Buyers are Helping the Market

“Smart Money” Buyers are Helping the Market to Firm Up

by Louis Navellier

January 8, 2019

Trading volume has been gradually improving, now that the holidays are over. I was encouraged that when the stock market initially sold off early Wednesday, the “smart money” quickly materialized and helped the overall stock market to stabilize. This smart money has been appearing predictably during down trading days for the past three weeks and is certainly helping the overall stock market to firm up.


Unfortunately, after the market close on Wednesday, Apple (AAPL) lowered its fourth-quarter sales forecast, blaming China for its lower-than-expected trade growth. As a bellwether stock, Apple’s lower guidance naturally spooked many other technology stocks. The truth of the matter is that approximately half of the S&P 500’s sales are outside of the U.S., so investors are increasingly concerned that other multinational companies may also lower their fourth-quarter sales guidance, due to slowing global GDP growth and eroding foreign currencies. Here is a link to my Thursday podcast that discussed these topics.

Navellier & Associates owns AAPL, NFLX, and LULU and does not own Ford in managed accounts and or our sub-advised mutual fund.  Louis Navellier and his family own AAPL, NFLX, and LULU and does not own Ford via the sub-advised mutual fund. Louie Navellier & his family own AAPL and NFLX in a personal account.

In This Issue

Bryan Perry likes Jerome Powell’s conciliatory script from last Friday, but he still prefers the safety and income of REITs in 2019. Gary Alexander looks back in history 25 to 200 years ago for those who think America has insurmountable problems today. Ivan Martchev thinks Apple’s recent decline reflects the economic slowdown in China and the general slowdown in global growth. Jason Bodner shares some very good news about past recoveries following long periods of depressing down days like we’ve seen lately. Then, I’ll close with the latest news on sinking Treasury yields and Friday’s robust jobs report.

Income Mail:
Taking Stock of the New Year’s Bounce
by Bryan Perry
REITS Look Attractive for Income

Growth Mail:
Memo to Those Wimps Who Think These are Hard Times
by Gary Alexander
Crazy Bloggers and Negative Media Cause Sane Investors to Sell Stocks

Global Mail:
Apple Didn’t Tell Us Anything New About China
by Ivan Martchev
Don't Blame Trump for China

Sector Spotlight:
Press Releases (Pens) Move Markets More than Wars (Swords)
by Jason Bodner
A Happy Ending for a Sad MAP-IT Ratio

A Look Ahead:
The Biggest (Ignored) News is the Decline in Treasury Yields
by Louis Navellier
The Friday Jobs Report (and the Fed) Lifted the Market on Friday

Income Mail:

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

Taking Stock of the New Year’s Bounce

by Bryan Perry

I don’t know who penned Fed Chairman Jerome Powell’s commentary during the panel session in Atlanta at the American Economic Association’s annual meeting with Ben Bernanke and Janet Yellen, but leave no doubt, he literally read right off a script. When watching the three most recent Fed Chairs sharing the stage, Mr. Powell was sporting his reading glasses and wasn’t the only one working off of notes – very well-prepared notes. This session was supposed to be a “casual get together” of the three bankers – to congratulate each other and celebrate the great job the Fed has done since the 2008 Great Recession.

The “casual confab” quickly turned into a discourse by Powell, who expressed a reformed position by himself and his colleagues that laid out a much more accommodative and “flexible” course of policy-making going forward – willing to make ‘quick adjustments’ if necessary. Again, he read this statement word-for-word, making sure it came out exactly as it had been scripted, knowing the market now trades substantially higher or lower off of key words and phrases. Yellen and Bernanke were quick to offer supportive follow-on comments that collectively fueled the market higher into Friday’s closing bell.


Upon further questioning about how the markets have moved in big waves – with Treasury yields down a quarter-point and Fed Fund futures pointing to no rate hikes in 2019, and possibly rate cuts, and whether the markets are telling Powell he made a mistake – Powell replied saying, “I think the markets are pricing in downside risk, and are obviously well ahead of the data,” citing Friday’s strong jobs data.

But is the market “pricing in downside risk well ahead of the data”? That was a pretty bold statement, considering the latest round of manufacturing data released in both the U.S. and China. The China Caixin PMI, at 49.4, was downright ugly and the December U.S. ISM Manufacturing, at 54.1, was down sharply from 62.1 in November, missing all estimates, with new orders plunging by the most in nearly five years.

Just to be clear, labor market data is backward-looking and manufacturing data is forward-looking. And Apple’s earnings grenade only verified what FedEx and Ford had already made clear – the pace of factory output at the two largest economies in the world is slowing at a faster pace than all the experts predicted.

The dismal ISM report came the same day as the profit warning from Apple. Thankfully, the combination of the strong jobs numbers and the Powell statement gave an oversold market a catalyst from which to trade higher, with high-volume conviction. But before we break out the party hats, Mr. Market has a lot of technical wood to chop before any notion of a resumption of sustainable upside bias has been restored.

From the chart below, both the 20-day and 50-day moving averages have crossed down below the 200-day moving average for the S&P 500, and they made that crossing in a pronounced fashion.


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

The S&P closed Friday right up against its first test of resistance – the 20-day-ma. If cleared, this will open the way for the index to trade up to 2,645 (its 50-day ma), where stiff overhead resistance lies.

The first level is very achievable, just on the adrenaline from Friday’s bullish close, which was fueled by widespread short-covering, but in order to retake the 200-day ma at 2,740, investors are going to need a comprehensive trade deal with China, coupled with banner fourth-quarter earnings reports with better-than-expected forward guidance. The Fed has already done its part to restore credibility, and now it’s really up to the Trump trade team and corporations to provide the second wind for market bulls.

It should be noted that portions of the yield curve are threatening to invert. In fact, the 1-year and 2-year Notes briefly inverted, as did the 3-month and 5-year notes last Thursday. To keep the bears at bay, a flat yield curve can be tolerated, but an inverted curve sends the wrong message, even for a short time.


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

REITS Look Attractive for Income

Any time the SPDR Dow Jones REIT ETF (RWR) trades down to a level that pays a current dividend yield of 5.0%, I start to get very interested. As of last Friday’s close at $85.19, the yield was 5.06%. The 52-week high is $98.11 and its all-time high was $104, set back in June 2016. Since late 2014, shares of RWR have traded in a rough range of $85-$95, while its fundamentals have only grown more substantial.


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

The idea of owning a basket of brick-and-mortar REITs weighted at the top in mixed use, self-storage, data centers, and healthcare facilities has in my view great appeal right now. There is little if any dollar-currency risk – since the Fed just gave the bond market the all-clear sign – and these REITs’ businesses are domestic-focused and have a strong history of raising dividends.

While utilities are often seen as the go-to safe haven sector for equity investing during periods of economic slowing, domestic REITs offer a higher blend of yields. Unlike utilities, they are not heavily regulated. Unlike real land, they allow investors to buy into premier real estate with the click of a mouse.

I believe the REIT sector will outperform in 2019, and I’m not alone. Bond king Jeff Gundlach and his firm DoubleLine Capital launched the DoubleLine Colony Real Estate and Income Fund (DBRIX) on December 17, 2018. It will be the firm’s first income fund that diversifies away from its bond strategies.

So, whether buying REITs in the form of an ETF, mutual fund, or individual stocks, the case for commercial property based in the U.S. during times when P/E multiples are contracting from uncertainty surrounding global growth remains sound. A portfolio with some domestic REIT exposure to those sub-sectors might be for some income investors a nice way to sail through the choppy seas with an extra-large keel that provides an extra-large dose of price stability and dividend income.


Growth Mail:

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

Memo to Those Wimps Who Think These are Hard Times

by Gary Alexander

Pundits on cable TV howl about how conditions are worse now than at any time in U.S. history, and we have “the worst President we’ve ever seen.” I don’t have time to answer every Doomsday theory, but at the start of each year I only ask these gloomy gussies to imagine living 200, 150, 100, 50, or 25 years ago.

200 years ago, the financial Panic of 1819 swept America, triggering one of the worst depressions in American history. As one observer put it, “Nothing is to be seen but a boundless expanse of desolation! Wealth is impoverished, enterprise checked, commerce at a standstill, the currency depreciated.” Prices for basic goods plunged. Cotton prices dropped 50% in one year. Congress passed severely protectionist tariff legislation, to protect America’s “infant industries” as tariff levels kept rising throughout the 1820s.

150 years ago, we began the final year of the first impeached President, Andrew Johnson, and the first year of one of the most disgraced Presidents in history, Ulysses Grant, starting with the gold speculation ring. By mid-September 1869, the “gold pool” held over $90 million in gold contracts – many times the gold supply available on any market. President Grant was part of that pool!  By September 15, the price of gold had risen to 138 (meaning 38% over par, or $1.38 in gold per paper dollar). Within a week, the gold corner would collapse, with disastrous results. At the same time, the North and South were bitterly divided under Reconstruction, with the birth of the Ku Klux Klan in the solidly Democratic South.

Speaking of which, 100 years ago, perhaps our most racist President, Woodrow Wilson, was in office. Born in Staunton, Virginia in 1856, Wilson was raised in Georgia and South Carolina. He segregated all government bureaus and arranged a screening of the pro-Klan movie, “Birth of a Nation.” In 1919 alone, this academic idealist tried to dominate the Versailles Conference in Paris, push through his League of Nations and 14 Points ideas through exhaustive whistle-stops throughout America, causing a heart attack on September 26 and a stroke a week later, resulting in his wife being a secret de facto President his last 18 months in office. Also, a Spanish Flu epidemic killed 25-50 million worldwide and about 675,000 in America. The postwar inflation reached double-digits, resulting in a steep, sharp depression in 1920-21.

50 years ago this week, the first trial flight of the Concorde took place on January 9th, the final issue of “The Saturday Evening Post” appeared, after 147 years of publication on January 10, and on Sunday, January 12, Super Bowl III delivered the first AFL victory: New York Jets 16, Baltimore 7. A week later, President Richard Nixon was sworn in on January 20, 1969 with an intention to fight inflation by cooling the economy. A recession inevitably followed. Then, Nixon escalated the war in Vietnam, rather than following his promise to end it, and the market began selling off. From December 3, 1968 to May 26, 1970, the Dow Jones Industrials declined from nearly 1000 (985) to 631, down 36% in under 18 months.

25 years ago this week, on January 6, 1994, the Dow Jones Industrials hit a record high of 3,803.88, and that seemed like just the beginning. On January 22, the Dow passed 3900 for the first time, closing at 3914. On Monday, January 31, the Dow hit a record 3,978.36, but on Friday that week, Alan Greenspan issued the first of seven rate increases in a year, making 1994 a bad market year. The S&P 500 declined 1.5% in 1994, leading to a “Republican Revolution” in the 1994 elections. There were also year-ending 1994 crises in Mexico (the peso crisis, or Tequila crisis) and a bankruptcy in Orange County, California.

At the same time, there was great news each year – the Annexation of Florida in 1819, the Golden Spike linking railroad lines coast to coast in 1869, the birth of radio and RCA in 1919, the moon landing in 1969, and the first International Worldwide Web Conference in 1994 at the European Particle Physics Lab (CERN) in Geneva. You just have to be of a mind – as I am – to look for good news instead of bad news.

Crazy Bloggers and Negative Media Cause Sane Investors to Sell Stocks

We know we can’t trust “Mr. Market” to deliver sanity. If the Dow goes down 660 one day and up 747 the next, we’re not dealing with a sane person. The fundamentals don’t change that radically that fast.

I don’t monitor the blogosphere nuts. As I told you last week, I read books and serious experts I trust, but friends and extended family members send me their favorite website theories and ask my opinion. One I got last week, summarized in a paragraph, said, “The U.S. economy and the dollar are slated for a controlled demolition. The Fed will do everything in its power to prod Trump and conservatives into war with the central bank, because the Fed is now ready to sacrifice itself and the dollar’s world reserve status in order to clear a path for a new global system and ideology. The Federal Reserve is a suicide bomber.”

To spare you the details, Jerome Powell is a plant of a global conspiracy of elites designed to destroy the dollar and bring in a New World Order. All I asked in return was, “If the Fed is ‘destroying the dollar,’ then why is it raising rates when the yen and euro – the two other mega-currencies on earth – offer near zero returns, thus drawing trillions of dollars to the U.S., rapidly lowering Treasury rates and strengthening the dollar, which rose 5% last year against the euro?” They had no e-mail response.

These nuts and media mavens are scaring many investors. The weekly polls of the American Association of Individual Investors (AAII) have been a good contrary indicator. When the market tanks, as it has done lately, these investors turn bearish. In late December, when stocks were at their lowest, their expectation that stock prices would fall over the next six months soared nearly 20% to 50.3% in just two weeks. The AAII noted that 50.3% is the highest bearish reading since April 2013, and the 11th straight week that bearish sentiment has been above the historical average. Falling markets invariably engender mass fear.

Investors act on these fears. During the week ending December 19, investors withdrew $56 billion from mutual funds, the biggest weekly withdrawal since 2008, during a deep recession and the threat of a new depression. There is no threat of a recession today. These sales are generated by media fears, and crazy bloggers, like the guy I quoted above. Do yourself a favor and read history books and sane analysts.

Global Mail:

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

Apple Didn’t Tell Us Anything New About China

by Ivan Martchev

While a 41% drop in Apple’s stock price from $232 to $142 is rather brutal, I think it is too simplistic to pin it on the trade war, or more precisely, the trade “skirmish” that is ongoing with China.


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

Apple also had to provide $29 batteries due to “Battery-gate,” the scandal where consumers accused Apple of purposefully slowing down their older phones in order to force upgrades to newer models. Also, with iOS 12, older iPhones saw a boost in performance, so now my 6s Plus with a new battery and iOS 12 upgrade works better than when it came out of the box! No wonder iPhone users are delaying upgrades.

Furthermore, Apple is too big not be affected by the ongoing global economic slowdown. When a company creates a premium product – the most expensive and arguably the best phones on the market – it will see slowing demand every time the global economy slows. Ask any luxury brand what happens to their sales in a recession, and you will hear that high-end brands tend to suffer the most.


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

While there is no recession to be seen in the United States in 2019, there is a very significant ongoing weakening in the global economy. You can see that in the price of industrial metals and the price of crude oil. Last time there was a severe economic slowdown in China, in 2014, the prices of industrial metals, as represented by the London Metals Exchange (LME) Index, fell simultaneously with the price of crude oil.

This time around, there was a four-month lag because the pullout of the Iranian nuclear deal that began on November 4 caused a lot of crude hoarding and the market misread the magnitude of the exemptions that the Trump administration was willing to give. The largest importer of crude oil in the world, China, is the largest driver of crude oil prices on futures markets. I am sure President Trump “guilted” the Saudis into pumping extra oil due to the gruesome murder they committed in their consulate in Istanbul, but in my professional opinion when the price of crude oil falls like a rock from $77 to $42 in a single quarter, this type of price action is not only about supply but also demand. After all, there is no Saudi component of the London Metals Exchange and the price action of the LME confirms the message of the crude market.

Don't Blame Trump for China

While Apple saw the Greater Chinese regional economy begin to deteriorate more notably in the second half of 2018, the trade tension began to pick up steam in the fourth quarter of 2018. I am sure that the trade tensions do not help, but they are not the primary cause of this economic deterioration.

Navellier & Associates owns AAPL, in managed accounts and or our sub-advised mutual fund.  Ivan Martchev does not own AAPL in a personal account.

The Chinese have created a credit bubble similar to the credit bubble a lot of Asian countries experienced in the 1990s that culminated in the Asian Crisis in 1997-1998. As the Chinese economy has grown from a little over $1 trillion in the year 2000 to close to $13 trillion for 2018 (when final figures are reported), the total credit in the Chinese financial system is up over 40-fold, if one counts the infamous unregulated shadow banking leverage. That has taken the total debt-to-GDP ratio from 100% to over 400% in just 18 years. This is a very similar dynamic to what most Asian countries experienced before the Asian Crisis.

The government crackdown on unregulated lending caused the Chinese economy to slow down in 2018, not (primarily) the trade tension. The trade tensions merely added to the slowdown and, if they can be resolved, the Chinese would still have serious issues in their domestic economy. I think China has every incentive to make a trade deal, and I’d say the odds are now much better than 50-50 that they will.

The trillion-dollar question is when will the Chinese recession strike? The reason why so many analysts and strategists have been early (i.e., since 2010) in calling for a recession in China is their lending quota business, which Chinese authorities have perfected in using their economic expansion for 25 years.

Eight years ago, on January 7, 2010, The New York Times reported that the famed contrarian investor Jim Chanos predicted an economic crash in China (“Contrarian Investor Sees Economic Crash in China”). The recession never came, even though there were two notable slowdowns in 2014 and 2018, but I think Chanos is 100% right in seeing a hard landing for the Chinese economy. Also, Dr. Jim Walker, the founder of Asianomics Ltd. (now Aletheia Capital) first mentioned this possibility in 2012 (April 5, 2012 Marketwatch, “China doomsayer sees crash coming”). The reason most have been early is the tendency to underestimate the ability of the Chinese authorities to keep inflating the epic Chinese credit bubble.


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

While the new lending quotas came in November, the latest stimulative measure that came last week was the cut in reserve requirements for Chinese banks. The required reserve ratio for banks will drop by 0.5 percentage point on January 15 and a further 0.5 percentage point on January 25. The cut will release a net 800 billion yuan (US$116 billion) of liquidity according to the People’s Bank of China (PBOC). The bet is that with credit multiplier effects associated with fractional reserve banking, this move will have a positive and lasting economic effect. If the result is not as quick as expected, more such moves are likely.

Lending into a credit bubble certainly has extended the present Chinese economic cycle past 25 years – much longer than anyone could have expected. The reason for this is the unprecedented control that the Chinese authorities have over their financial system, controls that have never existed to such a degree in any capitalist country. Since China is a hybrid economy with government control combined with free enterprise, they think they can eliminate the economic cycle – but I am sure that they cannot do that.

We are closer to an economic hard landing in China than the consensus believes and the price of industrial commodities, crude oil, and now Apple’s stock, will be better indicators of how such a hard landing is progressing than many economic statistics released by the Chinese government.

Sector Spotlight:

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

Press Releases (Pens) Move Markets More than Wars (Swords)

by Jason Bodner

If it wasn’t official before, it’s official now. Apple CEO Tim Cook’s letter to investors managed to shave-roughly a half-trillion dollars off of U.S. stock-market value with Thursday’s -2.5% performance in the S&P500. Imagine English author Edward Bulwer-Lytton’s face if he saw that. (He was the guy who coined the phrase, “The pen is mightier than the sword.”) Cook’s letter was just such a mighty pen.


All seemed misery and despair for most of last week. Conversations I had last week felt like emotional capitulation, which mimicked the price action. Major indexes took a nosedive after enjoying the first fruitful rally from Christmas lows, because Apple’s fall confirmed the world’s fears.

Navellier & Associates owns AAPL, in managed accounts and or our sub-advised mutual fund.  Jason Bodner does not own AAPL in a personal account.

The global slowdown is not only real, but it’s affecting the U.S. far more than originally thought. When the world’s first trillion-dollar company says that China’s slowdown affected them more than expected, things get spooky. This raises questions about Trump’s game of “chicken” in the trade war. At what point does policy aimed at constructive American economic strength harm more than help?

After nudging into the positive, the Russell 2000 about-faced and finished the day down nearly -2%. Market volatility, we hoped, would fizzle in 2019, but it roared back on this serious news.

After the storm, the flowers bloom – they say. Friday morning, sure enough, cheer returned. In a Jekyll and Hyde move, the market took back what it gave away on Thursday, plus a little more. The NASDAQ finished +4.26%. The U.S. labor force added 312,000 jobs vs. the median forecast of 182,000. This strong news could also be considered negative if it reinforces the Fed’s view of a heated economy, but Fed Chair Powell calmed investors’ nerves by saying the Fed would quickly adjust its policy as needed, essentially submarining any likelihood of rate hikes this year. This comes after market bond rates collapsed. The 10-year yielded 2.55% on Thursday. With S&P 500 dividends yielding 2.13% and taxed at a lower rate, this is bullish for stocks. That leaves trade wars, and China, with trade talks resuming this week.

Now, suddenly, the market feels much better. But that doesn’t erase the killer volatility. When the market gyrates this wildly, and everyone is looking for answers, I ignore the noise and dive into the numbers.

A Happy Ending for a Sad MAP-IT Ratio

The MAP-IT ratio is the 25-day moving average of unusual institutional (UI) buying over selling. It is essentially a barometer for how overbought or oversold we are. Below 25% is oversold; currently it’s at 28.9%. Buy-the-dip has been the mantra for many years, but what happens when the market sustains a period of unusual selling? This was our question, so we wanted to look at other periods like today.

Below is a table of the 16 periods when the MAP-IT ratio stayed below 50% for a duration of 40 or more trading days going back to 1990. It looks complicated, but I’ll draw your attention to the bold entries. For instance, the longest consecutive-day period of a ratio below 50%, was 128 days: June 24th to December 30th of 2008. That period also had the highest total number of UI sells (16,483), unsurprisingly so, given the state of the late 2008 market. The highest average daily UI sell count, more surprisingly, came from December 10th, 2015 to February 29th, 2016. It was a relatively short period of 53 days with a ton of sell signals. This supports our hunch that ETFs are the “tail that wags the dog.” More on that in the future, but for now, just know that ETFs have an ever-growing effect on market movements.

Now let's look at forward returns of the Russell 2000 for all 16 instances. To the right, you see returns: 1-month, 2-months, etc... out to 12-months. The highest return was +61.5%, 12-months after April 1st, 2003. The monstrous drawdown of -50.7% occurred 11-months after April 8th, 2008 - again understandably so as the trough of the financial crisis was March of 2009. Interestingly, the Russell was positive 93.7% of the time 5-months after the last day of the ratio below 50% each time for an average return of +12.2%.

The peak average return was +18.9% 12-months out. Bottom line: we are amid the 16th time in nearly 30 years when the ratio stayed below 50% for 40 days or more. At 61 days, we are around average duration but close to the highest average daily UI sell count.

No matter which way you look at the data, it bodes well for forward returns once our ratio crosses back above 50% after a sustained depressed stretch. All periods from 1-12 months out have a high likelihood of positive return for the Russell 2000. Significant double-digit returns kick in from four months onward.


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

Each downdraft was painful and prolonged, but each preceded a massive rally. Most times it paid to “buy the dip.” Most times also “felt different,” like “the bull market must be over.”  But most times it wasn’t.

So, what about now? This study does not mean I’m saying we will rip higher immediately, but it points out that we can’t go higher until we start to see a return of unusual buying. Immense rallies, like Friday, certainly help, but I’d like to see that ratio perk up. If it does, we should to see equity prices lifting.

As for sector leadership rotation, let’s talk about energy which is having, and will have, the best earnings growth out there. This is partly due to some pretty-sad comps a year back. A low hurdle isn’t the best yardstick for strength, but don’t forget the lag effect for forward earnings: As oil’s price has been decimated, I suspect energy leadership will be short-lived. This could also pressure an already-embattled financial sector. Energy debt tied to higher oil prices could spell disaster and rekindle the spirit of 2014-15 and its spectacular energy-to-financials domino-effect.

As seen below, Energy was #1 last week but remains worst for three months and 12 months.


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

Next-best earnings are expected with Specialty Retail and Health Care, but let’s not forget that all sectors have been punished. Bear action has been immense and damaging. But should we continue to see selling abate with good and confidence-inspiring news (like last Friday), the markets should stabilize. A 4+% one-day rally is always fun to watch, and it is a solid step forward.

Finally, Q4 earnings season is about to begin. I suspect growth rates to slow, like the poor Apple outlook showed, yet we should still see sales and earnings growth. How bad is the slowdown really and how deeply will it affect us?  No one knows, but the market looks forward. Likely most of the damage is done after the reset. We are looking for unusual institutional buying to put money to work as the year begins. Capital needs to be deployed, and bonds offer unappealing returns compared to equities.

Again, this is bullish for U.S. equities, so let today’s fears gradually subside, and let the market do what it usually does. Let it rain and let the flowers bloom. As for when, only the wind knows…

A Look Ahead

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

The Biggest (Ignored) News is the Decline in Treasury Yields

by Louis Navellier

By far the biggest news recently – ignored by most financial media – is the collapse of Treasury bond yields. Currently, the 10-year Treasury bond yield is 2.67%, after hitting 2.55% intraday on Thursday, during a global flight to quality. This sharp drop in rates led Fed Chairman Jerome Powell on Friday to say that the Federal Open Market Committee (FOMC) is “prepared to adjust policy quickly and flexibly” if necessary. Translated from Fedspeak, Chairman Powell seems to be saying that he may have been too strong in his previous language about two rate increases in 2019. With short rates rising and long rates falling, an ultra-flat yield curve will prohibit the Fed from raising key interest rates. As I have repeatedly said, the Fed never fights market rates, so current Treasury yields are forcing the Fed to adjust its policy.

The financial media is citing slow economic growth in Asia and Europe for falling Treasury bond yields, but the answer is much simpler, namely a strong U.S. dollar. Specifically, international capital prefers to hide in strong reserve currencies with relatively high interest rates. U.S. Treasury bonds yield much more than equivalent securities in Japan, Britain, or the euro-zone. China’s interest rates yield more than the U.S., but the yuan has been weak due to the ongoing trade spat as well as slowing GDP growth, so global investors are less inclined to park their capital in the Chinese yuan. As a result, the U.S. dollar continues to be the preferred reserve currency, which should help to keep Treasury bond yields relatively low.

Naturally, lower Treasury bond yields also make the stock market much more attractive, especially since it is very easy to pick high-dividend stocks that yield more than the 10-year Treasury bond. Since most dividends are taxed at a maximum federal rate of 23.8%, while Treasury interest is taxed at a maximum federal rate of 40.8%, the stock market delivers more after-tax income for most investors. This puts a floor under the market as long as the S&P dividend yield is over 2% and Treasuries remain around 2.7%.

Another factor that I am still waiting for regulators to address is ETF Premiums/Discounts relative to Net Asset Value (or Intraday Indicative Value in Morningstar). Unfortunately, as volatility soared in the fourth quarter, ETF Premiums/Discounts rose dramatically and have not fully subsided to where they were in the third quarter. Algorithmic traders have been increasingly utilizing ETFs to trade big blocks of stocks, so it is crucial that ETF Premiums/Discounts subside to boost investor confidence, especially for nervous investors that may want to trade in and out of financial markets in the upcoming months.

The Friday Jobs Report (and the Fed) Lifted the Market on Friday


The biggest economic news last week was the December payroll report. First, on Thursday, the ADP private payroll report rose a robust 271,000 in December, substantially higher than economists’ consensus estimate of 178,000 and the highest monthly private job gain in almost two years. ADP also revised its November private payroll increase to 157,000, down from 178,000 previously estimated.

Then, on Friday, the Labor Department announced that a whopping 312,000 payroll jobs were created in December, substantially higher than the economists’ consensus estimate of 182,000. Interestingly, the unemployment rate actually rose to 3.9% up from 3.7%, due to more people entering the labor force as the labor participation rate rose to 63.1% in December, up from 62.9% in November.

Average hourly earnings rose 0.4% or 11 cents per hour, to $27.48 per hour in December. In the past 12 months, average hourly earnings are up 3.2% and are now running at the highest pace in a decade. The average workweek also rose 0.1 to 34.5 hours per week. The other positive detail was that the October payroll report was revised 10,000 higher to 274,000, up from 237,000 previously estimated. Overall, the December payroll data was an incredibly bullish signal for continued strong consumer spending!

On the downside, on Thursday, the Institute of Supply Management announced that its manufacturing index in December decelerated to a two-year low of 54.1, substantially below economists’ consensus estimate of 57.5. In November, the ISM manufacturing index was a robust 59.3 and almost all industries surveyed reported an expansion. However, only 11 of the 18 industries surveyed expanded in December.

Some components of the ISM survey were disturbing, especially new orders, which decelerated sharply to 51.1 in December, down from 62.2 in November. The production component, at 54.3, is also at the lowest level in over two years. Any reading over 50 still signals an expansion, so the economy is still growing, but the abrupt deceleration in growth rates of the ISM manufacturing index was truly shocking.

Finally, on Wednesday, The Wall Street Journal reported that shale oil wells drilled in the past five years are pumping less crude oil than forecasted, so crude oil prices subsequently firmed up last week. Despite overly optimistic forecasts for crude oil production, U.S. production continues to rise steadily. Seasonal demand is expected to rise as Spring approaches, so some of the volatility in the energy sector may subside soon as worldwide demand rises as the weather improves in the Northern Hemisphere.

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