August Begins with Big-Name Stock Selling

August Begins with Big-Name Stock Selling on Light Volume

by Louis Navellier

August 11, 2015

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

Cartoon Balloons ImageNow you know why I do not like August.  It has nothing to do with the hot weather.  Instead it has to do with the seasonal profit taking in thin market conditions that are all too prevalent in August as most of my Wall Street peers go on vacation.  Typically trading volume declines in August and then unscrupulous short sellers come out and spread rumors so they can profit from the ensuing chaos that they help create.

Speaking of rumors, Apple (AAPL) and its suppliers were beaten up last week as the financial media tried to convince everyone that the Chinese would stop upgrading their cell phones.  Then Disney and other media stocks were hit on fears that everyone would cancel their cable TV and just watch Netflix! (Louis Navellier does not currently hold positions in AAPL, DIS, or NFLX. Navellier & Associates does currently hold positions in AAPL and DIS for some of its clients. Navellier & Associates does not currently hold a position in NFLX in client portfolios.)

As preposterous as these stories sound (to me), logic and common sense don’t seem to matter, since these outrageous stories are the kind of excuses traders like to circulate in order to take profits in key sectors.

The Dow Jones index fell 1.79% last week, capping seven straight daily declines, but the broader S&P 500 only fell 1.25% last week and managed to eke out two small gains in the last seven trading sessions.

Wall Street is very good at reacting but it often doesn’t think first.  Fortunately, good stocks often fall like fresh tennis balls, while bad stocks tend to fall like rocks.  In the meantime, we are now in the midst of what I call “summer shenanigans,” resulting in the kind of day-to-day volatility we have been witnessing.

In This Issue

I’ll comment on Friday’s jobs report and other key indicators at the end of this Marketmail, but first Ivan Martchev will report on the Greek situation from a front-row seat over there. Then, Gary Alexander will examine whether last week’s depressing market fits into the historical profile of how bull markets end.

Income Mail:
Gruyere Souvlaki, Part Trois
by Ivan Martchev
Greek 10-year Sovereign Bond Yields
Deflation Watch

Growth Mail:
How to Recognize a Major Market Top….or Bottom
by Gary Alexander
Lessons from Market Tops in 1929 and 1987
Lessons from the Market Bottoms in 1974 and 1982

Stat of the Week:
Another 215,000 Payroll Jobs Added in July
by Louis Navellier
How will the “Data-dependent” Fed Analyze This News?

Income Mail:

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

Gruyere Souvlaki, Part Trois

by Ivan Martchev

I am writing this week’s Income Mail not far (45 minutes by car) from the Hellenic border in smoldering heat right at the point where subtropical climate meets the moderate continental kind, if you believe the meteorological maps. There is nothing “continental” about 100-degree heat but it feels good to be home.

The locals here (in Bulgaria) have asked me at least three times since I got off the plane last Tuesday what I think of the Greek situation. Since Bulgaria is a neighboring country full of Greek banks (incorporated separately and regulated by the Bulgarian National Bank, not the ECB), people are worried about any possible domino effect. In Bulgaria, there were no bank runs at the local subsidiaries of Greece’s Alpha Bank or Piraeus Bank, but the runs that did happen in Greece forced Piraeus to sell its non-profitable Bulgarian bank network to a fellow bank for the glorious sum of one euro so that it can repatriate 100 million euros in capital to Greece, where Piraeus is fighting for survival.

National Bank of Greece Stock Chart

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

Piraeus has a 52-week range of EUR 0.11-1.59 and last Friday it closed at 14 EUR cents. I guess we can call this a “rebound” off the 11-cent bottom? The same is true for the U.S. ADR of the National Bank of Greece (NBG) which hit an all-time low of 69 cents last week. I think the fact that Greek bank shares are collapsing – after the preliminary agreement on the last tranche of a second bailout and the stated goal to be done with the third tranche by August 15 – is clear testimony of the incompetence of the present Syriza government. For the Greek government to take a somewhat stable situation in January and cause an epic bank run pushing the whole banking system near complete collapse, the situation cannot be categorized by any other word than “incompetence.” (Ivan Martchev does not currently hold a position in NBG. Navellier & Associates does not currently hold a position in NBG in client portfolios.)

The Greek banking system may need EUR 25 billion in new capital, which basically means yet another massive dilution similar to what shareholders of Citigroup (C) and AIG (AIG) experienced in the U.S. in 2007-09. In my opinion, the contrarian point of view is that if it was that bad in March of 2009 and all U.S. bank shares seemed like they should not be touched with a 10-foot pole, then it must be the time to buy in Greece. Still, this is the second time this has happened in Greece, three years after the last such panic, and now it seems the situation is much worse than three years ago. (Ivan Marchev does not currently hold positions in Citigroup (C) or AIG. Navellier & Associates does not currently own a position in Citigroup (C) in client portfolios. Navellier & Associates does currently own a position in AIG for some of its clients.)

The reason for concern is the total indebtedness of the Greek economy, which is likely to top 200% debt-to-GDP after the third bailout is hammered out this month, up from the present 175%. The IMF has broken away from the troika and stated that the country’s[1] debt burden will quickly become unmanageable without a lengthy moratorium on repayments, perhaps of up to 30 years, or a reduction in the face value of the debt. The IMF also suggested it is increasingly unlikely that a deal can be done by August 20 – this is when Greece is due to make a EUR 3.4 billion payment to the European Central Bank.

I think the Germans will press hard and get the maximum concessions negotiable. After they make sure there is thorough housecleaning in the infamously-porous Greek tax system and tax revenues are up while unsustainable social benefits are manageable, the Germans will then likely opt for extending maturities and lower interest rates as the proverbial carrot hanging at the end of their planned tax-reform stick.

Greek 10-year Sovereign Bond Yields

Greek Ten Year Sovereign Bond Yields Chart

Source: TradingEconomics.com

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

Who knows where this situation is going, but when the Greek government bond market saw 10-year sovereign yields approach 20% (see above chart), I sure thought the drachma resurrection was a highly likely outcome. Fortunately for the average Greek citizen, that drachma resurrection has so far been postponed.

As to whether this postponement is temporary, I cannot be sure.

Deflation Watch

The CRB index (charted below) has now taken out the lows from the 2008 Lehman Crisis, when the stoppage of credit markets threatened the next Great Depression. While there is no depression in the U.S., it sure feels like a depression in many of the emerging markets dependent on commodity prices. Other commodity indexes, like the S&P Goldman Sachs Commodity Index, have not taken out the Lehman lows as they are more overweight towards oil. Oil has a bit to go before it violates its 2009 lows; but I am confident that it is coming in due course because global oil production is up notably since 2009 while global oil demand growth has very serious issues, including the ongoing and overdue unravelling in the Chinese economy courtesy of debt overhang to the tune of 400% of GDP at a time when both the local stock market and real estate market have now crashed.

Commodity Research Bureau Index Chart

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

If one were to draw two lines in the CRB Index – one at 180 and the other at 200 – one would probably define an area of “support,” as traders like to say, that goes back to the early 1970’s. There is only one “stab” outside of that range – in early 1975 at 175.90 – but that stab did not last for long. Since 1975, that support level in the low 180s has pretty much held for 40 years.

What happens if this 40-year support breaks?

For countries dependent on commodity exports, I believe this is a worst-case scenario as I don’t think they have prepared for it. They thought the 300 and 400 levels on the CRB Index were normal, not levels of half that. This suggests sovereign defaults in places where forex reserves do not cover high sovereign debt loads, as I think this decline in commodity prices will last for years. I believe this is a multi-year decline as China – which has been the world’s No.1 and No.2 consumer of many commodities – is precipitating a historic downshift in growth that may turn into a bad recession or a real depression.

The thing about inflation is that it means different things in emerging markets and developed markets. If a developed economy is geared more towards services, food and energy comprise only a small portion of the average budget. But commodity prices comprise a large part of emerging market governmental budgets where their decline is a serious issue.

The U.S. Department of Labor and U.S. Bureau of Labor Statistics published a report, in May 2006, titled: “100 Years of U.S. Consumer Spending: Data for the Nation, New York City, and Boston” which basically details how family budgets worked in 1900 when the U.S. was the ultimate emerging market – what China is today – and how they looked in 1950 and 2003. (Things have not changed all that much since 2003 so from a 100-year perspective this is current.) I think this spending breakdown suggests we may see deflation in many emerging markets dependent on commodities as their government spending suffers as their dollar-denominated debt loads drag them down. I think the present decline in commodities suggests it is less likely that we will see deflation in many of the developed markets, if credit growth remains under control, as raw materials simply are less relevant to developed economies (save for Canada and Australia).

Percentage of Family Budget Spent on Major Categories Chart

Source: The Atlantic

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

Still, with sovereign defaults likely in some emerging markets as the Chinese situation deteriorates and commodity demand keeps sagging, I cannot help but think we will see a fresh all-time low in the U.S. 10-year note yield (we saw a new low in the 30-year bond in January).

Ten Year Treasury Note - Monthly OHLC Chart

Source: Barchart.com

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

According to Bloomberg.com in “China Slashes U.S. Debt Stake by $180 Billion, Bonds Shrug” (August 9, 2015),Treasury bonds are seeing forced selling out of China to the tune of $180 billion as the People’s Bank of China is trying to support the yuan peg at a time when there is a flight of capital out of China. So far this forced selling of 10-year Treasuries – which I believe helped them get from 1.65% in January to 2.49% recently – has not prevented the Treasury market from rebounding, although it sure did cause quite a correction.

Total Reserves Excluding Gold for China Chart

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

I think that if the Treasury market continues to rally and Chinese forex reserves (the greatest composition of which is in Treasuries) continue to drop, we may have the clearest global deflationary signal yet as even forced selling to the tune of a couple of hundred billions of dollars in Treasuries in 2015 would not make a ding in falling Treasury yields.

[1] www.theguardian.com/business/2015/jul/30/imf-will-refuse-join-greek-bailout-until-debt-relief-demands-met

Growth Mail:

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

How to Recognize a Major Market Top….or Bottom

by Gary Alexander

“Stock prices have reached what looks like a permanently high plateau…. I expect to see the stock market a good deal higher within a few months.” – Dr. Irving Fisher, a Yale Professor of Economics and a leading economist of his day, speaking on October 17, 1929

With the Dow falling seven sessions in a row through last Friday, investors are once again asking if we may be overdue for a correction or perhaps even an end to this bull market, which has now run longer than average, at six years and five months.  Historically, of course, bull markets don’t end of old age – we have seen decade-long bull markets, like the 1990s – but the general sign of a market top comes from a buying frenzy characterized by a rapid rise in prices, higher market participation, and rising expectations.

The market crashes of October 1929 and 1987 are famous, but I would like to focus on the buying mania that preceded each crash.  The seeds of both October crashes were sown in the previous August’s euphoria.

Lessons from Market Tops in 1929 and 1987

According to James Stuart Olson in “A Historical Dictionary of the Great Depression, 1929-1940” (2001), the stock market of the late 1920s “witnessed unprecedented growth. A speculative mania swept the nation.” He cited this data: “The New York Times stock index had risen from 65 in 1921 to 134 at the end of 1924. It went up to 180 at the end of 1926, 245 in 1927, 331 in 1928, and 449 in August 1929.”

To spare you the math, that’s a 177% gain from 1921 to 1926, followed by +36% in 1927, +35% in 1928, and an eerily similar +35.6% through August of 1929.  The relative flatness of the market from August through early October of 1929 was no “permanently high plateau,” as Professor Fisher called it, but a decade-long Matterhorn climb with a short rest near the sharp peak and then nowhere to go but down.

August Calendar ImageWhat was August 1929 like in the world of stocks?  On August 9, the Federal Reserve raised their key Discount Rate by a full point, from 5% to 6%.  This move, the biggest single rate increase since the end of World War I, was to stem speculation, but the Dow quickly recovered to hit new highs two days later.

Today, Internet trading from a beach vacation house seems modern, but something like that happened in 1929, too. On August 9, the German airship Graf Zeppelin was on an around-the-world flight over Boston when a trader made the first stock order to be placed from an airship. Then, on August 17, according to a PBS special on 1929, one brokerage firm launched a new trading service aboard an ocean liner – the Berengaria – which allowed transatlantic passengers to trade shares during their Atlantic crossing.  Also, Commander Byrd radioed his broker for the latest market quotes from his camp near the South Pole.

In late October 1929, on one fateful ocean crossing, according to PBS, “men came running out of their Turkish baths in towels. Card games ended abruptly. Everyone tried to cram into the tiny office, yelling ‘Sell at market!’ They had left England wealthy men. They docked in New York without a penny.”

Turning to August, 1987, we see a similar mania following a similarly rapid market rise: The Dow rose 250% from 776.92 in August of 1982 to 2722.42 in August of 1987.  The sharpest rise came in the last 10 months before the peak, with the Dow rising from 1755.20 on September 29, 1986 to 2722.42 on August 25, 1987, a 55% gain in just over 10 months.  (My view: The market crashed just because it rose too fast!)

Like 1929, the summer of 1987 was a heady time on Wall Street as 158 NYSE companies split their stock shares in 1987 through August 24.  What’s more, Wall Street was engulfed in scandals: The Securities & Exchange Commission (SEC) was investigating several alleged insider trading schemes in a string of highly publicized cases. Traders were also arrested for using and peddling drugs in the go-go mid-1980s.

Something else important happened on this date in 1987. Alan Greenspan, a New York economist, was sworn in as chairman of the Federal Reserve Board on August 11, after having been picked by President Reagan to succeed Paul Volcker.  In response, the Dow gained 44.64 points to a record high 2680.48 on Greenspan’s first day.  As it turned out, Greenspan may have contributed to the popping of that particular bubble. On September 4, the new Chairman staged a “pre-emptive strike” against inflation fears by raising the Discount Rate half a percent (50 basis points). The Dow fell 4.4% during that first week of September before recovering.  This rookie blunder may have contributed to the eventual crash of 1987.

In the peak of the 1982-87 bull market, in August of 1987, bearish sentiment reached a ridiculous all-time low (in the American Association of Individual Investors (“AAII”) poll) of 6% on August 21, 1987, the week the market peaked before the Crash of 1987.

Bull ImageFrom the above evidence – and other bull market bubbles (like gold in 1979-80, Tokyo stocks in 1989, and NASDAQ in 1999-2000) – we can point to a very rapid rise in prices and near-universal bullish sentiment.  Neither is happening today.  Year-to-date in 2015, through last Friday, the S&P 500 is up only 0.91% and the Dow is down 2.52%.  Likewise, investor sentiment is still down in the dumps.  Last week’s bullish sentiment in the AAII poll (for the week ending August 5) was 24.3%, a level “well below its average of 38% for the current bull market; a level it hasn’t been above for 19 weeks now,” (Bespoke, August 6).  Neutral sentiment moved back above the 40% threshold to 44%, and the bears total 31.7%.

American Association of Individual Investors Poll Chart

Source: Bespoke Investment Group

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

For a classic bubble to develop, there is often a meteoric rise in prices, coupled with a public mania to get on board, bidding prices up. There has been no such sharp rise or public buying mania in this bull market.

Lessons from the Market Bottoms in 1974 and 1982

Market bottoms are often the mirror image of tops, marked by selling panics and near-unanimous gloom.

Parachutist ImageOn August 8-9, 1974, President Richard Nixon resigned and left office. Vice President Gerald Ford was sworn in as America’s 38th President. The Dow fell 17.4% on the news, from 795.56 the day before Nixon resigned, to 656.84 three weeks later, in the worst plunge of the 1974 bear market.  During that time of free fall, Nelson Rockefeller was nominated Vice President on August 20.  The market did not take kindly to Rocky. In the week of August 19-23, 1974, the Dow continued its free fall, dropping 6.1% that week.

On September 8, 1974 (a Sunday), President Gerald Ford pardoned former president Richard Nixon for any crimes he may have committed while in office.  In the week following the pardon (September 9-13), the Dow fell by over 50 points (-7.5%), while the broader S&P 500 fell by 8.7%. Overall, the S&P fell 27% in the third quarter and 33% from its June 10 peak of 93.10 to the October 3 trough of 62.28. The recovery came equally fast, with the S&P rising back to 95.19 on June 30, 1975, up 53% in nine months.

The week of August 9-13, 1982 formed another major market bottom.  From a Las Vegas-style lucky low of Dow “777” on August 12, the bull market grew 15-fold in less than 18 years. The bull market was born on a Friday the 13th, no less. The dramatic turnaround came in the midst of the worst economic conditions of the last 70 years: Two severe back-to-back recessions; a Prime Rate exceeding 20%; unemployment rates at 11.2%; inflation falling from 13% in 1980 to below 4% by mid-1982, threatening deflation.

Penn Square Bank in Oklahoma City failed in July of 1982. In response, Fed chairman Paul Volcker cut the Discount Rate from 12% to 11.5% on July 20.  That didn’t help the market recover – it kept falling – but the Fed’s second half-point rate cut on August 13 did the trick, fueling a market recovery. In the next four months, the Fed cut the Discount Rate five more times, by 50 basis points each time, lowering the rate to 8.5% by December 15.  Other rates followed the Fed’s lead: Short-term (90-Day) T-bills declined from 13.3% to 7.8% in the third quarter of 1982, and banks lowered their Prime Rate from 21% to 13%.

For the week beginning Monday, August 16, 1982, the Dow gained 81.24 points (+10.3%), to close at 869.29, the second best weekly percentage gain since 1940 to that time.  Tuesday, August 17 was the day the rally gained its greatest momentum, as the Dow shot up 38.81 points (+4.9%).  This near-5% gain told most investors the dark days were over for good. On Monday, August 23, the Dow rose another 2.5%. The S&P 500’s gains were steeper, rising from 102 on August 12, 1982 to 171 (+67%) on June 22, 1983.

In short, we avoided a repeat of the worst of the 1930s because our central bankers (mostly born in the 1920s) remembered the 1930s and did the opposite of what the Fed did then.  Instead of choking off the economy, the Fed turned on the monetary spigots.  I remember that time extremely well, since I was part of the doomsday press at the time.  I wrote a special report about the “unsolvable” Latin American crisis.  I recited the warnings of Soviet economist Nikolai Kondratieff, who said economies crash in predictable 50-year cycles, so we faced another 1930s.  Like most perma-bears, I failed to see the recovery coming.

We’re obviously nowhere near a market bottom now, but it pays to read about such debacles far in advance of the next great buying opportunity so that we can recognize the warning signs far in advance.

Stat of the Week:

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

Another 215,000 Payroll Jobs Added in July

by Louis Navellier

The Labor Department reported on Friday that 215,000 payroll jobs were created in July, which was pretty much in line with economists’ consensus estimates.  May and June payrolls were revised up by a total 14,000, which is encouraging since every previous month in 2015 had seen downward revisions.

You Are Hired ImageThe unemployment rate remained unchanged at 5.3%.  Average hourly earnings rose 0.2% to $24.99 per hour and wages rose 2% in the past 12 months.  Labor force participation remained unchanged at 62.6%, the lowest rate in 38 years. Previously, on Wednesday, ADP reported that private sector jobs rose 185,000 in July, down from a revised 229,000 in June.  Overall, the job market is improving, but at a slower pace, so I suspect the “data dependent” Fed will want to see an even stronger labor market before raising rates.

The other economic news last week was mixed.  Last Monday, according to MarketWatch, the Institute of Supply Management (ISM) announced that its manufacturing index declined to 52.7 in July, down from 53.5 in June.  This was a big surprise, since economists were expecting the ISM manufacturing index to rise to 53.7 in July.  Although any reading over 50 signals an expansion, the weakness can be best explained by the fact that the ISM employment gauge fell sharply to 52.7 in July from a much more robust reading of 55.5 in June.

Then on Wednesday, according to a Bloomberg release, ISM announced that its service sector index surged to 60.3 in July, up from 55.9 in June, well above economists’ consensus estimate of 56.2.  This is the highest reading for the ISM service sector since August 2005 and the biggest monthly surprise since February 2012.  There is now a 7.6-point difference between the ISM manufacturing index and service sector index, as the manufacturing sector is hindered by a strong U.S. dollar putting downward pressure on American exports. On the other hand, low commodity prices put more money into consumers’ pockets, so the service sector is continuing to expand.

How will the “Data-dependent” Fed Analyze This News?

This mixed picture of the health of the U.S. economy brings up the question about what the data-dependent Fed will do next.  On Tuesday, MarketWatch reported that the Atlanta Fed President, Dennis Lockhart, said that he supports a key interest rate hike at the next Federal Open Market Committee (FOMC) meeting on September 16 & 17, unless there is major weakness in the economic data.

The next day, Fed Governor Jerome Powell said on CNBC that he is undecided about whether to support a rate hike at the next FOMC meeting.  Specifically, he said that he will wait to review the next raft of data to be released before the FOMC meeting, adding that “I haven’t made any decisions about what I would support.”  Additionally, Powell said that he was going to pay particular attention to the labor market and said he thinks that the economy has more slack than the current unemployment rate suggests.

Translated from Fedspeak, the August payroll report (released on September 4) will likely be a decisive factor that will swing various FOMC members on whether or not to raise key interest rates in September.

Another factor that may influence the Fed is their ongoing concern with a strong U.S. dollar causing a “commodity crunch” and raising the threat of deflation.  As Ivan writes, above, this commodity deflation is also fueled by ongoing concerns that China’s economic growth is continuing to decelerate. Eurostat reported Wednesday that retail sales in the euro-zone declined by 0.6% in June and have only risen 1.2% in the past 12 months.  This is the largest monthly decline in euro-zone retail sales since September 2014, so there are new fears that Europe’s economic growth may be decelerating, too. In other words, faltering global economic growth may also influence the Fed to postpone any key interest rate hike in September.

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