Despite Political Squabbles

Despite Political Squabbles, the Market Quietly Recovers

by Louis Navellier

March 1, 2016

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

Union Jack Euro Flag ImageThe S&P 500 scored its second straight weekly gain, but the biggest news last week was that the British pound hit a 7-year low to the U.S. dollar on Wednesday.  On June 23, Britain will hold a referendum on whether to remain in the European Union (EU).  Also undermining the British pound is the fact that the Bank of England switched from potentially raising key interest rates to signaling no rate increase, and then exploring the possibility of negative interest rates.  Last year, Britain was viewed as a good place for investors to park their capital; but since the pound fell, investors are bailing out of the British currency.

There was a G-20 meeting in Shanghai this weekend.  As Fortune.com put it (on Friday), “Indecision Leads the Agenda,” but their most vocal point of contention was the cause of slowing global growth and the deflationary spiral, led by persistent currency devaluations and a negative interest rate environment.

Last Wednesday, St. Louis Fed President James Bullard reiterated that the FOMC is under no pressure to raise rates at its next meeting on March 15-16.  In blunt language, Bullard said, “I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations.”

In This Issue

In Income Mail, Bryan Perry surveys the improving economic indicators, which possibly point toward a healthier market, even though it’s too soon to call a final bottom.  In Growth Mail, Gary Alexander takes a look at the short-term (March/April), medium-term (2017), and long-term (25-year) indications of future growth.  In Global Mail, Ivan Martchev analyzes the chances for a British Exit from the EU along with a detailed review of the brewing financial crisis in China.  In Sector Spotlight, Jason Bodner advises moving beyond generic terms (like “dividend ETFs”) into analyzing specific opportunities within sectors. And finally, I’ll return to offer some guidelines for finding the best dividend and growth investments available.

Income Mail:
Stocks and Yields Rise on Improved Economic Data
by Bryan Perry
What the Junk Bond Market is Telling Us

Growth Mail:
The Spring Market Thaw is Beginning
by Gary Alexander
Short (Spring), Medium (2017), and Long-term (25-Year) Forecasts
Separating “honest men and knaves”

Global Mail:
Here Comes the Brexit Referendum
by Ivan Martchev
An Interview on China with Agência Estado, Part 1

Sector Spotlight:
Don’t Walk through Sector-Land Blindfolded
by Jason Bodner
Sector Leaders in the Past Three (and 12) Months

A Look Ahead:
Finding Decent Income in a Deflationary Environment
by Louis Navellier
Energy Dividends Remain at Risk

Income Mail:

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

Stocks and Yields Rise on Improved Economic Data

by Bryan Perry

Just when investors were wondering what would be the catalyst to save the market from swooning to new lows, some good old-fashioned economic data crossed the tape, providing a measure of relief from all the headlines surrounding ineffective central bank stimuli, an oil supply glut, and some junk bond defaults.

As the week unfolded, the market was fed a steady diet of improving economic reports. Highlights included Durable Goods for January, up 4.9% versus 2.0% forecast; Gross Domestic Product (GDP) at 1.0% (in the federal government’s second revision) versus a 0.7% first iteration; Personal Income, up 0.5% vs. 0.4%; and Personal Spending up 0.5% vs a forecast 0.3%. (Source: Briefing.com Economic Calendar)

Consumers were more cautious. Last Tuesday, the Conference Board reported that its consumer confidence index declined to 92.2 in February, down from a revised 97.8 in January, and shy of economists’ forecasts of 96.9. This trend was mirrored on Friday when the University of Michigan’s consumer sentiment index declined to a final 91.7 reading in February, down from 92 in January. (Source: Conference-Board.org)

Taken collectively, last week’s data was mixed, yet investors chose to take a glass-half-full view, booking some profits in bonds and buying stocks, extending the stock market rally for a second straight week.

This week will bring more clarity as markets will digest the Chicago PMI, ISM Index, Auto Sales, ADP Employment Change, Fed Beige Book, Factory Orders, ISM Services, and the all-important jobs data on Friday. Investors are anxious for economic “green shoots” to put cash to work in equities at these still-depressed levels after the notable rotation last Friday away from ultra-safe utilities, telcos, consumer staples, and specialty REITs into transportation, industrial, materials, and deep cyclical stocks.

Everyone and their brother wants to see a reason to buy economically sensitive equities, especially those with serious dividend yields. My take is that we’re not yet at that moment of truth. However, the early-bird speculation in U.S. equity markets last week is worth noting. My view is to use pullbacks in safe-haven stocks with a history of strong dividend coverage and strong dividend growth to establish attractive entry points and let the speculators absorb the elevated risk/reward ratios of buying the deep cyclicals.

Slack consumer confidence readings warrant caution against the temptation to bottom-fish the blown-out sectors. Consumers account for most of our GDP – how much is debatable – but what we know for sure is that Americans are currently seeking ways to increase their savings. The personal savings rate as a percent of Disposable Personal Income (DPI) was 5.2% for January, the same rate as in December.

Real Disposable Personal Income and Real Consumer Spending Chart

What is interesting is that consumers are taking what is saved at the gas pump and moving it into personal reserve accounts as the savings rate has increased from under 3.5% at the end of Q1’14 to around 5.5% today. Along the way, wage growth has been quite stagnant. Medical premiums also shot higher after January 1. Across all markets in the 37 states using Healthcare.gov for 2015, the cost of the benchmark plan will increase an average of 7.5% for 2016 (source: USA Today– “Healthcare.gov Premiums Have Bigger Increase for 2016,” Oct. 26, 2015). Premium increases for plans outside the exchange, or plans that are not employer-sponsored PPOs, were considerably higher, impacting small business owners most.

Heading into spring, retail spending data will provide a better tell as to whether the dip in consumer confidence is just an anomaly or something deeper to consider.

Gas Tank Savings Chart

After hitting a multi-month low of 1.57%, the yield on the 10-year Treasury crept back up to 1.75% last week on the back of these better-than-forecast reports, as well as a general rotation back into equities with the bond market being a source of funds. Just as important is the S&P 500 trading up through the 50-day moving average at 1,950 that potentially opens the way for an extended move to 1985 to 2000, where stiff overhead resistance lies. I think there is a good chance we will see the market challenge this overhead level as WTI crude has made its way back up to $33-$34 amidst mixed plans from oil-producing nations.

Global Stocks versus Brent Crude Oil Chart

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

These positive developments dovetail with the previous week’s data that showed a much-needed uptick in inflation from both the Producer Price Index (PPI) and Consumer Price Index (CPI), providing some of the impetus for the upward reversal in equity prices. Most market professionals still attribute the recent rally to short covering in an otherwise broken market. Technically speaking, that would seem to be the case, at least for now. And with that thought in mind, I believe it’s too early to buy back into the income-bearing energy and commodity sectors (i.e., MLPs) without more evidence to support prices at current levels. The risk of multiple high-profile dividend cuts is a real and ongoing threat that is still unfolding.

What the Junk Bond Market is Telling Us

Bond investors have been keeping a close eye on the junk bond market, seeking clues for when it might be safe to go back into the subprime corporate debt waters. The past two weeks show a striking reversal from an extreme bottom that is likely the combination of speculative bargain hunting and short-covering.

As this chart (below) of the SPDR Barclays High Yield Bond ETF (JNK) shows, the rally of late is refreshing, but it does not confirm a breach of the downtrend. That would occur if shares of JNK traded above $36 on outsized volume. Such a move would be largely bullish for not just the high-yield market but it would undergird a major rally in equities.

(Please note: Bryan Perry does not currently hold a position in JNK. Navellier & Associates, Inc. does not currently own a position in JNK for client portfolios; Navellier & Associates, Inc. has held these securities in past client portfolios.)

Barclays High Yield Bond Exchange Traded Fund Chart

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

The long and the short of this set of observations is that the U.S. economy is not rolling over into a recession any time soon, at least as evidenced by the recent data. But can the U.S. economy pull Brazil, Russia, and possibly China out of their protracted downturns? That’s hard to say, but the U.S. economy at $17.4 trillion accounts for 22.4% of gross world product (according to Wikipedia’s List of Countries by Nominal GDP); so it stands to reason that if the U.S. economy gets healthier over the next few months, investor sentiment just might improve for large foreign markets.

BRICs Middle Class Income Bracket Chart

What’s important to note is that, according to this research from Goldman Sachs, hundreds of millions of citizens from the BRIC nations are joining the ranks of middle-class status between 2000 and 2020. At some point, investors should have some income-producing equity exposure to that dynamic set of demographics, because that is where long-term growth is fastest, fueled by global purchasing power.

For the time being, however, each of the BRIC nations (Brazil, Russia, India, and China) are reporting slower rates of GDP growth, so there is time to allow for the recessionary pressures in Brazil, Russia, and China to run their respective courses. Meanwhile, India’s GDP growth is forecast to be up 7.3% in 2016, a world-leading growth rate, though down from 7.7% in 2015. (source: TradingEconomics.com)

Once again, it is still too early for income investors to move outside the domestic dividend-paying sectors that have posted solid fourth-quarter results in line with Wall Street estimates, while providing reasonably good forward guidance. There may well be a bottoming process in the making for global markets, but it will be a very complex bottom coupled with extreme volatility that doesn’t warrant a high level of risk for the potential reward. The bottom line is that some storm clouds that have gripped investor sentiment are in the early stages of lifting. This is very good news for dividend-paying assets in particular. With two more weeks like the last two, we might start to see a more positive trend – pointing north for a change.

Growth Mail:

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

The Spring Market Thaw is Beginning

by Gary Alexander

“Market Turmoil Eases but Worries Persist” --Wall Street Journal page 1 headline, February 26, 2016

Friday’s Wall Street Journal Page 1 headline (“Market Turmoil Eases but Worries Persist”) is yet another example of how we human beings can’t stand to see good news without a negative slant in the end. When in the last 100 years have we ever seen a situation in which the two words “Worries Persist” did not fit?

Through Friday, the S&P 500 is up a scant 0.4% in February after losing 5.1% in January, with most of that damage (-9%) coming in the first three weeks of January. At that time, the conventional wisdom was that the Fed would raise rates in March, but the January market swoon went a long way toward changing the Fed’s mind on that subject. When expectations turned from a Fed rate increase to expectations of no change in March, the market began to recover. Worries over the Fed rate-raising cycle have now waned.

The spread of negative interest rates is another worry that continues to persist; but the lands where savings are punished most – Japan and Europe – tend to be stagnant economies, crippled by demographics and entitlements, with millions of elderly pensioners relying on younger workers to fund their final years, even though the older generations have refused to make enough babies to fund their generous retirements.

I would like to skip over the daily news barrage to present a short-, medium-, and long-term forecast.

Short (Spring), Medium (2017), and Long-term (25-Year) Forecasts

Short-term: March and April are great months for stocks, historically, even in the dismal years of 2008 and 2009. Why? Could it be that we humans hate storms and welcome warmth? We love the promise of spring, a warm time of new beginnings. (More songs are written about spring than any other season.) The days get longer (we will set our clocks forward on March 13), the snow is melting, heating bills decline, flowers start to bud, and the nation is transfixed with March Madness in basketball and political primaries.

In stock market history, March is a good month and April is the #1 month in the last 20 and 50 years.

Stock Market History Chart

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

We had a small setback last year, but the overall gains in the Dow Jones Industrials and the S&P 500 have been nearly 5% for the last 10 March/April combined-month averages since 2006.

March and April Market Gains the Last Ten Years Table

Short-term, we’re in one of the two sweetest spots in the calendar (November-December is the other).

Medium-term: There’s some indication that the market will be higher one year from now. Writing in MarketWatch last Thursday (“Historical pattern says the risk of a 2016 bear market is zero,”) Simon Maierhofer looked at all of the times since 1970 in which the S&P 500 rose by 1.5% or more each day for three consecutive days – as it did on February 12-17, surrounding the Presidents’ Day weekend. 

Since 1970, this has happened only seven other times. Maierhofer listed all of those times in his column:

Market Up Strongly One Year Later Table

In the seven previous instances, the average market gain was +19.63% a year after the three consecutive S&P gains of at least 1.5% per day for three straight days. These three-day “relief rallies” tend to be the culmination of a long siege of gloom and doom in the market. The last time this happened, in 2011, the correction was deeper than it was this time around, and the recovery was a stunning 25% within one year.

Long-term: The 85-year-old super-billionaire Warren Buffett has been watching markets since the 1940s.  In his annual shareholder letter, released last Saturday, he began by lamenting the “negative drumbeat” of headlines in this election year, including candidate claims that our country is in decline. “That view is dead wrong,” he said. “The babies being born in America today are the luckiest crop in history.”

Buffett charted real per-capita GDP since 1930 – the year he was born. Today’s GDP per capita is about $56,000, he said, “a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries.” That’s because today’s workers “work far more efficiently and thereby produce far more.” Even if we grow at just 2% a year for 25 years, he said, that’s 1.2% real per capita GDP per year or “a staggering $19,000 increase in real GDP per capita” by 2040.

United States Per Capita Real Gross Domestic Product Chart

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

Buffett said that 40% of the work force in 1900 worked on farms vs. 2% of our 158 million work force today. This is due to “huge increases in physical [crop] output.” He says, “Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farming” (i.e., to “save their jobs,”) and neither will we become stronger by saying that America should forever be the world leader in back-breaking industrial factory work, which can be done cheaper abroad.

Buffett concluded: “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs.”

Buffett won’t be around forever, but long after he is gone, his wisdom will be well worth remembering.

Separating “honest men and knaves”

On March 2, 1792, the New York Stock Exchange was conceived (if not yet born) when Secretary of the Treasury Alexander Hamilton wrote, “Tis time there should be a line of separation between honest Men & knaves, between respectable Stockholders and dealers in the funds, and mere unprincipled Gamblers.”  Hamilton continued by saying “an excess of the Spirit of Speculation must be corrected. And Contempt and Neglect must attend those who manifest that they have no principles but to get money.” (these quotes are from “Alexander Hamilton and the Growth of the New Nation,” by John Chester Miller, 1964, p. 304.)

Hamilton’s outrage at the private shenanigans in early 1792 stock trading led directly to the birth of the New York stock exchange under a buttonwood tree on Wall Street two months later, in May of 1792.

Presidential Candidate Bernie Sanders has repeatedly said, “the business model of Wall Street is fraud.” He doesn’t say “a few bad apples.” He blames the whole orchard. What sets Hamilton apart from Sanders is that Hamilton saw the clear division between honest men and knaves. Thankfully, Sanders and his anti-capitalist rhetoric are wearing thin, which may explain some of the market’s recovery in late February.

Alexander Hamilton championed stock markets but wanted to throttle the knaves from running the show.

Nearly 225 years later, we’re still fighting the unwinnable battle between knaves and honorable traders – between those who speculate (and then want a bailout) vs. patient long-term buy-and-hold investors. Men like Warren Buffett are long-term investors – untouchable by speculative excesses. When Presidential candidates can’t separate honest traders from knaves, they mark themselves as incapable of leadership.

Global Mail:

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

Here Comes the Brexit Referendum

by Ivan Martchev

Britain must be the most anti-European of EU countries when it comes to the question of membership in the EU. The fact that the British government is calling a referendum on the matter says so. No other EU country would dare do such a thing. A while back, the Greeks called a referendum on whether their people agreed with the terms of the troika bailout; the outcome was a clear “no.” The troika expeditiously made that a question of whether Greece would stay in the eurozone and so the Greek drama calmed down.

Brexit Referendum Chart

Polls at the moment suggest that 55% of Britons support staying in the EU and 45% want to leave, which is uncomfortably close to 50/50, in my view. In early February, before the Brexit referendum date was set for June 23, the polls showed a dead-even 50/50 split.

United States United Kingdom Foreign Exchange Rate Chart

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

Ironically, EU proponent George Soros (who was also against Scottish independence last year) may have inadvertently facilitated the Brexit referendum by betting against the British pound in 1992, thereby helping it fall out of the European Exchange Rate Mechanism, which was a system of relatively fixed exchange rates (that moved within tight bands) among European countries prior to the introduction of the euro. If Soros had not “broken the Bank of England,” euro banknotes (instead of pounds) might be circulating in London today. In that case, I doubt we would be talking about a Brexit referendum as it would have been too disruptive to the British economy. Britons, after all, are famous for being pragmatic.

The GBPUSD exchange rate closed at $1.3864 last Friday, below the $1.40 area of support that has held for almost 30 years on a monthly closing basis. The trouble is, February is now over so this close at $1.3930 on Monday, February 29 (not shown on the monthly chart) is what traders refer to as a major breach of “support.”  It is true that the GBPUSD exchange rate in the worst days of 2008 traded a hair below $1.35, but it hasn’t closed below $1.40 on a monthly basis since 1985.

United States Dollar Index - Monthly OHLC Chart

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

The lowest exchange rate of the pound since the 1944 Bretton Woods fixed exchange rate mechanism ended in 1971 has been the $1.05 GBPUSD cross rate from February 1985, when the US Dollar Index registered a multi-year high of 165. The US Dollar Index of developed-market currencies on Friday was consolidating its gains at 98, still flirting with a major area of resistance at 100.

I think 2016 is the year when the US Dollar Index rises decisively above 100, and as to how far the pound falls the Brexit polls will decide. It is easy to see how the pound will weaken going into the June referendum if the polls remain close. The pound had also been weakening against the euro, which is due for another leg lower as the ECB is expected to announce accelerating QE in March; so a 10%-15% depreciation of the GBPUSD exchange rate cannot be ruled out going into the referendum.

Why should U.S. investors care about a Brexit?

A successful Brexit is a dangerous precedent and weakens the EU. The collapse of the largest confederate experiment in European history is unlikely to be a positive event for the global economy. Those are remote outcomes, but they surely have to be considered. As to the GBPUSD exchange rate, it has already moved from $1.72 in 2014 to below $1.38 at last count. Any holder of British ADRs is paying dearly at the moment as the pound’s decay gets reflected in them. If the GBPUSD exchange rate is indeed headed to $1.20 to $1.25 by June 23, U.S.-based investors that hold British ADRs would be hurt even more.

I doubt Great Britain will leave the EU, but at the same time the polls are too close to rule that out.

An Interview on China with Agência Estado, Part 1

Last week a representative from Agência Estado, Brazil’s leading news service, got in touch with me regarding my views on China. The reporter had read my Marketwatch column, “Something Broke in China in 2016,” and wanted to ask some follow-up questions. Since I was travelling on business, I agreed to provide the answers in writing. Here is Part 1 of that interview:

Agência Estado: Do you think the rise in non-performing loans (NPLs) and yuan loans are an indication that your thesis is getting closer to becoming a reality? In this case, can this rise in loans mean that the Chinese government is trying to inflate a bubble that might have already burst?

Ivan Martchev: I do not believe that the Chinese government reports NPLs accurately (in order to maintain “social stability”). The real number may be multiples of the official number. (Sources from CLSA and Autonomous Research suggesting higher numbers were listed in my Marketwatch article.)

China Lending Spree Chart

I think the present surge in total financing is very similar to the mandate to lend at any cost in 2009 to offset the shock from the 2008 financial crisis. (See February 15, 2016 Bloomberg article, “China's New Credit Surges to Record on Seasonal Lending Binge.”) The credit surge then is creating the problem we have now. One cannot use more lending to reflate a credit bubble that has already burst. It was that forced lending in 2009 that was the beginning of the final stage of the credit bubble we have in China today.

AE: The Chinese credit bubble theme has been hanging around for some years now. What makes you think 2016 is the year that this bubble is going to burst?

IM: To be more precise, the year the Chinese credit bubble burst was 2015, not 2016. It is in 2016 that the average person will realize that there was a credit bubble and that it is now deflating. To help you understand this, the Chinese real estate market (one aspect of the credit bubble) topped out in 2014. The Chinese stock market based on record margin leverage (a second aspect) topped out on June 12, 2015.

This year is the year when people will realize that there was a credit bubble and it is now deflating. I do not believe that the majority realize that yet. Capital has been accelerating its flight out of China since the summer of 2014. See the forex reserve flows:

China Foreign Exchange Reserves Chart

In just 15 years, Chinese GDP grew 10-fold while total credit in the Chinese economy grew 40-fold. It is this ever-smaller growth in GDP per unit of credit that marks credit bubbles. This is very similar to what we saw in the U.S. in 1929. The Roaring Twenties were fueled by rapid credit growth in the U.S. followed by the 1929 Crash and Great Depression. Furthermore, the boom in China was built on fixed asset investments that went to extremes. They built empty cities and brand-new roads in a surreal “Field of Dreams” (“Build and they will come.”) But what happens if they build it, and nobody comes?

The 400% debt-to-GDP ratio in China is calculated by adding shadow banking leverage (that they don't report) to the official numbers. (See March 2015 Brookings Institution publication “Shadow banking in China: A Primer.”) In short, I think China is headed for a hard landing. I don't know if it will be a bad recession or a depression, but it will be a hard landing. I do not believe their official economic statistics.

The decline in shipping rates, global trade numbers, and commodity prices should help you see it better. 

For instance, the Baltic Dry (shipping rate) Index is down 73% since last August, as this chart shows:

Baltic Dry Index Chart

I do not believe a Chinese hard landing can create a recession in service-based developed economies like the U.S. or the UK, but it has created a nasty recession in Brazil. I think India is the only major emerging market somewhat immune to China’s slowdown as it is driven by domestic demand that is in good shape.

India Bombay Stock Exchange Sensex Index Chart

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

Tune in next week for Part 2 of this interview.

Sector Spotlight:

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

Don’t Walk through Sector-Land Blindfolded

by Jason Bodner

Do you remember that taste test when you were a kid in school – the one where you would wear a blindfold and clamp your nose and taste different foods? It is actually a scientific fact that without the sense of smell, an apple, potato, or onion all have the same taste. (Clearly taste tests like these happened in school at a time before an abundance of lawsuits. I'm not sure this practice happens much anymore.)

Blindfolded Dogs Image

In the market these days, it’s very easy to think of stocks in the same category as having the same “flavor.” For instance, investors have been attracted to various dividend products. Some voluntarily wear the blindfold and passively buy “dividend” ETFs or funds without looking under the hood. But when the blindfold is removed, things can take on a very different picture. As we have been witnessing recently, energy stocks have been cutting their dividends. In fact, 2015 saw 394 dividend cuts and that trend is on the upswing (According to Bespoke.com’s Chart of the Day February 5, 2016).  But when investors flock to stocks with “attractive” dividend yields in a tumultuous market, they can do themselves an immense disservice by not inspecting the quality and stability of the dividends.

As income-focused investors become bargain hunters, it is important not to get lured by attractive yields which may in fact become unsustainable. Just as energy stocks started to look like bargains many months ago, we found that the price of crude oil was able to continue to go lower for longer. For those who may have stepped in six months ago to buy an energy stock at a “discount” and therefore reap an abnormally high dividend yield while waiting for the capital recovery, they may have a long while to wait.  

The compression of energy prices has wreaked havoc on the cash flows and balance sheets of energy companies, and the ability for an energy company to sustain its dividend payments becomes highly suspect as oil stays depressed for long periods. When an energy company is paying out dividends at a rate that outstrips available cash flow, something’s got to give. Either a company will borrow to maintain its dividend, or cut the dividend, which will collapse the yield. Either way, the prospect seems grim.

The flip side, of course, is to identify companies that have strong balance sheets and grow their dividends through actual revenue growth. The sacrifice here is the “attractive” yield, while the gain is more stable income.

Sector Leaders in the Past Three (and 12) Months

The chase for yield has much to do with what we have seen in sector rotations recently. The winners for some time now have been Utilities, Telecoms, and Consumer Staples. REITs (storage, shopping, and data center) have also been quite strong. Utilities, Telco, some Staples and REITs are all strong dividend plays. Underperforming sectors include: Energy, Consumer Discretionary, and Financials – including banks and mortgage REITs. Their dividend yields have been increasing, but for how long is that sustainable?

Standard and Poor's 500 Sector Index Three Month Change Table

The charts below illustrate what we have been seeing over the past 12 months. The 12-month leaders (Telecom, Consumer Staples, and Utilities) are on the left and the laggards (Energy, Consumer Discretionary, and Financials) are on the right. The recent strength of Telecom and Utilities are particularly notable while the recent sagging of Financials and Energy has been particularly discouraging.

Standard and Poor's 500 Yearly Sector Indices Chart

Last week’s price action told a little bit of a different story. As volatility seems to be “dying down,” the volatility of the sector rotations continues. Each week seems to bring little consistency as we see constant shifting in the top and bottom members. The strength and weakness however, has emerged over time.

Last week saw recent winners lose while recent weakness turned strong. We see that the recent upward momentum of Utilities waned a bit this week as it was the week’s weakest performer. The same can be observed for Telecom and Consumer Staples. The past three month’s strongest sectors were this past week’s weakest. As far as strength we saw Materials, Consumer Discretionary, and Industrials performed the best. These sectors have been fairly weak for the prior three months. So this past week’s rally in the market was clearly led by recent weak sectors snapping back a bit. I should add, however, that I would be more concerned about the quality of last week’s rally if the strongest sectors were energy and financials.

Standard and Poor's 500 Weekly Sector Indices Table

One thing seems clear: While we all wait for clarity on the future direction of the market, it stands to reason that dividend stocks would offer an attractive place to park capital. This market is sure to bring about an attractive opportunity in some stocks. I think it pays to be looking at stocks with growing revenues and growing earnings. When it comes to dividends, special attention should be paid to those stocks with solid balance sheets to sustain payments and those stocks that are actually growing dividends.

Author Eric Collier said, “Dream with your eyes closed but live your dreams with your eyes open.” When sizing up stocks that have been beaten into “attractive yield-land,” the market is not a place to run around tasting everything with a pinched nose and a blindfold. Life is for living with your eyes open... because you never know what you’ll end up holding if you can’t see clearly what’s right in front of you…

Elephant Tail Image

A Look Ahead:

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

Finding Decent Income in a Deflationary Environment

by Louis Navellier

This week (March 2-5), I will be at the “World Money Show” in Orlando, where Bryan Perry and I will be discussing dividends in a deflationary environment.  (See Bryan’s column, above, for some of his many great ideas on generating decent income these days.)  Many investors in Florida drive to Orlando for this conference to try to figure out how to fund their retirement without digging too deeply into their principal.  Many retirees are stressed out by recent dividend cuts.  They do not understand why their REITs or MLPs have lost so much money.  They want to find safe, high yields in this new deflationary environment.

Last week (see MarketWatch, February 22, “S&P 500 dividend growth is slowest since 2009”), Howard Silverblatt pointed out that companies in the S&P 500 are boosting their dividends at a 10.43% annual pace; but this is the slowest pace of dividend growth since 2009, when dividends grew at a 9% pace. 

Despite some dividend growth this year, it looks to me like 2016 is shaping up to be a challenging year for income investors.  As Bryan Perry says, above, “it is still too early for income investors to move outside of the domestic dividend-paying sectors that have posted solid fourth-quarter results that were in line with Wall Street estimates, while also providing reasonably good forward guidance.”  But those gems are few and far between, as we do our best to find the “crème de la crème” in both income and growth for our clients.

Energy Dividends Remain at Risk

As Ivan Martchev wrote in our company’s recent white paper on energy dividends, these dividends remain at risk; so where do investors go for income?  Since that paper was published, energy companies have continued cutting dividends, so all eyes will be on giant Exxon Mobil (XOM) in April, since that company is paying out 115% of its estimated cash flow to sustain its current dividend.  Can they (or will they?) continue to fund generous dividends by using their seed capital?  Both Chevron and Exxon Mobil [ML1] have already suspended their stock buy-back programs to preserve cash flow.  They certainly don’t want to cut their dividends to prevent their credit ratings being downgraded – but there may be no other way out. (Please note: Louis Navellier does not currently hold a position in CVX or XOM. Navellier & Associates, Inc. does currently hold positions in CVX and XOM for some client portfolios.)

According to Bespoke Investment Group (February 8, “Exxon Mobil Payout Ratio to Top 100%), “XOM has raised its dividend for 33 consecutive years and has a healthy yield of 3.65%.”  But this year is different: “Over the last 10 years through 2015, the company’s payout ratio has averaged 31% of net income, and going all the way back to 1986 the payout ratio has averaged 48%.”  Last year, the payout ratio increased to 75%, the highest payout ratio since 1992, but this year’s payout may reach 115%.

Ocean Oil Drilling Rigs ImageThe worldwide glut of crude oil is growing, due in large part to China’s slowdown.  China’s crude oil imports declined 4.6% in January (year-over-year; see BloombergBusiness, February 14).  Last Wednesday, the Energy Information Administration (EIA) reported that U.S. crude oil inventories rose by 3.5 million barrels in the latest week to an all-time high of 507.6 million barrels.  EIA also reported that gasoline inventories declined by 2.2 million barrels in the same week – due apparently to rising seasonal demand – so even though crude oil tends to rise in the spring when seasonal demand picks up, China’s sudden drop in demand is adding to the worldwide supply glut that continues to suppress crude oil prices.

The price of oil has recovered a bit, but I don’t see any long-term relief in the glut of petroleum-based products.  There was a big energy conference in Houston last week, in which Saudi Arabia’s Oil Minister, Ali al-Naimi, said (on Tuesday) that “there is no sense in wasting our time seeking production cuts.”  So much for unity within OPEC!  Due to rising worldwide demand, Ali al-Naimi made it crystal clear that Saudi Arabia’s “purpose is to satisfy customer demand,” (by flooding the market with more crude oil).

There is no easy answer, but there are many companies with rising, well-funded dividends; and we have undertaken extra effort to find those companies for our clients and portfolios in recent months.


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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

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