Currency Shifts Continue to Punish Multinationals

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by Louis Navellier

August 21, 2015

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Currency Shifts Continue to Punish Multinationals and Commodities

by Louis Navellier

August 18, 2015

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

Trading Ships ImageSince China devalued its currency last week – effectively lowering the cost of China’s exports – we are seeing an escalation of the kinds of deflationary fears that have motivated many central bankers to keep interest rates low. This low interest rate environment is also fueling more stock buy-backs. According to a Bloomberg article on August 13 (“Goldman Buyback Desk Saw Record Volume in Wednesday Rebound”), Goldman Sachs’ stock buy-back desk reported its busiest day since 2011 last Wednesday.

Speaking of Bloomberg, the stock market staged a big rally last Monday after a Bloomberg TV interview that day with Fed Vice Chairman Stanley Fischer revealed his concerns about low inflation and how the Fed won’t likely move rates higher before seeing inflation return to more normal levels.  (Source: Bloomberg.com, “Fischer Says Temporary Inflation Factors Still a Fed Concern,” August 10, 2015.) Specifically, Fischer said that “employment has been rising pretty fast relative to previous performance and yet inflation is very low.  And the concern about the situation is not to move before we see inflation as well as employment returning to more normal levels.”  Furthermore, Fischer said that global disinflation “bothers us.”

After July’s “commodity crunch,” when many commodities declined 6% to 20% in a single month as the U.S. dollar rallied, the risk of deflation remains very real.  (Source: Bespoke Investment Group, “A Month to Forget for Commodities,” July 31, 2015.) Furthermore, the slowdown in China is also weighing on global growth concerns and putting additional downward pressure on commodity prices.

Due to money pumping and currency devaluations around the world, I expect that the U.S. dollar will remain super strong for the next few years.  Overall, this is a positive trend, but the bad news is that a strong U.S. dollar is not good for many multinational and commodity-related stocks in the S&P 500.

Second-quarter earnings announcement season is winding down. With over 90% of S&P 500 companies having already reported their latest quarterly results, sales were down 4% and earnings were up only 1.5% vs. the same quarter a year ago.  Company guidance for the third quarter is truly horrible and the strong U.S. dollar will continue to crush sales and earnings for the multinationals and commodity-related stocks. As a result, the “seismic shift” out of the big multinational stocks that dominate the S&P 500 is likely to continue and will likely last as long as the U.S. dollar remains strong.

In This Issue

In Income Mail, Ivan Martchev will dig deeper into China’s latest policy moves and why China’s similar actions in the early 1990s contain some chilling lessons.  Speaking of history, Gary Alexander will recall some of the strongest economic growth rates and the government policies that have spurred GDP and the market. Then, I’ll return with more signs of deflation and other economic indicators released last week.

Income Mail:
The Yuan is the Chinese Monetary Panic Button
by Ivan Martchev
U.S. Credit Spreads Show Red Flags

Growth Mail:
The Secret Formula for Greater Economic Growth & Job Creation
by Gary Alexander
Small Businesses (Under 500 Employees) Create ALL Our Net Job Growth
High Corporate Taxes are a Businessman’s Biggest Beef
The Strange Market Storm of August 19, 1991

Stat of the Week:
Import Prices Decline 10.4% in 12 Months
by Louis Navellier
The Other Economic News Last Week was Mixed
How the Fed May Respond to this Data

Income Mail:

*All content in Income Mail is the opinion of Navellier and Associates and Ivan Martchev*

The Yuan is the Chinese Monetary Panic Button

by Ivan Martchev

Most observers think that China has not experienced a recession in the past 25 years. They think that the Chinese economy has a compounded GDP growth of between 6% and 14%, save for a few slower years in the early 1990s. Having spent some time looking at the data, I think most such observers are wrong.

China Gross Domestic Product Growth Rate Chart

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

On April 5, 2012 Marketwatch ran a story, “China Doomsayer Sees Crash Coming,” [1] in which Dr. Jim Walker of Asianomics Ltd., who formerly held the position of chief economist of agency broker CLSA, laid out the case for a major readjustment in the Chinese economy, in which their fixed asset investment boom – i.e., an infrastructure buildout at any cost – would come to an end and lead to a nasty recession. I was familiar with the economic theory discussed in that article, but brilliant economists are often way too early in calling for an unravelling – which has finally accelerated in full force in 2015.

Marketwatch summarized Walker’s view like this:

“He said the non-stop growth might be a result of patching over official statistics to remove evidence of prior downturns, and he believes a recession did in fact take hold in the early 1990s, wreaking havoc on the Chinese banking system. Data later showed that by the middle of that decade, Chinese banks were laden with non-performing assets equivalent to around 25% to 40% of their balance sheets, levels that were much worse than anything seen in the U.K. or the U.S. during the Great Depression, Walker said. ‘It will come as a surprise to people who don’t believe that the Chinese economy can have a cycle,’ Walker said, referring to what he sees as a deflationary fallout that lies ahead.”

How did the Chinese decide to help themselves out of that swept-under-the-carpet recession over 20 years ago? They massively devalued the yuan to the tune of 33% in 1994, a move that many believe sowed the seeds of the Asian Crisis that kicked into full force in 1997. If China had no economic troubles as shown in the “official” statistics, then why did they devalue the yuan by that much?

This time, China’s “token” devaluation has been preceded by the massive devaluation of the Japanese yen, which has gone from 75 to 125 since late 2012 on the USDJPY cross rate – on par in percentage terms with what the Chinese did in 1994. The finer points are that the Chinese devalued the yuan by this much “overnight” and China at the time was a much smaller economy than Japan is today.

Yuan Versus Yen Chart

Source: TradingEconomics.com

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

The problem with China this time is that the authorities may have lost control of the economy due to the sheer size of unregulated lending. It was easy when there was no large and pervasive unregulated shadow banking system so that they could press the pedal on the monetary accelerators with their forced lending and reserve requirement cuts at major state-controlled banks, but I don't believe these monetary accelerators are working as well at the present time.

If indeed shadow banking leverage is to the tune of 100% of GDP – as I previously stated in these pages over the past year – then the only way to override the shrinkage in unregulated shadow banking credit is via the exchange rate. This is because the Chinese economy is now too large, forecasted to be $11.2 trillion at the end of 2015 as estimated by the IMF [2], this puts trillions of dollars in unregulated shadow banking credit at risk due to the unravelling of China’s real estate and stock markets.

The sheer size of the problem now simply means that if the Chinese decide that they can’t tackle it via their normal monetary tools of reserve ratio cuts and interest rate cuts – as they do not affect the massive shrinkage of unregulated credit due to losses in real estate lending and stock market shadow margin – then they may lean harder on the exchange rate, as they did in 1994.

China’s GDP was only $728 billion at the end of 1995. At the end of this year, it will be 15 times larger on a current-dollar basis using data from the US Federal Reserve [3]. That means if the Chinese opt for a large scale devaluation the domino effect that took two years to develop (in the 1997 Asian Crisis) may come much faster this time, except that the effects are unlikely to be limited only to Asia as the Chinese economy is 15-fold bigger this time.

iShares MSCI Emerging Markets NYSE Chart

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

In some respects, this domino effect has already started via the effect on commodity prices, which closed again last week at 197.98 as measured by the Reuters/Jeffries CRB Index – which has now decisively undercut its 2008 Great Financial Crisis low of 200.16. As elaborated last week, the CRB index has an area of support going back 40 years in the range of 180 to 200. The low end has been undercut marginally only once, in the 1970s. I am of the opinion that if the Chinese economy enters a bad recession or a real depression due to the crash in both the real estate and stock markets at a time of massive financial leverage to the tune of 400% of GDP (when shadow banking leverage is counted, as it should be, that 40-year support of 180-200 in the CRB index may not hold. I would not be surprised one iota if crude oil declines under $20 in the next two years and U.S. consumers begin to cheer their $1 gas again – not that cheap gasoline is anything to cheer about, since it would be a symptom of a much bigger global problem.

The correlation of crude oil and the iShares MSCI Emerging Markets Index ETF (EEM), charted above, is painfully obvious. Why the MSCI EM Index has not come down more is another story, helped by some of the less commodity-oriented large caps in the index. Smaller caps in the MSCI EM Index have been underperforming for a while and may yet be leading indicators for the emerging markets space. (Ivan Martchev does not currently own a position in EEM. Navellier & Associates does currently own positions in EEM in some client portfolios).

U.S. Credit Spreads Show Red Flags

As of last Friday, the BofA Merrill Lynch US High-Yield B Option Adjusted Spread closed at 5.59%. This is the credit spread between B-rated bonds and the relevant risk-free Treasuries, the widening of which shows increasing stress in the junk bond market. One of the main drivers of the junk bond sell-off is the sell-off in oil, since much of the shale expansion in the U.S. has been financed with junk bonds, and falling oil prices mean falling cash flows to service those debts.

Bank of America Merrill Lynch High Yield Bonds Chart

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

What is peculiar here is that we have notable credit spread widening without a sell-off in the U.S. stock market. If one were to examine the chart of the S&P 500 Index and the B-rated spread, one would find that in 2014 there were three notable waves of credit spread widening that preceded two modest but sharp stock market sell-offs, and one that was not so modest in October of 2014.

All three such credit spread widenings were noted here in Income Mail before the ensuing sell-offs in the stock market occurred. Since we are entering the seasonally weak period of the year, in which September is weaker historically than October, and since the Chinese economic data is getting pretty dismal, I have great doubts that the Fed will be hiking rates if commodities and stocks are under pressure in September.

It should be a sight to behold.

[1] China doomsayer sees crash coming.

[2] China Fact Sheets.

[3] Gross Domestic Product for China.

Growth Mail:

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

The Secret Formula for Greater Economic Growth & Job Creation

by Gary Alexander

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise revenues in the long run is to cut the rates now… not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

– President John F. Kennedy at a news conference, November 20, 1962.

We keep hearing about how anemic this economic recovery has been compared with the 1980s (Reagan), 1990s (Clinton), 1920s (Coolidge), 1950s (Ike), or 1960s (Kennedy/Johnson).  I name the Presidents at the time since they are often credited with spearheading those growth spurts. Under President Obama, growth has been slower.  Perhaps it’s no coincidence that one of his most quoted remarks disparages business.

On the campaign trail for re-election (on July 13, 2012 in Roanoke, Virginia), President Obama said: “If you’ve got a business, you didn’t build that. Somebody else made that happen.” The Republicans made fun of that statement in their convention, but today’s leading Democratic candidate said the same thing.

Trucking ImageOn October 24, 2014, Hillary Clinton said: “Don’t let anybody tell you it’s corporations and businesses that create jobs.” On September 21, 2012, Massachusetts Senator Elizabeth Warren said the same thing: “There is nobody in this country who got rich on his own — nobody. You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for.”

These politicians have downplayed the role of business in building this nation’s wealth and creating jobs.  They seem to think that government created a magic carpet of prosperity and national infrastructure and then just got out of the way.   But let’s take a closer look at job creation to find a more complete picture.

Small Businesses (Under 500 Employees) Create ALL Our Net Job Growth

The ADP data series on private-sector payrolls and job creation by company size goes back to January, 2005.  “Since then through June 2015,” according to Ed Yardeni, writing on July 16, “small companies with 1-49 employees added 5.1 million workers and had payrolls totaling 50.2 million. Medium-sized companies with 50-499 employees added 3.8 million workers and had payrolls totaling 43.0 million. Large companies with 500 workers or more cut 234,000 from their payrolls, which totaled 26.5 million.”

Using these data (and ignoring government jobs), businesses with under 500 employees account for 78% of private payrolls in America and they created 103% of the net new jobs in the last decade! The big business behemoths, their expensive lobbyists, and their government enablers have been job destroyers.

A National Federation of Independent Business (NFIB) poll regularly asks small business owners about their biggest problem. According to Yardeni, “the average responses over the past six months through June showed 22.0% and 21.8% complaining about taxes and government regulation. Only 11.3% said that sales are poor, while merely 2.2% said that credit conditions are tight.”  The July NFIB survey, released last week, listed the top four “single most important problems” as taxes (22%), government regulations and red tape (21%), the low quality of labor (13%), and poor sales (10%).  Yardeni concludes from this:

“The NFIB data confirm my long-held view that there are only two alternative economic systems, namely capitalism and corruption. There are two varieties of capitalism, namely entrepreneurial capitalism and crony capitalism. The latter is really just another variety of corruption, not capitalism. It is entrepreneurial capitalists running small and medium-sized companies who ‘built that’ and ‘hired them.’ The political class more often than not just gets in the way of the entrepreneurial class, in my opinion.”

--Ed Yardeni, “Entrepreneurial Capitalism at Work,” July 16, 2015

Yes, government can create economic growth – mostly by cutting paperwork and getting out of the way.

These small business owners – those creating virtually all the net new jobs – list taxes and government regulation as their two most common complaints – each scoring twice the votes as “poor sales.”  Those who don’t run businesses can’t know the depth of the quagmire that taxes and regulations represent in their lives. Maybe they’re on to something the rest of us need to bear in mind during this election season.

First, regarding regulations, here is a chart of the number of pages of regulations added to the Federal Register each year.  They first peaked at 72,000 pages in President Carter’s last year (1980), then dipped under 45,000 in the mid-1980s under Reagan, before reaching new highs over 80,000 pages in 2010-11.

Federal Regulations Added Each Year Chart

Source: Ten Thousand Commandments

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

The sharp rise from 20,000 pages in 1970 (Nixon) to 72,000 in 1980 (Carter) paralleled the “malaise” of the 1970s, a decade of stagflation (economic stagnation amid high inflation).  As I showed here last week, there was zero net “real” growth in the U.S. economy for the 14 quarters from mid-1979 to end-1982.

America’s two greatest postwar economic contractions came in 1981-82 and 2008-09, each at the start of a new President’s tenure.  By comparing their recovery years, we can see that President Reagan’s policies worked better than President Obama’s. (To be fair to the Democrats, I’d like to throw in the 1960s, too.)

 *Through June 30 for 2015; GDP percent changes based on chained 2009 dollars 
  Source: Yahoo Finance.
  Year of Recovery   Reagan Obama Kennedy/Johnson
Year 1  1983   +4.6%   2010   +2.5%  1962 +6.1%
Year 2 1984 +7.3% 2011 +1.6% 1963 +4.4%
Year 3 1985 +4.2% 2012 +2.2% 1964 +5.8%
Year 4 1986 +3.5% 2013 +1.5% 1965 +6.5%
Year 5 1987 +3.5% 2014 +2.4% 1966 +6.6%
Year 6 1988 +4.2% 2015* +1.45% 1967 +2.7%
Average annual rate: +4.55 +1.95 +5.35

 

High Corporate Taxes are a Businessman’s Biggest Beef

Now, let’s turn to the small business owner’s #1 beef – high taxes. The U.S. has the highest corporate income tax rate in the developed world, at 39.1%, well above the OECD overage of 25% as of 2013.

Top Statutory Corporate Tax Rate Chart

Source: Tax Foundation

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

In this political season, it’s interesting to note that a Democratic incumbent favored “across-the-board” tax cuts 53 years ago. President Kennedy promised an “across-the-board, top-to-bottom” cut in corporate and personal tax rates to take effect in 1963. The Dow shot up 3% that week, launching a 16.2% second-half gain. Kennedy’s tax cuts were delayed in Congress (and later by his tragic assassination), but the next President, Lyndon Johnson, followed up on Kennedy’s promise in 1964, accelerating the market’s gains.

The Kennedy-Johnson tax cuts (the Revenue Act of 1964), signed into law on February 26, 1964, cut the top rate from 91% to 70%, while all other rates fell and a standard deduction was added.  Prosperity soon erupted: The jobless rate fell from 5.2% in 1964 to 3.8% in 1966 and 3.5% in 1969, the lowest rate in the last 50 years.  Initial fears of a loss of revenue were forgotten when tax revenues increased each year – so much so that the federal budget was balanced (with a surplus!) in 1969, despite LBJ’s “guns and butter” (welfare and war) spending, plus the project of landing men on the moon and the launching of Medicare.

The same kind of booster shot happened a decade ago under George W. Bush. After a long and lingering crash and recession (plus 9/11) in 2000-02, the S&P 500 doubled from its October 10, 2002 low to its October 10, 2007 peak. Most of the gains came after the Jobs & Growth Tax Relief Reconciliation Act of 2003 was signed into law on May 28, 2003, reducing the top tax rate to 35%, while cutting long-term capital gains and dividend rates sharply. The resulting prosperity engendered both jobs and lower deficits:

 Source: U.S. Office of Management and Budget (deficit); 
 BLS (unemployment)
  Year   Federal Deficit (billions) Unemployment Rate
2004 $428.0 5.6%
2005 $318.3 5.1%
2006 $239.6 4.6%
2007 $151.1 4.6%

 

During the same four years, the percentage of federal income taxes paid by the top 1% vs. the bottom 90% grew from rough parity (34% each) to 40.4% paid by the top 1% vs. 28.8% by the bottom 90%.

P.S. This pleasant but widely misunderstood outcome is still routinely labeled as a “tax cut for the rich.”

Income Tax Share of the Top 1% Chart

Source: Tax Foundation

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

During the Reagan years, the percentage of income taxes paid by the richest 1% rose from about 18% in 1981 to 28% in 1988, while the share paid by the bottom 90% shrank from about 52% to 42%.  The lines crossed in the late Clinton years before retreating during the 2001 recession and 9/11.  But since the Bush tax cuts of 2003, the top 1% of taxpayers have paid more federal income tax than all of the bottom 90%.

A series of 1920s tax cuts, engineered by Secretary of the Treasury Andrew Mellon (serving Presidents Harding, Coolidge, and Hoover), reduced the top income tax rate from 60% down to 25%, but amazingly the amount of taxes paid by the rich (earning over $100,000) grew from $321 million in 1920 to $714 million in 1928, while their share of total taxes paid grew from less than 30% to over 60%.  Meanwhile, those earning under $5,000 paid barely 1% of all incomes taxes by 1928, vs. 15.4% of all taxes in 1920.

These tax cuts fueled the Roaring 20s, a bonanza of prosperity. From 1922 to 1929, our real GDP grew by 4.7% per year and the unemployment rate fell from 6.7% to 3.2%.  In a time of low inflation, the number of taxpayers in the highest income bracket (over $100,000) almost quadrupled, while the upper middle class earning $10,000 to $100,000 grew by 84% and taxpayers reporting less than $10,000 per year fell.

Now for the investment payoff: The stock market surged during each of these four tax-cutting decades:

Major Bull Markets Accompanying Major Tax-Cut Decades
 Source: Stock Traders’ Almanac 2010
  Decade   Low High  Dow Gain 
1920s  1921 (August 21)   1929 (September 3)  496.5% 
1960s 1962 (June 26) 1966 (February 9) 85.7% 
1980s 1982 (August 13) 1987 (August 25) 250.4% 
2000s 2002 (October 9) 2007 (October 10) 97.3% 

 

Like the small business owners are telling us, the key to economic growth and job growth is lower (and less complex) taxation and fewer onerous pages of small-print legalese under the rubric of “regulation.”

This Week in Market History

The Strange Market Storm of August 19, 1991

Something dramatic happened on Monday, August 19, 1991: The Dow fell 70 points (-2.4%) in response to a startling turn of events in Russia.  In the last gasp of the 45-year Cold War, eight senior “hard-liners” in the Soviet government staged a coup against Mikhail Gorbachev, whom they detained under house arrest.  They sent troops to take over Moscow, Leningrad, and the Baltics, but they forgot to arrest the elected President of Russia, Boris Yeltsin, who began to rally opposition at the Parliament Building.

Parliament Building ImageMeanwhile, the Soviet Vice President Gennady Yanayev said that Gorbachev was suffering “serious health problems” and was “unfit to govern.”  But at the Parliament Building, Boris Yeltsin led a growing crowd of protesters that included defecting troops.   Very soon, the hard-liners’ coup began to unravel.

Adding to the drama of Soviet disunion, Hurricane Bob was terrorizing the U.S. Northeastern states from August 16 to 20.  Winds reached 115 miles per hour off the coast of New England on August 19, when Bob made landfall in Rhode Island. It became the second costliest hurricane in U.S. history to that date.

On Wednesday, August 21, Mikhail Gorbachev declared that he was back in charge of the Soviet Union, but Yeltsin had checkmated him.  In the wake of the failed coup and the end of Hurricane Bob, the Dow shot up 88 points (+3%). The collapse of the Soviet coup felt like a “double-bottom” chart pattern – a far more definitive end to the 45-year Cold War than the 1989 fall of the Berlin Wall – and thereby a booster shot to the young 1990s bull market.  Also on August 21, Latvia declared its independence from the now-crumbling Soviet Union. There was a certain amount of justice in that choice of dates.  It was August 21, 1968 that the Soviet tanks invaded Czechoslovakia to put down that country’s experiment with freedom.

Stat of the Week:

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

Import Prices Decline 10.4% in 12 Months

by Louis Navellier

For further indications that deflation remains an impediment to interest rate increases, on Thursday the Labor Department announced that prices for imported goods declined by 0.9% in July.  In the past 12 months, import prices have fallen 10.4% due to a strong U.S. dollar.  Although falling oil prices account for much of the decline, all import prices remain under pressure due to a strong U.S. dollar.

On Friday, the Labor Department reported that the Producer Price Index (PPI) rose 0.2% in July – a bit higher than the economists’ consensus expectation of a 0.1% rise.  Excluding food and energy prices, the core PPI also rose 0.2%.  Despite falling commodity prices – the wholesale cost of goods declined 0.1% in July – wholesale service costs rose 0.4%, the biggest monthly gain in services since October.

In the past 12 months, the PPI has fallen by 0.8%. Furthermore, I do not expect that the PPI will rise significantly in August, since crude oil prices just hit a six-year low of $42 per barrel last week.

The Other Economic News Last Week was Mixed

Welder ImageLast Tuesday, the Labor Department reported that productivity rose 1.3% in the second quarter after two previous negative quarters.  In the past 12 months, productivity has risen only 0.3%, while unit labor costs have risen 0.5%.  Hourly labor costs rose 1.8% in the second quarter, but after adjustments for inflation, hourly labor costs actually declined 1.1%.  There is no doubt that weak productivity growth is hindering wage growth, which Fed chair Janet Yellen is closely watching as the Fed ponders their next rate change.

The best news came on Thursday, when the Commerce Department announced that retail sales rose by a healthy 0.6% in July, slightly below economists’ consensus estimate of a 0.7% rise.  Excluding vehicle sales, retail sales rose 0.4% in July.  May and June’s retail sales were also revised up to a 1.9% rise (up from 1%) and unchanged (up from a 0.3% decline), respectively.

Interestingly, the folks at Bespoke reported last Thursday (in “Retail Sales Rebound – Amazon a Prime Driver”) that these revisions were partly due to the Commerce Department finally figuring out how to track Amazon’s sales better.  As online sales have become more dominant in recent years, the monthly retail sales report has become more erratic, so I hope the Commerce Department finally found a fix. In the past 12 months, overall retail sales have risen 2.4% and most of those gains have occurred since April.

On the downside, on Friday, the University of Michigan’s consumer sentiment index declined to 92.9 for August, down from 93.1 in July.  This was the second lowest consumer sentiment reading this year.

Also on Friday, the Fed announced that industrial production rose 0.6% in July, significantly higher than economists’ consensus estimate of 0.4%.  Furthermore, industrial production was revised 0.1% higher for each of the previous three months.  In July, there was a 10.6% surge in vehicle production, so excluding that surge, industrial production rose by only 0.1% in July.  Interestingly, utility demand declined 1% in July, so industrial production may have been held back by seasonally cooler weather in parts of the U.S.

Finally, I should add that Eurostat announced on Friday that euro-zone growth slowed to 0.3% (a 1.3% annual pace) in the second quarter, below economists’ consensus expectation of a 0.4% increase.  Mighty Germany posted 0.4% GDP growth (a 1.8% annual pace), up from 0.3% in the first quarter, and France’s GDP was unchanged after rising 0.7% in the first quarter.  Italy’s GDP decelerated to only 0.2% growth after rising 0.3% in the first quarter.  This deceleration in euro-zone GDP will raise further concerns about China and global economic growth, since like the U.S., the euro-zone imports a lot of Chinese products.

How the Fed May Respond to this Data

Expectations of a key rate increase in September declined sharply last week on the Fed Funds futures market. According to the Wall Street Journal last Wednesday, “Fed-funds futures, which investors and traders use to predict central-bank policy, showed that investors and traders see a 39% probability of a rate increase at the September meeting, data from CME Group show. That compared with a 54% likelihood on Monday.”  Essentially, the Fed can use lackluster productivity, low (or no) inflation, a strong dollar, and anemic wage growth as their excuses not to raise key interest rates in September.

My hunch is that most of the Fed wants to raise key interest rates in response to robust job growth and rising inflation, but neither has materialized.  As a result, I stick by my prediction that the Fed will NOT be raising key interest rates at its next Federal Open Market Committee (FOMC) meeting in September.

Foreign Building ImageIn the meantime, the U.S. and Britain remain the beneficiaries of capital flight from around the world, largely because our central banks have turned off their monetary pumps.  The U.S. dollar is especially attractive to foreign investors, but the strong dollar is also causing commodity deflation.  And if the Fed needs another excuse not to raise interest rates, then China’s yuan devaluation just provided that excuse!


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IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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