“Big Bang” in Small Stocks

The First Half of 2018 Should Close with a “Big Bang” in Small Stocks

by Louis Navellier

June 26, 2018

United States China Trade War Image

Even though a wave of tariff escalations sent the Dow Jones average down 2% last week, the truth of the matter is that the U.S. has the leverage, since China needs the U.S. because it is its biggest export market.

This week marks the annual Russell realignment, so I expect to see many stocks surging higher as they are added to the Russell 1000, 2000, and 3000 indices (Note: The Russell 3000 index is composed of the Russell 1000 & 2000 indexes). Quarter-ending window dressing will also positively impact stocks this week, especially growth stocks with strong sales and earnings, Furthermore, the crisis in emerging markets is causing worldwide capital flight to the U.S. dollar. In 2017, most investment funds flowed into international stocks, including emerging markets and multinational stocks, but in 2018 that flow has been diverted to domestic stocks, propelling the Russell 2000 index higher. The critical path now is into domestic micro-, small-, and mid-capitalization companies with strong forecasted sales and earnings.

On my Tuesday podcast, I reiterated that the stock market is still the best place to be, since the S&P 500 yields approximately 1.9% and dividends are taxed at a maximum federal rate of just 23.8%. That means investors earn more staying in the stock market than by putting their money in a bank, where their interest income is taxed at a maximum federal rate of 40.8%. Furthermore, the 10-year Treasury bond yield has declined significantly since mid-June’s Federal Open Market Committee meeting. This means the yield curve is “flattening,” removing pressure on the Fed to hike key interest rates in upcoming months. This creates a ‘nirvana’ environment of moderate interest rates, 4% GDP growth, and strong company earnings.

In This Issue

Bryan Perry sees the stars lining up for a second-half rally, particularly in dividend growth stocks. Gary Alexander takes time out to honor Charles Krauthammer, including some of his financial commentaries. Ivan Martchev expands on something I’ve long said about many ETFs – they act like a scam on small investors, and Jason Bodner gives us an example of how it often pays not to sell into a panicky market.

Income Mail:
Setting Up for a Sizzling Second-Quarter Earnings Reporting Period
by Bryan Perry
“FOMO” Will Make Domestic Dividend Growth Investing the Second-Half “Sweet Spot”

Growth Mail:
R.I.P. Charles Krauthammer (1950-2018)
by Gary Alexander
Krauthammer’s Common-Sense Solution to the Entitlements Crisis

Global Mail:
The ETF Industry is Like a $3.6 Trillion Scam
by Ivan Martchev
A Practical Example of a “Bad” ETF

Sector Spotlight:
Don’t Let the Bad News Bewitch You into Selling
by Jason Bodner
An Example of Not Selling into Bad News

A Look Ahead:
This “Trade War” Will Likely End with Fewer (and Lower) Tariffs
by Louis Navellier
Despite Negative Political News, “Positive Business Outlook” is at Record Highs

Income Mail:

*All content of "Income Mail" represents the opinion of Bryan Perry*

Setting Up for a Sizzling Second-Quarter Earnings Reporting Period

by Bryan Perry

Over the last few weeks, I have written about some potential “speed bumps” to the primary bull trend. While I don’t expect all the stars to line up in favor of the bulls, it has been nice to be able to check off some of the potential market hazards on the bear’s short list. Here are three of their most recent concerns:

#1: Rising oil prices: OPEC has agreed to raise production by 600,000 barrels per day. Investors were hoping for a one-million-barrel-per-day increase, and though the price of oil finished higher on Friday at $68.58 per barrel for West Texas Intermediate, it is still 5.5% below where it was trading in late May. With production picking up both domestically and internationally, oil prices should stabilize soon.

Check One.

#2: Rising tariffs. The U.S. imported 1.26 million vehicles from Europe in 2017, according to LMC Automotive. About half came from Germany, according to Evercore ISI. Most are luxury vehicles. BMW, Mercedes, and VW operate U.S. plants, but most of their U.S.-sold vehicles come from Europe.

On Friday, President Trump signaled that, without concessions, he would penalize European-made vehicles sold to Americans “based on the tariffs and trade barriers long placed on the U.S. and its great companies and workers by the European Union. If these tariffs and barriers are not soon broken down and removed, we will be placing a 20% tariff on all of their cars coming into the U.S.”  The Germans blinked. Germany’s leading auto manufacturers are now in favor of eliminating all import tariffs.

Check Two.

#3: Rising Democrats: As to the upcoming mid-term elections, now less than five months away, a new USA Today/Suffolk University Poll finds that the political landscape still favors the Democrats, but not by as much as earlier this year. In the poll, Democrats have an advantage of six percentage points, 45% to 39%. At the end of February, however, Democrats had a 15-point edge. Given the latest economic data – and the especially strong employment and wage data – James Carville’s now famous phrase, “It’s the economy, stupid,” will undoubtedly be widely quoted on Republican placards during the campaign season.

James Carville Quote Image

Come November 4th, if the economy is still on pace to grow GDP at an annual rate north of 3.5%, people that aren’t that fond of Donald Trump but are fond of their rising paychecks will vote with their wallets for Republicans. To that point, the Republicans will very likely maintain control over both the House and the Senate with the stock market finishing the year in rally mode that takes the S&P to my target of 3,000.

Check Three.

In addition, the latest consumer confidence reading is at a 17-year high, suggesting that economic growth in the second quarter is likely to have improved from Q1. Overall, confidence levels remain at historically strong levels and should continue to support solid consumer spending in the near-term.

Consumer Confidence Index Chart

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

“FOMO” Will Make Domestic Dividend Growth Investing the Second-Half “Sweet Spot”

Any wave of good news could fuel a “fear of missing out” (FOMO) rally in the stock market.

While headlines of the Dow being down for the year (-0.56%) and the S&P 500 up a scant 3.04% as of last Friday’s close, there has been a sizzling spring-and-summer rally taking place among big-cap technology and small-cap stocks. Shares of most FAANG stocks are surging, taking the Nasdaq to new highs (+11.4% YTD) with Apple the only laggard. It is interesting that the Nasdaq is trading at new highs without the participation of mega-cap Apple, something that many analysts thought could not happen.

(Please note: Bryan Perry does not currently hold a position in Apple. Navellier & Associates does not currently own a position in Apple for any client portfolios).

As for small-cap stocks, the U.S. dollar rally coupled with the expanding U.S. economy and flight from emerging market currency volatility has the small-cap Russell 2000 higher by 9.8% for 2018 YTD.

The big-cap tech and small-cap sectors are viewed quite differently by investors in how they are valued and traded. The strength of the domestic economy is certainly at the forefront of why these two market sectors are outperforming, but one could say that about any sector. Where there is a common denominator is that small-cap technology companies are leading the Russell 2000 higher. The strong fund flows into U.S. stocks with the force of a firehose is finding its way primarily into technology stocks.

Where I see the market broadening out in the second half is into dividend growth stocks. The strong dollar will keep a lid on commodity inflation and the Fed is less apt to raise interest rates if inflation is tame. With many of the best blue-chip companies that double their dividends on average every seven years essentially flat for the year, it’s my view that we’ll see strong rotation from impatient money trapped in value stocks and into premier dividend growth stocks for “fear of missing out,” or FOMO.

If the most recent FactSet data regarding forecasted earnings is even close to accurate, the Q2 reporting season is going to be full of upside earnings fireworks and announcements of hefty dividend increases from literally hundreds of companies. For Q2 2018, the estimated earnings growth rate for the S&P 500 is 19%. If 19% is the actual growth rate for the quarter, it will be the second highest growth rate since 2011.

Standard and Poor's 500 Change in Forward versus Change in Price Chart

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

Among the 505 stocks currently in the S&P 500, 415 pay a dividend, and they increased their payments by an average of 13.9% in the first quarter while not a single company in the S&P 500 cut its dividend. 

Companies are sitting on a record pile of cash. Their earnings have been boosted by lower corporate tax rates, which has caused many companies to repatriate cash from operations abroad. So far, the largest dividend hikes of 2018 have come from energy companies, as they start to rebound from low energy prices that pressured earnings. But it won’t be just the energy companies gushing cash to shareholders. It will be a widespread payday for investors that I expect will be realized in stock appreciation. Ka-ching!

Growth Mail:

*All content of "Growth Mail" represents the opinion of Gary Alexander*

R.I.P. Charles Krauthammer (1950-2018)

by Gary Alexander

On June 8, I was shocked to hear Charles Krauthammer telling America he had only “weeks to live,” and I was more shocked when he didn’t even last two weeks from that date, dying last Thursday at age 68.

From 2010 to 2016, I had the honor to moderate a series of political panels at the New Orleans Investment Conference featuring Charles and others. These panels began as a political debate between liberals, conservatives, and libertarians, then we added a “Summit on America’s Future.” Charles was on each of those Summits as I recall, until 2017, when he missed the conference for health reasons. He said he would return but that didn’t work out. His cancer returned and claimed his life far faster than anyone expected.

Over the weekend, I went over some of my notes from those panels with Charles. Considering the current anger and emotionalism saturating the media’s political polarization, I find it refreshing that Charles never indulged in name-calling or disrespect for the other side of an argument. His sense of humor was always refreshing. I find it interesting that the person most qualified to comment on the mental health of some of our leaders refrained from doing so. (Before turning to political writing, Krauthammer went to medical school and became a psychiatrist, rising to Chief Psychiatry Resident at Massachusetts General.)

Krauthammer once told our panel that back in 1964 Fact Magazine conducted a poll of psychiatrists, asking if the Republican Presidential candidate Barry Goldwater was fit to be President. Half said “no.” That ethical lapse caused the American Psychiatric Association (APA) to add “the Goldwater Rule” to their Medical Ethics guidelines in 1973, calling any diagnosis of candidates “irresponsible, potentially stigmatizing, and definitely unethical.” But that, of course, doesn’t stop amateurs from slinging their psycho-babble daily. Still, I dared ask Charles to diagnose Obama after his re-election victory in 2012:

Charles Krauthammer Image

Alexander: Charles, as a trained psychiatrist, how would you diagnose President Obama?

Krauthammer: I took a pledge when I left psychiatry to avoid publishing any psychiatric insights into public figures. In fact, I have been critical of those who diagnose public figures from afar. The American Psychiatric Association once labeled Senator Goldwater as “disturbed.”  So I won’t answer your question with specifics. All I will say is that Obama, like all politicians, has a high opinion of himself, but his self-love is excessive, even among Presidents. Before turning 45, he had written two books – both about himself. And remember, this is the man who said in 2008 that history will remember the day he secured the Democratic nomination as the day “the rise of the oceans began to slow and our planet began to heal.”

Krauthammer’s Common-Sense Solution to the Entitlements Crisis

One of Charles’ greatest contributions to our “Summit on America’s Future” was a common-sense series of solutions to our most intractable problems. One of our most frustrating challenges is the entitlements crisis, in which Medicare and Social Security may become insolvent by 2026 and 2036, respectively, due to aging Baby Boomers and fewer young workers (and immigrants) paying into the system. The resultant cost overruns threaten to run up trillion-dollar annual budget deficits for as far as the eye can see.

Charles told us, “The solution is not that complicated. With Social Security, you must raise the retirement age and index it to longevity. When Social Security was introduced, life expectancy was just 62. Now it is 82. You have to change the cost-of-living formula and you have to “means test” the benefits. If you’re rich, you shouldn’t collect benefits. To contain medical costs, we must have tort reform. Malpractice suits account for 25% of medical costs, yet the 2,000-page Obamacare bill didn’t mention tort reform once.”

In one panel, former Republican House Majority Leader (1995-2003) Dick Armey exploded at Charles, saying, “If any pension manager proposed that cockamamie scheme of ‘means testing’ one’s pension benefits, he would be thrown in jail,” but Charles calmly responded, “It’s not fair, but it’s the only way to balance the budget. Social Security will become like any other welfare benefit – only for those in need.”

I particularly enjoyed the sharp repartee between Democratic gadfly James Carville and Krauthammer:

Krauthammer: The 10th Amendment has essentially been liquidated through the use of the Commerce Clause to allow the federal government to do anything and everything it wants.

Carville: Ah, the 10th Amendment, every conservative’s wet dream. I’m a proud supporter of the 16th Amendment (income tax). It was this country’s finest hour.

Krauthammer: The biggest problem with the income tax is in the area of civil liberties. The greatest intrusion into the life of the average American is the IRS (audience applause).

Carville: I see the audience is against me. I feel like a fireplug at a dog show…

Krauthammer: Then allow me to lift my leg.

As we approached the 2016 election, the New Orleans political panel seemed muted. Nobody wanted to vote for anybody! The libertarian P.J. O’Rourke didn’t even like the Libertarian candidate, Gary Johnson. Steven Moore was pro-Trump but didn’t like some of his policies, and Charles was adamantly anti-Trump. I pinned Charles down on this subject, and he gave one of his classic answers in our final encounter:

Alexander: Charles, you have said that you will vote for neither Donald Trump nor Hillary Clinton, nor the Libertarian. As a public figure, how can you defend not voting for even the “least of three evils”?

Krauthammer: This election reminds me of when I was a clinical psychologist in a locked psychiatric ward in the 1970s. Trump won the nomination on his name recognition and antagonistic rhetoric. He is a liberal posing as a conservative. He is no Christian but won their vote by vowing to “defend Christianity.” Hillary Clinton carries more baggage than Delta Airlines. She couldn’t legitimately beat a socialist who honeymooned in the Soviet Union (and never came back, politically). She lies badly (Bill lied well).

Charles said he would probably write in “Paul Ryan” for President, but either way, it was his last vote. We all miss Charles, and I’m sure we will hold a special tribute to him this November in New Orleans.

Most of us don’t get to write our last words, but Charles did, and they were characteristically profound:

“I believe that the pursuit of truth and right ideas through honest debate and rigorous argument is a noble undertaking. I am grateful to have played a small role in the conversations that have helped guide this extraordinary nation’s destiny.

“I leave this life with no regrets. It was a wonderful life – full and complete with great loves and great endeavors that make it worth living. I am sad to leave, but I leave with the knowledge that I lived the life that I intended.”

– Charles Krauthammer, June 8, 2018

For further reading, I recommend his 2013 book, “Things That Matter,” dedicated to his wife and son:

“This book is dedicated to my son, Daniel, whose incisive, brilliant mind has kept me intellectually honest and at my keenest since he was about ten years old. And, to my wife, Robyn, who urged me 35 years ago to follow my calling without looking back. With extraordinary intelligence, humor, grace and loving kindness, she has co-authored my life, of which this book is but a reflection.”

Next week, I’ll return to a mid-year review of the markets, but I had to take a pause for Charles this week.

Global Mail:

*All content of "Global Mail" represents the opinion of Ivan Martchev*

The ETF Industry is Like a $3.6 Trillion Scam

by Ivan Martchev

Some may wonder why an iconic active manager like Warren Buffett likes to tell people to buy a low-cost index fund in order to participate in the stock market. His advice has to do with minimization of costs, which adds a lot to performance over time. Still, I have never heard him say anything about buying a low-cost index ETF, which is a passive investing vehicle similar to an index fund. An ETF provides daily liquidity, whereas index mutual funds only get their NAV updated after the close of trading.

While on the surface ETFs may look superior to index funds because of this intraday pricing – and hence they have seen massive growth, to the tune of $3.6 trillion in assets in the U.S. and much bigger globally (see chart, below) – under the surface, this intraday pricing “advantage” of ETFs can get really ugly.

Global ETF and ETP Growth Bar Chart

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

There is no hard-and-fast rule in separating the good and bad ETFs – especially with new issues coming out every month – but after spending 20 years in this fascinating world of finance in various roles, I can tell you from experience that no more than one third of ETFs fall into the “OK” category. The rest are like a shell-game scam. (For more on this issue, see my article in Marketwatch “Opinion: This is what happens when Skynet from ‘Terminator’ takes over the stock market.”) And no, the market regulators have not done nearly enough to address these problems, which are growing bigger by the day.

Michael Lewis, who became a best-selling author with his tell-all books about the world of finance, gave a 60 Minutes interview when promoting his book on high frequency trading (HFT) called Flash Boys: A Wall Street Revolt. At the onset, the interviewer asks him, “What's the headline here?” Michael Lewis responded: “Stock market’s rigged. The United States stock market, the most iconic stock market in global capitalism, is rigged” (the video is available on Youtube). While Lewis’ book covers HFT, all the issues outlined in this article stem from computerized trading, as it is HFT that makes ETFs possible.

There are numerous ways to “shave” nickels and dimes with bid-ask spreads, tracking errors, and the like, so in the majority of cases the arbitrageurs are the ones that make the money at the expense of individual investors. As a rule of thumb, the more liquid the ETF is when it comes to daily volumes, the more likely it is that tracking errors and bid-ask spread problems will be smaller, even though highly volatile market environments – like those in August, 2015 – showed that even liquid ETFs can have some very serious problems (see Marketwatch, “Opinion: ETFs suffer from a ‘chessboard’ problem”).

I often get this question from clients: “What is an ETP, and what is the difference between an ETN and an ETF?” An exchange-traded product (ETP) is an umbrella term for exchange-traded funds (ETFs) and exchange traded notes (ETNs). While ETNs and ETFs may look similar in the way that they are passive investing products that track indexes and provide intraday liquidity to investors, they are fundamentally different. An exchange-traded note is a liability of the issuer and is technically debt that is designed to track an index. It is much more of a black box than an exchange-traded fund, which is technically a trust full of assets, whether they are stocks, bonds, or even derivatives like futures contracts.

In many cases, ETNs tend to use more derivatives to make what is, in essence, unsecured debt track their index of choice, while ETFs may or may not use derivatives, like futures. To make matters worse, there are leveraged ETPs where the tracking error and bid-ask spread issues tend to be magnified simply due to the leverage factor. The need for ETNs arises from the desire of the issuer to corner the arbitrage market (as there is typically one arbitrageur in the face of the issuer) and as such make more money that way, where with ETFs there are multiple arbitrageurs and therefore the ability to profit from discrepancies between the NAV and the market price of the ETF is typically smaller.

While I think it is highly unlikely for policy makers to let another systemically-important firm like Lehman Brothers fail – are you following what is going on with Deutsche Bank right now – it’s bankruptcy does illustrate the fundamental flaws of ETNs (read unsecured debt). All of Lehman's ETNs went to zero as there was no buyer to be found for its ETNs in the middle of the 2008 Wall Street crash.

As a rule of thumb, the smaller the daily volume and assets in an ETP, the bigger the problems with bid-ask spread liquidity and tracking errors. It is pretty clear to me that many ETPs are being launched so that the issuers can milk unsuspecting investors via bid-ask spread slippage and NAV arbitrage. It is almost like a carefully-designed legal shell game, where computerized trading transfers assets from unsuspecting investors in ETP products into the pockets of arbitrageurs. While legally not a scam, it acts like a scam, where the goal is not to help investors but to hoover up their nickels and dimes at very fast speeds.

An experienced  trading department can deal with this shell game due to long experience in the trenches and more sophisticated access to market data via level-2 quotes, but the individual investors who still have not mastered “All or None” and “Fill or Kill” limit orders – and dare I say still use “market orders”? – are the roadkill which keeps piling on the side of the HFT-ETF highway (for more, see our “ETF sharks” report).

A Practical Example of a “Bad” ETF

While it is not unheard of for a closed-end fund to trade with a large premium or discount to NAV due to the lack of arbitrage, it is truly bizarre to see large premiums or discounts on an ETF outside of extremely volatile environments like August 2015 or February 2018. A case in point is the ETF MG Alternative Harvest ETF in December 2017, which is marketed as a way to invest in legalizing marijuana.

Alternative Harvest Exchange Traded Fund Value Table

 

This ETF did not always trade under the ticker “MJ” on the Amex. The previous ticker was “MJX.” When we asked one of our industry sources why this ETF recently experienced a massive NAV dislocation with no particular market shock event on December 29, 2017, here is what he said:

“In a case like MJX, the Marijuana ETF, the underlying basket of stocks are smaller, illiquid Canadian-listed equities. The ETF is more liquid than the stocks, I believe, so this would fall under the first category, where NAVs drift from the underlying supply/demand issues. Naturally, market makers are experts in their products, so they will use this to their advantage to widen bid and offer spreads. Remember, the wider the interest is to keep the spread as wide as they can.”

In closing, I would like to say that Michael Lewis is right: There are massive scams going on in the stock market right now. ETF industry issues are a subset of the larger HFT problem, but the regulators are asleep at the switch. The best path forward is for trading to be controlled by experienced people, and not computers that are programmed to utilize millisecond advantages from specifically-installed shorter fiber optic cables that connect New York with Chicago in order to “legally” front-run investors.

Sector Spotlight:

*All content of "Sector Spotlight" represents the opinion of Jason Bodner*

Don’t Let the Bad News Bewitch You into Selling

by Jason Bodner

Throughout human history, there are countless examples of reactionary behavior gone wrong. A mistake is not a big deal, but when “group think” constructs social behavior based on ignorance, trouble begins.

Take the strange case of the Salem Witch Trials in Massachusetts in 1692. In the winter months, eight young girls fell ill. They had strange symptoms of delirium, incoherent speech, strange skin sensations, and trance-like states. Of course, concern grew, but when no one could explain it, questions quickly rose. Finger-pointing began, and blame was needed. The desperate residents of the village came to the then-logical conclusion that the girls were “bewitched.”  The town rounded up 150 “witches” and put 20 of them to death. This extreme example of mass hysteria cost these 20 innocent people their lives.

Witch on a Broom Image

The far lesser-known likely explanation was discovered by Linnda Caporael when she dug into the Salem trials as a college student in the 1970s. She found that the girls’ symptoms bore a striking resemblance to the effects of LSD (acid), the hallucinogenic drug that characterized the late 1960s. She found that LSD is a derivative of ergot, a fungus that affects rye, wheat, and other cereal grains. The fungus thrives in warm, damp, rainy springs and summers. Records from Salem in 1691 indicate this was the climate at the time. These rye crops were consumed in the winter of 1691-92, which led to the strange symptoms. The dry summer of 1692 did not bring the ergot fungus, thus the cases of bewitched villagers dropped to zero.

Ergot Fungus on Rye Image

Humans are conditioned to “shoot first; think later” and Wall Street is no different. I’ve seen my fair share of craziness on Wall Street. I sold and traded stocks and derivatives at big banks for well over a decade. Our days were filled with tickers and prices zipping by, shouting, ringing phones, fists slamming on desks, and countless other distractions. It was hard to keep track of stocks and what they were doing.

Sitting so close to ground zero for stock trading action, it was always a terrible feeling when a bad story broke on a stock I owned. Nothing stoked the flames of fear more than seeing one of my stocks trading down 20% or more. This usually evoked the deer-in-the-headlights feeling of “what should I do now?”

The feelings of panic can be strong enough to cause a poorly-timed reaction. Usually, the pain and fear of loss become so strong that relief is desperately needed. An individual typically sells their sagging stocks at the worst possible moment, only to watch them recover thereafter. How can this be avoided?

Strong emotional urges – like ascribing an LSD trip to the witches of Salem, or selling a falling stock – can do some serious damage to a portfolio. The way to overcome that is to stack your deck with facts and supportive data. Determine why you own the stock in the first place. Is it a leading stock, in a leading industry, in a leading sector, which in turn is leading the market higher? Does the company make money? Does it carry big debt? Does it have a big profit margin? Is its revenue stream diverse or heavily concentrated in a single contract which could cause serious damage if cancelled?

An Example of Not Selling into Bad News

These questions can really help you avoid doing something rash at the wrong moment. Let me give an example: I hold a long position in Chipotle Mexican Grill (CMG). The stock has been a major growth story for the past several years. On January 1, 2009, the stock closed at $47.76. It peaked at $749.12 on August 3, 2015. That’s about 1,470% gain. Then the stock began hitting some rough patches and negative press. It seemed like a good discounted price to grab some shares around $485, 35% off its 2015 peak.

(Please note: Jason Bodner does not currently hold a position in Chipotle Mexican Grill. Navellier & Associates does not currently own a position in Chipotle Mexican Grill for any client portfolios).

Well, the stock troughed at $251.33 on February 13 of this year. The market was in free fall, the stock was out of favor, and it was battling negative press. I was down almost 50% on paper in my $485 position. I wanted to sell it. I wanted to take my money and put it to good use elsewhere. The tone of the market was negative, and the fear factor was high. It was the perfect moment to NOT sell it, so I held on; and here we are a few months later, and the stock closed this past Friday at $469.94. It is now down about 3% from my entry price, but more importantly, it is up almost 87% from its low, in just four months.

Why didn’t I sell? The company has shown explosive growth from a handful of locations to over 2,000 stores since it began in the 1990s. It has double-digit sales and earnings growth, a nice profit margin, and 3-year earnings growth of over 200%. The company now sits in one of my favorite sectors: Consumer Discretionary. Money has been flowing into apparel, footwear, and restaurants. The supportive facts were too strong to sell into despair. To be clear: I am not making a recommendation to purchase CMG now. I am merely giving a real-world example of how logic and facts can overcome desperate emotional urges.

The Consumer Discretionary, Information Technology, and Energy sectors continue to be the strongest leading sectors for the past three and six months. These sectors are economic growth engines, bullish for the market. I continue to pay attention to the following Industries and Sub-industries: Retailing, Internet Software & Services, Semiconductors, Health Care Equipment, Apparel, and Restaurants. I see much of the market strength concentrated in the leading stocks of these areas.

Standard and Poor's 500 Sector Indices Changes Tables

The point here is this: Emotional investing can do you in, like the witches of Salem. I told you why I didn’t sell. “Why didn’t you buy more?” you may ask… That will have to wait for another day’s musing.

In the words of Billy Wilder: “Hindsight is always 20/20.”

Billy Wilder Quote Image

A Look Ahead:

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

This “Trade War” Will Likely End with Fewer (and Lower) Tariffs

by Louis Navellier

The Wall Street Journal reported last week that President Donald Trump asked U.S. Trade Representative Robert Lighthizer to identify an additional list of $200 billion in Chinese goods that would potentially be hit with additional tariffs. In the event that China keeps escalating its tit-for-tat tariff responses, President Trump said, “Further action must be taken to encourage China to change its unfair practices, open its market to United States goods, and accept a more balanced trade relationship.” 

In my opinion, Wall Street’s adverse reaction to all this back-and-forth tariff escalation with China is just an excuse to take profits. These threatened tariffs are not intended to be permanent. They are used to negotiate a more favorable trade balance. President Trump reiterated his “excellent relationship” with Chinese President Xi Jinping, saying the two would continue working together on many issues.

To back up what I’m saying, Bloomberg featured an article last Wednesday entitled “Investors Agree with Trump: The U.S. Will ‘Win’ Any Trade War.”  Also on Wednesday, The New York Times featured an article entitled, “Trump’s Ace in the Hole in the Trade War: A Strong Economy.”  Essentially, the NYT pointed out that economic growth is slowing outside of the U.S., while economic growth is accelerating here at home; so the rest of the world is now more dependent than ever on us buying their products, so they have virtually no negotiating leverage. The Wall Street Journal also reported on Wednesday that Germany’s leading auto manufacturers are now in favor of the abolition of all import tariffs.

Although the German auto industry does not control the tariffs, clearly Germany has tremendous leverage in Brussels at the European Union (EU) headquarters. U.S. Commerce Secretary Wilbur Ross said that “Germany has the right approach to resolving this trade disagreement among friends,” adding that “if the EU were to reduce its 10% tariff on U.S. cars and trucks, that would be a positive first step toward trade that was more fair and reciprocal.”  Clearly, the threat of more U.S. tariffs is now breaking down trade barriers. In the end, this should result in more free trade, with fewer (and lower) tariffs.

Despite Negative Political News, “Positive Business Outlook” is at Record Highs

The economic news last week was generally positive – in one case reaching record-high levels of positive sentiment. On Wednesday, the National Association of Manufacturers survey reported that 95.1% of manufacturers reported a “positive outlook” for their companies. This is the highest-ever positive reading in the 20-year history of this survey. Between a robust manufacturing sector and higher consumer spending based on retail sales, second-quarter GDP growth is shaping up to be the strongest in several years.

On Thursday, the Conference Board announced that its leading economic indicators (LEI) rose 0.2% in May. The current conditions component also rose 0.2% while the lagging component (which looks at the last several months) rose a more impressive 0.5%. Most of the 10 LEI components continue to steadily rise, so economists’ consensus estimate of 3.7% annual GDP growth in the second quarter looks solid.

The Commerce Department announced on Tuesday that housing starts rose 5% in May to a 1.35 million annual pace, well above the economists’ consensus estimate of 1.3 million. New housing starts remain especially robust for single-family homes, coming in at a 936,000 annual pace. Housing starts are now at an 11-year high – the fastest rate since 2007 – and new building permits are up 8% in the past 12 months.

Meanwhile, existing home sales declined 0.4% in May to a 5.43 million annual rate, according to the National Association of Realtors, but this small decline is attributable to rising median prices, higher mortgage rates, and a lack of inventory. Currently, there is only a 4.1-month supply of existing homes on the market, which is substantially below the normal six-month inventory when the balance between buyers and sellers is considered neutral. As a result, it remains a “seller’s market” (the average home was only on the market for 26 days in May), until these new housing starts create a larger housing inventory.


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.

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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.

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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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