Friday’s Jobs Report

Friday’s Jobs Report Lifts the Market from its Long Slumber

by Louis Navellier

September 6, 2016

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

After an extremely boring August, we will likely see stronger trading volume in the upcoming weeks. In addition, September has always been a “window-dressing” month as professional managers tend to realign their respective portfolios before the third quarter ends and earnings announcement season begins.

After a flat August, we saw a small rally in the S&P 500 last Friday after the release of the monthly payroll report in which the Labor Department reported that 151,000 payroll jobs were created in August, well below economists’ consensus estimate of 180,000. The July payroll totals were revised up by 20,000 to 275,000 jobs, but that was offset by the June payroll total being revised down 21,000 to 271,000. That makes the preliminary total for June, July, and August a gain of 697,000 jobs – not bad. The labor force participation rate was unchanged at 62.8% and remains near a 40-year low. Average hourly wages only rose 0.1% or 3 cents to $25.73 cents per hour, which will disappoint Fed Chair Janet Yellen, who wants to see greater wage inflation before raising key interest rates. The stock market’s rise on Friday was likely based on the fact that the August payroll report may cause the Fed to postpone any September rate hike.

Practitioners Addressing Dual Threats Image

Global growth is lagging and global trade volumes are suffering. The Labor Day weekend G20 meeting in China addressed the dual threats of growing protectionism and anemic worldwide economic growth. Not only is China slowing but Canada just announced that its GDP fell at a -1.6% annual rate last quarter.

Another big story was the EU’s decision to punish Ireland by imposing a 13 billion euro ($14.6 billion) retroactive tax on Apple. This action made Treasury Secretary Jack Lew furious, since in his eyes the EU is “stealing” tax revenue that the U.S. could have possibly collected. If there is any good to come out of these “tax wars” and growing protectionism around the world, it could be the Obama Administration finally considering dropping its repatriation tax so U.S. multinationals can bring their profits back home.

In This Issue

In honor of Labor Day weekend (and a rather boring market the last two months), our authors expand on their normal market analysis to examine lessons from history. Bryan Perry recalls the dramatic recovery of Chrysler after Lee Iacocca went before Congress on this date to ask for a bridge loan to the future. Gary Alexander goes back to the birth of the index funds 40 years ago (September, 1976) and wonders if Vanguard created a monster that is currently gobbling up shares of big-cap stocks. Then, Ivan Martchev recounts his recent trip to his homeland, Bulgaria, and how the economy has fared there since its 1989 liberation. Jason Bodner goes the furthest back in history – to the Caveman diet – to examine today’s market cycles. Then I’ll return to 2016 with an examination of the major stock market trends this summer.

Income Mail:
Firming Credit Markets are a Good Sign for Stocks
by Bryan Perry
Turning Junk into Gold – the Chrysler Example

Growth Mail:
The Index Monster That Ate the Stock Market
by Gary Alexander
A Labor Day Look at America’s Army of Idle Men

Global Mail:
The Latest News from my Homeland of Bulgaria
by Ivan Martchev
The Tightest Technical Squeeze in 20 Years

Sector Spotlight:
The Paleo Diet vs. McFood Substitutes
by Jason Bodner
The Seasonal Cycle in Oil Should Strike Again

A Look Ahead:
What Worked Best (and Worst) This July and August?
by Louis Navellier
Labor Day Gasoline Prices are the Lowest in 12 Years

Income Mail:

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

Firming Credit Markets are a Good Sign for Stocks

by Bryan Perry

Seven years after the Great Recession ended, the spreads between investment-grade and junk-rated debt are narrowing at a rate that would imply that the economy is regaining its health. High-yield spreads saw further declines last week, falling seven basis points (bps) to 513. Altogether, the spread has fallen 49 bps during the past four weeks, marking a new low for the year.

The recent decline puts the spread below last year's level of 556 bps, which corresponded with the early stages of a sharp decline in the price of crude oil (source: Briefing.com Rate Brief, September 2, 2016).

High Yield Junk Bonds Minus Ten Year Treasury Chart

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

The chart above shows the spread between the high-yield bond market minus the 10-year Treasury. Below, we see the same 10-year span in terms of the S&P 500 Index – representing a dramatic inverse correlation. What is most notable in the past month is that the high-yield spread has come down in a pronounced fashion while the S&P paused in its rise after a short-lived rally in early August.

Standard and Poor's 500 Large Cap Index Chart

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

If the past is prologue, then it stands to reason that the rally in junk bonds is paving the way for a strong move up for the stock market in the coming weeks and months. Being an election year, history is on the side of the bulls. With bond yields still well under those of dividend-paying blue chip stocks, the weather forecast for investors is for a sky looking mostly clear and blue.

History is a wonderful guide for investors looking for harbingers of what the future might hold for their portfolios. Let me take this time on a holiday weekend to cast back to a time far worse than today – a time of high inflation, frequent recessions, a long sideways trend in stocks, and a stunning corporate reversal.

Turning Junk into Gold – the Chrysler Example

In 1978, Chrysler was on the verge of bankruptcy and facing a future akin to the dodo bird, until a former Ford executive took the reins of that troubled company and brought it back from a near-death experience.

Lee Iacocca served as President and CEO of Chrysler from 1978 (and chairman from 1979) until he retired at the end of 1992. He realized that Chrysler would go under if it did not receive a large infusion of cash, so Iacocca approached Congress on this date in 1979 to ask for $1.5 billion in loan guarantees.

Lee Iacocca at the White House Image

To obtain that loan guarantee, Chrysler had to reduce costs and abandon some longstanding projects, such as the turbine engine, which was ready for production in 1979 after nearly 20 years of development.

Right in the middle of the double-dip 1979-1982 recession, Chrysler introduced the small, efficient, and inexpensive front-wheel drive K-Car line, which sold well, followed by the release of a new vehicle type, the “minivan,” in the fall of 1983 – a leader in automobile sales for 25 years. The third innovative move on the part of Iacocca was to land the profitable Jeep line, then a division of AMC, which had finished most of the work on the Jeep Grand Cherokee, which Iacocca desperately wanted to own and produce.

Jeep Grand Cherokee Image

Unlike the 2009 bailout of GM, which cost U.S. taxpayers $51 billion at the time of its Chapter 11 filing and saw its common stock lose 100% of its value, part of the requirement of the U.S. government bailout of Chrysler was that Iacocca had to guarantee an additional $2 billion in commitments or concessions from “its own owners, stockholders, administrators, employees, dealers, suppliers, foreign and domestic financial institutions, and by State and local governments.” (Source: www.ritholz.com, November 20, 2008, “Looking at the 1980 Bailout of Chrysler”)

The story goes that in early 1980 Iacocca walked into the Lehman Brothers office at 55 Water Street in Manhattan and gave such an impassioned pitch that when he finished he was standing on top of the conference table. Truth, legend, or lie, it’s a great story told to this day, with great color, by former Lehman brokers. At the time, shares of Chrysler stock were trading at $3 but by the end of 1982 they rose six-fold to $18 with Peter Lynch of the Fidelity Magellan Fund as one of its biggest shareholders. (Source: New York Times, January 2, 1983, “The 10 Super Stocks of 1982”)

The climax of the bailout was Chrysler debt holders settling for repayment of bonds at 30 cents on the dollar. (Source: www.heritage.org, July 13, 1983, “The Chrysler Bailout Bust”). While bond investors trade on fear and pessimism, stock investors tend to trade on courage and hope for tomorrow. As long as the government was getting behind the credit side of the bailout, it seemed rational to come alongside and buy the debt. As it played out, the senior bonds rallied first, followed by the junk debt, followed by the preferred stock, and then the common stock.

Chrysler Bond Certification Image

Long story short, Chrysler bonds soared to huge premiums above par when it became evident that the company would survive. Because of the K-cars and minivans, along with the structural reforms Iacocca implemented, Chrysler turned around quickly and was able to repay the government-backed loans seven years earlier than expected. Despite high inflation and two recessions, Iacocca turned junk into gold. (Please note: Bryan Perry does not currently hold a position in Chrysler (FCAU). Navellier & Associates, Inc. does not currently hold a position in Chrysler (FCAU) for any client portfolios.)

Growth Mail:

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

The Index Monster That Ate the Stock Market

by Gary Alexander

Befitting the soporific market action so far this summer, we have become a passive army of do-nothing, know-nothing investors. According to MarketWatch on September 4, eight of the largest 10 mutual funds are stock index funds (the other two being money market funds, which are also passive). Eight of the top 10 largest funds are run by Vanguard, the people that invented index funds 40 years ago.

On August 31, 1976, Vanguard’s Jack Bogle floated the idea of an S&P 500 index fund for the first time. The response was underwhelming, at $11.3 million in assets, not even a tenth of Bogle’s $150 million target. The growth was snail-like at first, growing to only $511 million by 1985 at the start of the 1982-99 mega-bull market. But today, according to Jason Zweig (in “Happy Birthday to the Index Fund,” Wall Street Journal, September 1, 2016), “the Vanguard 500 Index Fund holds more than $252 billion, and index mutual funds and exchange-traded funds invest nearly $5 trillion in combined assets.” Five trillion!

Here’s the first problem I see with index funds: They are usually cap-weighted, meaning that an S&P 500 index fund must invest more in the top 50 stocks than the smaller 450. According to Morningstar, as of August 31, 2016, the Vanguard S&P 500 index invests 10.7% of the fund’s assets in the top five stocks and nearly one-third (32.8%) in the top 25 (5%) of the stocks in the S&P 500. This means that investors miss most of the big moves in the smaller stocks, particularly over the last two months of sleepy markets.

Standard and Poor's 500 Performance by Capitalization Table

The Vanguard S&P 500 index fund rose 4.3% from July 1 to August 31, but as this table shows, the gains among the smallest 10% through 40% of S&P 500 stocks out-gained their bigger brethren by 3% or more.

Most investors I know (real investors – those who buy shares of company stock after careful study of the company outlook) don’t invest 100 times as much money in a $100 billion stock as a $1 billion stock. If an investor sees more room for growth in a smaller stock, he/she might even invest more in the stock with greater room to grow – the smaller, well-run company that may be off the radar of big investment firms.

In an August 23rd report (“The Silent Road to Serfdom: Why Passive Investing is Worse than Marxism,”) Sanford C. Bernstein investment strategist Inigo Fraser-Jenkins asserted that passive investing defeats the fundamental tenet of capitalism by which capital is allocated to the most deserving (for instance, the most potentially profitable) enterprise rather than indiscriminately handing out buckets of cash to all big firms (and dribbles to smaller companies). Marxists at least make capital choices, even if based on favoritism or fraud but index investors check their brains at the door and reward big stocks with a slice of their cash.

What is the purpose of researching companies and their earnings prospects if the lion’s share of that firm’s funding comes from what amounts to an annual endowment from the index funds? I would argue that it is more noble, patriotic, and ultimately more profitable to “swing for the fences” on a few well-run companies than to give out “participant trophies” to every kid on every team. Real investors don’t win on every stock purchase, but a few life-changing winners can make up for a lot of strikeouts along the way.

This chart shows how active fund investing (in gold) has been underwater for most of the last five years (since 2011), while passive investing (blue) gobbled up all the funds from active investors and a lot more:

Active Versus Passive Investing (in Gold) Chart

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

Jason Zweig asked, in the August 26th Wall Street Journal, “Are Index Funds Eating the World?” In looking over the past 12 months (straddling 2015 and 2016 in the chart above), he calculated that “$310 billion has fled actively managed funds” while “$409 billion has poured into passive, or index, funds.”

Even John Bogle, Vanguard’s founder and a champion of indexing, wonders now, “What happens when everybody indexes?” His answer (as quoted by Zweig): “Chaos, chaos without limit. You can’t buy or sell, there is no liquidity there is no market.” But, thankfully, we’re not there – at least not yet.

Do yourself and America a favor by refusing to be average. Examine specific company stocks yourself, or look for proven money managers who aim to beat robotic index investors.

A Labor Day Look at America’s Army of Idle Men

Since the jobs report usually comes out on the first Friday of the month, Labor Day weekend usually coincides with the release of August jobs data. Last Friday, we learned that total nonfarm payroll jobs increased by 151,000 in August, a slight disappointment, but I seldom give much credence to those reports. The revisions are often large in later months. I look more closely at the longer-term trends.

A vital fact to remember about our unemployment rate – now 4.9%, a relatively low number, historically – is that it ignores millions of non-job seekers. It only counts people working or looking for work, but there is now a huge army of idle males who have given up looking for work – a wasted national resource.

Millions of American men have gone on strike. American Enterprise Institute economist Nicolas Eberstadt has written a book on this subject, “Men Without Work: America’s Invisible Crisis,” (it will be out later this month, on September 19). The book was excerpted in last Friday’s Wall Street Journal.

According to Eberstadt, the ratio of employment to population for U.S. males in prime working age (25 to 54) was 84.4% last year. That’s 2% lower than it was in 1940, when the jobless rate was over 10%. The men over age 20 without paid work was 19% in 1965, rising to 32% last year. In men’s prime working years (25 to 54), the percentage of men without paid work rose from just 6% in 1965 to 15% last year.

Eberstadt defines America’s army of prime-age male “unworkers” as less educated, never married, and native born, but with some counter-intuitive tradeoffs: “Black married men are more likely to be in the workforce than unmarried whites” and “high-school dropouts from abroad are as likely to be working or looking for work as native-born college grads.” What do these unworking men do? “Time-use surveys suggest they are almost entirely idle—helping out around the house less than unemployed men; caring for others less than employed women; volunteering and engaging in religious activities less than working men.” Leisure accounts for “3,000 hours a year, much of this time in front of TV or computer screens.”

Social Security Disability Insurance Beneficiaries Chart

Eberstadt says America has “recast ‘disability’ into a viable alternative lifestyle.” Disability claims are up from 0.5% of working age Americans in 1960 (when we had far more dangerous jobs, like coal mining) to over 5% lately. The death of work also spells “the death of civic engagement, community participation and voluntary association.” This is a grave social ill, which our media have tended to ignore, but he says “imagine how different America would be today if another roughly 10 million men held paying jobs.”

Labor Force Participation Rate of Men Chart

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

Good jobs are out there. The same issue of the Journal (“Manufacturers Search for Workers,” September 2nd) says, “Openings for manufacturing jobs this year have averaged 353,000 a month, up from 311,000 in 2015 and 122,000 in 2009,” the “highest level in 15 years, according to Labor Department data.”

Rise from the dead, American males! Get the necessary training and go out and apply for those jobs.

Global Mail:

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

The Latest News from my Homeland of Bulgaria

by Ivan Martchev

Having spent the last three weeks outside of the U.S., I can say that the overnight jet lag going to Europe is twice as bad as the daylight trip back. It takes about a week to wear off in either case and it causes you to operate in sub-optimal mode. That said, my annual trips to my homeland of Bulgaria serve as a rather interesting yardstick by which to measure the economic development behind the former Iron Curtain.

When I went back home to Bulgaria in 2007 after not being back for nine years, the country had made a giant leap forward. They thought that 8% annual (year-over-year) GDP growth was normal as the country was experiencing speculative investment flows after joining both NATO and the EU several years earlier.

Bulgarian Gross Domestic Product Annual Growth Chart

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

The official annual GDP total for Bulgaria peaked at $57 billion, which would make the “official” GDP numbers about twice as high as the highest GDP level reached when the country was in the Eastern Bloc. So if one is measuring Bulgarian GDP on same-scale dollars, the locals should be very happy.

The reality is somewhat different. The Bulgarian economy is probably much larger than the reported GDP numbers because of the off-books nature of business activity which by some estimates puts the unofficial economy at 50% of the official GDP according to a Harvard University study from 2001. In my personal opinion, the numbers could easily reach 100%. This is a very common practice in the Southern arc of the EU, ranging from Portugal and Spain in the West through Italy, the Balkans, and the infamous Greek economy.

For the sake of argument, if we assume that the real GDP level of the Bulgarian economy is four times larger than its best Eastern Bloc level from 1988, there are still some very serious problems. For comparison, the Cincinnati regional economy is $121.4 billion, based on official statistics, and Cincinnati is the 29th largest regional economy in the U.S. So all of Bulgaria is no bigger GDP-wise than Greater Cincinnati, even if one takes into consideration the best guestimate for shadow economic activity. (Source: Cincinnati.com, September 23, 2015, “Cincinnati economy fastest-growing in the Midwest”)

As a result of the lack of more coherent regional development programs from multiple governments (from the left or the right of the political spectrum), many Bulgarian citizens did what any reasonable person would do – they packed up and left the country. Based on official statistics (as seen in the graph below), in 1988 the country was just shy of nine million inhabitants. At last count (at the end of 2015), the population stands at 7.15 million, down about 20%.

Bulgarian Population Chart

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

I doubt even that 7.15 million number. My home town of Haskovo, a regional center with a governor and many municipalities, is turning into a ghost town. I saw empty stores with “For Rent” signs (which no one rents), empty apartments in many multi-family buildings, and even empty houses. Between 2007 and 2016, I have personally witnessed dramatic deterioration there, which is easy to see when one leaves the country and then comes back every year or two. The streets are getting emptier each year.

I believe the culprit is the lack of foreign investment in the regional economy, which basically serves as a green light for younger people to leave. More than half of my high school classmates have left the country for places like Germany, the UK, the U.S., and Canada. Many are unlikely to go back to Bulgaria until they hit retirement age, if ever. What I witnessed in my hometown is not a worst-case scenario by local standards as smaller towns have been hit harder and a few of the smallest ones have been completely deserted.

Bulgarian Foreign Direct Investment Chart

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

This is a fixable problem with the right economic policies, which regrettably I have not seen emanate, either from the left or the right wing. Foreign direct investment (FDI) is running at one-fifth of its peak and given that Europe has much bigger problems to worry about – like Brexit and an overall deflationary problem that is crippling its banking system – somehow, I do not see FDI flows accelerating there.

Bulgarian Stock Market Chart

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

The Bulgarian stock market, however, seems to be refusing to go much lower. One could say that it has successfully tested its 2009 low and has recently (2015) set a “higher low,” a hopeful sign. The local news is not particularly encouraging, but with a local Presidential election in November, just like in the US, and with likely early parliamentary elections coming in 2017, the stock market is hoping for a change.

There aren’t many good alternatives for the current right-of-center coalition government, so I have to wonder what positives the local stock market index is discounting. Still, one should not forget that stocks tend to bottom on bad news and perhaps the worst news is now behind us in the Bulgarian economy.

I will never forget a 2007 meeting I had with a local fund manager who was trying to convince me that the SOFIX benchmark index, then near 1600 – at present, it is near 440 – was the “new normal.” True, it was “normal” for the average stock to be trading at five times book value, even though five years earlier those same companies were trading at 0.5 times book value. I told that fund manager that I could not find a single person who was bearish on Bulgarian stocks, which was not a good sign from a contrarian perspective. I explained that there were certain financial companies that were failing in the U.S. and that we were only at the onset of a financial crisis that was likely to hit most emerging markets, including Bulgaria. I am not sure where that fund manager is at the moment, but the fund he was running at the time no longer exists.

Unlike in 2007, when I could not find a single stock market bear, I could not find a single bull this summer. The contrarian in me wants to think that the local stock market is “washed out” and that from a 10-year perspective, the risk/reward is not so bad – provided that the EU does not break apart and the euro survives, which are becoming very big “ifs” this year.

The Tightest Technical Squeeze in 20 Years

August is now in the books and we enter one of the least positive months for stock market performance in history, even though it appears that we started this September on a positive note, since the weak jobs total for August is seen as a reason for the Fed to stand pat until after the Presidential election in November.

Standard and Poor's 500 Index Versus Bollinger Bands Chart

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

In the complex chart above, we see the S&P 500 Index with an overlay of the popular technical indicator called “Bollinger bands.” As I have mentioned previously, I am not one to base investment decisions on charts and technical indicators alone, as I have to know what it is that is going on “behind the chart;” but I am not one to dismiss such indicators out of hand, either. In this case, we have a rare “technical” event in the S&P 500. The middle blue dotted line is the S&P 500 20-day simple moving average, while the two blue bands represent the two standard deviations of the index within that 20-day period. If the index does not move much up or down around that 20-day moving average the two Bollinger bands begin to squeeze.

The present “squeeze” in the S&P 500 Bollinger bands is easily the tightest in 20 years. You can see a measure of the Bollinger bandwidth as a separate indicator depicted in the chart by the black line. There was a tighter Bollinger band squeeze in the mid-1990s but we have not experienced such an event since then.

What does such a tight squeeze mean? Such squeezes tend to precede moves higher in the direction of the overall trend in the market, which is now up. While such squeezes are not a guarantee that the market will break out to the upside, they certainly suggest it. I know the overall news backdrop is not that positive but this move in the stock market could simply be a function of long-term interest rates continuing to fall – possibly to as low as 1%  on the 10-year Treasury note, which by definition should push the stock market higher, due to the much higher dividend yield in stocks.

Sector Spotlight:

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

The Paleo Diet vs. McFood Substitutes

by Jason Bodner

The Paleo Diet, if you’ve heard of it, is a fascinating take on nutrition. The foundation of the diet is that humans’ natural evolution made our bodies to operate at peak efficiency as hunter-gatherers. Therefore, we should consume frequent small meals high in lean meats and leafy green vegetables, infrequently eat grains, and never have sugar or anything processed. For marketing purposes, this was briefly called, “the Caveman Diet” or “Neanderthin,” but the health benefits have been widely touted. In a December 2011 TED Talk, Dr. Terry Wahls, an MD stricken with MS, describes how this diet helped her beat the crippling effects of Multiple Sclerosis. It’s truly a fascinating look into how our bodies work and what nature designed them for.

One interesting aspect of her video discusses that for 2.5 million years, humans were hunter-gatherers. Then 10,000 years ago we entered the agricultural revolution, so for 99.6% of human evolution we ate one way, and we have been eating another way for 10,000 years. Only in the last 50 years have we moved to a food system of additives, gluten, preservatives, GMOs, and fast food – a food system which possibly makes humans chronically ill and out of sync with our biology. So humans didn’t eat franchised fast food, processed sugar, bleached flour, gluten, or “enriched” foods for 99.998% of our evolutionary history.

Caveman with Fast Food Image

Whether we like it or not, corporate-made food has launched a new cycle for human nutrition.

The Seasonal Cycle in Oil Should Strike Again

We have already discussed how practically all things can be observed to be cyclical. Clearly the equity markets, functioning as an expression of human emotions, are no different. We know the market to be very cyclical. In this Marketmail forum, we have discussed several times the seasonal cycles of energy waxing in the spring and waning in the fall. This annual price cycle is clearly spelled out in this chart:

Crude Oil Seasonal Price Cycle Chart

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

As this chart shows, the peak doesn’t always come in September. It looks like the drop from mid-October to mid-December is the steepest. The economic cycle also tends to follow a similar sine wave pattern:

Economic Cycle Chart

For some time, I have identified Technology as the emerging leader in this rally, and I have labeled this as an encouraging trend. But I have also made note of the fact that much of the market rally since last February has come from weaker sectors recovering. A colleague of mine pointed out the other day that market cycles can often be observed to begin and end with sector rotations. In addition, there have been studies linking the beginning of new bull market cycles with leadership in Technology and Financials. Despite last week being a low-volume, pre-holiday week, we saw encouraging action in the Financials sector.

Before we jump in and look at how the sectors performed this past week, I need to acknowledge the birth of a new 11th GICS sector, Real Estate. GICS (Global Industry Classification Standard) was jointly created by MSCI (Morgan Stanley Capital International) and Standard & Poor’s in 1999 as a way to standardize classification. Ordinarily, we would separate out and highlight the performance of this new sector, but this is pretty difficult. September 1st was the birthday of real estate as a sector. MSCI updated their databases and display capabilities on September 1st, but MSCI is not available to everyone publicly yet. Unfortunately, S&P decided to update their displaying capabilities on September 16th, so while we have a new sector, the Standard & Poor’s system which I rely on will not be displaying the relevant real estate sector index data until mid-month. Oh well, patience, my friends….

Standard and Poor's 500 Weekly Sector Indices Changes Tables

Financials continued their strength, rallying nearly 2% this past week. Positive news from that sector, including better earnings, has boosted a recovery from out of the post-Brexit depths. Financials are a key sector to watch. Should the strength continue, finance is an engine for market recovery. One area to take note of, however, is energy weakness. If that continues and we see a repeat of price pressures this fall, concerns over capital base, health, and fear of bankruptcies will potentially take Financials down as well.

The S&P 500 Financials Sector Index has rallied 4.2% in the last month, the strongest 1-month sector performance, followed by Energy and Infotech, each with a +2.1% performance. The same 1-month (August) performance saw the defensive sectors down significantly. Utilities fell -4.1%, Telecom fell -3.6%, and Healthcare fell -3.4% for the same one-month period. Meanwhile, Tech, Industrials, and Financials emerged as 3-month leaders. These three sectors have been powering the rally since June:

Standard and Poor's 500 Quarterly Sector Indices Changes Table

Six-month performance (below) has been strong across the board, as we seem to have avoided the treachery that rocked the market during the past two summers. As we enter the fall, ahead of the election, it will be interesting to see if market strength continues. Either way, the current strength in Tech and Financials vs. weakness in the defensive sectors is a healthy sign for strength gathering in the market.

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

It took humans about 10,000 years to go from the beginnings of agriculture to space travel. It will be four times that long (40,000 years) before Voyager can approach another solar system. By the time that happens, what will space travel look like? What will we humans look like? What will we eat? What will our markets look like? These are all great questions to ponder, but I’m afraid the answers for now are relegated to the imagination; but the future is closer than you think. In the words of poet Mattie Stepanek, “Even though the future seems far away, it is actually beginning right now.”

Voyager Space Travel 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.*

What Worked Best (and Worst) This July and August?

by Louis Navellier

Bespoke Investment Group reported (September 2, 2016, “Q3 So Far”) an interesting array of what worked best (and worst) in July and August. They reported that the first two months of the third quarter marked a continuation of the small-capitalization short-covering rally that has dominated the stock market so far this year. Stocks that performed best were in the bottom deciles of capitalization (up 7.43%), dividend yield (up 6.21%), and lowest first-half performance (up 11.88%) plus those in the top decile for short interest (up 6.72%). This “reversion to the mean” is likely caused by index investing and short covering. Here is a sample of the differences among the various deciles during July and August:

  • Small-caps did better: The smallest 50 stocks in the S&P 500 rose 7.43% vs. 2.22% for the biggest 50 stocks. The largest 150 stocks rose 3.21% vs. 6.99% for the smallest 150 stocks.
  • The 150 stocks with the lowest P/E ratio rose 8.10% vs. 2.03% for the highest 150 P/E stocks.
  • High-yield lost some appeal. The highest-yielding decile of S&P 500 stocks rose 5.38% vs. 6.21% for the lowest-yielding 10% (which actually contain no yield at all).
  • The 50 stocks with the highest short-interest rose 6.72% vs. 3.40% for the lowest short-interest.
  • The 150 stocks with the highest analyst ratings rose 5.50% vs. 3.48% for the lowest-rated 150.
  • Institutional ownership also paid off, with an average 6.20% gain for the 100 stocks with the highest institutional ownership vs. 1.92% for the lowest 100.
  • The 50 stocks with the highest percentage of revenues coming from international operations rose 7.73% vs. 1.77% for the 10% stocks with the least (zero) overseas exposure.

I also noticed the continued dominance of winners among the stocks that were previously depressed the most. The 100 best performing S&P 500 stocks of the first half of 2015 were actually DOWN an average -1.47% in July and August, vs. +10.68% for the worst-performing 100 stocks in the first half. That’s a spread of 12.15% favoring the worst 20% vs. the best 20%, foiling “momentum” investors once again.

However, due to all the short-covering activity in July and August, I must stress that I am expecting a big leadership change in the overall stock market this month and in the fall. Specifically, I expect that many energy stocks will falter when crude oil prices stage their inevitable seasonal swoon.

Labor Day Gasoline Prices are the Lowest in 12 Years

Last Friday, the U.S. Energy Information Administration released a report that said the average retail price for regular gasoline on the week before Labor Day was the lowest since 2004, and 27-cents-per-gallon lower than the same time last year. Outside of natural gas, many energy-related stocks are poised to crash and burn, since the glut of refined products (e.g., diesel, gasoline, jet fuel, etc.) and crude oil is about to expand after Labor Day when worldwide demand often slumps as seasonal demand ebbs.

Oil Pump Jack Image

I spoke about this situation on CNBC last week. Interestingly, after my comments on CNBC about the crude oil glut, the Energy Information Administration (EIA) reported a few hours later that crude oil inventories rose 2.3 million in the latest week, substantially above analysts’ consensus estimate of just 921,000 barrels. The EIA also reported that distillate inventories (e.g., diesel, heating oil, and jet fuel) rose by 1.5 million barrels vs. analysts’ consensus estimates of a 157,000-barrel decline. Inventories of gasoline fell 691,000 barrels, but even that was a big surprise, since the analysts’ consensus estimate was for gasoline inventories to fall by 1.2 million barrels. As a result, the EIA report was a “trifecta” of bad news for crude oil and refined products, as crude oil, diesel, and gasoline prices fell sharply last week.

I must also mention that a strong U.S. dollar is contributing to the decline in crude oil prices as well. The catalyst for the dollar’s strength was largely the impression from the recent Kansas City Fed’s Jackson Hole conference that the Bank of Japan, the Bank of England, and the European Central Bank (ECB) are disappointed that the Fed has not yet authorized member banks to hold corporate debt as part of their reserves. Specifically, in Japan, Britain, and Europe negative government yields are forcing their respective central banks to buy corporate debt as part of their quantitative easing. However, not only has the Fed stopped its quantitative easing (almost two years ago), but with the exception of TIPS (Treasury Inflation Protected Securities), U.S. Treasury securities have positive yields rather than the negative yields that increasingly characterize government debt in Japan and most of Europe. Frankly, as long as the U.S. has higher yields than other major countries, the U.S. dollar is likely to remain strong for the foreseeable future, which will in turn continue to suppress commodity prices, like crops, crude oil, copper, and steel.


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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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