Despite Positive Jobs Report

Despite Positive Jobs Report, China Fears Sink the Market

by Louis Navellier

January 12, 2016

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

Last week was the worst opening week of any year in history, with the S&P 500 down 5.96%, the Dow Jones Industrial Average (DJIA) down 6.19%, and NASDAQ down 7.26%. Last week’s wave of profit taking was triggered after China’s stock market had to close repeatedly due to circuit breakers. The market rallied briefly on Friday morning after a positive jobs report, but it fell sharply in the final hours.

In addition, crude oil plunged to a 12-year low at $33.16, due primarily to concerns about slowing global GDP growth, especially in China, which had been a major consumer of commodities. Right now, the best we can hope for is 2% global GDP growth; but economists are notoriously behind the curve with their forecasts, so be prepared for more GDP downgrades for the global economy in the upcoming months.

Black Arrow ImageAs I have indicated in the last few issues, some of last year’s market leaders, especially Amazon.com, had their valuation bubbles “pricked” by analyst downgrades at the start of the New Year. This leadership change is especially important to us, because more money can now be diverted back to stocks with superior fundamentals and earnings growth, creating a “stock picker’s market” in 2016. (Please note: Louis Navellier does not currently own a position in AMZN; Navellier & Associates does not currently own a position in AMZN for client portfolios.)

In This Issue

Not all markets suffered last week. Gold rose $40, the U.S. bond market performed relatively well, and some defensive sectors outperformed cyclicals. In this issue, Bryan Perry will focus on REITs and other income opportunities, while Ivan Martchev looks at the near-term outlook for China, and Gary Alexander takes a longer view of China. Jason Bodner will examine the pain in the S&P’s 10 sectors, and then I’ll take a closer look at the jobs market and other indicators which seem to have fallen under the media radar.

Income Mail:
Rotation into Yield is Beginning
by Bryan Perry
Building a REIT Portfolio Brick by Brick
Seeking Shelter with REIT Income

Growth Mail:
A New (Very Old) Way of Looking at China
by Gary Alexander
Think of China as “America 100 Years Ago”
Market Peaks in mid-January of 1906, 1973, and 2000

Global Mail:
Something Broke in China in 2016
by Ivan Martchev
Investment Implications for U.S. and Chinese Stocks

Sector Spotlight:
Things That Seem Permanent…Usually Aren’t
by Jason Bodner
As China Slows, “Materials” are Hit the Hardest

Stat of the Week:
Ho-Hum: 292,000 New Jobs Created in December
by Louis Navellier
FOMC Minutes Reveal Dissension in the Ranks

Income Mail:

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

Rotation into Yield is Beginning

by Bryan Perry

After the worst opening week of any year in history, every investor’s portfolio strategy is open for question. This is no time to be complacent. When looking in the rearview mirror at last week’s tape, some aspects of how 2016 are shaping up came into clear focus. When stocks like Constellation Brands (STZ), Reynolds America (RAI), and Smith & Wesson (SWHC) are some of the handful of stocks trading in the green, it does give pause, and maybe a chuckle, that market leadership is being exhibited by companies that prosper from “drinkin’, smokin’, and shootin’.” But who’s complaining? Money goes where it’s best served. (Please note: Bryan Perry does not currently own a position in STZ, RAI, or SWHC; Navellier & Associates does currently own positions in STZ, RAI, and SWHC for client portfolios.)

When the ground shifts this dramatically, it warrants laser-like attention to asset allocation strategies. What is glaringly obvious from last week’s carnage is the flight to safety amidst the great unknowns in the global growth outlook. Ten-year sovereign bond yields fell across the board. The benchmark U.S. 10-year T-Note ended the week at 2.13%, while the 6% slide in the S&P 500 pushed the yield on that index up to 2.53%, a level not seen since last October, when the market was just coming off its annual lows.

Below is a table published by the U.N. Department of Economic and Social Affairs that provides a snapshot of where the global economy has been and what is forecast for 2016. Most notably, the growth forecast for all but one region (Southeastern Europe) has been revised lower for 2015, primarily as a result of the bust in commodity markets and a widespread slowdown in manufactured exports from emerging markets. As of January 5, the U.N. projects the world economy to grow by 2.9% in 2016 and 3.2% in 2017. Based on recent events, these numbers will likely be revised lower by the end of March.

United Nations Growth of World Output Table

Building a REIT Portfolio Brick by Brick

With the global market being more of an investing minefield than at any time in the past seven years, the safe haven of high-quality U.S. dollar-based equities is rapidly being elevated as the go-to space for fund flows. The latest week just solidified this point. One of the benefits, if you can call it that, of a week in which the broad market resembles a slow-motion train wreck, is that it reveals which selective sub-sectors are not being abandoned in the “sell first, ask questions later” rush to the exits. While all sectors came under varying degrees of pressure, there was a noticeable shift into stocks with stable, predictable income.

Among 11 major market sectors, two are considered defensive, with the remaining nine being cyclical. Defensive sectors include utilities and consumer staples, which provide portfolio balance and cushion in a falling market, assuming they are well-run companies. Conversely, cyclical stocks cover everything that tends to react to various economic conditions that cause them to trade up and down with higher volatility.

Major Market Sectors Table

Assuming that the current business cycle is entering a period of slower growth, the accelerated rotation out of cyclical stocks and into more defensive equities is in my view both a logical and rational approach to staying invested in this very unforgiving and challenging market landscape.

Seeking Shelter with REIT Income

One safe harbor during times of low interest rates, slow growth, and market turbulence is the income and capital appreciation available in Real Estate Investment Trusts (REITs). During the recent economic recovery, going into the first quarter of 2015, the great majority of REITs have performed quite well. That would include not only physical REITs, but mortgage REITS, specialty finance REITs, and hybrid REITs. From the second quarter of 2015 and thereafter, however, their performance has been much more selective.

Below is the 11/30/15 composition of the Vanguard REIT ETF (VNQ) that tracks the MSCI U.S. REIT Index:

Vanguard REIT ETF Table

(Please note: Bryan Perry does not currently own a position in VNQ; Navellier & Associates does not currently own a position in VNQ for client portfolios.)

As a group, the physical REIT sector has been treading water, paying dividends but struggling to deliver capital appreciation. However, specific brick-and-mortar REITs that target certain pockets of defensive strength while utilizing a low level of leverage have enjoyed steady upside share price movement, most notably in the past three weeks following the December 16 Fed rate hike.

How ironic. In a highly nervous market, where dependability of quarterly revenue and income is paramount, selective REITs that fall into the classes of self-storage, skilled nursing, data center operation, and neighborhood shopping centers are beginning to stand tall in the REIT space.

With yields averaging between 2.5% and 6.0%, the allure of such timely assets is drawing capital flows to REITs such as Public Storage (PSA, yield: 2.75%), Digital Realty Trust (DLR, 4.41%), and Realty Income (O, 4.48%), which are trending up, against the current market sell off. It’s this kind of impressive relative strength that investors should be keying on, namely, stocks that buck the bearish trend, where there is evidence of bullish money flow into asset classes that sport bond equivalent or higher yields. (Please note: Bryan Perry does not currently own a position in PSA, DLR, or O; Navellier & Associates does not currently own a position in DLR or O for client portfolios; Navellier & Associates does currently hold a position in PSA for some client portfolios.)

Public Storage REIT Chart

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

This rotation into defensive REITs may not be a temporary situation. The market senses that the current slow growth economy will make any further interest rate increases gradual for many months, and possibly, several quarters to come. Positioning one’s portfolio for risk-averse income and growth in a market short on trust is the genuine sweet spot for the majority of income investors that need a yield of more than 2.0% on their investible cash to keep up with the cost of living increases, inflation, and taxes.

For now, the market has deemed these types of REITs as one of the few safe zones for income investors that don’t want to fight the Fed over the near term and at the same time participate in certain pockets of domestic economic strength that are being well rewarded in an otherwise difficult investing landscape.

Growth Mail:

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

A New (Very Old) Way of Looking at China

by Gary Alexander

Last January, the S&P 500 fell nearly 5% over fears of a collapse of the euro. From a close of 2090.57 on December 29, 2014, the S&P 500 fell nearly 100 points to 1992.67 on January 15 and 1994.99 at the end of January. Like this year, the 2014 Santa Claus Rally collapsed amid a spasm of 2015 New Year fears.

In an instant replay this year, the S&P 500 fell from 2078.36 on December 29, 2015 to 1922 last Friday.  Yes, last week’s decline was more severe than the January 2015 decline, but not by much. Last year, if you recall, the S&P rose 7% from the end of January to its peak last May, before trending down again.

Once again, investors are overreacting to financial crises in faraway places with strange-sounding names. Last year, those fears centered around a Greek exit (“Grexit”) from the euro and the removal of the Swiss franc peg to the euro. Our Marketmail headlines reflected those fears, namely “Grexit Fears” (January 13, 2015) and “The Swiss Surprise” (January 20). The only difference is that this year’s panic is being blamed on China, not Europe; but it’s still the same old story of overseas fears spooking U.S. traders.

While the situation in China is indeed serious (see Ivan Martchev’s column below), I would argue that the slowdown is long overdue and welcome. No economy can grow 7% to 12% a year for 25 years without creating excesses, which must be cleaned up. But there is a great deal of energy and flexibility among the 1.3 billion Chinese people. I believe they will emerge from this rough patch and resume slower growth.

I would also argue that China is moving from a manufacturing economy (based on low-cost labor, built on physical brawn) to a service economy (with higher-paid, more educated workers) focused on greater domestic consumption. This is a natural path which Japan (and America) have gone through in the past.

Rubber Gloves ImagePart of the evidence of this trend comes from China’s Purchasing Manager Index (PMI) segments. As Ed Yardeni pointed out in his Morning Briefing last Monday, January 4th,  China’s official manufacturing PMI (M-PMI) is slightly below 50 (49.7 in December), but the output component of China’s M-PMI stands well above 50, at 52.2. This all-important output component has not been below 50 since January of 2009.

China’s official non-manufacturing PMI rose to a 16-month high in November. The weak link in China’s M-PMI is the employment component, which has been below 50 since June 2012, due in part to the rise of factory automation, which boosts productivity while reducing the demand for more factory workers.

The China stock market is admittedly a dangerous place for long-term investors, but it has always been that way. As Ed Yardeni reported in his Morning Briefing last Tuesday, January 5th,  the Shanghai-Shenzhen 300 Index is down 35.2% from last year’s high (set on June 8), but it is still 66.2% above its March 20, 2014 low. Putting those numbers together, you can see that there was a huge bubble from late 2014 to mid-2015.

Over the last 52 weeks, the Shanghai-Shenzhen 300 Index (CSI) low was 3312 last February 6 – about where it was last Friday, but there was a manic rise to 5354 on June 12, 2015, up 61.6% in four months.

Rather than concentrating on what’s happening week to week, I prefer to look at longer historical trends:

Think of China as “America 100 Years Ago”

Almost 20 years ago, I toured a nearly-empty Shanghai Stock Exchange at the end of a three-work trip on China’s backroads. It was the culmination of a beautifully designed 20-day tour of “The Real China” by our guide, Keren Su, for 30 subscribers of a global-oriented investment newsletter I helped to edit then.

By “Real China,” I mean we avoided the Great Wall, Beijing, and the terra-cotta soldiers of Xi’an.  Our first week was spent in the primitive corners of Guizhou, China’s poorest province, visiting small towns, some never seen by Western visitors before. We stopped randomly at schools and farms, with an always friendly greeting. The second week we spent in Sichuan province (primarily Chengdu and Chongqing), before boating down the Yangtze River through the then-developing Three Gorges dam to Wuhan and finally to Shanghai – it was like a 2000-year trip from ancient practices to the fast-growing coastal cities.

Chinese Rail Line Image

It’s impossible to summarize that life-changing trip in a few paragraphs, but what I learned from dozens of books (before and after the trip) and meeting hundreds of real Chinese at random was that the Chinese people love America. They are learning American English and are eagerly learning the technology that will make them our greatest trade competitor over the next few decades. Although nominally Communist, the Chinese are natural capitalists. According to The New World Encyclopedia, the overseas Chinese represent 3% of Indonesia’s population, but they control 22% of the Indonesian economy. In Thailand, the Chinese minority represents 14% of the population, but they control 44% of the Thai economy.

There are many massive problems in China, but they are problems that others have also faced and solved. In China, I had the feeling I was living in America 100 years ago. Some examples: (1) There is terrible air pollution in Chongqing, Beijing, and other cities, just like there was in Pittsburgh, Chicago, or Boston 100 years ago; (2) There are human rights violations against minorities in China, like America endured 100 years ago, when women couldn’t vote and blacks were denied their basic freedoms; (3) China has some rigged markets, gambling dens, and frequent “bubbles,” like America had 100 to 150 years ago. By the same token, (4) China has fewer business regulations and safeguards, like America 100 years ago.

In America 100 years ago, our older citizens had fresh memories of a Civil War and the Reconstruction and Industrial Revolution that followed, causing pollution and class inequities. Likewise, China suffered a similar percentage of deaths a century later in its Great Leap Forward (1959-62), in which perhaps 30 million Chinese starved, followed by the Cultural Revolution (1966-76), which paralleled our oppressive Reconstruction era a century earlier. Then came China’s Industrial Revolution (1980-2015), like ours from 1878 to 1915. America had plenty of inequities a century ago, but we also had the kind of energy and self-examination which fueled an emergence from that transition into leadership in the 20th century.

Most of China’s major leaders are engineers, not lawyers. From what I saw in 1996, Chinese kids were more serious about education than our youth. Attention to education will basically determine who leads the world in the 21st century. The biggest mistake we could make would be to turn China into our enemy.

The Chinese have long memories. One day in Chengdu, our local tour guide brought us a huge bouquet of flowers and said, “We know that there are some in your tour who fought in World War II. On behalf of the people of Chengdu, we thank you for protecting us during the War of Japanese Aggression.” There was hardly a dry eye on the bus that day, but the same thing happened when we stopped for lunch at an outdoor teahouse. Some older Chinese gentlemen came over and essentially said the same thing, through interpreters. They remembered Claire Chennault, a retired captain in the U.S. Army Air Corps, who volunteered to help the Chinese develop an air force to fight the Japanese in 1938, long before Pearl Harbor. American volunteers, the Flying Tigers, helped halt Japan’s invasion plans in the upper Yangtze.

This is not an argument to invest in China.  As I discovered 20 years ago, we invest because of China, but not in China. China is the epicenter of Asian growth, and Asia is home to 60% of the world’s citizens.  We need and want that area of the world to grow, as it creates the base of customers that could triple the markets for many iconic American brand names seeking more middle-class customers for their products.

Market Peaks in mid-January of 1906, 1973, and 2000

Speaking of America’s primitive markets, on January 12, 1906, the DJIA closed above 100 (specifically, 100.25) for the first time. It would peak at exactly 103.00 on January 19, 1906, only to fall back to 53 in late 1907 and once again on December 24, 1914 (at 53.15). It took more than a decade – from early 1906 until late 1916 – for the DJIA to return to triple digits, peaking at 110.15 on November 21, 1916.

After suffering triple-digit phobia for the decade from 1906 to 1916, the same thing happened when the DJIA dared to exceed 1000. On January 11, 1973, the DJIA reached a record high of 1051.70, a level which it would not exceed for another 10 years. Following this peak, the DJIA fell 45% by late 1974.

What caused the market to peak on January 11, 1973 and then to stay down for 10 years?

  • On January 11, 1973, the trial of the Watergate burglars began in Washington, DC.
  • On the same day, President Nixon ended the wage and price control program he began in August 1971. In the previous 17 months, the national debt, inflation and unemployment were all rising steadily, and soon rose even faster after Nixon’s artificial wage and price controls were lifted.
  • In a sure sign of the coming decline of Western Civilization (to baseball purists, anyway), the American League adopted their controversial “designated hitter” rule on January 11, 1973.

Shortly after the market bottomed out in late 1974, President Gerald Ford began his State of the Union Address on January 15, 1975, by saying: “I’ve got bad news and I don’t expect any applause. The state of the union is not good. Millions of Americans are out of work.  Recession and inflation are eroding the money of millions more. Prices are too high and sales are too low.” (P.S. The DJIA rose 38.3% in 1975.)

In the week of January 11-15, 1999, the DJIA lost 533.4 points in the first four days before gaining back nearly 220 points on Friday. The cause was another one of those fears of financial crisis in another nation – this time, a possible Mexican currency crisis and the collapsing economy in Brazil (sound familiar?).

On Thursday, January 13, 2000, Microsoft’s Bill Gates stood down as CEO, 25 years after founding the company. Steve Ballmer took over, just as their legal battle with the U.S. Justice Department escalated.  The next day, the Dow set a then-record high of 11,722.98, which would not be exceeded for seven years. During this week, Glaxo-Wellcome offered SmithKlineBeecham $75.7 billion in stock to merge. This came on top of another mega-merger (AOL and Time Warner), which seemed to herald the market’s peak.

Global Mail:

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

Something Broke in China in 2016

by Ivan Martchev

China is not “fixed” and the situation may get a lot worse by the end of 2016. I have been making the case for the economic unravelling of China in this column throughout 2015, before it became mainstream news, and the situation is rapidly deteriorating. (For a summary of the root causes of why this is happening, see my last MarketWatch column for 2015: “Will 2016 Bring New Treasury Yield Lows?”)

But before I explain why China is rapidly deteriorating, here’s some good news:

After the worst-ever first week of the year in the U.S. stock market’s history, the U.S. Treasury market is acting very well, with firm bond prices and falling Treasury yields. In this highly deflationary global environment, Fed rate hikes are hopelessly misguided and highly inappropriate; but for the time being the Fed is still focusing on the improving employment picture in the U.S., even though both the stock and bond markets shrugged it off on Friday, with bonds rallying and stocks selling off.

Twenty Year Treasury Bond IShares - Daily OHLC Chart

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

The good news is that the U.S. stock market can rebound from external shocks. The current collapse in oil and other commodities is not the same as the collapse in the U.S. real estate market in 2007 and 2008. When commodity prices drop, producers lose and consumers win. In contrast, the 2007-2008 collapse in real estate prices threatened to take the whole financial system down. Too much mortgage credit extended to too many un-creditworthy borrowers caused real estate prices to overshoot spectacularly. It is this irresponsible expansion of credit, repackaged and leveraged to the hilt in some truly-fascinating structured mortgage products that nearly blew up the banking system after the collapse of the real estate market, leading to the Great Recession. (See “The Big Short” film, even if you already read the brilliant book.)

Luckily for us, the situation today is rather different in the United States. Unfortunately for the Chinese, their situation is very similar to 2008, or even 1929. The Chinese economic unravelling reminds me of the Asian Crisis in 1997-98, with the caveat that it is much bigger. China today is an economy whose 2015 GDP will be close to $11 trillion when finally reported, using estimates from Trading Economics LLC.

Commodities Research Bureau Index Chart

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

The CRB Commodity Index made fresh 40-year lows last week and looks to be headed lower. China is the #1 or #2 consumer of most major commodities and the action in the commodity markets signifies increased supply (after years of investments to boost capacity) as well as weakening demand. In the Asian Crisis copper traded down to 61 cents/lb. (today it’s near $2.00/lb.) while oil barely held $10/bbl. (today it’s near $33/bbl.). It is true that the costs of extracting major commodities have dramatically risen since the Asian Crisis, but it is also true that the largest consumer of commodities has been caught in an economic spiral that seems to be gathering momentum based on the action of the CRB Index and other secondary indicators. I simply do not believe official Chinese statistics, as you will see below.

China's Bad Loans - Searching For the Truth Chart

Why do I think it is impossible for the Chinese authorities to stop the situation from deteriorating further? The debt overhang in the Chinese economy is around 400%, a leverage ratio that quadrupled in 15 years while the economy grew almost 10-fold. (I have made this calculation more than once in this column.)

Bad debts in the financial system are exploding. Autonomous Research in Hong Kong puts them at 20% to 21% using top-down data and parallels from similar situations like Japan, which went into a financial system crisis after a massive expansion of credit. (See the October 29, 2015 Bloomberg article, “Credit Sleuths in China Uncover Bad Debt Dwarfing Official 1.5%.”)

CLSA Asia Pacific Markets, which was often rated the #1 Asia-focused institutional broker over the past 10 years, puts the estimate of bad loans at 6.1%. The trouble is that CLSA has now been sold to mainland-based Citic Securities and Citic bosses have been arrested by Chinese authorities in what appears to be a witch hunt to seek blame for the crash in the mainland Chinese stock market. How are the CLSA analysts now going to “call a spade a spade,” which is a trait they were famous for over the years? (See November 17, 2015 Bloomberg article, “Fear Spreads as China's Finance Firms Face Arrests”).

Chinese monetary policy is not working. The central bank has lost control of the unregulated Chinese shadow banking system, which by some estimates is larger than the Chinese economy. If non-performing loans (NPLs) in China are rising, cutting interest rates and lowering reserve ratio requirements will not work until NPL ratios level off. In other words, the credit bubble has burst but it has to yet be deflated.

China's Foreign Exchange Reserves Chart

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

The massive capital flight out of China is not helping. In December 2015, China’s forex reserves dropped to $3.330 trillion from $3.438 trillion in November and an earlier peak of $3.993 trillion. Capital flight out of China is accelerating. Provided that NPL ratios are rising in the banking system and Chinese banks are rapidly burning through bank capital, it is not surprising that the People's Bank of China is loosening its grip on the Chinese yuan so as not to throw good money after bad and increase the burn rate on the dwindling forex reserve assets. Forex reserve assets are deceptively large in absolute terms but may turn out to be inadequate to support the yuan fixing (pictured above), so a massive yuan devaluation similar to the one we saw in 1994 cannot be ruled out.

Investment Implications for U.S. and Chinese Stocks

U.S. stocks will likely hold up relatively much better than Chinese stocks. Just like the Asian Crisis in 1998 did not hurt the U.S. economy, even though it did temporarily hit the stock market, this time economic spillovers in the U.S. are likely to be limited. The worst is yet to come for many emerging market economies (and their stock markets) that are big Chinese trading partners via manufactured goods (in Asia) or commodities (in Latin America and elsewhere, including Canada and Australia).

China's Stocks World's Most Expensive Table

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

Chinese stocks, after a nasty bear market that commenced on June 12, 2015, are still the most expensive in the world (see January 5, 2016 Bloomberg: “As China Revives Stock Intervention, Foreign Funds Lose Patience”). They trade at about 65 times earnings – more than three times higher than the U.S.’s multiple of 19. It is this overvaluation at a time when the Chinese economy is headed into a nasty recession that suggests the decline in the Chinese market is far from over. A decelerating economy in China will further suppress earnings, which means the mainland Chinese stock indexes are likely headed lower.

Shanghai Composite - Daily OHLC Chart

Source: Barchart.com

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

The arguments of why the Chinese stock market was about to crash were given in the Income Mail section of Market Mail (now rebranded more-appropriately Global Mail) on April 27, 2015 “Can Crashes be Predicted?” six weeks or so before the crash commenced. The arguments for a hard landing in the Chinese economy have been given much earlier than that, with the caveat that the stock market in China is less correlated with the real economy even though it is my opinion that there is a correlation and that correlation is increasing.

Given my opinion that the credit bubble in the Chinese economy has burst, I am maintaining a target of 1000-2000 for the Shanghai Composite in the next 12-24 months (it closed last Friday at 3186). I cannot give a more precise estimate as bear markets tend to wear out both the bulls and the bears. They tend to have multiple bear-market rallies and cascading sell-offs that keep making deeper new lows. The situation in the Shenzhen Composite is even more dire, as it is home to many small- and mid-cap stocks that experienced bubbles similar to the Nasdaq Composite in 2000.

The Chinese will fight this crisis with all they have, but I don’t think there is anything they can do to stop their monumental credit bubble from unraveling.

Sector Spotlight:

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

Things That Seem Permanent…Usually Aren’t

by Jason Bodner

Some things in life that once seemed normal now seem crazy. For example, women used to iron their hair on ironing boards. Cars did not have seatbelts. Smoking was once allowed anywhere on flights. Then there were smoking and non-smoking sections, separated by row number (with not even a curtain) as if that accomplished anything. I even once wrote an article which had reference to how babies were suspended in cages for fresh air, outside apartment buildings. Apparently this seemed perfectly normal! (See The Atlantic, October 9, 2010: “Old, Weird Tech: Baby Cage Edition,” by Nicholas Jackson.)

Several years ago I remember reading more than a few reports about the rapidly depleting availability of oil. I remember hearing predictions that the planet had less than 50 years of oil supply before we ran dry. Oil had peaked at near $140 a barrel, but was still well north of $110 when these stories circulated. Now, with oil near $30, “Peak Oil” seems just about as absurd as the notion that house prices will rise forever.

Crude Oil West Texas Intermediate - Monthly Nearest OHLC Chart

Source: Barchart.com

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

Petroleum literally means “Rock oil,” and behind water it is the second most abundant liquid on earth. Oil and gas also provide two-thirds of the world’s primary energy supplies. Oil and its residues have been used for thousands of years as a waterproofing agent, for boat building, brick bonding, and medicinal purposes. There is even historical reference to bitumen being used as a coating for Moses’ basket and Noah’s Ark being pitched inside and out with it. As the whaling industry was failing to provide enough whale oil to meet demand, a new source of energy was needed. Enter the organized petroleum industry. The first oil well was drilled in August 1859 by Edwin Drake in Pennsylvania.

We human beings have a habit of adapting to our environment so much that the realities of any point in time can take on a feeling of permanence in our perception – such as high inflation, high oil prices, ever-rising home prices, and perpetual growth of business – but once things begin to change, age-old instincts of fight-or-flight, fear, and panic can take hold. Wall Street is very much a place where investors can be trained to “shoot first, question later.” The global growth fear seems to have been confirmed, at least based on some very measurable economic statistics, most recently those out of China. Everyone now knows that last week was the worst start for equity markets in history. Unfortunately, as I profiled last week, it appears New Year’s had nothing to do with it. Good cheer did not spread much past January 1.

As China Slows, “Materials” are Hit the Hardest

Fears are now spreading from growth slowdown concerns to deflation. A few years ago, as the Fed was in the midst of maintaining historically low rates, there was an awful lot of conversation about inflation giving way to hyper-inflation. Some were even saying, “It’s only a matter of when, not if.” Now here we are, and the markets are clearly telling us there are deflationary concerns. A great way to see this, even if there seems to be little to glean from sector behavior in a week as negative as last week, is by looking at what some sectors are telling us. Let’s start by peeling off the bandage and looking at the week:

Standard and Poor's 500 Weekly Sectors Index Change Table

Obviously, everything slid last week. In a classic show of flight to safety, as one would expect, Utilities outperformed the overall market handsomely. With all the talk of energy dragging on the market recently, (myself included), what’s interesting is that Materials was the worst performing sector. As the China story indicates even lower commodity demand, the toll seems to have been taken heavily on materials.

As the U.S. dollar continues to strengthen, commodities continue to see the downward spiral of falling pricing. Our historic fears went from hyperinflation to inflation, then skipping right over disinflation (the slowing of inflation), landing us right on today’s fears of deflation – which is a very troubling word for economists and investors. Commodities have been a heavy weight on the market for some time. Just looking at the charts of some precious and industrial metals helps tell the story. Below you’ll find 1-year charts of Gold, Silver, Platinum, Palladium, Copper, and the U.S. Aluminum Index:

Metals Indices Chart

Now when we compare those metals to how the sectors have been performing over the same time period, we see clearly why Industrials, Materials, and Energy have been experiencing such price pressure.

Standard and Poor's 500 Yearly Sector Indices Changes Table

The questions the markets currently seem to be asking (in a somewhat frustrated tone) are these: 

  • “Will the price pressure continue?”
  • “Will the drag on commodity prices lead to debt defaults which will rip through the financial system?”
  • “Will this contagion spread to all equities?”
  • “Will all this cause deflation and possibly depression?”

The tone of the global situation has quickly turned to seem quite negative and in fact bearish. But perhaps there is some silver lining here: With rates negative in most regions, and U.S. rates only slightly above zero, the question should really be: “Where can the money go?” It would seem that the U.S. is still “best in show” in terms of a strong economy, with strengthening economic data, a strong dollar, decent labor prospects, and some pockets of remaining growth. The U.S. equity market still may offer a place for investors to find solace. Large-cap companies that still have a strong dividend yield with prospects of growing their dividends seem to be likely benefactors from this environment. Also, companies with true growth that will serve as the engine for the next round of leadership are also a better place for investors.

Either way, the beginning of the year was a nauseating start for most. The important thing, as Simon Sinek points out in one of his Ted Talks, is not to panic but rather to calmly assess the situation. He says: “Panic causes tunnel vision. Calm acceptance of danger allows us to more easily assess the situation and see the options.” 

Naturally, this is easier said than done, especially when our notion of normal is often turned on its ear…

Stat of the Week:

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

Ho-Hum: 292,000 New Jobs Created in December

by Louis Navellier

Payroll Jobs ImageOn Friday, the Labor Department announced that 292,000 payroll jobs were created in December, substantially above economists’ consensus estimate of 210,000. In addition, the October and November payroll reports were revised up by a total of 50,000. This means that 2015 delivered the strongest job growth since 1999.  The unemployment rate remained unchanged at 5%. Hourly wages declined by a penny to $25.24 per hour, which may cause some FOMC members to hesitate before raising key interest rates further. December’s robust job growth might have been artificially boosted by abnormally warm winter weather, but the positive upward revisions signaled that the job market is now much healthier.

I should also add that the broader household survey reported that an extra 485,000 people were working in December and that the overall workforce expanded by 466,000. On Wednesday, ADP reported that the private sector created 257,000 jobs in December, the highest monthly gain in the past 12 months and well above the economists’ consensus estimate of 190,000, so every major employment survey was positive.

In other news, the Institute of Supply Management (ISM) announced last week that its manufacturing PMI slipped to 48.2 in December, down from 48.6 in November. U.S. manufacturing is now back to recession levels, despite a very strong auto sector, since a strong U.S. dollar has curtailed exports and driven down the price of energy. ISM also reported that its new orders component rose to 49.2 in December, so there is some hope, but new orders still remain below 50. ISM’s employment component plunged to 48.1, down from 51.3 in November. Of the 18 industries that ISM tracks, only six expanded.

On Wednesday, the ISM added that its service index slipped to 55.3 in December, down from a very strong 55.9 in November. Since any reading over 50 represents an expansion, the ISM number was still very strong; but it was the lowest reading since April 2014, so even the service sector is contracting, which might make some economists revise their fourth-quarter GDP growth a bit lower. Currently, economists are estimating that the U.S. economy expanded at a 1.2% annual pace in the fourth quarter.

One sign of hope for the U.S. is that the first tanker exporting crude oil from the Eagle Ford Shale region left the Port of Corpus Christi last week after the 40-year ban on crude oil exports was finally lifted in the controversial budget bill that Congress recently passed. The massive U.S. crude oil storage facilities in Cushing, Oklahoma are nearing record levels and are near capacity, so it is crucial that the U.S. exports crude oil, otherwise the price of crude oil could collapse if the Cushing storage facilities hit capacity. (See the December 31, 2015 Fortune article, “Tanker With First U.S. Crude Export in 40 Years to Set Sail.”)

Speaking of exports, on Wednesday, the Commerce Department reported that U.S. exports declined 0.9% in November to $182.2 billion, while imports declined 1.7% to $224.6 billion. Overall the trade deficit declined 5% to $42.4 billion in November (down from $44.6 billion in October) and is now at the lowest level since January 2012. Falling prices for commodities and electronic items are helping to shrink the trade deficit, which remains a drag on overall U.S. GDP growth. However, as the trade deficit continues to shrink, its negative impact on the U.S. GDP growth will continue to moderate a bit.

FOMC Minutes Reveal Dissension in the Ranks

In my opinion, the most important economic news released last week was the minutes of the last (mid-December) Federal Open Market Committee (FOMC) meeting, released Wednesday, which revealed that many Fed officials expressed trepidation about (1) the Fed’s 2% inflation forecast, (2) a strong U.S. dollar pushing down commodity prices, (3) slowing exports, and (4) tepid overseas growth.  Specifically, the minutes revealed “significant concern about still low readings on actual inflation” in addition to “uncertainty and risks present in the inflation outlook.” Furthermore, the FOMC minutes said that their “decision to raise the target range was a close call, particularly given the uncertainty about inflation….”

The concerns expressed by FOMC members could derail the Fed’s inflation forecast and their plans to raise key interest rates further. In fact, on Thursday, Chicago Fed President Charles Evans, who is a major dove, said, “I believe that policy should plan to follow an even shallower path for the federal funds rate than currently envisioned.” Due to the FOMC minutes and Evans’ comments, fed funds futures have fallen below 1% and are expected to fall further as evidence of deflation and slow economic growth spreads. Personally, I expect that the “data dependent” Fed may only raise key interest rates once this year, probably at its March FOMC meeting. After that, we are getting too close to the Presidential election. I expect them to stop raising rates and to try to ‘lay low” until after the Presidential election.

The European Union’s statistics agency, Eurostat, announced on Tuesday that consumer prices rose only 0.2% in 2015, so the European Union is teetering on the edge of deflation. ECB President Mario Draghi said in early December that he expected inflation to start to pick up “at the turn of the year,” and continue to move toward the central bank's target of just under 2% in 2016 and 2017. However, the opposite seems to be happening. So just like some FOMC members were skeptical about the Fed’s own inflation forecast, skepticism in the European Union is spreading. This means that last week’s collapse in bond yields may persist as economists, central bankers, and investors continue to realize that deflation is spreading due to the global economic slowdown, which continues to push down commodity prices.

Speaking of commodity prices, the strongest commodity continues to be gold, which rose $40 per ounce in the first week of 2016. Naturally, gold does well as the confidence in central banks wanes and global turmoil increases, since gold is historically a safe haven. Not only is the steadily eroding value of the Chinese yuan helping to firm up gold, but the ongoing tension between Iran and Saudi Arabia, plus the North Korean nuclear test last week, all contributed to help gold prices rally by almost 4% last week.


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.

Marketmail Archives Trade Summary

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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