August Doldrums

August Doldrums Often Precede September Fireworks

by Louis Navellier

August 23, 2016

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

Like the weather, many small cap, special-situation stocks have been heating up in recent days.  This is a good sign, since if some relatively obscure stocks can firm up on light volume during vacation time, we could see more buying across the board when trading volume historically rises again, after Labor Day.

Trading Volume Image

Coincidentally, Bespoke Investment Group’s “Chart of the Day” last Friday (August 19: “Volume, Like Paint, Drying Up”) showed how a string of low-volume days is usually followed by better performance in subsequent months.  Bespoke opened by saying, “The last time that we had an above average volume day in the S&P 500 tracking ETF (SPY) was on July 15th.  That’s 25 straight days of below average volume.”

Bespoke then examined the seven other times since 1996 when “SPY” traded at below-average volume for 25 days or more.  In the subsequent six months (following the 25th subpar volume day), SPY was up an average 5.25% (median: 7.11%).  In fact, the longest low-volume trading-day streak happened earlier this year, with a 53-day streak starting February 12, the day after the 2016 market low.  (The S&P is now up 19% since February 11.)  The theory is essentially that if the stock market can meander higher on lighter trading volume, then it is potentially much more explosive on the upside, when trading volume perks up.

In This Issue

The big news later this week will be the central bankers’ convention in Jackson Hole.  Bryan Perry and I will handicap the slim chances of any rate increase notions coming out of that meeting.  In Growth Mail, Gary Alexander adds truth serum to five economic overstatements by the leading Presidential candidates, while Ivan Martchev covers two markets he watches very closely – the Japanese yen and crude oil.  Jason Bodner then adds a very entertaining look at the Telecom sector, in light of the evolution of the telephone.

Income Mail:
Fed Hangs Out “Free Hot Dogs” Sign at NYSE
by Bryan Perry
Is the Bull Market for Bonds Over?

Growth Mail:
Aging Presidential Candidates Look Backward…Blindly
by Gary Alexander
Five Market Myths Repeated by Trump & Clinton

Global Mail:
The Yen Mystery Revisited
by Ivan Martchev
V-Shaped Recoveries Are Rare, Even in Oil

Sector Spotlight:
Telecom Services Lead the Way in 2016
by Jason Bodner
A Flat Market Week Masks Wide Sector Swings

A Look Ahead:
Central Bankers Retreat to Jackson Hole
by Louis Navellier
Beware of Asset Bubbles in Crude Oil and Housing

Income Mail:

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

Fed Hangs Out “Free Hot Dogs” Sign at NYSE

by Bryan Perry

The back-and-forth narrative fashioned by the Fed as to the future of short-term interest rates has entered the ‘silly stage.’ Recent stronger employment data had re-fueled rate hike language that would surely be reflected in last week’s release of the minutes from the last FOMC meeting, but instead stocks and bonds ended the week on a flat note as market participants walked back recently-adjusted rate hike expectations.

The change in thinking followed some dovish remarks from St. Louis Fed President James Bullard (an FOMC voting member) and less hawkish-than-feared minutes from the FOMC's July meeting. Then came some hawkish remarks by New York Fed President William Dudley (an FOMC voter) and Atlanta Fed President Dennis Lockhart (not an FOMC voter) who pushed forward rate hike expectations, signaling that at least one rate hike remains possible before the end of the year. But it gets even more convoluted…

St. Louis Fed President Bullard elicited some buying interest after he suggested that the Fed likely will only raise rates one time between now and late 2018! These recent comments echoed remarks he made in the past, citing GDP growth remaining under 2.0%. So, as you can see, there is some dissension among the ranks of the Fed; but at the end of the day it’s all just “noise,” since Fed policy remains unchanged.

As of last Friday, 85% of bond futures traders predicted that the Fed will make no move at their next (September 21) FOMC meeting. That number dips to 79% for the November 2nd meeting (right before the elections) and then 53% for the December 14th meeting. (Source: www.cmegroup.com).

Futures Expiry Table

In essence, the Fed will likely be staying the course through at least mid-December. This is like hanging out a big sign from the rafters of the NYSE: “Free Hot Dogs with Every Stock Purchase.”

Is the Bull Market for Bonds Over?

There is chatter among bond trading desks that long-dated Treasuries appear to be coming to the end of their bull run. The 30-year yield is testing the 50-day moving average (2.285%) and the 10-year yield is now above its 50-DMA (1.541%). Before getting too committed to this viewpoint we can see from the chart below that this same flashing red light appeared as recently as early June, only to give way to a steep sell-off that took the 10-yr T-Note yield to a record low 1.31%. So could this be the turning point for bond yields, not just another bear trap? If forward S&P earnings are taken into account, then maybe so.

Treasury Bond Values Chart

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

Based on profit calculated under generally accepted accounting principles (GAAP), S&P 500 companies have posted negative growth for six straight quarters, a stretch that’s been exceeded only once since 1936 – namely, the seven-quarter slump of the 2007-2009 recession (according to data compiled by S&P Dow Jones Indices and Bloomberg). However, there is a growing belief that the profit recession has troughed with a resumption of net earnings growth set to take place in the current quarter, and more importantly, accelerating into 2017 as per the two FactSet charts, below.

Standard and Poor's 500 Companies Negative Growth Bar Chart

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

As we now stand, investor faith that earnings will rebound is visible in the form of strong rotation into consumer discretionary and technology stocks, led by the semiconductor sector where second-quarter revenue and profits generated several better-than-forecast results, and more importantly, provided upbeat forward guidance. The wild card in forecasting forward S&P earnings lies with the energy and materials sectors, where volatility remains high and guidance is cloudy, making it hard to get an accurate read.

Standard and Poor's 500 Quarterly Actuals and Estimates Bar Chart

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

The forward 12-month P/E ratio for the S&P 500 is 17.1 (based on last Friday’s closing price of 2183.87), while the forward EPS estimates (in the above chart) show a significant rise from first-quarter 2016 lows.

This quarterly focus shows why – despite deflationary pressures and stagnant growth outside the U.S. – the latest quarter-over-quarter rise shows that the world’s largest economy can weather the current global slowdown.  With 95% of the companies in the S&P 500 reporting earnings to date for Q2 2016, 71% have reported earnings above the mean estimate and 54% have reported sales above the mean estimate.

Standard and Poor's 500 Second Quarter 2016 Earnings Bar Chart

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

Ideally, Fed policy should be interlinked with the fiscal operations of other central banks. Europe and much of Asia are fully engaged in elevated levels of quantitative easing, so delaying a Fed rate hike is preferable, until the Eurozone, Japan, and China can gain some better economic footing. A Fed rate hike would cause the dollar to soar, while imposing headwinds on multinational U.S. companies.

The U.S. discontinued QE in late 2014, and that has contributed to a massive rise in the U.S. dollar:

Value of United States Dollar Chart

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

It would stand to reason then, that though bond yields might have stopped going down at this juncture, they aren’t likely to spike higher, either, until the overall economic data reveals that wage inflation and core inflation are trending higher on a sustainable basis. Inflation expectations as measured by the “five-year, five-year forward breakeven” rate, returned into the bottom half of this year's range. (The 5y5y forward rate is the difference between Treasuries and TIPS, i.e., inflation as measured by market prices.)

The 5y5y forward breakeven rate reflects the views of investors who have money on the line and that index slid eight basis points to 1.59% last week after holding steady the first two weeks of August. The rate is well below last year's level of 1.96%, hovering 19 basis points above this year's low. (Source: Federal Reserve). This is a tool the Fed pays close attention to, and in light of recent robust jobs gains, inflationary pressures remain very tame, giving them another reason to delay any rate hikes.

Five Year Forward Inflation Breakeven Chart

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

To sum up, a do-nothing Fed and a sideways bond market are a green light for the bulls and especially for investors looking for near-term visibility. Even if the Fed does raise rates in December, trading pros are already saying that it will be a “one and done” situation for a while. Any rate increase at all will further the inflow of funds from institutional foreign accounts, where negative interest rates punish investors.

In my view, a quarter-point bump in the Fed Funds Rate won’t move the needle on investor sentiment and will be received as a ‘no harm, no foul’ move that satisfies the ‘let’s get it over with’ crowd. The fiscal academics at the Fed desperately want to “normalize” rates to any extent possible. Investors can continue to take advantage of this Fed-friendly bull market for blue chip, dividend-paying equities and make the most of capital dedicated for risk-on income that is sensitive to a gradual and steady economic recovery.

Growth Mail:

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

Aging Presidential Candidates Look Backward…Blindly

by Gary Alexander

“The exhaustion of the Baby Boomer Order will be on display this fall as two 70-year-old Presidential candidates yell at each other about how best to go backward.” 

-- Yuval Levin, “The Fractured Republic”

As I predicted here two weeks ago, the U.S. won the most Olympic medals, 121, well ahead of #2 China (70). The U.S. women won 27 gold medals to 19 for the U.S. men. In fact, U.S. women won as many gold medals as the combined male and female athletes of any other nation except Britain, which also won 27 golds. These facts fly in the face of Donald Trump’s claim that “America never wins” and Hillary Clinton’s mantra that women don’t get a fair shake in America – two of several myths I’d like to debunk.

The following four statements come from the recent acceptance speeches of the two leading candidates:

Myth #1: Household Income is Declining

“Household incomes are down more than $4,000 since the year 2000.”

– from Donald Trump’s acceptance speech, July 21

In recycling this factoid, Trump’s speechwriters are using the Census Bureau’s household-income data, but household size is shrinking. The number of U.S. households with one person has increased sharply, putting downward pressure on household income. The statistic also ignores rising government benefits.

Ed Yardeni’s earned income proxy (computed by multiplying average hours worked times average hourly earnings) shows that aggregate household earnings rose 4.3% in July, setting yet another record high.

Another fallacy is that today’s jobs pay less. This myth is perpetuated by comparing good (high-paying) jobs from retiring Baby Boomers (which are disappearing) with bad (low-paying) new jobs from younger, inexperienced workers. A better way to measure wage growth is to track workers in the same jobs over time, via the ADP Workforce Vitality Report, compiled by Automatic Data Processing, the company that handles payroll processing. This measure shows that wages for the same job rose 4.6% in the first quarter.

If consumers are hurting more than ever each year, why did consumer spending reach a record high last quarter? And how did household net worth hit a record high, up 57% since 2008 and 100% since 2002?

United States Household Net Worth Chart

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

In addition, auto sales are at record levels – at a 17.7 million rate this year, according to Sean McAlinden, chief economist for the Center for Automotive Research. This follows a record 17.5 million in 2015.

How is this possible if U.S. households are now worse off than at any time since the year 2000?

Myth #2: The Wealthy Don’t Pay Their Fair Share of Taxes

“Wall Street, corporations, and the super-rich are going to start paying their fair share of taxes. Not because we resent success. Because when more than 90% of the gains have gone to the top 1%, that's where the money is.” – From Hillary Clinton’s acceptance speech, July 28, 2016

Since her nomination, candidate Clinton has been running a TV ad which shows the rich at the top of a pyramid, with the announcer saying that these elite don’t pay their fair share of taxes. The truth is the opposite. According to the American Enterprise Institute (see June 13, 2016: “CBO study shows that ‘the rich’ don’t just pay a ‘fair share’ of federal taxes, they pay almost everybody’s share”), the richest 20% (‘highest quintile’) basically pay all of our income taxes, when you include benefits vs. taxes paid.

Average Federal Taxes Paid Bar Chart

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

Candidate Clinton cynically threw red meat at the Bernie Sanders crowd when she said she’ll tax the rich because “that’s where the money is,” recalling Willie Sutton’s famous quote about why he robbed banks.  But ironically, taxes collected from the top 1% tend to rise during times when their top tax rates are cut.

In the chart below, notice the rise in percent of taxes paid by the richest 1% during the Reagan (1981-88) and George W. Bush (2001-08) years. These leaders were maligned for creating “tax cuts for the rich,” yet the taxes paid by the rich rose and taxes paid by the lowest 90% fell in the Reagan and Bush years.

Income Tax Share of the Top One Percent Chart

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

Myth #3: America is More Dangerous Than Ever

“President Obama has made… America a more dangerous environment than frankly I have ever seen or anybody in this room has ever watched or seen.” – Donald Trump in his acceptance speech, July 21.

Just imagine you lived at any other time in history. Life would have been much more violent then, but you would likely not hear the news, much less see it on live TV or an Internet feed from the billions of people walking around with camera phones. Here are a couple of snapshots from 50 and 25 years ago:

  • 50 years ago, there was a major terrorist attack in Texas, as Charles Whitman killed 17 and wounded 41. There were also campus riots and race riots every year in the late 1960s, plus escalation of the Vietnam War. This depressed stocks: As of August 26, 1967, the Dow had lost 23% in six months.
  • 25 years ago, there was an ill-fated Soviet hard-liner’s coup attempt, the last gasp of the Cold War. Mikhail Gorbachev was detained under house arrest. The Soviets sent troops to take over Moscow, Leningrad, and the Baltics, but Boris Yeltsin took a risky stance and turned back the Soviet coup.

Another thing happened in 1991: Violent crime began to decline in America. The rate of murder fell from a peak of 10.2 per 100,000 people in 1980 to just 4.5 per 100,000 people in 2013 and 2014. The rate for all violent crimes fell 50%, from 758.1 per 100k in 1991 to just 375.7 in 2014, according to the FBI:

Reported Violent Crime Rate in the United States Chart

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

This is not “the most dangerous time in America.” If you feel unsafe, that’s a feeling, not a fact.

Myth #4: Women Don’t Get a Fair Shake in America

“If fighting for women's health care and paid family leave and equal pay is playing the woman card, then deal me in.” – From Hillary Clinton’s Acceptance Speech, July 28

This Friday, August 26 – Women’s Equality Day, marking the passage of the 19th amendment on August 26, 1920, giving women the right vote – the world will weigh the words of the second most powerful person in America – Federal Reserve chair Janet Yellen speaking at Jackson Hole, Wyoming. With the likely election of Hillary Clinton to be President, the top two offices in America will be held by women.

According to the American Enterprise Institute, using data from the Department of Education, women earned far more college degrees than men at every level of higher education in 2016 – for the 11th straight year. Overall, women in the Class of 2016 earned 139 college degrees at all levels for every 100 men who received degrees. In fact, there is a 610,000 college degree gap in favor of women. In 2016, colleges will award 2.195 million total degrees for women vs. 1.585 million total degrees for men. Women will also earn 135 bachelor’s degrees for each male B.A., a streak that now runs to 35 years in a row, since 1982.

College Degrees Table

Title IX (in 1972) gave women equality in sports, resulting in their dominance in the 2016 Olympics this month. Greater educational advantages since 1982 will no doubt translate to better jobs for women, too.

Bonus Myth: America Doesn’t Win (or Work) Anymore

“Our country doesn’t win anymore…Nothing works in our country.”

– A mantra by Donald Trump during the Republican candidate debates

Donald Trump must not be watching the Olympics – or the stock market, for that matter. The U.S. stock market is up this year while most global markets are down. According to Ed Yardeni’s morning briefing (August 16, “Lifting All Boats?”), “Since the start of the current bull market on March 9, 2009, US MSCI (in dollars) is up 222.4%, while the All Country World ex-US MSCI (in local currencies) is up 89.2%. Since the end of last year, the former is up 6.7%, while the latter is up less than 0.1%.” Go, Team USA!

Top Three Olympic Medal Winners Table

America wins a lot. We have the strongest currency in the world. We have lower unemployment and higher growth rates than Europe. Millions of immigrants want to move here. Our military is the world’s best, by far. Our markets are the most liquid, and we have the lion’s share of the world’s top corporations.

As of March 31, 2016, the top 10 global companies (in terms of market capitalization, as compiled by the Financial Times) were all American, led by four giant West Coast firms co-founded by two high school dropouts (Steve Jobs and Bill Gates, respectively), plus a Russian immigrant (Sergey Brin), and a Seattle entrepreneur (Jeff Bezos). Then comes Warren Buffett’s holding company in fifth place. Fortune’s list of the 10 most respected brand names is dominated by gigantic American companies. These iconic brand names blanket the globe. In fact, you could see some of their logos during the Rio Olympics TV coverage.

All in all, I’d rather live in the United States in 2016 than at any other time or place in human history, but I won’t hold my breath waiting for politicians to stop misusing statistics to generate more fear and anger.

Global Mail:

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

The Yen Mystery Revisited

by Ivan Martchev

It is no secret that the Japanese multinational companies included in the Nikkei 225 large-cap index have great leverage to moves in the Japanese yen as they are predominantly exporters whose profits are mostly (sometimes 70% to 80%) generated outside of Japan. Hence, a weak yen will boost their yen-reported profits in Japan while a stronger yen tends to suppress those profits. Therefore, a stronger yen tends to suppress share prices for Japanese stocks while a weak yen tends to boost them. This is evident when posting the Nikkei 225 Index and the USDJPY cross rate on the same chart (see below).

Japanese Yen versus Nikkei 225 Stock Market Index Chart

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

This is why July and August trends in the Nikkei 225 and the yen make little sense as this rather strong correlation has held for a long time – until last month. In early July the yen weakened all the way from 100 to 106 on the heels of former Fed Chairman Bernanke’s visit to Tokyo which was rumored to discuss “helicopter money” (see August 4, 2016 MarketWatch, “The point of no return for quantitative easing is getting closer”). Since a cabinet-level adviser had discussed “helicopter money” with Bernanke in April, the speculation was that this was again a topic of discussion as the Bank of Japan has failed to produce positive inflation and Japanese 10-year government bonds are now in negative yield territory.

So far, the sound of helicopters dropping freshly-printed yen has not been heard and the yen weakening did not last. The yen delivered a quick rebound from 106 all the way to 100, with a few stabs below that in the past week. (As a reminder, a stronger yen in the USDJPY inverted chart goes down, as it means fewer yen per dollar.) The trouble is, the Nikkei 225 index “forgot” to sell off. I would have expected six-yen worth of strengthening in a month would have been worth 1000 to 1500 points on the Nikkei. I know that Japanese Prime Minister Shinzo Abe won the recent election in Japan and many are expecting a big fiscal spending package, but no fiscal spending in a long while has managed to overpower a stronger yen.

So either the yen is wrong, or the Nikkei is about to see a pretty sharp nose dive. The yen has pretty well-defined resistance level at 100. On Brexit day it ran up all the way to 99.07 but could not hold on to a double-digit USDJPY cross rate. It tagged that key resistance level in early July and was tagging it again last week with marginal dips below 100 but never really closing there.

United States Dollar versus Japanese Yen - Daily OHLC Chart

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

If we go purely on technicals – because the fundamentals suggest the yen should be a lot weaker – the chart suggests that we will see a stronger yen in the months to come, maybe reaching 90. I think the rise in the yen comes because of unwinding carry trades due to collapsing global interest rates where the yen is used as a funding currency. This creates a massive short squeeze in the yen as a carry trade is a short yen position, by definition. There are no signs that the unwinding of carry trades is close to being over.

I have great difficulty seeing a sub 100-yen as being a positive for the Nikkei 225 index. It is true that the BOJ has now upped their limit for buying of exchange traded funds, which has already made them the top 10 shareholder of most major Japanese corporations. There are days that the BOJ spends 70 billion yen (c. $700 million) in a single purchase. That could help explain the temporary Nikkei divergence from the yen.

It is also true that the BOJ now holds an estimated 38% to 45% of all Japanese government bonds (JGBs) with maturities of 10 years or less so there is speculation that the BOJ may venture into different types of bonds, like corporates and municipals, further distorting the Japanese financial system. Those new moves on the QE front are expected in September, and maybe Japanese stock traders think that if those increased QE measures are big then the yen will weaken and it will recouple with the Nikkei.

Japanese Labor Force Participation Versus Population Chart

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

I think that investors are too caught up on short term BOJ moves and don't necessarily pay attention to the long-term fundamentals. Japan has a population of 127 million that is now falling (right-hand scale) as the populace is rapidly aging. Its labor force participation rate has been falling for 50 years as Japan has aged.

Couple that with an exploding government debt to GDP ratio of 229.2 % (blue line, left-hand scale, below) and a government budget that is in deficit for decades (black dotted line, right-hand scale, below).

Japanese Debt Versus Government Budget Chart

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

I don't see how the Japanese will escape the present debt spiral where more old people mean fewer taxes collected, along with more expenditure and a constantly rising debt to GDP ratio until the JGB market refuses to clear. I don’t know when that moment will come, but it sure feels close. I doubt that Japan will have another 10 years going down that same wrong path.

So whatever the BOJ decides in September, and whether the Nikkei or the yen sells off, keep in mind that monetary policy has its limits. As I have mentioned before, the BOJ may be able to print yen and run the printing presses until Japan runs out of trees, but it cannot print babies.

V-Shaped Recoveries Are Rare, Even in Oil

Those of us in the investing business know that there aren't many moments when one can get bored, as there is always something going on that doesn't quite fit the overall picture. In this case, it’s the V-shaped recovery in crude oil futures which in July traded from a hair above $50 to a hair below $40, while in August they reversed course and the October 2016 WTI (CLV16) contract, closing on Friday at $49.11.

West Texas Intermediate Crude Oil - Daily OHLC Chart

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

The V-shaped August move in the front-month WTI futures contract is a head scratcher. Inventories and production are high and demand is weak. I follow the oil market numbers closely and I don’t see a rebalancing of the market to call for such a sharp move to the upside. What is more, we are in late August, and poor seasonality where oil demand drops off starts in September; so something is not quite right here.

Keep in mind that this is the October 2016 contract and the way the futures curve in crude oil works. In January when the oil market made a $34 bottom, February futures went as low as $26 while every month further out was trading at a higher price, $6 higher in the case of the October contract. So when CLV16 fell below $40 in early August it had actually given up two-thirds of the gains since the January lows.

To me this V-shaped recovery in WTI crude oil futures looks like a short squeeze. The fundamentals are bad enough for crude oil to attract a lot of short-selling interest. The fundamental backdrop for crude oil is not expected to improve by the end of the year but only to deteriorate further. We are only $4 away from the June highs in the CLV16 contract. I have great difficulty seeing the oil market surpassing that high, while I have a much easier time seeing how we can test the January 2016 lows of $34 by January 2017.

Sector Spotlight:

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

Telecom Services Lead the Way in 2016

by Jason Bodner

Fifty years ago, Frank Sinatra displaced the Beatles and Rolling Stones at the top of the Billboard charts.  You can hear the first four bars of Frank’s hit on a touch-tone telephone by pressing “48848-48984.”

That number sequence is the touch-tone code for “Strangers in the Night.” If you punch in those numbers on your phone and listen to the touch tones, you will be able to play the opening 10 notes of that song. I bet you’re trying it right now. Assuming you have a mobile phone – as 92% of Americans do, according to the Pew Research Center – just make sure your phone is not on “silent” (muted) and it should work.

Hopefully I brightened your day with this useless trivia. But aside from being an amusing party trick, touch tones were a major innovation in the 1960s, representing a significant advancement over the rotary dial phone. The speed of dialing and keyed information transfer shortened immensely. Bell Telephone customers could pay $1.50 a month for the pleasure and convenience of touch-tone, according to newspaper reports at the time. Although the pound and star keys would not appear until 1968, the first 10-button sets largely resembled the keypads used on billions of mobile and other phones today. 

Ironically, when I say the term “pound key,” my sons give me a blank stare, as if to say, “What is that?” When I say the “number sign,” they finally get it: “Oh, you mean the hashtag!?” Time is a raging river… 

Hashtag Was Called a Pound Sign Image

 

Hashtag Tattoo Image

Remember your old phone used to have a little plastic window near the keypad (or the center of the dial plate on a rotary phone)? That was called a number card. It enabled anyone who was using the phone to know what number they were calling from. As is often the case, however, people found nefarious uses for them—like copying the numbers and making sure no one was home for a quick robbery.

Evolution of Phone Image

Time marches on and change is constant. Look at the evolution of the phone. The first phone message (“Mr. Watson come here, I want to see you,”) was transmitted March 10, 1876 in Boston, Massachusetts, between Alexander Graham Bell and his assistant Thomas A. Watson. How far we have come since then! Even the original greeting has changed. Alexander Graham Bell suggested “ahoy,” until Thomas Edison thankfully suggested “Hello.” Could you imagine answering your phone, “AHOY!”? The origin of the phrase “to put someone on hold” was Bell handing his telephone to his partner Mr. Watson and saying, “here, hold this.” From those early days, we have witnessed rotary phones, touch-tone phones, cell phones, faxes, voicemails, automated dialing, etc. The phone changed drastically over the years but the basic function of a phone is still communication (even if it’s less voice and more text these days.)

Time Marches On Image

Change is the only true constant. The markets are changing dynamically on a daily basis. But the fundamental underlying propellant will always be the same: Fear and greed. These two powerful emotional responses are still coded into algorithms that instruct computers to trade.

A Flat Market Week Masks Wide Sector Swings

Today’s market looks strong, with the S&P 500 at or near all-time highs, but what is going on underneath doesn’t always corroborate that story. This past week was a good example: The S&P 500 Index finished flat (down 0.01%). But on the sector level there was some noticeable pushing and pulling.

Standard and Poor's 500 Weekly Sector Indices Changes Tables

The S&P 500 Energy Sector Index, by far the weakest sector of last year, has staged a stunning six-month rally of 17.64%, aided by a +1.97% performance last week. It is worth noting, however, that this seasonal surge in demand usually concludes after Labor Day, as summer driving wanes. The recent heat wave has also contributed to the rise in energy prices.

Standard and Poor's 500 Semi Annual Sector Indices Changes Table

The past nine months saw the strongest sectors being Utilities and Telecommunications, each with a performance north of +14%. This past week saw those two sectors the weakest performers with a notable -3.84% performance in Telecom, but I must remind you that Telecom has the fewest components of any sector index and can therefore be misleading. For the past week, Consumer Discretionary and Healthcare were weak while Industrials and Materials were strong. Info tech, which has seen a significant surge in the past month, was relatively quiet for the week. For the year though, Info tech remains second best.

Standard and Poor's 500 Annual Sector Indices Changes Tables

The rally from the February lows was catalyzed by a flight to safety and evolved into a rise in weakness. In short, it has been a low-quality rally. One area to be excited about has been Information Technology, but Energy has been the clear winner for the past six months. The fundamental backdrop has not changed with oversupply lingering, and no significant curtails on production. It is a rally to avoid. Unless solid footing is found in growth sectors, it could just end up being a head fake. That said, we are in an election year which is historically positive for markets, and we are also on the heels of historic volatility which has left investors rattled and weary and ready for it to be over. Anything is possible, but I for one would be looking towards sectors growing market share, revenues, earnings, and market cap to lead us forward.

Just like with phones, as time ushers in new change, it is important to focus on the basic underpinnings of the market. Everyone is out to increase what they put in. With a steady focus and attentiveness to what is driving markets up and down, investors can hope to have an edge in identifying trends early on. Energy was a sector to avoid last year. Tech is a sector to pay attention to now. Getting back to phone music, an investor armed with good information can avoid everyone’s favorite uh-oh song: 9997 (Beethoven’s 5th).

Orson Welles said, “If you want a happy ending, that depends of course on where you stop your story.” Looking at Energy for the past few months and ending the story here, energy prices have given us what looks like a happy ending. But of course the story doesn’t end here. Will it be happy or not? While we ponder that, I’ll leave you with an ironically appropriate outro tune of everyone’s favorite party song…

111-66-999-66 is the tele-code for “Louie Louie” by the Kingsmen, another big hit from the 1960s.

A Look Ahead:

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

Central Bankers Retreat to Jackson Hole

by Louis Navellier

“…if economic performance turns out to be disappointing and progress toward our goals proceeds more slowly than we expect, then the future path of interest rates likely would be more accommodative than we currently anticipate.”

– Janet Yellen at Jackson Hole, Wyoming, August 22, 2014

The first annual central banker’s conference was sponsored by the Kansas City Fed in 1978 and it covered a specialized topic, “World Agricultural Trade,” since Kansas City is situated in America’s Breadbasket. The Chairman of the Federal Reserve then was G. William Miller, soon to be replaced by Paul Volcker.

After three years of Volcker’s tight-money, anti-inflation medicine, he finally eased the Fed Funds rate in the summer of 1982, fueling a market rally.  To take a victory lap of sorts, Volcker asked the Kansas City Fed to hold their annual meeting near a fishing hole he liked in Jackson Hole, Wyoming – in the remote Northwestern corner of the Kansas City Fed’s district.  Volcker’s fishing haven has now become an annual getaway in a fairly cool oasis in the midst of a summer heat wave throughout most of the rest of America.

This year’s meeting will be held August 25-27, with a major speech scheduled by Janet Yellen on Friday, August 26.  There has been no shortage of chatter by other central bankers leading up to this meeting.

  • Last Tuesday, New York Fed President William Dudley said in a Fox Business channel interview that “We’re edging closer towards the point in time where it will be appropriate I think to raise interest rates further.”  Dudley said, “The economy is in OK shape,” implying that a September rate hike is “possible.”  However, “OK” is a pretty weak basis for a rate increase.  Dudley also raised some concerns about the bond market, saying, “The 10-year Treasury yield at 1.5% is pretty low.”
  • As an encore, on Wednesday St. Louis Fed President James Bullard said that he did not put much weight on whether the Federal Open Market Committee (FOMC) acts in September or even at all this year.  Specifically, Bullard said that “it does not matter much when we move,” and added that he preferred that a rate increase follow “good news,” such as evidence that economic growth is rebounding.  Clearly, the Fed is still struggling with deflation and global economic stagnation.
  • Also on Wednesday, we saw the release of the FOMC minutes from the July 26-27 meeting that revealed that its members had doubts that economic growth was poised to rebound in the second half of 2016.  Several FOMC members “preferred to defer another rate increase in the federal funds rate until they were more confident that inflation was moving closer to 2% on a sustained basis.”  Only two FOMC members suggested a hike, so the hawks were out-numbered by doves. 

Beware of Asset Bubbles in Crude Oil and Housing

Last Tuesday, the Labor Department reported that the Consumer Price Index (CPI) was unchanged in July.  In the past 12 months the CPI has risen only 0.8% but the “core” CPI has risen 2.2%.  If the Fed looks at this “core” increase, they may see some justification for inflation meeting 2%, their target; but I think deflation remains a greater risk.  Crude oil prices are surprisingly strong now, but the crude oil supply glut is real, especially for refined products like diesel and gasoline.  Even though the devastating flooding in Louisiana disrupted at least one refinery, the glut of refined product remains shockingly high.

In the meantime, the heat wave in the Northeast and much of the U.S. is helping to keep natural gas prices high due to high air conditioning demand.  Furthermore, last Friday Farmer’s Almanac predicted a freezing cold winter in the Midwest, based in part on sunspots and solar activity.  This essentially means that natural gas prices may remain high, since hot miserable summers and freezing cold winters tend to boost natural gas demand, but those energy companies that are tied to crude oil remain vulnerable.

Freezing Cold Winters Image

One part of the economy that is hotter than the summer weather is homebuilding.  This rise is partially due to Freddie Mac’s push to provide 3% down for mortgages up to $417,000.  On Tuesday, the Commerce Department announced that housing starts rose 2.1% in July to an annual rate of 1.21 million, higher than economists’ consensus estimate of 1.18 million.  Single-family starts rose 0.5% to a 770,000 annual pace, while multi-family starts surged 8.3% to a 433,000 annual pace.  In the past 12 months, housing starts have risen 5.6%.  However, when either inventories or interest rates rise, the housing bubble could burst.

Overall, the housing bubble best describes the conundrum that faces the Fed going into the fall.  As long as the Fed remains accommodative, asset bubbles will likely continue to grow.  Another example is the S&P 500, which continues to yield substantially more than the 10-year Treasury bond, so assets seeking income should continue to flow into the stock market.  Furthermore, companies are expected to continue to buy back their company’s shares due to the ultralow interest rate environment and record bond sales.

Weighing all the evidence, this looks like a Goldilocks economy – neither too hot nor too cold – so low interest rates should remain in place, fueling various asset bubbles due to the Fed’s accommodative monetary policy.  Fed Chair Janet Yellen’s speech in Jackson Hole on August 26th will likely be very dovish, which will likely help the stock market to rally leading up to the long Labor Day weekend.


It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

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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It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

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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