
Focusing on Single Stocks is Like Earth-Centric Astronomy

A Look Ahead:
Are Big Traders Front-Running the Economic Data?
by Louis Navellier
Last Week’s Statistics Reflect Political Uncertainty

Income Mail:

*All content in "Income Mail" is the opinion of Navellier & Associates and Bryan Perry*

Softer Payroll Data Fuels Lower Rates

by Bryan Perry

Last Friday, the Labor Department reported that the U.S. economy added only 160,000 net new jobs to the nation’s payrolls, well shy of the 205,000 estimate. February and March payrolls were also revised down by a combined 19,000. The only bright spot was that the average work week rose to 34.5 hours and hourly earnings ticked higher by 8 cents to $25.53 per hour. Several Fed officials have hung their rate-raising hopes on interest rate spreads, which have spent the past few weeks inside relatively narrow ranges, but the jobs data appears to put a lid on any further risk of the 10-year Treasury Note pushing above 2.0%.

Not to be deterred by a decelerating labor market, New York Fed President William Dudley (an FOMC voter) told the New York Times in an interview that “the April jobs report was a touch softer, maybe, than what people were expecting, but I wouldn’t put a lot of weight on it …” Dudley went on to say that two rate hikes in 2016 is a "reasonable expectation" (See: www.nytimes.com, May 6, 2016, “U.S. added 160,000 Jobs Last Month as Brisk Hiring Slowed.”) His comments triggered profit taking in the bond pits where a run-up in prices had occurred over the prior seven trading sessions.

 Weekly Change in Yield as of May 6, 2016: 
 Source: www.treasury.gov 
2-yr: +2 bps to 0.73%
5-yr: +3 bps to 1.23%
10-yr: +3 bps to 1.78%
30-yr: +2 bps to 2.62%

 

The bond market landscape has been highlighted by policy meetings at the Federal Reserve and the Bank of Japan. The Federal Reserve was up first, on April 27, holding the fed funds rate unchanged between 0.25% and 0.50%. Going into the meeting, the market believed that the statement could begin setting the stage for a rate hike in June amid more chatter from comments by voting Fed governors, but the FOMC Statement was dovish and contained no hints of an impending rate hike.

The next day, April 28, the Bank of Japan followed down the same road as the Fed, releasing its policy statement to outline the fact that the central bank made no changes to its interest rate, but did announce a 300 billion yen ($2.75 billion) 0% lending facility for companies affected by the Kumamoto earthquake. The yen surged on the news, dropping the dollar/yen pair into the neighborhood of this year's low near 108. A surging yen only hurts Japanese exports at a time when the BOJ has embarked on a negative interest rate policy.

Rate hike expectations have not changed much in recent weeks with the market not expecting another hike until the end of the year. According to the latest read from the CME Group, the fed funds futures market sees a 64.2% chance of a rate hike in December after projecting a rate hike in November last week. This is good news for stocks in general, especially in the high-yield sector, where 1%-2% GDP growth, coupled with 1%-2% annual inflation is the sweet spot for income assets outside the bond market.

Mortgage REITS Provide a “Swing Vote” for the Bond Market

Last week at the much ballyhooed Sohn Conference, where many of the world’s most successful hedge fund and asset managers gathered, bond Guru Jeff Gundlach of DoubleLine Funds, who oversees $84 billion under management and is known for making bold calls, predicted Donald Trump would win the election and ramp up debt even further to energize the economy because Trump is extremely comfortable with debt. I think Gundlach has about as much chance of calling this one right as the janitor in his office.

But when Jeff Gundlach turns to his forte, namely fixed income, he did make more sense when he said that because interest rates are down for the count, it’s timely for income investors to consider jumping back into the mortgage REIT sector where dividend yields are anywhere from 8% to 14% depending on the quality of assets, leverage, and management style. Back in December the Fed was telegraphing that they would hike rates no less than four times in 2016, and the mortgage REIT sector rinsed out in January. Since the market’s nadir on February 11, the group has been under steady repair, much like the rest of the high-yield market. Below is a one-year chart of the FTSE NAREIT Mortgage REITs Index.

FTSE NAREIT Mortgage REIT Index Chart

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

The rotation into mREITs, as they are called in Wall Street vernacular, are a special animal. When this sector is experiencing price appreciation, the ‘animal spirits’ tend to rise in the bond market. The move into mREITs is hugely notable given the typical 6:1 leverage of these investments. The way these instruments pay out yields of 10%-13% is by the REIT manager borrowing money at 1.5% to 2.5% and then leveraging residential mortgages that pay around 3.5% by a factor of 5-7x, carving out another 1.0% to run the business and paying out 90% of the income, as is required under a REIT structure.

This sector is easily spooked, as was the case in January when many of the most widely held mREITs lost 20% or more of their share value because the Fed was sending a clear message of their intention to raise rates. Leverage is like a knife – it cuts both ways. When professional money like that of DoubleLine Funds and other bond shops are buying mREITs, it’s a clear ‘market tell’ that big money does not believe the Fed has an option to raise rates any time soon and any talk of doing so is probably intended to massage investor sentiment. When I see this kind of confidence return to a sector that just three months ago took investors through a gut-wrenching correction, the upside technical breakout of the sector gets my full attention.

Maybe Mr. Gundlach is on to something and I’m sure he’s talking up his book, just like Bill Gross and every other big time asset manager does when they have a stage and a worldwide audience. Taking that into account, once the initial wave of enthusiasm from this broad market call takes a pause, and it will when short-term traders take quick profits, it will be interesting to see if aggressive follow-on buying in the sector follows Gundlach’s lead. If earnings for the S&P remain flat and the market stays in a trading range for the balance of the year, there is a strong case for locking in a blended dividend yield of 10%+.

With pensions, endowments, retirement plans and fixed-income investors starving for yield, Grundlach’s mREIT call may have legs.

Growth Mail:

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

Are the Good Times Really Over for Good?

by Gary Alexander

“I wish a buck was still silver.
It was when the country was strong…
When a man could still work and still would.
Is the best of the free life behind us?
Are the good times really over for good?”

--A song by Merle Haggard (1937-2016), released in May, 1982

When this hit country song was released in May 1982, America was coming off three straight years of double-digit inflation, a Prime Rate of 16.5% (peaking at 21% in late 1980).  The unemployment rate for the full year was 9.7%, peaking over 10%, and the Dow Jones industrials hit a low of 777 in August.

Haggard’s rhetorical questions reflected the dismal outlook of the time, but “the best of the free life” lay just ahead of us – a massive bull market, a falling jobless rate and the end of the Cold War – and the good times were not over. They were just beginning – but songs about job growth and bull markets don’t sell.

This week marks my seventh anniversary of editing MarketMail for Louis Navellier.  In my second column, in May 2009, I wrote about how the new bull market, then just underway, should be long and strong since a historically strong bear market (down 55% in 17 months from late 2007 to 2009) usually indicates a fast recovery, based on the “reversion to the mean” principle in physics and in market history.

Since then, I have been singing the same song over and over again, since so few retail investors seemed to believe in this bull market. The painful bear markets of 2000, 2002 and 2008 seemed to have shocked and scared investors into staying away from risky stocks in favor of annuities or just plain money in the bank, which our Federal Reserve has dutifully punished over the last eight years with near-zero rates of return.

Every daily paper, most TV talk shows, popular magazines and the most intriguing Internet headlines usually involve some variation on cleverly-worded bad news.  As I picked up my pile of magazines in last Saturday’s mail, I saw TIME’s cover story (May 16) on the “devastating effects” of the Zika Virus.  The May 7-11 issue of The Economist had a cover story on “Trump’s Triumph: America’s Tragedy” and a “Special Report on China’s Coming Debt Bust.” Also, my May Atlantic Magazine had a cover story on “The Secret Shame of the Middle Class,” in which a well-known film critic and author (Neal Gabler) claims that “nearly half of Americans would have trouble finding $400 in a crisis. I’m one of them.”

I have addressed all of these scares in the past, and I will address these specific fears over the next few weeks, but I think it would be interesting to recall some fears we’ve overcome in recent months of May.

Most “May Day” Crises Were False Alarms

May 2010 began with a Flash Crash on May 6.  It began at 2:32 pm (EDT) and lasted about 36 minutes. The DJIA fell 998.5 points (-9%) within minutes.  The bids for dozens of ETFs and other stocks fell to as low as a penny a share.  It was certainly scary, but it was a technical anomaly, not a real market crash.

After the Flash Crash on May 6, our weekly headline for May 10, 2010 was “Market Meltdown Can’t Stop Positive Trends,” in which Louis’ opening paragraph reminded our readers that the fundamentals were strong: “While the problem appears to be technical, there were certainly plenty of negatives to cause the ‘wall of worry’ to seem sky-high last Thursday – the Greek crisis turned deadly; British elections were inconclusive; plus a major oil spill in the Gulf of Mexico seemed to be unstoppable. But amid all of these tensions, U.S. corporate earnings were still soaring, and that usually fuels a higher stock market…”

Our headline for the “Flash Crash” story was “The Car Stopped, but the Engine is Fine.”  In that article, Louis wrote: “I recommend that investors focus on the fundamentals, which are outstanding.”  For a while, it looked like we were wrong.  The S&P 500 fell 8.2% in May 2010, with the worst day being May 20, which delivered a bigger drop than the “Flash Crash” scare two weeks earlier.  CNN Moneywatch’s headline for May 20 was “Fear Spikes, Stocks Tank.”  The opening paragraph said the Dow, NASDAQ and S&P 500 lost enough to “fall into ‘correction territory’ – marked by a drop of more than 10%....”

On that dismal May 20, 2010, Professor Nouriel Roubini (the reigning “Dr. Doom”) appeared on CNBC, predicting that stocks would fall another 20% as the world economy weakened, causing a deep double-dip deflationary recession. Roubini called the recent plans to rescue Greece “Mission Impossible.”

In the end, we were right and Dr. Doom was wrong.  Six years later, the S&P is almost twice its May 2010 low of 1040.  There has been no global recession. Greece is still in the EU.  But there were Greek crises every May from 2010 to 2012, with the S&P declining during each of those three May crises:

 “May Day” Markets: 2010-12 
 Source: Yahoo Finance, using the S&P 500 
May 2010: Down 8.20%
May 2011: Down 1.35%
May 2012: Down 6.27%

 

The first Greek protests began on May 5, 2010, resulting in three deaths and a 110 billion euro bailout.  The 2011 Greek crisis began on May 25, resulting in 270 injuries and another bailout, while the 2012 Greek riots began early, April 4, and then leapfrogged to Italy, Spain and Portugal.  We took the view that Greece is a very small nation and cannot bring about anything close to a global slowdown in growth.

Then, in May 2013, the focus of our worries changed to Fed policy, when Fed Chairman Ben Bernanke said on May 22, 2013 that “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery.”

When Bernanke told Congress that he might “taper” the volume of Quantitative Easing (QE) as early as the following September, the market had a “taper tantrum,” as the stock and bond market panicked that day (May 22, 2013). The Dow fell 2.3% in the final 10 days of May, and the bond market pushed long-term rates higher, but those feared outcomes didn’t happen – no recession and no stock market crash.

Are the Good Times Really Over for Good – Again?

Now that we’re in the 8th scary May of the current bull market, we’re in uncharted waters.  The S&P 500 has tripled from its low of 666 in March 2009, but the market has gone nowhere in the last 18 months.

The latest Bespoke Report (May 6, “A Dog’s Life”) compares the last year to a pet dog getting zapped:

“If you’ve ever wondered what it feels like to be a dog getting adjusted to an invisible fence being installed around a yard, the market’s performance over the last year or so should result in some sympathy for the dog. For more than a year now, the S&P 500 has surged up toward the 2,100 to 2,150 level, but each time it gets close to breaking out and past the sidewalk to new territory – zap!”

We’re coming up to the anniversary of the S&P’s all-time high closing of 2130.82, set last May 21.  We may or may not find a way to pole vault or tunnel around the invisible fence protecting that sacred space, but my guess is we’ll top it sometime this year.  Either way, this is a time to be more selective, as Louis Navellier has been urging since he proclaimed a coming “seismic shift” in stocks in February of 2015.

Although the market has tripled since 2009, I continue to remind investors that we’re not at a bubble peak – where’s the euphoria?   We’re up less than 2% per year, compounded, since the market peak in 2000.

As for those magazine scare stories in my weekend mail, let me add a little historical perspective to them:

On the Zika scare, we have endured similar scares since the dawn of Y2K, including Radon gas (2000), Anthrax (2001), West Nile Virus (2001), SARS (2002), Mad Cow Disease (2003), Bird Flu (2003), Killer Spinach (2006), Killer Tomatoes (2008), Swine Flu (2009) and Ebola (2014), among others, but our public health system is superb.  Diseases don’t spread unchecked as they did in 1918-19 with Spanish flu.

On President Trump or Clinton, the nation has always been divided sharply over politics. This is not new. Half of America seemed to hate President Bush from 2000 to 2008 and the other half hated Obama since then. But there are checks and balances in our system that prevent a President from becoming a dictator.

Atlantic Monthly Covers Image

And on the mythical disappearance of the U.S. Middle Class, see my Growth Mails of October 19 and December 22, 2015.  If you want to hear from another voice, consider the Atlantic cover article from March (“Can America Put Itself Back Together?” above), in which James and Deborah Fallows took a three-year journey across America and discovered great hope in nearly every community they visited.  They discovered a “revival and reinvention that belie the popular perception of a nation in decline.”

Somebody say “Amen.”

Global Mail:

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

Crude Oil Reflexivity in Action

by Ivan Martchev

“I can state the core idea in two relatively simple propositions. One is that in situations that have thinking participants, the participants’ view of the world is always partial and distorted. That is the principle of fallibility. The other is that these distorted views can influence the situation to which they relate because false views lead to inappropriate actions. That is the principle of reflexivity. For instance, treating drug addicts as criminals creates criminal behavior. It misconstrues the problem and interferes with the proper treatment of addicts. As another example, declaring that government is bad tends to make for bad government.”

-- George Soros’ “General Theory of Reflexivity” (Financial Times, October 26, 2009)

One of today’s more fascinating examples of a widespread misunderstandings of cause and effect is that of the relationship between the U.S. dollar and crude oil or, if you prefer, the larger definition of the same problem – the dollar vs. commodity prices. Commodity prices are down over the last two years, but not because the dollar is strong. They are down because there is too much supply and not enough demand. That causes commodity-related currencies – such as the Brazilian real, Russian ruble, South African rand, Canadian dollar, and Australian dollar – to be weak against the U.S. dollar. Then, there is the issue of the tapering of QE and the threat of rate hikes in the U.S. (which will be cancelled, in my opinion), plus the acceleration of QE in the eurozone and Japan and the global experimentation with negative interest rates.

The exchange rate of the U.S. dollar is a multi-variable equation and certainly not just a function of Fed policy, although that remains one of its rather important drivers. That said, there is a certain degree of reflexivity when the seasonal rally in oil is being mistaken for a major bottom. Oil demand tends to be stronger in the March-to-September period and much weaker during the fall and winter months. That’s because more people live in the Northern hemisphere, so there is more oil consumed for transportation purposes during the warmer months. This seasonal rebound is also helping multiple commodity currency pairs, previously under pressure, to rebound and cause a decline in the Broad Trade-Weighted Dollar Index (see chart).

Trade Weighted United States Dollar Index versus West Texas Intermediate Chart

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

With oil inventories high, and with global and U.S. production also at high levels, I think we are headed back toward $20 per barrel oil prices come next fall or winter. Since the seasonal rally in oil started in February – earlier than usual – the price may also top out earlier than it did last year. I do not expect significant upside past the present level of crude oil prices, barring unforeseen escalation in military activity in the Middle East, which presently is experiencing a lull in disturbing headlines – which is not the same as a lull in actual hostilities. I think that the Broad Trade-Weighted Dollar Index will surpass the high we saw in January of this year when the oil price takes out its January low, which should happen in the next six to twelve months.

Euro FX versus United States Dollar - Weekly OHLC Chart

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

This seasonal rebound in commodity prices has also helped many developed-market currencies like the euro. This commodity price rebound is alleviating concerns about entrenched deflation in the eurozone, but I think this amounts to a false hope. I fully expect the euro to resume its decline and ultimately reach parity to the dollar (1:1), which may not be the end of its long-term decline.

German Ten Year Government Bond versus European Union Inflation Rate Chart

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

The Eurozone inflation rate is now -0.2%, while German inflation is 0.1% and German 10-year bunds yield a hefty 0.14%! European Financial Stability Facility 10-year bonds, which are currently being taken for eurozone area “confederate” bonds, now yield -0.3%. It appears that the ECB QE maneuvers are “too little too late” and are not producing results on the eurozone deflationary front. This means that the ECB will likely accelerate QE, or eurozone deflation will get worse. In either case, that means the EURUSD cross rate is likely headed lower. It is possible that both will happen – the ECB accelerates QE and the deflation picture gets worse – at which point the end result for the euro exchange rate is still a decline.

Thirty Day Fed Funds - Daily OHLC Chart

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

In this global deflationary environment, it has been fascinating to see plans for more Fed fund rate hikes, which I view as nothing but absurd. I don't think that the U.S. economy is that weak that it cannot handle somewhat higher interest rates, but I think the global economy is much weaker than the Fed appreciates.

I think the Fed could have gotten away with some more rate hikes if they had started a year or so earlier, but at this point things have gotten so out of hand in Europe, Japan, and now China, that the present Fed rate hiking cycle now looks ludicrous.

December fed fund futures (ZQZ16) rallied as high as 99.525 on Friday in reaction to the employment report, which market participants now view as reason enough for rate hike cancellations. A ZQZ16 price of 99.525 implies a fed fund rate of 0.475% in December 2016, which is within the present target range of the fed funds rate of 0.25-0.50%. This means that there may or may not be any more rate hikes in 2016. I don't doubt the ability of the Federal Reserve to hike one more time in 2016, but that would be a mistake.

A Yen-Ruble Rendezvous at 100?

One consequence of the busting of the spectacular Chinese credit bubble, which is far from having fully deflated, and the resulting collapse in commodity prices and global deflation is the present turmoil in the cross-currency market. The yen is rallying when everyone expected it to decline, while many commodity-related currencies have been under serious pressure for several years, despite their rebound since January.

United States Dollar versus Japanese Yen - Weekly OHLC Chart

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

I think the dollar-yen USDJPY cross rate (in black, above) and the dollar-ruble (USDRUB) exchange rate (in green) could meet in the area of 100. That means I expect the yen to rally further against the dollar based on further unwinding of carry trades, which is the present source of its strength. It also means that the USDRUB exchange rate is likely to reach 100 or so if the oil price challenges $20 per barrel, as I expect it will.

Japanese Yen versus Russian Ruble - Weekly OHLC Chart

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

In other words, I predict the Japanese yen and Russian ruble are headed to parity (100:100). This would mean that the JPYRUB exchange rate pictured above is headed to 1. I know this currency pair is not all that important in global trade, but it sure is one of the more volatile ones, given the policy of the Russian central bank to stop intervening and let the ruble find its natural exchange rate – if there is such a thing.

While euro-dollar parity is a bit easier to see, yen-ruble parity would be another symptom of the present global deflationary problem that is being exacerbated by the unravelling of the Chinese credit bubble.

Sector Spotlight:

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

Looking Beyond the Obvious for Hidden Opportunities

by Jason Bodner

In September of 2014, scientists from the University of Hawaii and the University of Lyon stunned the scientific community with the mapping of our galactic home address in a supercluster of galaxies. Last week, I talked about how we are a tiny planet orbiting an average star in a remote arm of an average galaxy. I also discussed how our Milky Way galaxy is one of a local cluster of 54 neighboring galaxies.

Well, the 2014 mapping of our location within the supercluster just makes our planet seem even tinier. Laniakea, which translated from Hawaiian means “immeasurable heaven,” is a supercluster of 100,000 galaxies. It was mapped not by observing the large supercluster on its own, per se, but by mapping the individual movements of clusters of thousands of galaxies by looking at their individual red shifts.

This structure, which is deemed to be one of the largest structures in the universe, has 1017 solar masses. So basically our tiny speck orbits one of potentially 100 million billion suns in our little neighborhood. I say “little” because 100,000 galaxies is a rounding error within the 100 billion or so galaxies estimated to be in the observable universe! Scientists estimate at least 10 million superclusters exist in the universe...

Galaxy Super Clusters Image

Practicality dictates that we occupy most of our thoughts to the issues and challenges on our home planet. But when we compare our planet to what else is potentially out there, our view is limited, to say the least.

Focusing on Single Stocks is Like Earth-Centric Astronomy

The stock market and the media can tend to be extremely limiting when it comes to where it wishes us to focus our attention. Let's take Apple, for example (a stock in which I hold no position, but in which Navellier & Associates, Inc. does currently hold a position for some clients). A mere mention of the stock, even in passing, can move the Nasdaq. If the news is bad, like poor earnings or lower guidance, it can drag the entire market down. Granted, Apple requires a lot of suppliers and vendors to make their products, so slower or faster sales will clearly impact the companies that rely heavily on the consumption of Apple products. This is why when Apple reports disappointing numbers, Nasdaq sinks.

My point, though, is that there are literally thousands of opportunities each day for both longs and shorts in the equity market, yet much of the investing public focuses on a handful of big stocks featured on the news each day. This spotlight effect becomes a self-fulfilling prophecy as stories create interest which creates a need for more stories on that specific stock.  This creates a classic media-driven feedback loop.

This cycle continues as the nervous story-du-jour tends to dominate the headlines and focus the interest of the investing public. There are plenty of stocks that have very interesting stories and positive news that may not make it into the mainstream press. A big story like Apple can temporarily move markets, but the longer trend of various sectors tends to move with the collective impact of many stories under the surface.

Take energy, for instance; the fundamental story is one of oversupply and potentially lower prices, giving energy-related companies a string of horrible earnings. It seems however, that the market doesn’t really care about that, at least not recently, as the energy index has rallied nearly 14% in three months.

Another great example is healthcare. The sector as a whole, is not really front and center in the headlines the way it was last August, when Hillary Clinton made specific statements about policies she would seek to enact to curtail price increases if she became President. As she emerges as the front-runner, the sector remains under pressure and individual names are contributing to its lackluster performance as opposed to one bellwether stock driving the sector. Looking back 9-months, Healthcare is the biggest loser at -9.06%.

In looking at how the sectors performed last week, we see whippy volatility and rotations taking place. Energy was the big loser last week dropping almost 3%, and the sector still displays elevated volatility. Energy, Materials and Industrials have been leading the market recovery since February 11th,, yet this past week, these are exactly the sectors that we see renewed pressure in, leading the market lower in May.

Standard and Poor's 500 Sector Indices Charts

Harvey S Firestone (yes, he of tire fame) said “Success is the sum of details.” This is true on many levels. If one looks at the market, one may find a difficult time in just “trading the news” of the major stories.  They tend to represent a tiny sliver of what's actually going on. In many cases, the very existence of the story on mainstream media outlets often signifies that you're too late. In Michael Lewis’ excellent book “The Big Short,” he tells the tale of how very few people were able to recognize the inflation of the housing bubble. By the time the story was out, the bets had long-ago been placed and the winners and losers had long been decided. Keep all this in mind as you look at the sector movements that may or may not make sense at the time. By the time you know definitively why it happened, the trade is likely over...

Harvey Firestone Image

Laniakea was discovered and mapped by creating the collective work of many individuals. The market’s intricate movements are composed of the collective movements of thousands of buy and sell decisions on thousands of specific stocks. A handful can have significant relative importance like Apple (or Earth).

The human species has discovered so much about who we are by looking to the skies in search of what is not immediately apparent.  Looking within the sector movements for pivot points may also provide a place to identify tomorrow's hidden opportunity in the equity market. It may not be Apple, or planet earth.

A Look Ahead:

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

Are Big Traders Front-Running the Economic Data?

by Louis Navellier

The most interesting news last week was a European Central Bank (ECB) working paper (“Price drift before U.S. macroeconomic news: private information about public announcements?”) released on May 2 that provided evidence that 7 out of 21 economic data releases showed evidence of “substantial informed trading” before the official release.  The seven indicators that they said showed “strong” evidence of pre-announcement drift were (1) the Conference Board’s consumer confidence index; (2) the National Association of Realtors’ existing-home sales report and its (3) pending-home sales report; (4) the Commerce Department’s preliminary GDP report; (5) the Federal Reserve’s industrial production report; (6) The Institute for Supply Management’s manufacturing index and (7) the ISM service sector index.

Insider trading is the theme of at least two movies I can recall.  One is “Wall Street” (1987), in which Gordon Gekko said to his protégé Bud Fox that “the most valuable commodity I know is information.”

Wall Street Movie Image

“Trading Places” (1983) covered the illegal early knowledge of a government report on orange juice crops, in which young traders played by Dan Akroyd and Eddie Murphy outsmarted the rich old Duke brothers by feeding traders disinformation, making huge profits while wiping out the Duke brothers.

Trading Places Movie Image

One indication that the markets knew nothing about last Friday’s jobs report is that gold traded up $15 in a single minute after 8:30, when the jobs report was released.  If any gold trader was aware in advance of the downbeat jobs report, I can’t see any evidence of early action on that data last week in the gold market.

As to whether the Fed itself is getting tipped off early, it does seem suspicious that the unexpectedly elevated dovish policy statement from the Fed was released on April 27, a day before the advance GDP report for the first quarter, which showed annualized growth of just 0.5%, well below the 0.9% estimate.

Although the ECB paper implies that the sensitive economic data may not be fully secure, I should add that some economists are pretty good at estimating these sensitive economic reports in advance, and it would be highly unusual that five separate agencies are leaking sensitive economic information early.

Last Week’s Statistics Reflect Political Uncertainty

I’m willing to wait for the official announcement of these all-important statistics, which are often heavily revised in future months.  It’s more important to know the trend rather than one specific data point.  The trend in U.S. statistics is not good right now.  The big news last week was the April payroll report, where the Labor Department announced new jobs came in 45,000 (over 20%) below the estimate of 205,000. February and March payroll totals were revised down by a combined 19,000.  The Labor Department also reported that first-quarter productivity fell at a -1% annual rate, the fourth drop in the last six quarters.

In addition, the Institute of Supply Management (ISM) announced last week that its manufacturing index slipped to 50.8 in April, down from 51.8 in March and well below an expected 51.4 reading in April. New orders dipped to 55.8 in April (down from 58.3 in March).  This ISM manufacturing report can best be described as lackluster, despite decent improvement in factory orders and continued strong vehicle sales.

The bright spot in the U.S. economy remains the service sector.  On Wednesday, the ISM said that their service sector index rose to 55.7 in April, up from 54.5 in March.  The new orders component surged 3.2 points to 59.9 in April. We also learned on Wednesday that March imports declined -3.6% and exports declined -0.9%. The fact that both imports and exports declined raised fears of weakening global demand.

The manufacturing slowdown is now a worldwide problem, since Japan is especially weak and Canada, China and the euro-zone continue to struggle.  The Obama Administration, via the Treasury Department, warned China, Japan, South Korea, Taiwan and even Germany about alleged polices designed to weaken their currencies to capture more worldwide market share at the expense of the U.S.  (See Wall Street Journal, April 30, “U.S. Chides Five Economic Powers Over Policies.”) This attempt by the Treasury Department to “shame” other countries into undoing their currency manipulation is politically motivated and probably futile but it shows U.S. voters that the President is actually doing something and that the decline in U.S. manufacturing is not their fault.  Obviously, now that Donald Trump has secured the Republican nomination, unfair trade deals will be endlessly debated this year, so Hillary Clinton can cite the Treasury Department’s attempt to shame our major trading partners to say the U.S. is “talking tough.”


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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 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 performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. 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.

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.

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