British Voters Torpedo Global Markets

British Voters Torpedo Global Markets

by Louis Navellier

June 28, 2016

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

Going into the Brexit vote last Thursday, the latest polls implied that Britain would vote to remain in the European Union (EU).  That expectation sparked a major market rally, along with a huge reserve of cash on the sidelines waiting to pour into stocks in Europe and around the world on the conclusion of the vote.

However, the British polls turned out to be very wrong.  The final Brexit vote came in with only 48.1% wanting to stay in the EU versus 51.9% voting to exit.  British Prime Minister David Cameron then fell on his sword and announced that he would resign in three months, necessitating another British election.

Big Ben Image

As a result of Britain’s decision to leave the EU, the British pound plunged over 10% intraday, reaching its lowest level against the U.S. dollar in over 30 years.  The euro also fell 2.35% to the dollar, which has emerged as the world’s “safe haven” currency.  The Bank of England and the European Central Bank (ECB) both pledged to maintain stability, so I expect that the currency chaos should diminish soon.

I’ll cover the stock market repercussions later on, but I also need to flag the fact that U.S. voters are also getting restless.  On Friday, the University of Michigan reported that consumer expectations declined to 82.4 in June, down from 84.9 in May.  This negative outlook could be due in part to the dismal choice between Trump and Clinton for our next President.  Rather than promising everything and anything to get elected, they are in full attack mode.  This must eventually change, since it is hard to inspire confidence by being entirely negative.  If they turn positive, I expect that consumer sentiment will improve and rub off on investor sentiment, which is why the stock market has historically rallied in Presidential election years.

In This Issue

Last week’s surprise Brexit vote justified our safety-first income strategies, as they performed relatively well in Friday’s chaotic market.  I’m glad we’ve been beating the dividend drum all year.  Bryan Perry shows how our “ballast income” strategy has provided income and relative safety.  In Growth Mail, Gary Alexander examines the impact of Britain’s new Declaration of Independence – along with a side trip to Argentina.  In Global Mail, Ivan Martchev examines the dramatic reversal between currencies and gold, while Jason Bodner looks at the lighter side of Brexit and the darker side of the Financial sector.  In my Look Ahead, I’ll share our latest thinking on how to profit from the collapsing yield curve in the U.S.

Income Mail:
Brexit and Black Friday in Europe
by Bryan Perry
Ballast Income Takes Center Stage

Growth Mail:
Britain’s Stunning “Declaration of Independence”
by Gary Alexander
Don’t Cry for Argentina (under New Management)

Global Mail:
A Brexit Currency Domino Effect
by Ivan Martchev
When the Yellow Dog Barks

Sector Spotlight:
Brexit as a Stand-up Comic Routine
by Jason Bodner
Financials Have Been “Worst in Show” for a Long Time

A Look Ahead:
Staying Away from “Junk” Pays Dividends
by Louis Navellier
Low Rates Fuel Record-High Corporate Stock Buy-backs

Income Mail:

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

Brexit and Black Friday in Europe

by Bryan Perry

The Brexit vote came as a huge surprise to many, as polls leading right up to the deadline implied a vote to remain in the EU. Britain has now created a precedent for other countries that may consider leaving the EU, making for a negative development both for that regional economy and their trading partners.

The ETFs of EU nations got slammed on the news. The Greek ETF was down 16.41%, Spain was off 16.29%, Italy fell 14.95%, France was down 11.34%, and of course the United Kingdom was down by 11.96%. There was just no place to hide in Europe last Friday. (Source: Yahoo Finance, Friday close vs. Thursday close)

Markets hate uncertainty and last week’s “leave” vote unleashed a number of possible and probable headwinds regarding trade, currency, tariffs, and regulation, not to mention the resignation of Prime Minister David Cameron. Japan’s Nikkei cratered by 7.92% and spot gold climbed to $1,319/oz. in a flight to safe haven assets. The yield on the U.S. 10-yr Treasury Note traded as low as 1.406%, near a new 150-year low before stabilizing back above 1.50%. The S&P 500 traded down 3.39% in a global stock market sell off. The U.S. Dollar Index (95.48, +2.1%) ended broadly higher as the euro and the pound finished with substantial losses against the buck. The euro/dollar rate (1.11) declined 2.4% while sterling plunged 8.1% against the dollar, to 1.3676 (source: Bloomberg Markets – June 24, 2016).

The European Union is the only economic block larger than the U.S. With the likely pullout of a key contributor like the U.K., it evokes the thought of whether there is any major impact on the wellbeing of one’s income portfolio on this side of the pond. With the Brexit vote now a done deal, it opens the door to other ‘exit’ movements by other disgruntled EU member nations that may harbor similar feelings. Rest assured that the EU will levy massive punitive damages on the UK to thwart the allure of other nations exiting.

Speaking of other nations, below is an excellent array from TradingEconomics.com that provides a snapshot of the global economy with 15 listed nations plus the Euro Area, making up the majority of global GDP (roughly 75%). If we strip out the Euro Area and just go by single-country weighting, the United Kingdom falls squarely into fifth place on the world stage. The U.K. is made up of England, Scotland, Wales, and Northern Ireland. Although the U.K. doesn’t occupy a large land mass (94,058 square miles) its population of 64.8 million makes it – pound-for-pound, no pun intended – a significant player in the global economy. I think Britain’s strength may be misunderstood by investors in general.

Global Economic Statistics Table

Ballast Income Takes Center Stage

At Navellier & Associates, Inc., we’ve been staying on point all year long about maintaining a primary weighting in U.S. dividend-paying assets that are sensitive to a strong U.S. dollar. In last Friday’s whirlwind of global equity market upheaval, there was safe refuge in American dividend-paying stocks in the utility, telecom, specialty REIT, and consumer staples sectors. As the Dow shed 610 points on Friday, shares of many well-known, all-weather companies, such as leading utilities, REITs, and quality high-dividend stocks closed up on the day.

There was also considerably less selling pressure within the U.S. high yield market. The two most heavily owned and traded ETFs, namely the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond ETF (JNK), were down by -1.64% and -1.49%, respectively. I find it very telling that the carnage within the equity markets is not spilling over into high-yield sectors with equivalent disruption. This would indicate that traders, while raising some cash in the fray to free up liquidity, are not thinking that a recession is just around the corner. Junk bonds have a much higher correlation to equities than to investment grade bonds. This sounds counter-intuitive, but it’s historically true. We may have seen much steeper declines if investors thought the U.S. economy was rolling over. (Please note: Bryan Perry does not currently own positions in HYG or JNK. Navellier & Associates, Inc. does not currently hold positions in HYG or JNK for any client portfolios.)

When fear enters the investment mindset, money has to go somewhere. Aside from cash and bonds – natural havens in the short term, but offering little or no yield or income – the clear winner during this dramatic sector rotation is the domestic non-cyclical space. This is where essential and basic goods and services are rewarded with massive capital inflows. These inflows come from both domestic and foreign sources of funds seeking 2%-5% or higher yields in dollar-based assets to manage through periods of uncertainty that provide a lower risk of principal loss while still participating in the world’s largest economy, which is projected to grow by 1.7% this year and 1.9% in 2017 (source: The Conference Board – “The U.S. Economic Forecast”).

While the Brits might have voted to “leave,” investors in the all-weather sectors noted above have hands down voted to “remain” in these sectors now that roiling global equity markets all but put to rest the notion of a Fed rate hike in July or maybe even in September, or for that matter, the rest of 2016.

In fact, Bloomberg reported on Saturday, June 25, that pricing on the fed funds futures contracts imply a 10% probability that the Fed will reduce rates in July, with a zero percent chance of a hike. In fact, these implied probabilities signal that a looser policy is more likely than a continuation of the central bank's tightening phase all the way through February of 2017, with rate cuts more likely than rate increases.

Current Implied Probabilities Based on Fed Fund Futures Contracts Table

What this poll tells us is that if a political referendum can subtract 8.62% off the Euro Stoxx 50 Index – a basket of blue-chip Eurozone stocks – then an untimely rate hike by the Fed could unglue the U.S. markets in a similar fashion, especially since the recent data – such as May Durable Goods, down -2.2% vs. -0.6% expected – says a rate hike is unwarranted (source: Briefing.com June 24, 2016, Closing Market Summary).

The bullish takeaway from Friday’s events is that the big decline in U.S. long-term interest rates should keep a strong fire lit under our Navellier dividend strategies. In addition to the safe haven trade and the market-neutral tone toward high yield assets – covered calls also provide a way for investors to keep chopping wood and piling up extra income in the form of selling call option premiums against great growth stocks.

The market is stuck in a range, and with the Brexit vote, it will likely remain so for some time to come. There is always a strategy that investors can put in place in difficult markets, but it has to be one that proves itself on a steady basis. A highly focused income portfolio, paying out a blended yield of better than two times the yield on the 10-year Treasury combined with a covered-call strategy that targets the highest quality U.S. growth stocks, is an excellent one-two punch for income investors to consider at a time when buy-and-hold growth investing through index ETFs and mutual funds with hundreds of holdings is underperforming (on a broad basis) a diligent and hard-working set of income strategies.

Growth Mail:

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

Britain’s Stunning “Declaration of Independence”

by Gary Alexander

“We have not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level with a European super-state exercising a new dominance from Brussels.”

--Former British Prime Minister Margaret Thatcher, speaking from Bruges, Belgium, September 20, 1988

It was 240 years ago next Monday – July 4, 1776 – that the United States formally seceded from Great Britain with a Declaration of Independence. The first two stirring paragraphs are burned into our national DNA, but the bulk of that document contains a list of economic gripes that could apply to the EU today.

  • “He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance.”
  • “He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their acts of pretended legislation.”
  • “He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their public Records, for the sole purpose of fatiguing them into compliance….”

From the U.S. Declaration of Independence, July 4, 1776

Matt Ridley, a great author and a Member of Parliament, issued his own Declaration of Independence last week, writing “The Business Case for Brexit” for the June 22 Wall Street Journal – the day before the big vote. In that piece, Ridley argued that “the EU is a supranational government run in a fundamentally undemocratic, indeed antidemocratic, way. It has four presidents, none of them elected. Power to initiate legislation rests entirely with an unelected commission. Its court can overrule our Parliament.”

Ridley said the EU may have made sense in the 1950s after World War II, but not in the modern age, when “container shipping, budget airlines, the internet and the collapse of tariffs under the World Trade Organization made it as easy to do business with Australia and China as with France and Germany.” The EU seeks a “harmonization” of rules, but over-regulation creates discord for innovators. There’s no Apple or Google or Amazon equivalent in Europe. Innovation still finds its warmest home here in the USA.

The EU mentality is to stifle growth and protect large, entrenched, unimaginative corporate giants. As Ridley puts it, “the corridors of Brussels are crawling with lobbyists for big companies, big banks and big environmental pressure groups seeking rules that work as barriers to entry for smaller firms and newer ideas. The Volkswagen emissions scandal came from a big company bullying the EU into rules that suited it and poisoned us.” Ridley also finds it interesting to note that “nobody on the Remain side is prepared to make a positive case” for the EU. Instead, they warn about “wars, depressions and plagues of Egypt that will follow” if the British dare to leave the womb of the EU.  Britain finally said “Hold, Enough!”

Brexit should not be confused with isolationism, Ridley wrote. “Britain has no desire to withdraw from NATO, the United Nations, the International Monetary Fund, the Council of Europe or, for that matter, the Olympics.” Over the weekend, for instance, the European soccer championships featured four British and Irish soccer teams in the final 16 – England, Wales, Ireland, and Northern Ireland. EU membership is not necessary for a healthy economy. Norway and Switzerland seem to manage fine outside the EU. In addition, Croatia, the Czech Republic, Hungary, Poland, Romania, and Sweden are non-Eurozone nations. Many of these non-euro economies are doing better than the Eurozone nations. According to the June 25 edition of The Economist, non-euro Sweden and Poland lead Europe in 2016 GDP growth rates at +3.5%.

European Union Countries' Currency Status Image

The trend in Europe is toward a peaceful break-up of some big and bulky agglomerations of artificial nations into smaller units. In 1991 alone, Croatia and Slovenia cut loose from Yugoslavia on June 25. The Soviet Union broke up in August 1991, spurred by Declarations of Independence in Estonia (August 20), Ukraine (August 24), and Moldova (August 27). On July 17, 1992, Slovakia split Czechoslovakia in half, peacefully creating the Czech Republic and Slovakia. America is not unique in writing its Declaration of Independence. At least 75 nations have also done so (see Wikipedia, “Declaration of Independence.”)

Don’t Cry for Argentina (under New Management)

As I mentioned last week, Argentina declared independence from Spain 200 years ago, on July 9, 1816.  The most troubled South American nation today, Venezuela, declared its independence on July 5, 1811.

Therein lies a story of why some nations succeed under independence and others become worse off.

The tales of starvation and crippling inflation in Venezuela are sad, and so unnecessary. Their food shortage began under the policies of the late Venezuelan populist dictator Hugo Chavez, and they have become worse under Nicolas Maduro as “basic goods such as coffee, sugar, rice, milk, pasta, toilet paper, hand soap and detergent remain impossible to find. According to Datanalisis, the country’s leading polling agency, over 80% of regulated foodstuffs have vanished from store shelves. As a result, many Venezuelans now make do with a single meal a day, or resort to rustling through garbage bins to find food” (source: Foreign Policy, June 19, 2016, “Venezuela’s Season of Starvation,” by Peter Wilson).

It’s easy to see why a commodity-rich nation like Venezuela has fallen on bad times – socialist policies never work. They hurt most the people they claim to help. But Argentina is a different story. They did the right things for most of their first century – 1816 to 1916 – but then their success story started to unravel.

According to Alan Beattie (in “Argentina: The Superpower that Never Was,” Financial Times, May 22, 2009), the U.S. and Argentina were the hemisphere’s two giant economies during the “first wave of globalization at the turn of the 20th Century. Both were young, dynamic nations with fertile farmlands and confident exporters. Both brought the beef of the New World to the tables of their European colonial forebears. Before the Great Depression of the 1930s, Argentina was among the 10 richest economies in the world. The millions of emigrant ­Italians and Irish fleeing poverty at the end of the 19th century were torn between the two: Buenos Aires or New York? The pampas or the prairie?” Today, there is no choice.

The decline of Argentina – like Venezuela – is due to a charismatic politician. Juan Perón led a military coup in 1943 and became president in 1946, creating an economy built on protectionism and nationalism. Along with his charming wife Eva, they became a cult of personality. While the world adopted free trade in 1947, through the General Agreement on Tariffs and Trade (GATT), Peron drew Argentina into a shell.

Under “Peronism,” which endured until late last year under Cristina Fernandez Kirchner, the government in Buenos Aires monopolized utilities and controlled big businesses like steel, chemicals, or car makers.

According to a special report in The Economist (“A Century of Decline: 100 years ago, Argentina was the future. What went wrong?” February 15, 2014), Argentina has endured a century of political reversals, including military coups in 1930, 1943, 1955, 1962, 1966, and 1976. “The election of 1989 marked the first time in more than 60 years that a civilian president had handed power to an elected successor.”

Argentina's Gross Domestic Product Changes Chart

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

As I predicted last week, the #1-ranked Argentine men’s soccer team made mincemeat out of the 31st-ranked U.S. team; but Argentina fell in the finals to Chile, the #1 economy in Latin America in terms of per capita GDP. In the economic Olympics, America is #1 and Argentina is #21. Still, there is some hope that Argentina can learn from its past mistakes. According to a March 20 edition of 60 Minutes (repeated in June), Argentina’s new “El Presidente” Mauricio Macri is “rebuilding his country, and quickly.” While his predecessor sought ties with anti-American Venezuela, Cuba, and Iran, Macri made a U-turn, seeking closer ties with America and the West. He’s also a businessman. Trained as an engineer, he became a real estate titan, which suggests comparisons with a certain real estate mogul in America’s political contest.

Prosperity is all about enlightened leadership guaranteeing the protection of law under a constitution of checks and balances. It makes you wonder: Why don’t most nations worldwide adopt a Constitution like ours?

The lessons of Argentina bear close watching this election year, when an avowed protectionist is running for U.S. President. It would be a pity to see America turn inward while Argentina finally comes to life.

Global Mail:

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

A Brexit Currency Domino Effect

by Ivan Martchev

The British pound is headed lower. That is now a forgone conclusion. Leaving the EU will cause a negative economic multiplier effect for Britain as investment flows are likely to diminish dramatically in the months ahead, until the uncertainty is cleared up. Ultimately, a lower British pound could stimulate the British economy in the long term, but over the next year or so, the British economy could get quite a bit messier.

British Pound versus United States Dollar - Monthly OHLC Chart

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

The British pound – or “cable,” as traders like to call it, harkening back to the days when currency quotes traveled via telegraph cable on the bottom of the Atlantic Ocean – registered a rather peculiar trading pattern – an outside-down month. In June the GBPUSD exchange rate traded well above the May highs to reach $1.50155 and then it declined well below the May lows to reach $1.32278. What is extraordinary is that the June monthly range (so far) is also the overnight range on June 24th, the day after the Brexit vote.

From a historical perspective, such wide daily ranges are rare, but in this case they seem appropriate for a watershed event like Britain voting to leave the European Union. Cable is likely to get weaker in the months ahead as Scotland could hold a second independence referendum, which this time may succeed.

The GBPUSD exchange rate was under significant pressure before the first Scottish independence referendum, but with Scots voting 62% to 38% to remain in the EU last week, the pound could be under even more pressure at the time a second such Scottish independence referendum is held. The messiest outcome for the British pound would be if the Scots hold their independence referendum before Britain officially leaves so Scotland can remain in the EU. While this may sound like a bandaid solution, it should put even more pressure on the British pound due to numerous uncertainties concentrated in a short period of time.

It is ironic that an EU proponent, George Soros, had something to do with the events that catalyzed the now-successful Brexit. Great Britain withdrew from the European Exchange Rate Mechanism (ERM) on September 16, 1992 after pressure from speculators (like Soros) forced it to abandon the inflexible exchange rate, a “dirty peg” of sorts. George Soros made over £1 billion by shorting the pound that year. Pragmatic people like the Brits are highly unlikely to have upheld a Brexit referendum if the banknotes in their wallets last week were euros, but that would have been the case if they had stayed in the ERM.

British Pound Chart

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

I have a high degree of conviction that the pound is likely headed somewhere into the $1.20s and will get there faster if the second Scottish independence referendum is called expeditiously. Cable has been as low as $1.05 in 1985, which arguably was an extreme level. While markets gravitate towards an equilibrium level near their intrinsic value, they can deviate substantially from equilibrium and reach previously unheard-of extremes. The disintegration of the UK (by Scotland leaving) or the EU (by more countries leaving), or both, would be the type of events that could provide the necessary level of uncertainty to reach extremes for the GBPUSD exchange rate, and the EURUSD exchange rate for that matter.

If Brexit and a potential Scotland exit (Scotchit?) are bearish for the pound, they are also clearly bearish for the euro and bullish for the U.S. dollar. While Britain never joined the euro, any more eurozone countries leaving the EU would put a serious strain on the common currency. It is true that the euro was only introduced as a currency in January of 1999, but historical exchange rates of the previous currencies going back much further can be modeled to create a synthetic euro using the exchange rates under which they were folded into the common currency – including the Deutsche mark and the French franc. Using such a method, we can see that when the pound was at $1.05 in 1985, the extrapolated electronic predecessor of the euro went below 70 U.S. cents!

United States Dollar Versus Euro Chart

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

While cable was the first to decline after Brexit, and it will be under the most pressure from a short-term perspective, I have great difficulty seeing who will want to hold euros if some Eurozone countries start leaving. I do not believe that euro-dollar parity (1:1) will hold as support. I wrote previously that the euro would fall to parity based on the deflationary pressures in Europe, even without Brexit. Brexit simply means that the euro will decline faster towards parity with the dollar.

This Brexit currency domino effect means that it is only a matter of time before the U.S. Dollar Index breaks out above 100, which has been the recent round number resistance level. As the euro comprises 57% of the U.S. Dollar Index, the extrapolated EURUSD exchange rate and the U.S.  Dollar Index look almost like mirror images of each other. They are not quite the same, though, as the British pound is the third largest component of that index (after the euro and yen), at 11.9%.

United States Dollar versus Japanese Yen - Weekly OHLC Chart

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

The only currency component of the U.S. Dollar Index that is acting like a “fish swimming against the current” is the Japanese yen. Yes, the inverted chart (above) seems to be declining, but a lower number translates to fewer yen per dollar (i.e., a stronger yen). USDJPY traded all the way to 99.075 on Friday, so technically the 100 USDJPY target mentioned here on multiple occasions has now been reached. The trouble is, I don't know how far below 100 the yen will “rally,” but I know that it can.

I don’t think that this move in the yen is over, as we are in risk-off mode and the massive synthetic short position against the yen – caused by its popularity in carry trades due to years of low short-term interest rates – is now creating a short squeeze. Those carry trades are being unwound, as interest rates are collapsing globally and it is too dangerous to hold some risk assets, despite the cheap yen funding costs.

While Brexit is not as bad as the Lehman Brothers failure in September of 2008, which catalyzed but did not cause the greatest financial crisis in living memory, the effects of this referendum should continue to play out against the pound and euro if Scotland leaves the UK and/or other countries choose to exit the EU.

When the Yellow Dog Barks

“And in that regard, here's a bit of advice for the ‘no consequences’ bunch as they prepare to explain away gold’s rise. They’ve done an excellent job of perpetuating the ‘we're running out of oil!’ meme in order to disguise the link between excess money creation and higher oil prices. With gold, start with the line that ‘gold is reflecting increased prosperity, so higher gold prices are a good thing.’ When that gets old, trot out ‘gold is an ancient, barbarous relic.’ As the desperation builds, try ‘it’s unpatriotic to own gold.’ Eventually, establish a mantra that ‘gold is the currency of terrorists.’ And when there are no more pages in the script, conjure up FDR’s spirit for advice on what to do next.”

-- When the Yellow Dog Barks, from The Cunning Realist blog, December 8, 2005

The Cunning Realist was a pseudonym for an asset management professional from New York City who used to post regularly on his eponymous blog with the tagline “an oasis in a world of hacks, hustlers, and hired spin.” Although I do not know this person, it is my judgment that he had a deep understanding of the world of finance. Regrettably, he stopped posting in 2012, just as demand for no-spin commentary was most needed. The Cunning Realist had substance in his writing. He chose to use his First Amendment right anonymously, as many of the things he said would undoubtedly hurt him professionally. I understand that well.

United States Dollar Versus Gold Price Chart

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

I cited his post on gold from 10 ½ years ago as on Friday something very rare happened. Both the U.S. dollar and gold bullion went up a lot – at the same time! Typically, they move inversely but Brexit caused such a domino effect in financial markets that both rose dramatically (see the very right side of the above chart).

If the Brexit repercussions are somewhat orderly, I do not believe that gold and the U.S. dollar can continue to rise in unison, given their inverse relationship since Nixon took the U.S. off the gold standard in 1971. If those repercussions are disorderly, they could continue to rise in tandem, short-term, so any coincidental rally of the dollar and gold bullion will be a good “tell” as to how smoothly Brexit is progressing.

Sector Spotlight:

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

Brexit as a Stand-up Comic Routine

by Jason Bodner

These are some of the light-hearted responses I heard from colleagues over the weekend. Oh the jokes!

“I guess the EU now has 1 GB of free space!”

“Brexit could lead to Grexit, Departugal, Italeave, Czechout, Outstria, Finished, Slovakout, Byegium, and Latervia. Possibly only Remania or Germonly might stay.”

“It's important to just accept the result and move on, possibly to another country.”

“Meanwhile, India is just blown away by the fact that you can get Britain to leave by just voting.”

“I'm not giving up my seat to the elderly anymore. Eye for an eye” (most pensioners voted to “leave”).

We all know by now that the referendum debating Brexit or Bremain caused global financial markets to stage a big, fat, old-fashioned Bremper-Brantrum. As I watched the fireworks after the vote, I was struck by how unexpected it was to the markets, based on the pre-poll indications, which indicated a very close vote to remain. At one point in the night, the British pound was down 15% against the Japanese yen!

Brexit Comics Image

Moves like that in the currency markets equate to maybe double in an equity index like the S&P 500. There were certainly a lot of knee-jerk reactions and more than a few margin calls, but before we write off the pound sterling, it might interest you to know that the pound is the longest surviving currency.

In 980 A.D. a pound could buy 15 head of cattle. The classic British pound was defined as 12 ounces of silver (about $212 now), so the most successful long-standing currency in the world has lost 99.4% of its value. But survive it has and survive it will. Even though the UK could fit inside the U.S. 39 times with room to spare, it still has a GDP of $2.44 trillion, ranked 5th in the world according to nationmaster.com.

I was fortunate enough to live in London for four years, 2001-2005, and I was struck by what a culturally diverse place it was. People of all nations called Britain home. I happened to fall into a French crowd. The group of French friends I was seeing regularly was trying to get out of Paris! A chief complaint was that the culture and demography of France were changing at lightning pace due to the EU’s open immigration policies. The same concern in England was a driving factor for the outcome of the vote last Thursday.

Yet it seems clear that some voters actually may have had no idea about what they were voting for. A video is circulating showing one young woman who chose to vote “leave” because European eggs crack, since they come from “bad chickens.” Her decision was almost swayed because of “the fact that I won't be able to go to Disneyland Paris to see Mickey and Minnie anymore ‘cause of the borders will be shut.” (Source: www.mirror.co.uk “’Confused’ girlfriend hilariously explains her reasons for voting out in the EU ‘Refeyendum’” June 25, 2016)

Here is an interesting heat map from The Guardian, showing how the UK broke down in terms of votes to exit (blue) or remain (yellow), adjusted for population. The biggest yellow concentrations are in Scotland and London. Scotland may stage a vote to exit the UK and some of my former colleagues that live in London are even calling for London to exit the UK.

Brexit Vote Breakdown Image

The real question to U.S. investors, of course, is: How does this affect us? Well needless to say, the U.S. did not escape the global sell-off on Friday, but it did relatively well with “only” -3 to -4 % for the broad-based market indices. (The Eurostoxx closed down 8.62%.) Volume swelled heavily in the U.S., denoting real institutional selling; but the day’s volume was also inflated due to the Russell index rebalance, which also took place on Friday. It is interesting to note, however, that banks bore the brunt of selling on Friday.

Financials Have Been “Worst in Show” for a Long Time

Financials have been having a really hard time for a very long time – to put it politely. As we have pointed out here before, banks have a difficult environment in which to make money. In theory, interest rates below zero should reduce borrowing costs for companies and households, raising loan demand. In practice, however, paying to hold your money may cause cash to go under the proverbial mattress. This could reduce the source of funding for lenders, which in a dark scenario could cause a bank run.

More importantly, if banks have to absorb the cost of negative rates, their profit margins will get squeezed, which reduces the desire to lend. With more nations implementing negative rates, the global market is not favorable for a U.S. rate increase. This is one reason why the Financial sector is now “worst in show.”

This past week saw banks hammered hard, with a -5.41% return for the S&P 500 Financials Sector Index on Friday. Financials were also worst month-to-date and over the last six and 12 months too – even worse than the beleaguered Energy sector. Unsurprisingly, the remaining sector action was very consistent with risk-off trading. Telecom and Utilities saw relative strength while pretty much everything else was punished. Tech, Industrials, and Materials were in close competition for second-worst performer on Friday. Info-tech is now the second worst sector month-to-date with a performance of -5.06%.

Standard and Poor's 500 Sector Indices Changes Tables

Standard and Poor's 500 Financials Sector - Daily Area Chart

As the world digests this latest shock, the coming weeks should prove interesting. The obvious question is “Where are you going to put your money?” The European Union is facing its share of troubles, while the growth concerns in Asia are not yet resolved. Global yields in developed economies are either negative or close to zero. The dollar is strengthening (even more so on Friday), which puts pressure on commodities.

Equity markets of emerging countries tied to commodities also have their share of headwinds, so the U.S. is seemingly the “best in show” for now and will likely be a beneficiary of some global money looking for a home. Just keep in mind though, that “wherever you go, there you are” (a quote credited to Confucius).

A Look Ahead:

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

Staying Away from “Junk” Pays Dividends

by Louis Navellier

The U.S. Treasury yield curve continues to flatten, crushing big banking and financial stocks.  Concerns about potential currency losses are also now haunting many major banks, especially in Europe.  A surging U.S. dollar is also crushing many commodity prices, so energy and other commodity related companies are also under pressure.  Gold is the only commodity that is now prospering due to the lack of confidence in major central banks and the negative interest rate environment that has enveloped much of the world.

Multinational companies that are hindered by a strong U.S. dollar are also under pressure.  As a result, U.S. domestic-based stocks were much more resilient during the market’s carnage on Friday.  On days like Friday, I’m proud that we have avoided the “junk” stocks that seemed to do so well earlier this year.

The simple fact of the matter is that the algometric traders that try to front-run the HFT order flows for hedge funds have been endlessly jerking around the financial, energy, and materials sectors this year.  They had no defense on Friday, since they were dealing with fundamentally inferior stocks, like money center banks and energy and commodity related stocks that are characterized by largely negative forecasted sales and earnings.  Many portfolios benefited if they have virtually no exposure to large money center banks (which have been crushed by a flattening yield curve and rising currency risk), or energy & commodity related stocks (which are hindered by a strong U.S. dollar and worries about global growth).

Low Rates Fuel Record-High Corporate Stock Buy-backs

Fed Chair Janet Yellen’s Congressional semi-annual testimony on Tuesday was painful for me to watch, as she is seemingly always playing defense and does not seem naturally confident in the labor market or the U.S. economy.  In fact, Yellen warned Congress that the U.S. economy faces “considerable uncertainty” due to slower domestic activity and the Brexit vote.  Not only did Yellen say that Brexit could send shockwaves that would impact global financial markets, but she signaled that the Fed has become less optimistic about U.S. growth near-term and would proceed with great caution before raising key interest rates.  Translated from Fedspeak, Yellen does not plan to raise rates in July, since she is very concerned about the economy.

Manufacturing Image

Regarding the labor market – which is Janet Yellen’s expertise as a labor economist – she says, “The latest readings on the labor market and the weak pace of investment illustrate one downside risk…that domestic demand might falter.”  Yellen noted that a number of prominent economists have argued that slow productivity growth in the U.S. will continue, dampening overall growth.  Furthermore, Yellen also said that as long as other domestic weaknesses persist, like slow household formation and slow business investment, the Fed needs to hold rates ultra-low “to keep the economy operating near its potential.”

One obvious consequence of low interest rates is an escalation in stock buy-backs.  The Wall Street Journal reported on Wednesday that companies in the S&P 500 spent $161.4 billion on stock buy-back programs last quarter, the second highest quarterly stock buy-back pace on record.  Compared to the first quarter of 2015, S&P 500 stock buy-backs rose 12%.  In the past 12 months, stock buy-backs in the S&P 500 hit a record $589.4 billion, barely surpassing the previous record of $589.1 billion in 2007.

In addition, cash reserves in the S&P 500 are now at a record $1.347 trillion, surpassing the previous record of $1.333 trillion at the end of 2014.  Adding dividends to stock buy-backs, these two shareholder-friendly outlays hit a record $257.6 billion in the first quarter and $974.6 billion in the past 12 months.

Since 2005, companies have spent approximately $5 trillion on stock buy-backs and there is no doubt that this pace is rising as companies continue to issue corporate bonds at ultra-low yields, often using those funds to aggressively buy back their respective stock.  This is why the S&P 500 seems to rally after each earnings announcement season when the buy-backs often pick up.   Clearly, companies with low price-to-earnings ratios are leading the stock buy-back parade.  Overall, the stock market, based on the S&P 500, is slowly shrinking due to share buy-backs, while international capital keeps pouring into the U.S., flattening the yield curve.


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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