Crude Oil Prices Will Likely Fall

Crude Oil Prices Will Likely Fall Farther, Faster – Very Soon

by Louis Navellier

August 2, 2016

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

The horrific terrorist attacks in France and Germany are taking a great toll on the spirit of Europe.  On a practical level, the threat of terrorism limits public gatherings and holiday travel, even though Europeans traditionally like to take most of the entire month of August off from work.  This August, I would not be surprised to see tourists stay closer to home, which will sharply lower the demand for petroleum products.

French and German Flags Image

Here in the U.S., gasoline inventories are not declining as fast as they normally do during the peak summer driving season; so when seasonal demand plummets after Labor Day, I would not be surprised to see regular gasoline fall below $2 per gallon in many parts of the U.S., especially near where major refineries are located and gasoline taxes are low, such as in Louisiana, Georgia, New Jersey, Oklahoma, and Texas.

Crude oil and gasoline inventories remain higher than they were during last year’s glut, so if global demand plunges – as it usually does in September – then crude oil futures may fall well below $40 per barrel.  Since peaking at $53.69 intraday on June 8th, crude oil futures are down over 20%.  Last Wednesday, the Energy Information Administration (EIA) reported that crude oil inventories rose by 1.7 million barrels and gasoline rose by 500,000 barrels in the previous week, despite the fact that oil and gasoline inventories typically fall in the summer.  As a result, as I have warned repeatedly, steer clear of most energy stocks.

The stock market is getting narrow very fast.  Companies must (1) post strong sales, (2) post even stronger earnings, and (3) provide positive guidance moving forward to inspire investor interest.  The companies that cannot meet or exceed analyst expectations may be hit hard and subsequently taken to the woodshed.

In This Issue

July is in the books, with a positive stock market surge.  The S&P 500 is now up 19% since its February 11 lows, but the gains have not been even – not by a long shot.  As Jason Bodner shows in Sector Spotlight, watching the big indexes alone can take an investor’s eye off the ball.  Specifically, big banks recovered a bit in July but are still in the tank (see Income Mail and Global Mail), while the GDP figures were weak on the surface but healthier in the details (see Growth Mail).  Meanwhile, the three major central banks in Europe, Japan, and America keep playing their bizarre game of interest-rate limbo: How low can they go?

Income Mail:
Second-Quarter GDP Fails Expectations
by Bryan Perry
European Banks are a “No-Fly Zone” for Investors

Growth Mail:
U.S. Growth is Closer to 2% than 1%
by Gary Alexander
The Folly of “Selling all Stocks”

Global Mail:
Deutsche Bank’s Surreal Tango
by Ivan Martchev
Some Commodity Currencies Are Lagging Oil

Sector Spotlight:
The Presidency is Dangerous Work
by Jason Bodner
Watching Indexes (Alone) Can Mislead Investors

A Look Ahead:
The Central Bank’s “Limbo Contest” Continues
by Louis Navellier
The Limbo Bar Keeps Going Lower in Europe

Income Mail:

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

Second-Quarter GDP Fails Expectations

by Bryan Perry

The advance estimate for second-quarter GDP was a real eye opener. It showed output increasing at an annual rate of just 1.2% -- less than half of Wall Street’s consensus of 2.6%. We also saw a downwardly revised 0.8% first-quarter increase (from 1.1% previously). Real final sales, which exclude the change in inventories, were up 2.4%. That understanding helped to mitigate the disappointment somewhat, but the market rose, perhaps on the notion that the Fed may refrain from raising rates at its September meeting.

Within the GDP report, the best news was that personal consumption expenditures (PCE) increased 4.2%, the strongest gain since the fourth quarter of 2014. That gain accounted for nearly all of the growth last quarter, contributing 2.83 percentage points. Net exports added 0.23 points. The biggest drag was gross private domestic investment, which subtracted 1.68 points. The bulk of that subtraction was the change in private inventories, which subtracted 1.16 points. In addition, government spending was down 0.9% and subtracted 0.16 percentage points (source: Briefing.com Economic Calendar, July 29).

The bond market was quick to react as Treasury prices spiked, with benchmark 10-year Treasury yields falling to 1.47% from 1.62% on July 21. So much for the rate hawks and the notion that the economy was approaching escape velocity. However, it’s a bullish development for equities when market participants surmise that the Fed will have to maintain low interest rates for longer. Fund flows into stocks, especially those with dividend yields in excess of the 10-year T-Note, will remain solidly bullish.

The FOMC is steadfast in its reminder that the path of monetary policy will be shaped by incoming economic data. It offered a nod toward that fundamental principle when it reiterated that “in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation” (source: Fed Policy Release, July 27, 2016 – available at FederalReserve.gov).

One major data point this Friday will be the latest employment data for July, which will hopefully build upon the 287,000 jobs created in June. The forecast is for non-farm payrolls to come in at 185K and the jobless rate to edge lower to 4.8% from 4.9% in June. (source: Briefing.com – Economic Calendar)

Right now, the fed funds futures market is pricing only a 12% probability of a rate hike in September or in early November, down from an 18% probability the day before the downbeat GDP report came out. As we’ve been saying, we don’t think the Fed will raise rates just before a presidential election.

Fed Funds Futures Market Table

The CME Group’s Fed Watch Tool currently shows a 33% probability for a rate hike at the December meeting, which effectively means that it thinks a rate hike before year end is a 2-to-1 underdog. Below is the latest “Dot Plot” road map of what the Fed’s desired course of the Fed Funds Rate will take over the next two years and beyond. To say that the Fed’s narrative is overly optimistic and “all over the map” would be a compliment. I would venture to say that the dots on the right side of the chart below (longer run) will be modified to be closer to the dots on the left side of the chart (2016-17) before 2018 arrives.

Federal Open Market Committee Participants' Assessments of Appropriate Monetary Policy Dot Plot

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

These expectations for the Fed will assuredly change in the coming weeks as more data are released and financial markets have to deal with any potential fallout from last Friday’s poor results of the balance sheet stress tests on 51 of Europe’s top banks conducted by the European Banking Authority.

European Banks are a “No-Fly Zone” for Investors

In last week’s stress test, Italy’s member banks fared worst. Banca Monte dei Paschi di Siena (BMPS), Italy’s third largest – and the oldest bank in the world – will face great difficulty covering its toxic loans between now and 2018 in adverse economic conditions. Shares of BMPS are down nearly 77% this year.

From the results of the stress test, we can see that some of the poorest performing banks at or near the bottom of the list are among the biggest banks in Europe, including Deutsche Bank (Germany), Commerzbank (Germany), Barclays (UK), Royal Bank of Scotland (UK), Unicredit (Italy), Societe Generale (France), Santander (Spain), and BBVA (Spain). In short, Europe’s financial system is a complete mess right now and there is no hurry to bottom-fish at this point. It will be years before these banks come back to health.

Italy’s banks have been hit hard by their level of toxic loans. These were not unpaid home loans but small- to mid-sized, undercapitalized companies that make up the bulk of the country’s economy. Andrea Enria, chairman of the European Banking Authority (EBA) told CNBC in advance of the report that “We have 1 trillion (euro) of Non-Performing Loans - it's a big figure,” so “this is not a clean bill of health.”

What is most interesting is that the EBA’s stress test baseline scenario did not incorporate the potential impact from “Brexit” or a prolonged period of negative interest rates. Unlike previous tests there are no pass-or-fail rankings this year, which only muddies the waters about how regulators will quantify the future ‘work out’ for the most troubled banks if the European economy doesn’t get out of first gear. The latest tests came under fire immediately for not capturing shocks such as the UK’s unexpected decision to leave the EU, plus negative interest rates – two very real-time situations that could have lasting effects.

Though the broad takeaway from the stress tests is that the European banking community as a whole could survive a new financial crisis, they did little to restore investor faith as to how the underlying stocks should trade. Even though most shares of banks are trading at or below 50% of book value and look dirt cheap on a pure historical valuation basis, in my view investors should consider the sector as a “no-fly zone” for the time being until there is some notion of genuine improvement in balance sheets.

To sum up an event-filled week of a Fed standing pat on rates, a big miss on second-quarter GDP, the Bank of Japan announcing they will now buy ETFs in the open market as a new form of stimulus, and the European bank stress tests showing the road to recovery as a multi-year workout, it becomes ever more clear that U.S. companies with investment-grade balance sheets defined as blue-chip dividend-paying growth stocks are head and shoulders the de facto winner for where risk-on capital is best served.

Please note: Bryan Perry does not currently hold a position in Deutsche Bank, Commerzbank, Barclays (UK), Royal Bank of Scotland (UK), Unicredit (Italy), Societe Generale (France), Santander (Spain), and BBVA (Spain). Navellier & Associates does not currently own a position in, Commerzbank (Germany), Barclays (UK), Royal Bank of Scotland (UK), Unicredit (Italy), Societe Generale (France), Santander (Spain), and BBVA (Spain) for any client portfolios. Navellier & Associates does currently own a position in Deutsche Bank (Germany).

Growth Mail:

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

U.S. Growth is Closer to 2% than 1%

by Gary Alexander

What kind of an upside-down world do we live in when anemic GDP numbers (+1.2%) inflate the price of gold and keep fueling record-high stock prices?  Ironically, gold’s leap and the market’s relentless rise tell us that last Friday’s ultra-low 1.2% GDP growth rate for the second quarter – less than half the economists’ consensus of a 2.6% reading – means that the Fed will likely NOT raise rates in September.

The market is also telling us that it sees through the headline number to the positive details underneath.  Bryan Perry touched on these points above, but I want to delve into a little more detail on the matter of inventories.  In an analysis of GDP numbers (“Why U.S. GDP Figures Might Be Better than They Look: A fall in inventories suggests the economy is ready for a rebound next quarter,” July 29), the Wall Street Journal showed that inventories have dragged down an otherwise “normal” growth rate of 2.1% over the last five quarters.  Specifically, last quarter grew 2.36%, less a -1.16% inventory adjustment, netting 1.2%.

Inventories Drag Down Gross Domestic Product Table

The Journal concluded: “If the rate of inventory accumulation had remained unchanged, the economy would have expanded 2.4%,” explaining that “goods and services that are produced but not sold add to GDP growth and are counted as inventory investment. The opposite is also true: When consumption eats into inventories that were stacked up during previous periods, this detracts from growth.”  This augurs well for expanded GDP growth figures in subsequent quarters as these inventories must be replenished.

Why such an overload of inventories?  Looking at GDP by quarter over the last five years, you can see the peak in mid-2014, when the GDP rose 5% in the third quarter.  As a result, businesses became overly confident that this recovery would continue strong so they produced too much in 2015, creating a glut.

Percent Change of Real Gross Domestic Product Bar Chart

Some say the stock market is getting way ahead of itself in light of our weak growth figures, but I beg to differ.  The new century has delivered ultra-slow stock market growth.  On Labor Day 2000, the S&P was just over 1520.  As of last Friday, it is 2173, up 43% in nearly 16 years, an average gain of just 2.3% per year.  U.S. GDP was $10.285 trillion in 2000 and $17.947 trillion in 2015, for a much bigger (74%) gain.  (Note: Annual GDP totals are in nominal dollars, while annualized GDP gains are inflation-adjusted.)

Since the year 2000, the strongest full-year GDP growth came in 2004, at 3.8%, which is barely above the average GDP growth of the previous four decades.  While disappointing, this slow-growth stretch is due to the Law of Big Numbers.  It’s hard for a huge $18 trillion economy to keep growing by 3% to 4% a year.

The Folly of “Selling all Stocks”

The week ending August 2, 1996 – 20 years ago today – marked the largest weekly Dow Jones Industrial point gain to that date: +238 points, the first 200-plus point weekly gain in the Dow.  Then it just kept rising.  There’s quite a story behind how and why that happened – and I was there, with a ringside seat.

In the summer of 1996 – the year before I started working with Louis Navellier – I was working with four investment advisors at a major publishing company, turning their research into readable and actionable advice for a large and growing consumer audience.  That summer, there were three major sell signals by market timers who had a superb historical record as market timers.  They were very famous at the time.  (I won’t name these advisors here but you can read an excellent summary in a New York Times account the week it happened: “From Bears to Bulls and Back Again” by Reed Abelson, N.Y. Times July 28, 1996).

One leading technical analyst issued his sell signal on June 22, 1996.  I was not affiliated with this person, but I knew him well from introducing him at various investment conferences in that era.  He was quickly joined by other bears.  In mid-July, two famous advisors affiliated with our publishing company issued major sell signals within eight days.  First, on Monday, July 15, 1996, after the Dow lost 161 points in a day, a famous mutual fund market timer issued a sell signal to his followers, who were legion.  Mutual fund redemptions were unusually heavy that week.  One fund attributed $100 million in sales to that call.

That kerfuffle was merely a foretaste of what happened on Tuesday, July 23, 1996, when a more widely followed market timer issued a “sell all stocks” signal on national TV at around noon Eastern time.  The market had been up that day, through noon.  The Dow was up 40 points as of noon, but it lost 84 points that afternoon to close down 44 points and the turnaround was blamed on her very public sell signal.

So what happened next?  The rapid recovery during the week of July 29 to August 2, 1996 was the initial slap in the face for any hasty sellers.  Then the market just kept soaring.  On July 23, 1997 – one full year after that famous sell signal – the S&P closed at 936.56, up a huge 49.4% from 626.87 on the day of that ill-fated sell signal (July 23, 1996).  To her credit, she reversed her sell signal in February 1997, but many investors failed to get back into stocks in time, as they had lost their faith in any market-timing gurus.

The prophets of doom will always be with us.  After the terrible market opening in the first week of 2016, FORTUNE Magazine reported on a major bank analyst predicting a 75% crash (January 13, 2016: “Here Comes the Biggest Stock Market Crash in a Generation: It would be worse than the financial crisis.”)

Five years ago, a viral 77-minute video circulated in our e-mailboxes throughout 2011 entitled, “The End of America,” in which the promoter said that the dollar was doomed, gold would soar ,and stocks would crash, but it was published in the year gold peaked and the dollar bottomed out.  The S&P 500 had a sharp correction in August 2011, but it has doubled from its 2011 low of 1075 to 2163 in less than five years.

Please pay no heed to anyone who tells you to “sell all stocks.”  Even in the worst markets, try shifting sectors instead, but don’t let the juggernaut of this incredible stock market wealth machine pass you by.

Global Mail:

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

Deutsche Bank’s Surreal Tango

by Ivan Martchev

The surreal trading in Deutsche Bank (DB) stock (dark line, below) continues. One of the largest financial institutions in the world is closely tracking the declining 10-year Treasury yield almost tit for tat. The correlation is not perfect, but given that one line represents risk-free, interest-rate returns in the U.S., while the other line represents the equitypart of the capital structure of the largest bank in Germany, one has to wonder what conclusions result from this surreal tango dance from this oddest couple of dance partners.

CBOE Ten Year Treasury Yield Index Chart

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

I pointed out this strange correlation over a month ago (see June 24, 2016 Marketwatch article: “A look at the global economic malaise through Deutsche Bank”) and the correlation has continued unabated in the weeks since. Since then, Deutsche reported second-quarter earnings, which were expected to be bad (see July 27, 2016 Bloomberg article “Deutsche Bank Flags Deeper Cuts as Trading Drop Hits Profit”) but that did not really lift any pressure off the stock. We also know that high-profile absolute return investors like Soros Fund Management and Sealight Capital have taken substantial short positions against the stock (see Bloomberg July 27, 2016 “Deutsche Bank Set for Investor Scrutiny as Short Sellers Circle”).

Why would a sophisticated institutional investor like Soros Fund Management sell seven million shares of DB stock short if the shares trade at just 25 cents per dollar of book value? (The position was reported by Bloomberg last month, and even if the position was taken when DB stock was trading in the 30s, in terms of cents per book value dollar, isn’t Deutsche Bank “too big to fail”?) Surely George Soros and his managers that took the position know Deutsche is likely to get propped up by the German government?

I think getting propped up by the German government and maintaining DB’s equity value are not one and the same thing. Citigroup was propped up by the U.S. government, which forced a massive dilution on its shareholders, and so did AIG. The same may happen here. Deutsche had total assets of €1.803 trillion as of June 30, 2016 while total equity on its balance sheet was €66.809 billion. I know that banks are typically highly-leveraged institutions, but DB is in the middle of a bad deflationary problem in Europe, which just got worse with the outcome of the Brexit vote. Highly-leveraged bank balance sheets and accelerating deflation do not go well together due to rising losses in the banking sector in such a scenario.

Declines in Ten Year Interest Rates in the Last Twelve Months Table

The decline in global interest rates over the past year (highlighted above) has been astounding. It is a result of global deflation emanating from Europe, Japan, and now China. That Deutsche Bank stock follows the decline in U.S. 10-year Treasury yields simply means that as global deflationary pressures increase, the business prospects of this highly leveraged global financial institution worsen. Since I am of the opinion that U.S. Treasury yields are headed to 1% or lower (see July 14,  2016 Marketwatch article “What happens now that Treasurys hit their target?”) this strange correlation may mean DB stock is going into the single digits and is likely to trade for less than 20 cents per book value dollar at some point.

Deutsche Bank Ag - Monthly OHLC Chart

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

If we have to go by the looks of its ghastly long-term chart, Deutsche Bank looks like most large Japanese financial institutions, which were the first to experience the effects of protracted deflation. Negative short-term interest rates, negative government bond yields, as well as a rather sluggish Eurozone economy suggest that Europe is going through a similar stage as the Japanese experienced in their “lost decade” in the 1990s. The trouble is: one lost decade became two, and now they are entering their third one.

Gut feeling tells me that we have not seen the worst of this Deutsche Bank situation, where massive leverage on the balance sheet combined with a worsening deflationary backdrop may force more losses on shareholders than are seen in present estimates. Given that DB has a balance sheet that is much bigger than Lehman Brothers’ and it is among the top dozen banks in the world by assets, one could conclude that there is more at risk here, particularly in light of the fact that there are many banks in Europe in worse shape than DB when looking at present valuation as a percentage of book value dollar, like those in Italy.

Please note: Ivan Martchev does not currently hold a position in DB or AIG.  Navellier & Associates does currently own a position in DB and AIG.

Some Commodity Currencies Are Lagging Oil

With the price of September 2016 WTI futures (CLU16) barely above $40 last week, some commodity currencies like the Russian ruble have begun to be increasingly under pressure – as I have expected in this column before this repercussion began to unfold. Others, like the Brazilian real, are so far ignoring the move in the oil market as well as the broader sell-off in commodities that got going in earnest in July.

West Texas Intermediate Crude Oil - Daily OHLC Chart

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

Keep in mind that the September 2016 WTI crude oil futures contract got only as low as $32.85 last January, while the front-month futures at the time got close to $26. From the standpoint of buyers of this futures contract, we have given up quite a bit more than half the gains in the rebound in crude oil prices that played out in the first part of 2016. The fact that many leveraged oil and gas companies – like those in the SPDR Oil & Gas Exploration and Production ETF (XOP) – have not given up even a third of their gains in their share prices since January should be taken as a red flag. The same red flag should be raised in the case of commodity currencies that are still holding up.

United States Dollar versus Brazilian Real - Daily OHLC Chart

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

I think the Brazilian real exchange rate (USDBRL) is holding up because of the Olympics, which start in Rio this week, while the Russian ruble (USDRUB) has finally begun to react to the decline in the oil price, also helped by the DNC email hacking scandal that is pointing fingers at Russia. While it would be difficult to prove Russian involvement in this political scandal, as hackers can rout their activities through multiple countries, it will not be a positive for the “rubble” if Russia becomes a topic in the Presidential election, particularly when these two countries were working on joint plans to combat ISIS in Syria.

As to the Brazilian real – which is on an inverted scale like the ruble, so fewer Brazilian reals per dollar is a stronger real – I think it is only a matter of time before it follows the ruble and other commodity currencies if oil heads into the $20s next year. The weakening of the crude oil price has started on schedule, precisely at the time of the year when last year’s seasonal rebound began to play out.

Large international events like the Olympic games tend to give a boost to local financial markets, but I predict that this temporary boost will fizzle out after the Olympics end on August 21.

Sector Spotlight:

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

The Presidency is Dangerous Work

by Jason Bodner

Hillary or Trump? This undoubtedly is the hot topic today and for the foreseeable future. As debates flare and the race for the presidency heats up, it may be easy to overlook the fact that the most dangerous job in America is actually to be President. Four (9%) of our 43 Presidents have been killed in office. That’s far more danger than the next most dangerous job, loggers, which have a 0.13% on-the-job death rate (per year). Naturally that 9% number, while factual, is another example of how to misuse statistics. Out of the 43 presidents sworn into the post so far, eight have died while in office, four of whom were assassinated. If you divide eight deaths by the 227 years since 1789, that works out to a death rate of 3.5% per year.

The Presidency is dangerous work… Remember when George Bush had to watch out for that shoe?

President Bush Dodging Shoe Image

Watching Indexes (Alone) Can Mislead Investors

We human beings love convenience. If anything makes life easier, it is in our genetic wiring to be attracted to it. Running water, electricity, vacuum cleaners, dishwashers, and air conditioning are all examples of things that we view as essentials, but are actually known as “conveniences” – at least according to Wikipedia. Think of all the waste that comes from the modern convenience of the plastic supermarket shopping bag – but it’s way more convenient than bringing our reusable bags to shop.

Convenience spurs innovation, which spurs more convenience! I just came across a great example when I found a small company called Postable, whose whole premise is to replicate snail mail. You pick from a collection of designer cards and type your messages online. They then print them out for you using fonts that look like real handwriting. They print, address, stamp, and mail everything for you. For example:

Digital Postable Image

Now that’s convenient!

Convenience can be great in everyday life, but in investing, it can actually cause problems. One simple example is how it can make the investor take his eye off the ball. The most common convenience in equity markets is following the broad indexes. These baskets of stocks were designed to give us a quick, convenient barometer of the market they represent. The Dow Jones Industrial Average began as an 1896 representation of large companies that best represented the market. In 1957, the S&P 500 augmented the Dow as a more diverse barometer. NASDAQ is clearly the tech-heavy index, while the Russell 2000 is associated with small cap stocks. These indices are great conveniences for getting a quick picture of what’s happening in the market. What we see recently when we look at the indexes has been smooth sailing after a storm of wicked volatility. I mean, just look at the VIX: It closed below 12 again on Friday.

Standard and Poor's 500 Compared to CBOE Volatility Index - Daily Area Charts

But recently, the major indexes don’t really tell the whole story of what’s actually going on beneath the surface. When we look at single stocks, we see a lot of volatility continuing, especially around earnings season. We see outsized moves in quick and violent reactions to earnings reports, both up and down. Some stocks have been soaring while others have been plummeting 10%, 20%, 30%, or even more!

While single-stock volatility continues, we see oil declining precipitously. Yet last year, the equity market seemed locked in a shadow dance duet with the price of oil. This time around, these declines don’t seem to damage the market indices much. Perhaps the reason for this is that the market has shifted its focus to tech. Last week we talked about how clearly there has been an awakening of the info-tech sector. Maybe now is a good time to revisit our old friends – the collective FANG stock index (Facebook, Amazon, Netflix, and Google). Three have reported earnings that beat expectations. (Netflix is set to report on Thursday.) In the process, the first three FANG stocks have added well over $30 billion of market cap.

FANG (Facebook, Amazon, Netflix, Google) Stock Index Chart

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

These notable stocks have continued to propel Information Technology as an emerging sector leader. This week saw the sector lead again, with the only notable positive weekly performance. Utilities and Staples had lackluster performances, but Energy was the clear loser. According to FactSet, West Texas Crude Oil declined just over -5.85% last week. Yet as we can see, the S&P 500 Energy sector fell by just over 2%.

Standard and Poor's 500 Information Technology Sector - Daily Area Chart

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

Standard and Poor's 500 Weekly Sector Indices Changes Table

Energy was not only the weakest sector for the past three months, but was also the only negative sector. And in this time frame we can also see that Infotech and Telecom posted the strongest performance.

Standard and Poor's 500 Quarterly Sector Indices Changes Table

Yet as we look at the sector performance for the last six months, fierce strength is evident in all sectors. Energy weakness of late leaves the sector as second best by a nose. Information Technology is clearly gaining in strength. The question is whether tech will continue to lead the markets going forward.

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

Having a simple, concise gauge on overall market performance can be convenient but it can also be deceiving. The indices’ recent performances paint a picture of a market regaining its feet after a lengthy swath of volatility. But looking underneath the surface in more detail, we see wild swings on individual stocks. Technology is rising while energy is falling. The index volatility – or present lack thereof – does not match what we are witnessing in the behavior of single stocks.

Convenience saves all of us time and hassle, but not all things can be summed up with a simple proxy. Sometimes they don’t tell the whole story. Theoretical Physicist John D. Barrow reminded us of this when he said, “There is no reason that the universe should be designed for our convenience.”

There is no reason that markets should be designed for our convenience, either.

Please note: Jason Bodner does currently hold a position in FB but Jason Bodner does not hold a position in AMZN NFLX or GOOGL.  Navellier & Associates does currently own a position in AMZN FB, and GOOGL but does not own NFLX.

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 Central Bank’s “Limbo Contest” Continues

by Louis Navellier

The Fed held a two-day Federal Open Market Committee (FOMC) meeting last Tuesday and Wednesday.  Its official statement on Wednesday essentially said that the “near-term risks to the economic outlook have diminished.”  However, the FOMC also said that the pace of the improvement in job growth has “slowed” and that it expects “gradual” adjustments in monetary policy.  This has decidedly dovish overtones.

The Fed’s likelihood of raising rates declined sharply after the GDP advance estimate on Friday came in at only 1.2% vs. the expected 2.6%.  The price of gold surged $20 (from $1,334 to $1,355) after the GDP miss, since low interest rates create an advantage for gold as a store of wealth.  Gold is also benefitting from increasing demand from the ETF industry as the leading gold ETF (GLD) is being increasingly added to more asset allocation models.  As an asset class, gold often “zigs” when other financial assets “zag.”

As far as future Fed policy is concerned, all eyes will now shift to Jackson Hole, Wyoming, where Fed Chair Janet Yellen will deliver a speech on August 26th at the Kansas City Fed’s annual conference there.  Since Yellen is clearly a dove and tends to move ultra-cautiously, I do not expect to hear any surprises at Jackson Hole.  As I have said repeatedly, the FOMC is unlikely to raise key interest rates just before a Presidential election, since the Fed wants to steer clear of influencing the national economic debate.

Another reason for the Fed to be cautious is that the Commerce Department reported that durable goods orders plunged 4% in June, following May’s revised 2.8% decline.  For the first six months of 2016, durable goods orders have been flat, signaling major business uncertainty.  Weak demand for commercial aircraft and defensive products are weighing down the overall durable goods number, while automotive orders remain relatively strong in the past couple months.  Overall, durable goods orders have clearly stalled due to (1) more cautious business spending, (2) uncertainty following Brexit, and (3) fears that a stronger U.S. dollar will continue to suppress U.S. exports, thereby depressing the earnings of U.S. multinational stocks.

The Limbo Bar Keeps Going Lower in Europe

Key Negative Interest Rates Chart

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

On Friday, the Bank of Japan didn’t lower rates further, but they said they would buy six trillion yen ($57 billion) in exchange-traded stock funds annually, nearly double the previous 3.3-trillion-yen annual pace.  There is no doubt that the Bank of Japan is testing the limits of quantitative easing and since it makes virtually no sense to buy government debt with negative yields, the central bank is buying stocks instead.

Japan is now the world’s biggest buyer of home safes, since it citizens are now increasingly hoarding cash and gold rather than putting their money in banks with negative yields.  Clearly, we now live in a strange new world, but the real winner of the ultra-low and negative interest rate environment remains stocks, which continue to steadily disappear from stock buy-backs and the Bank of Japan’s quantitative easing.

The European Central Bank (ECB) is not yet buying stock, but when it boosted its quantitative easing by 20 billion euros per month recently, the ECB allowed corporate bond debt to be bought by its member banks.  So one of the outcomes of negative interest rates is that central banks increasingly have to buy corporate securities rather than negative-yielding government securities.  This is bullish for stocks.


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.

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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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