End-of-June Realignments

End-of-June Realignments Should Boost the Market This Week

by Louis Navellier

June 27, 2017

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

This week, I expect to see the annual Russell realignment boost the market in advance of the long July 4th holiday weekend.  I also expect the market to benefit from the 90-day smart Beta and equal-weight ETF realignment, plus the usual quarter-ending window dressing.  Add it all up and I expect that fundamentally strong stocks will finish the first half on a strong note, followed by positive earnings surprises in July.

Atlanta Fed Peach Image

One damper on the market has come from the Atlanta Fed revising its second-quarter GDP forecast down to a 2.9% annualized GDP growth in the second quarter.  At the start of June, the Atlanta Fed was expecting 4% annual GDP growth, but in my opinion, investors should not be alarmed by these aggressive downward GDP revisions, since they are quite common in the Atlanta Fed’s economic model, which is based on successive economic indicators being released in real time.  The latest downgrade was largely caused by lackluster retail sales and a bigger-than-previously-estimated trade deficit.  Despite these downward revisions, 2.9% growth is a great improvement over the first quarter’s 1.1% reading.

In This Issue

We don’t have to wait for late-July earnings season to find profitable strategies in specific sectors and stocks.  Bryan Perry shows us how “sizzling software stocks” have been leading this market.  Then, Gary Alexander delves into market history for perspective on today’s challenges.  Jason Bodner shows how a very few stocks in the best-performing sectors can supercharge a portfolio over time, while Ivan Martchev and I show how deflation rules the commodity market, impacting U.S. and global GDP growth trends.

Income Mail:
Sizzling Software Earnings Set Stage for a Summer IT Rally
by Bryan Perry
The Covered Call Option – Grabbing Hold of Free Money

Growth Mail:
Market History Teaches Patience and Perspective
by Gary Alexander
The Week of June 26-30 in Market History

Global Mail:
Fresh 52-Week Lows in Commodities
by Ivan Martchev
Stay Away from Junk Bonds

Sector Spotlight:
Only 4% of Stocks Deliver 100% of Market’s Long-Term Gains/strong>
by Jason Bodner
Infotech Continues to Lead, Energy Continues to Lag

A Look Ahead:
Deflation is Resurfacing, Limiting the Fed’s Options
by Louis Navellier
The Exception – The Housing Market

Income Mail:

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

Sizzling Software Earnings Set Stage for a Summer IT Rally

by Bryan Perry

Let’s face it: When earnings season returns in full bloom (next month), that gets investor juices up, as we watch and wait with bated breath to see which companies are going to scorch analysts’ forecasts, likely propelling those stocks higher on heightened prospects for future profits. Earnings season typically kicks off in the second week of January, April, July, and October. Currently, there is much debate about which sectors will post better-than-expected revenues and earnings, given a backdrop of uneven economic data, declining energy prices, a strong bond market, a weaker dollar, and declining rates of inflation.

However, we don’t have to wait for late July. We’ve already seen a few early bird Q2 earnings reports from notable tech companies that are leaders in the software sector. Specifically, the pace of overall IT business spending by medium-to-large corporations is noted by several surveys to be the highest in five years (source: “Gartner Says Worldwide IT Spending Forecast to Grow 1.4% in 2017,” April 10, 2017). Wall Street analysts know this because they carefully track business spending on refreshed and upgraded software needed to maintain competitive advantages and reduce long-term costs of running a business.

When the economy is muddling along at a growth rate of less than 2%, as has been the case for the past several years, companies are less aggressive about IT capital investment and will do without until their forward budgets determine the expense for more and upgraded IT is justified by a growing order backlog.

This economic cycle is no different, with the exception of some major technological advances. The advent of cloud computing has mushroomed into a multi-hundred billion dollar global industry and 74% of Tech Chief Financial Officers (CFOs) say cloud computing will have the most measurable impact on their business in 2017 (source: Roundup of Cloud Computing Forecasts, 2017 – Forbes, April 19, 2017).

This Forbes survey is rich in data which could provide great value for investors. When the most powerful wave of global business investment of any kind is being forecast for the next decade, it takes a lot of the guesswork out of where one should invest for predictable growth. Such a powerful claim cannot be made about energy, healthcare, infrastructure, retail, real estate, transportation, or even defense spending.

According to this data-rich Forbes article, “Cloud platforms are enabling new, complex business models and orchestrating more globally-based integration networks in 2017 than many analyst and advisory firms predicted. Combined with cloud services adoption increasing in the mid-tier and small & medium businesses, leading researchers including Forrester are adjusting their forecasts upward. The best check of any forecast is revenue.” Based on early earnings from select blue chip software stocks of the past two weeks, revenues related to cloud computing are fostering one upside earnings surprise after another.

Wikibon Worldwide Enterprise Information Technology Project Chart

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

Forbes says, “Wikibon is predicting enterprise cloud spending is growing at a 16% compound annual growth (CAGR) run rate between 2016 and 2026…. Cloud computing spending is growing at 4.5 times the rate of IT spending since 2009 and is expected to grow at better than 6 times the rate of IT spending from 2015 through 2020. According to IDC, worldwide spending on public cloud computing will increase from $67 billion in 2015 to $162 billion in 2020, attaining a 19% CAGR.”

Gartner predicts the worldwide public cloud services market will grow by 18% in 2017 to $246.8 billion, up from $209.2 billion in 2016 (see table, below). Infrastructure-as-a-Service (IaaS) is projected to grow 36.8% in 2017 and reach $34.6 billion. Software-as-a-Service (SaaS) is expected to increase 20%, reaching $46.3 billion in 2017. By the end of 2018, spending on IT-as-a-Service for data centers, software, and services will be $547 billion. Deloitte Global predicts that procurement of IT technologies will accelerate in the next 2.5 years from $361 billion to $547 billion. At this pace, IT-as-a-Service will represent more than half of IT spending by the 2021/2022 timeframe. 

Worldwide Public Cloud Services Forecast Table

Total spending on IT infrastructure products (server, enterprise storage, and Ethernet switches) for deployment in cloud environments will increase 15.3% year-over-year in 2017 to $41.7 billion. IDC predicts that public cloud data centers will account for the majority of this spending (60.5%) while off-premises private cloud environments will represent 14.9% of spending. On-premises private clouds will account for 62.3% of spending on private cloud IT infrastructure and will grow by 13.1% in 2017.

Heading into the teeth of the second quarter 2017 earnings reporting season, there is already strong evidence of profit growth corroborating these industry research findings, providing investors and traders an opening to get in front of other software companies’ earnings reports. Shares of software companies reporting Q2 numbers are spiking by an average of 10% on their earnings headlines and I expect similar moves on the part of other software stocks that deliver cloud solutions and services.

The Covered Call Option – Grabbing Hold of Free Money

Knowing fully well how whippy tech stocks can be when traded in and around earnings season, it argues well to sell short-term, out-of-the-money covered calls on software stocks that spike on bullish earnings. It’s possible to capture 10% or more in call option premiums for a call option contract that expires in 30 to 60 days. A high-performance basket of software stocks built on leading names where earnings drivers are cloud-computing and subscription-based models can deliver terrific income month after month.

Tech stocks that explode higher on a “hot earnings number” almost always take the next few weeks to consolidate the move, doing some technical backing and filling. Selling call option premiums into the euphoria of the earnings moment is like responding to a sign post hanging out that says, “Free money for the taking.” A properly executed covered-call strategy can be anyone’s “free money” income strategy that invests in two of the most powerful IT investment themes that have a 10-year runway of prosperity ahead.

Fashioning five-to-seven liquid software stocks that fit this profile, anyone with the most basic knowledge of options trading can put together one hot IT sub-sector portfolio and sell covered calls against them. In doing so, two good things can happen. First, selling calls generates immediate income; secondly, selling short-term out-of-the-money calls lowers one’s cost basis. It’s a proven money management tool used by hedge funds, institutional investors, and savvy retail investors who use volatility to their advantage.

Growth Mail:

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

Market History Teaches Patience and Perspective

by Gary Alexander

During most of June, I’ve chosen to ignore the headlines and read about a dozen history books.  I’ve also been honored to be a film reviewer for the Anthem Film Festival at the upcoming Freedom Fest (July 19-22 in Las Vegas), where Louis Navellier and I will both speak.  In reviewing nine full-length, non-fiction documentaries and 14 shorter films in June, I bathed my mind in history and today’s greatest challenges.

Among the books I’m reading, the most relevant is Robert Prechter’s study of investor psychology in the markets, “The Socionomic Theory of Finance,” and Steven Pinker’s “The Better Angels of Our Nature: Why Violence Has Declined,” plus Alexis de Tocqueville’s classic “Democracy in America” (1835).

That’s where I’d like to begin – in 1835:

French observer Alexis de Tocqueville published a memoir of his 1831 tour of America as “Democracy in America: Volume 1” in 1835.  In re-reading that masterpiece this year, I marvel at how well informed the public was about our Constitutional division of powers, and how free the press was.  De Tocqueville cited this 1831 editorial, which sounds like a 2017 news report, if you substitute the name Trump for Jackson:

“The language of [President Andrew] Jackson has been that of a heartless despot, solely occupied with the preservation of his own authority. Ambition is his crime, and it will be his punishment, too: Intrigue is his native element, and intrigue will confound his tricks, and will deprive him of his power … His conduct in the political arena has been that of a shameless and lawless gamester. He succeeded at the time, but the hour of retribution approaches, and he will be obliged to disgorge his winnings, to throw aside his false dice, and to end his days in some retirement, where he may curse his madness at his leisure; for repentance is a virtue with which his heart is likely to remain forever unacquainted.”

– An editorial in the early 1830s, quoted by Alexis de Tocqueville in “Democracy in America” (1835)

De Tocqueville noted that such vitriolic criticism of national leaders was punishable by prison in Europe.

In that same year, 1835, a stock market bubble was brewing, as exemplified by this “high volume” day:

“As the banking system expanded, the stage was set for rampant speculation, fueled by torrents of paper money.  The biggest day on the NYSE came on June 26, 1835, when over 7,800 shares were traded. At that time, some 80 commercial firms’ securities traded on the Exchange, including 70 banks and insurance companies, and a total of 10 railroads, canals, and gas companies.  Then the Panic of 1837 hit, creating a depression and many financial failures.”

– Gary Giroux, “Business Scandals, Corruption and Reform: An Encyclopedia” (in 2 volumes)

The Week of June 26-30 in Market History

Several other panics began near this date.  On June 27, 1857, The New York Herald foresaw another panic:

“What can be the end of all this but another general collapse like that of 1837, only upon a much grander scale? Government spoilation, public defaulters, paper bubbles of all descriptions, a general scramble for Western lands and town and city sites, millions of dollars, made or borrowed, expended in fine houses and gaudy furniture; hundreds of thousands in silly rivalries of fashionable parvenus, in silks, laces, diamonds and every variety of costly frippery are only a few among the many crying evils of the day.”

– Editorial by James Gordon Bennett, founder and publisher of the New York Herald, June 27, 1857

Yes, America has always loved spinning scary scenarios, spawning an army of Doomsday prophets.

On June 27, 1893, the Panic of 1893 began, when silver fell from 92-cents to 77-cents in one week.  The proximate cause was the abandonment of silver coinage by India, a pro-silver nation.  The U.S. silver dollar sank on world markets to 60-cents.  The #1 subject in the minds of traders was the repeal of the Sherman Silver Purchase Law of 1890, so that silver certificates could be redeemed for their full value in gold, creating a bi-metallic standard.  This never happened, so American entered a Depression in 1894.

On June 29, 1906, the passage of the Hepburn Act empowered the Interstate Commerce Commission (ICC) to investigate and set railroad rates.  President Roosevelt, in signing the Act, called it a major victory against the “malefactors of great wealth.”  When a President calls business leaders “malefactors,” stocks tend to fall.  The Dow Jones Industrial Index fell 48.5% from January 1, 1906 to November 11, 1907.  The Dow did not surpass its 1906 peak until 1916, during the middle of “The war to end all wars.”

Inflation Adjusted Dow Jones Industrial Average Chart

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

On June 28, 1914, Archduke Franz Ferdinand, heir to the Austrian-Hungarian empire, was shot to death, launching World War I.  Stocks collapsed.  European markets closed.  The U.S. stock market reopened in early 1915, more than doubling from a low on June 30, 1914 (Dow 52) to November 21, 1916 (Dow 110).

War briefly collapsed the market again in 1950, only to spur a big bull market in the early 1950s.  On Monday, June 26, 1950, the Dow fell by a staggering 10.44 points (-4.7%), to 213.91, the largest one-day drop since 1937, and the worst decline we would see again until 1962 (below).  The cause was the start of the war in Korea on June 25.  On June 29, President Truman declared a naval blockade.  For the week of June 26-30, the Dow fell 15.24 points (-6.8%), to 209.11, the worst weekly drop since the 1930s.

On June 26, 1962, the Dow fell to 535.76, mercifully reaching the end of a steep, six-month 36% bear market (the “U.S. Steel sell-off”), but it was also the start of an 11-month (+51%) bull market.  (Source for stock data: Stock Traders’ Almanac. All ‘Dow’ readings are based on the Dow Jones Industrial Average).

On June 26, 1974, Bankhaus Herstatt, one of Germany’s largest private banks, collapsed—the first major bank failure since Western currencies began to float in 1973.  On June 30, the famous beach scene from Steven Spielberg’s hit movie, “Jaws,” was filmed.  A crowd of 400 screaming, panic-stricken extras in bathing suits ran from the surf – over and over again – until they were panicked enough for Spielberg.  I like to imagine that those 400 extras might have been stock traders, because the 1974 bear market began in earnest that day.  The Dow fell from 806 on July 1 to 584 on October 4th (down 27.5% in the quarter).

Then, on June 28, 1979, OPEC raised oil prices 24%.  Gas lines and oil shortages followed.  Very soon, President Carter issued stringent measures to address America’s oil shortage and our national malaise.

So, when the news gets you down, read history for perspective.  Then, today’s news won’t look so bad.

In one of the films I reviewed, “Is America in Retreat?” a series of eloquent spokesmen answered “yes” to that question, since America is not adequately policing the world in places like Syria or punishing China’s incursion into fishing grounds in the Spratly Islands off the Philippines.  But foreign affairs expert Walter Russell Mead came on camera near the film’s end and put the question into historical perspective:

“All my life, all I hear is ‘America is in decline.’ When I was in elementary school, the Russians launched Sputnik. Then, Kennedy ran on ‘the missile gap.’ We were told Russia was winning. Then came Vietnam, the oil embargo. Then, people talked about Japan ‘eating our lunch’ the way they’re talking about China today. I keep hearing that America is in decline but then comes another Fort McHenry moment, ‘the flag is still there…by dawn’s early light.’ I can personally remember 60 years of anguish over America’s decline, never actually followed by America’s decline.”

– Walter Russell Mead, in the film “Is America in Retreat?”

That quote doubles as great market analysis and a fine way to honor America’s 241st birthday on July 4th.

Global Mail:

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

Fresh 52-Week Lows in Commodities

by Ivan Martchev

Another week brought another fresh 52-week low for the CRB Commodity Index, led by the price decline in the most important commodity of all – crude oil. Readers of this column should not be surprised at this rather strange behavior of commodities in a seasonally strong part of the year, since we have written about this often (see my May 8, 2017 column, “The commodity conundrum--why are prices so weak?”).

Commodities Research Bureau Commodity Index Chart

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

The CRB Index touched a low of 166.48 last week, not that far above the January 2016 lows at 154.85. As I have mentioned before – in my “China rant,” as one of my colleagues so eloquently described my musings – I believe it was the Chinese economic slowdown that caused the 50% crash in commodity prices since 2014, and there is something wrong with China now, hurting commodities again in 2017.

The other explanation is that there may be something wrong with the U.S. economy as gasoline demand at home has been weak and the economic data has been spotty. With the S&P 500 Index making all-time highs despite delays in the vitally necessary Trump-era tax code overhaul, the prospect of economic trouble at home is also a reasonable factor explaining the slower demand for many commodities.

The bond market is also reflecting some concerns about the U.S. economy at present, with massive yield curve flattening – where long-term interest rates are declining and short-term rates are rising, courtesy of Fed rate hikes. This can be seen in the performance of the 10- and 2-year Treasury yields in the chart below. Keep in mind that the 2-year yield is more sensitive to Fed policy and fed funds rate outlook while the 10-year note yield is more sensitive to the intermediate-term inflation and economic outlook.

United States Ten Year Government Bond versus Two Year Note Yield Chart

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

Stay Away from Junk Bonds

Another bond market sector tied to commodity prices is junk bonds, which at the January 2016 lows for crude oil were under significant pressure. Since the shale boom in the U.S. was financed with junk bonds, much in the same way junk bonds paid for the build out of fiber-optic networks leading up the tech bubble in 2000, it is normal to see pressure in the junk bond market in a crude oil sell-off. We have not seen it yet but that does not mean it is not coming as I believe there is substantial downside for commodity prices and crude oil, in particular given the coming economic hard landing I see in China.

Bank of America Merrill Lynch High Yield Bond versus West Texas Intermediate Crude Oil Chart

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

After the initial sharp sell-off in crude oil and junk bonds in late January 2016, the widest credit spreads in B-rated junk to Treasuries came on February 11, 2016 at 900 basis points (9%) when the oil price was barely holding onto $26. While the oil price is barely holding onto $42 per barrel at present, the same (B-rated) junk spreads closed on Friday at 392 bps (3.92%). For comparison, when oil was heading towards its January 2016 lows and when it was in the mid-40s in late 2015, B-rated junk spreads were near 600-650 bps, which means that there is a lot of risk in junk bond prices at present.

Shale producers have dramatically cut costs in order to survive in an environment of lower oil prices, but I believe they underestimate the possible downside in oil prices if that belated hard landing in China ever arrives. Many shale producers have shoved ever larger amounts of sand in order to keep fracking at ever lower oil prices. However, there is a finite amount of sand a shale producer can shove down an oil well. They may be able to use 2-3 times more sand than what they originally thought possible to lower their shale oil production costs, but they are not likely going to be able to use four times the amount of sand.

My point is that if the oil price goes down to $20 a barrel or lower and stays there for a couple of years, the rout in the junk bond market – primarily concentrated in the energy sector – would be horrific.

The drama is already unfolding in the S&P 500, where the index is up 8.9% YTD while the energy sector is the only industry group that is down – to the tune of -14.5% YTD. If that is not a horrific and widening performance differential between the energy sector and the S&P 500, I don't know what is.

The decline in commodity prices – and crude oil in particular – is not yet front-page news; but should the CRB index take out its January 2016 lows and should the price of crude oil decline below $40 and stay there, I expect investors would pay a lot more attention. I think both of those developments are coming soon.

Sector Spotlight:

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

Only 4% of Stocks Deliver 100% of Market’s Long-Term Gains

by Jason Bodner

It’s turtle time here in Florida. Walk along the beaches and you'll find small, triangular areas cordoned off with what looks like police tape (see photo, below). Access is prevented because these are sea-turtle nests. With roughly 60,000 nests in Florida each year, you can see several nests on nearly every beach. On average, each nest contains about 110 eggs. When eggs hatch, the baby turtles instinctually move towards the sea to begin their struggle for survival. That struggle is great. Odds of a baby turtle surviving to adulthood are something on the order of 1 in 1,000.

Reproducing Sea Turtles Nests Image

The natural world is an endless collection of bell curves, or variations thereof. Examples are limited by your imagination, but here are just a few: Take the population of a nearby high school and plot the heights of students on a line. You will get a normal curve. The tallest and shortest will yield the lowest results with the average clustering in the middle. The same will be observed for weights, incomes, cars owned over a lifetime, steps walked per day, and, sadly, the lifespan of the average turtle hatchling (in days).

Bell Curve using Real People Image

The list goes on and on. The normal distribution is a phenomenon that happens with most data sets and the effect tends to become more pronounced the larger the data set is. The curve of heights of a high school class (above) is a bit jagged, but for the entire U.S., the bell curve would become far smoother.

So are stocks like baby turtles? Thousands of small companies go public but don’t live long enough to grow into ‘adult’ stocks. Among the survivors, thousands of stocks trade each day, shaping the overall returns of the market. We all know that the stock market has outperformed Treasuries for many decades. This is known as “the equity premium.” A common piece of advice is to buy a diversified basket of stocks and forget about it for 30 years. During that time span, less than a handful of stocks will likely account for all your success. If you have time to read Hendrik Bessembinder’s (University of Arizona) 49-page paper on the subject, you can find it online (“Do Stocks Outperform Treasury Bills?” SSRN, May 22, 2017).

Here is the startling summary fact from Bessembinder’s findings: “The entire net gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks, as the other ninety six percent collectively matched one-month Treasury bills.” Furthermore, he showed, only 1/3 of 1% of all stocks since 1926 produced 50% of the gains. As for that notion of buying a diversified basket and forgetting about it, this study suggests that a portfolio of 25 stocks will contain one great winner and 24 losing or mediocre stocks that deliver the equivalent of ‘safe’ short-term T-bills. In a portfolio of 300 stocks, one single stock will likely provide half your overall gains in those 90+ years.

This is great news for stock pickers. This study highlights the value of an investor’s ability to select the “crème de la crème” over time. Only a handful of money managers have withstood the test of time for decades and consistently discovered the positive tails of the distribution curve, but by picking a handful of the best stocks any investor or advisor can consistently generate excess returns (“alpha”) over time.

So why do I harp on sectors rather than specific stocks? Well, sectors have ebbed and flowed over the years. For example, railroads accounted for 60% of the stock market in 1900. Now it’s 0.2%. This creates a survivorship bias, in which a few names account for most of the gains over the last century. As a sector (like railroads) wanes in popularity, only a handful of names survive and continue to prosper.

So where does that leave us? As sectors wax and wane, the leaders and laggards of those sectors will be the drivers (and laggards) of the market. The market could have a net 0% return for a year, but the best stocks of the best sectors will yield high returns, while the worst stocks of the worst sectors will decline.

Infotech Continues to Lead, Energy Continues to Lag

On that note, Infotech rebounded while energy continued to be sick, so the six-month trend of weak energy and strong tech continues. There are a few specific points to focus on (in the tables, below):

  1. Tech’s sell-off a week ago was largely technical in nature with no real fundamental change.
  2. Energy’s fundamentals continue to weaken, due to the downward trend in the price of oil.
  3. Healthcare and Biotech have also taken on a key leadership role. The Healthcare sector is up 6.13% so far in June, most of which (3.65%) came last week. Typically, swift rotations like this mean we’ll see similar future price action to come, so I would look to identify leaders in Healthcare.

Standard and Poor's 500 Weekly, Monthly, Quarterly, and Semi Annual Sector Indices Changes Tables

Everywhere you look, you can find a normal (“bell”) distribution curve. The extreme ends are typically where things get interesting. Out of 7+ billion people on earth, there can only be so many great world leaders, great stock pickers, and surviving turtles. Similarly, leading and lagging sectors will reveal leading and lagging stocks. While less than 1/3 of 1% of all stocks since 1926 produced 50% of the wealth, it pays to focus on where the tails are. Don’t be afraid to look towards small things at extreme ends. As Vincent van Gogh said, “Great things are done by a series of small things brought together.”

Vincent Van Gogh Self Portrait 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.*

Deflation is Resurfacing, Limiting the Fed’s Options

by Louis Navellier

A trend toward deflation is resurfacing, which in turn puts a drag on most economists’ GDP estimates, since deflation can severely impact retail sales and trade balances.  Crude oil prices are currently the most obvious indicator of inflation and have fallen more than 20% from their highs earlier this year.  It is very odd for crude oil to decline during peak demand season (the summer months), but since the glut of crude oil and refined products persist in the U.S. and around the world, there is a growing fear of just how much crude oil prices can decline in September, when global demand drops significantly after Labor Day.

The shale boom in the U.S. is frequently cited for causing the U.S. supply glut, but OPEC is also part of the problem, since Libya and Nigeria have no production quotas.  As long as the gasoline glut persists, the prices at the pump are expected to remain soft, contributing to the overall deflationary trend.

Traditionally, the Fed believes in the Phillips Curve, which describes an inverse relation between inflation and unemployment rates.  The theory implies that as wages rise, businesses become more efficient, mostly through productivity enhancements, or else they have to raise prices, which is inflationary.  There are many deflationary forces at work today, such as (1) Amazon.com making retailing more efficient; (2) the fracking boom that has driven crude oil prices lower; (3) robotics in manufacturing, boosting productivity; and (4) healthcare practices such as better drugs and less invasive technologies to shorten hospital stays.

Market forces are basically overpowering the Fed and flattening the yield curve, which means that the Fed may not be able to raise key interest rates much further.  No matter what the Federal Open Market Committee (FOMC) says, they do not like to fight market rates and do not want to risk flattening the yield curve further by raising key short-term rates too quickly.  If the deflationary forces that materialized in recent months persist, the Fed has effectively been neutered by market rates.  The 10-year Treasury now yields 2.15%.  If Treasury yields remain low, I expect that the Fed will curtail their key interest rate hikes.

The Exception – The Housing Market

There is no deflation in home prices yet.  On Wednesday, the National Association of Realtors announced that existing home sales rose 1.1% in May to an annual pace of 5.62 million.  Median home prices rose to $252,800 in May and have risen 5.8% in the past 12 months.  In fact, median home prices on a trailing 12-month basis have now risen for 63 consecutive months.  The average home is now on the market for only 27 days and the inventory of homes for sale has declined 8.4% in the last year to 1.96 million.

New Home Key Image

Then, on Friday, the Commerce Department announced that new home sales rose 2.9% in May to an annual pace of 610,000, above economists’ consensus estimate of an annual pace of 590,000.  In the past 12 months, new home sales have risen 8.9% and are up 12% year-to-date vs. the first five months in 2016.  May was the second strongest month for new home sales this year.  Median prices soared to $345,800, up from $310,200 in April and $296,000 in May 2016.  Growing demand coupled with a tight inventory of homes for sale bodes well for higher median prices and robust earnings for homebuilders.


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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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