High P/E Stocks Struggle

High P/E Stocks Struggle while Former High-Fliers Crash

by Louis Navellier

February 9, 2016

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

Balloon ImageOuch! The S&P 500 declined 3.1% last week, including 1.8% on Friday; but the big story was the panic selling in high price-to-earnings (P/E ratio) stocks, especially on NASDAQ last Friday. This is a clear signal that Wall Street will no longer tolerate high P/E stocks. I have been warning investors that the bubble in Netflix (the #1 performer in the S&P 500 in 2015) and Amazon.com (#2) would be pricked.

Netflix and Amazon.com are down 27.6% and 25.7%, respectively, year-to-date, and are now trading at 295 and 401 times trailing earnings, respectively. Looking forward, Netflix and Amazon are trading at 331 and 109 times 2016 forecasted earnings, respectively. So the question remains: Just how many more of these valuation bubbles will be pricked?  I would argue that all pricey NASDAQ stocks with erratic earnings and a poor earnings surprise history, including Tesla, remain vulnerable to more selling pressure until they trade at more reasonable forecasted price-to-earnings ratios and overall volatility subsides.

The problems in the energy patch are not going away, so more dividends are being slashed. Ouch again!  Last Tuesday, in the wake of poor fourth-quarter results, Standard & Poor’s cut its credit rating for 10 energy companies. This all means that the big dividend ETFs with significant exposure to the energy patch, like iShares Select Dividend (DVY), will likely continue to decline steadily as they have over the past year.  Another bad omen for big dividend ETFs is that Bespoke Investment Group showed on Friday (“Dividend Cuts in 2015 Surpass 2008”) that 394 companies cut their dividends in 2015, the most since 2009. So far, 2016 is shaping up to have even more dividend cuts than 2015 so the case for many dividend stocks is crumbling.

Complicating matters further, crude oil fell back below $30 per barrel on Tuesday after the American Petroleum Institute announced that inventories rose by 3.8 million barrels in the latest week. What I feared is now unfolding faster than I had anticipated, namely that the dividends of many energy-related companies are now threatened, since energy companies have to shore up their respective cash flow by (1) suspending stock buy-backs, (2) announcing layoffs, and (3) eventually cutting their dividends to preserve their credit ratings. Although crude oil surged on Wednesday, crude oil prices will likely remain under persistent pressure.

(Please note: Navellier & Associates, Inc. does not currently hold positions in NFLX, AMZN, TSLA or DVY for client portfolios).

In This Issue

In Income Mail this week, Bryan Perry sees “light at the end of the tunnel” with a “bullish blip” in the high-yield debt market, even though he says we may only be in the “third inning of a low scoring game.”  In Growth Mail, Gary Alexander takes his usual longer look back to the GDP as a benchmark for the stock market over the last few decades, indicating a “reversion to the mean” between jagged (stock) and smoother (GDP) lines. In Global Mail, Ivan Martchev explains what the flattening yield curve, China slowdown, and the latest currency trends portend for overseas bank stocks vs. domestic banks, including one key “canary” stock. In his Sector Spotlight, Jason Bodner (who doubles as our Astronomer Royal) compares Gamma Ray Bursts to what we’ve experienced in the market lately, but he does find some safe spaces in a dangerous market.  Finally, my Stat of the Week column examines jobs and manufacturing.

Income Mail:
Jobs Report Puts More Downward Pressure on Yield Curve
by Bryan Perry
What Lies Ahead for Interest Rates?
So What’s Up with Fed Policy?

Growth Mail:
The Fundamentals Still Apply (as Time Goes by)
by Gary Alexander
Comparing the “Syncopated” Dow to the “Smooth” GDP
More Market History: Boeing Bet the Farm…Twice

Global Mail:
The Flattest Yield Curve
by Ivan Martchev
The Ultimate Financial “Canary” Stock

Sector Spotlight:
Surviving a Gamma Ray Burst
by Jason Bodner
Sector Scorecard for Last Week (and the Last Three Months)

Stat of the Week:
Job Growth Slows, but Wages Rise
by Louis Navellier
Trade & Manufacturing Statistics Remain Weak

Income Mail:

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

Jobs Report Puts More Downward Pressure on Yield Curve

by Bryan Perry

Treasuries ended last week mixed and the yield curve flattened further as stocks sold off sharply on a modestly positive January jobs report. Hourly earnings grew by 0.5%, ahead of the consensus 0.3%, but the nonfarm payroll number of 151,000 new jobs badly missed the consensus of 188,000. The Treasury market made no firm conclusions from this data, although the sluggish wage growth of previous years saw a nice uptick in the January labor report, which could explain why bonds didn’t extend their rally.

Thanks to the recent increases in minimum wages, average hourly earnings rose 0.5% to $25.39 per hour, a good bump that leaves the trailing 12-month average hourly earnings up by 2.5%. Another positive sign was that the average workweek rose a bit to 34.6 hours in January and the labor force participation rate rose slightly to 62.7%. On balance, the payroll data was encouraging, but not enough for the Fed to raise rates in March. The U.S. Dollar Index dropped sharply on speculation the Fed may dial back its ambitious four-rate hike blueprint for 2016, and the Treasury yields were close to “unchanged” on Friday’s trading:

Treasury Yields Table

What Lies Ahead for Interest Rates?

On the domestic front, investors received the January 27, 2016 FOMC policy statement with mixed emotions as the Fed acknowledged the presence of macroeconomic headwinds, but still left the possibility of four rate hikes in 2016 on the table. Once again, the Fed reiterated its belief that the decline in oil prices is transitoryeven though WTI crude declined by 20% between the December and January meetings. The unchanged outlook at the Fed did not prevent the market from extending out its rate hike expectations as fed fund futures now project that the Fed will not hike the fed funds target rate until December, 2016.

Fed Fund Futures Rate Prediction Table

The past week was relatively quiet on the economic front, but the previous Friday’s advance reading of fourth-quarter GDP coming in at an annualized rate of just 0.7% (vs. a street consensus of 0.9%) was a jolt, as every major GDP component showed weakness on a quarter-over-quarter basis.

In other economic results (according to Briefing.com’s Economic Calendar (1/27/16-1/28/16), new home sales of 544,000 beat the consensus of 506,000 while December durable goods orders fell 5.1% versus a consensus -0.5%. Excluding the transportation component, the report also disappointed as the related index fell 1.2% against forecasts of -0.1%. Just about every area disappointed with transportation equipment orders falling 12.4%, machinery orders dropping 5.6%, and nondefense capital goods orders sliding 4.3%. The durable goods order report provided further negative input for the next update of the fourth-quarter 2015 GDP report, which is due at the end of this month.

There was a dim light at the end of the tunnel when the high-yield spreads narrowed after starting the year with a notable widening. Last week's narrowing occurred amid a relief rally in crude oil, which climbed to $34.82 per barrel by mid-week after testing the $26 level two weeks ago. The rally came amid speculation over an emergency OPEC meeting, but Friday’s WTI crude retreated to $30.89/bbl.

With the mild rebound in crude prices and the better market tone for commodities in general, the high-yield spread came down to 736 basis points as of Friday. This is an interesting development when one considers the fact that blue chip ConocoPhillips (COP) slashed its dividend by over 60% this past week from $0.74 to $0.25 per share in a move to preserve cash and more importantly its credit rating. So why didn’t the high yield market gap down more – like Amazon.com and Netflix did?

(Please note: Bryan Perry does not currently own positions in AMZN or NFLX or NFLX. Navellier & Associates, Inc. does not currently hold positions in AMZN or NFLX for client portfolios; these positions have been held in past client portfolios.)

It’s widely understood by Wall Street pros that debt markets lead the equity markets – they lead equities into trouble and also out of trouble. From the one-year chart, below, the clear pattern is for the rates on high-yield debt to spike up followed by a period of consolidation after which they can then wreak further havoc. There will be a point when this pattern is broken and yields head lower with little or no advance notice. That’s just how markets have worked since the dawn of man. Bond mavens are up at night with one eye open waiting for this pendulum to swing the other way; but the hard evidence of contracting global economic growth just doesn’t support a reversal of fortune until there is a final “rinse phase” of the sub-prime energy, materials, mining, and emerging market debt markets.

Merrill Lynch High Yield Bonds Chart

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

Using baseball lingo as a measuring rod, we’re probably in the third inning of a low scoring game, meaning this dividend-slashing bankruptcy cycle will likely be like a waterfall event with most of the damage being done by the third quarter. Even perma-bear Goldman Sachs is predicting crude prices to recover by 50% above current prices by year end. If they are even half right, then assuming that markets are a forward discounting mechanism, the bottom for high yield debt just might be in the making.

It is far too early to consider this minor pullback in the high-yield spread as a turning point, but the coincident move up for the iShares MSCI Emerging Markets ETF (EEM) had me wondering just how much of the worst-case scenario for the commodity-related emerging market downward spiral has been priced in. Markets closed with such a thud on Friday that it’s premature to draw any salient conclusions about the “bullish blip” on the screen; however, it is noteworthy for all investors to take notice when something like the EEM shares, which should have been obliterated in the wake of Friday’s sell-off, buck the trend and close out the week with a sustained move to the upside on above average volume.

(Please note: Bryan Perry does not currently own a position in EEM. Navellier & Associates, Inc. does currently own a position in EEM for some client portfolios.)

Emerging Markets Exchange Traded Funds Chart

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

Inflation expectations increased during the past week after falling sharply through the first three weeks of 2016. According to Briefing.com’s Rate Brief released February 8, 2016, the five-year forward inflation breakeven rate (noted in last week’s update as an insightful forward indicator of the future inflation) increased eight basis points to 1.62%, which remains comparable to levels seen in March 2009 and is below the 1.93% rate seen a year ago.

So What’s Up with Fed Policy?

The Federal Open Market Committee (FOMC) is maintaining its policy of reinvesting principal payments from its holdings of agency debt and mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The latest FOMC directive acknowledges the grip that deflationary forces are having on the domestic economy. This is my summary of their message:

  • Household spending and business fixed investment have been increasing at “moderate” rates in recent months versus “solid” rates before.
  • Inventory investment has slowed.
  • Market-based measures of inflation compensation declined further.
  • Inflation is expected to remain low in the near term and
  • The Fed is closely monitoring global economic and financial developments and their implications.

The FOMC has left the door open to ultimately meet its dot-plot expectation of four rate hikes by the end of the year. The policy directive, though dovish, fell short of what the bond market sensed, leading me to believe the Fed doesn’t hold the prevailing view that markets are vulnerable to more extreme levels of volatility than the Fed’s model would suggest.

That disconnect between the Federal Reserve's collegial attitude of how they view the world vs. how the world really is will continue to drive investment dollars into stocks of ultra-safe companies where dividends and dividend growth are supported by pristine balance sheets.

Growth Mail:

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

The Fundamentals Still Apply (as Time Goes by)

by Gary Alexander

“This day and age we’re living in gives cause for apprehension,
With speed and new invention, and things like ‘Fourth Dimension.’
Yet we get a trifle weary with Mister Einstein’s theory.
We must get down to earth at times: Relax, relieve the tension.
No matter what the progress, or what may yet be proved,
The simple facts of life are such they cannot be removed….”

--The verse to “As Time Goes By” by Herman Hupfeld (1931)

The German-American songwriter Herman Hupfeld (1894-1951) was most famous in the 1930s for his nonsense songs written for specific Broadway shows or radio programs. His biggest hit of that depressed decade was “When Yuba Plays the Rhumba on the Tuba.” He was also featured on a 1932 Victor 78-rpm record singing his composition “Goopy Geer Plays Piano, and He Plays by Ear.” He wrote a minor hit for a 1931 show called “Everybody’s Welcome,” which was added to an unproduced play called “Everybody Comes to Rick’s,” which became the basis for a 1942 “B” movie called “Casablanca.” So it was 11 long years (a sunspot cycle) between the composition of “As Time Goes by” and its immortal revival in 1942.

In 1999, the American Film Institute (AFI) voted “As Time Goes by” #2 among the top 100 songs in the movies in the 20th century, behind only “Over the Rainbow,” which was almost cut from “The Wizard of Oz.”

As you can see from the verse (quoted above), Hupfeld’s 1931 song was written as a protest against the depressing downbeat of dismal news during that era. He even spoofed Einstein’s theory linking space and time – the Fourth Dimension – as being inferior to the human element of creating lasting relationships.

The Gershwin brothers also wrote about negative economic headlines in their 1931 Pulitzer Prize-winning Broadway musical, “Of Thee I Sing,” in a song called “Who Cares?” The verse of that song echoes the same basic message as Hupfeld’s verse, in that it urges the listener to forget the “news” for a moment:

Let it rain and thunder. Let a million firms go under.
I am not concerned with stocks and bonds that I’ve been burned with!
…Who cares what banks fail in Yonkers,
As long as you’ve got a kiss that conquers?

--Ira Gershwin’s lyrics for “Who Cares?” from “Of Thee I Sing” (1931)

About 9,000 banks failed in the 1930s, but it was also a decade of almost-universal optimism in song. 

Even though the market crashed severely in 1931 (when these songs were written), these tunes provided good advice for the longer-term. The 1930s would have been a great time to accumulate stocks. As our title song says, “The fundamental things apply as time goes by,” so let’s take a longer-term look at stocks.

Comparing the “Syncopated” Dow to the “Smooth” GDP

Fifty years ago today, on February 9, 1966, the Dow Jones Industrial Average (DJIA) hit a record 1001, intra-day, before closing at 995. That’s as close as the DJIA got to the magic four-figure barrier for the next six years, as the DJIA then fell 25% in the next eight months of 1966 and -36.6% by May of 1970.

One of my favorite correlations is measuring the stock market by the growth of Gross Domestic Product (GDP). This makes some sort of rough sense since the stock market should reflect economic growth in the long-run. For long periods of time, the DJIA (hereinafter called “the Dow”) traded below the GDP, but the Dow rose above the GDP in the late 1950s and 1960s, and then once again from 1998 to 2001:

Gross Domestic Product Gross National Product Dow Jones Industrial Average Chart

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

One historically valid strategy would be to sell stocks whenever the Dow surpasses the GDP, as happened above in 1998, when the Dow peaked at 9338, well above the nominal 1998 GDP rate of $8,793 billion.

Once again, in October of 2007, the Dow peaked at 14,164.53 – slightly above the 2007 GDP ($14,028.7 billion), but the difference was so slight (less than 1%) that it would be easy to miss. The margin was even narrower last May (2015), when the Dow peaked at 18,351.4 and the GDP for 2015 was $18,281.2.

In hindsight, it would be great to have sold in 1998, 2007, and May of 2015; but I prefer to look at the reverse strategy, i.e., the Dow has always returned to match the GDP, so far, so I’ll wait for the market to return to the GDP (“Old Man River”), which keeps rising over time. That’s why I tend to hold good stocks.

If you buy into my Dow vs. GDP theory, you can look at any time in market history – or in the future – to see if the market is generally overvalued or undervalued. I’ve done this for 15 snapshots at five-year intervals over the last 70 years (below), giving you the year-end Dow figure vs. the GDP for that year:

Gross Domestic Product versus Dow Jones Industrial Average Table

Bringing this data up to the moment, the Dow closed last Friday at 16,205, which puts it 11.4% below the closing 2015 GDP figure of $18,281 billion. If the GDP grows a real 2% (along with 1% inflation) this year, the GDP for 2016 will be about $18.83 billion. This does not mean the Dow will rise to 18,830 this year. Long cycles can run 15 to 20 years. The Dow might trail GDP for another five years or more. But it’s comforting to know that market growth has been subpar over the last 15 years. We’re not in “bubble” territory, in my view. As I have long stated, we’re still playing “catch-up” from two huge market crashes.

You could argue that the similarity of the Dow to GDP is a numerical coincidence, or that the Dow is a limited index – and you would be right on both counts – but I would respond that the Dow is the longest-running index for comparisons to GDP and that neither the Dow nor GDP are indexed to inflation, so it’s an apples-to-apples contest. However, if you prefer the S&P 500 in most comparisons (as I do), the long-term chart tells the same basic story as the Dow. This long-term chart shows the S&P 500 being over the GDP line in the 1960s (overvalued) and again in 1997-2001 and 2006-08, but it is under the GDP today.

Gross Domestic Product versus Standard and Poor's 500 Chart

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

Bringing this chart up to date, GDP is $18.3 trillion in 2015 and the S&P 500 is 1880 as of last Friday, so the S&P 500 line (in red, right axis) would still be below the nominal GDP in billions (black, left axis).

The market provides “Fascinatin’ Rhythm” but my money is on “Old Man River” (“As Time Goes By”).

More Market History: Boeing Bet the Farm…Twice

This year marks the centennial of a great American corporation. William Boeing incorporated his Pacific Aero Products Company on July 15, 1916. Two of Boeing’s biggest hits debuted on this day in the 1960s.

On February 9, 1963, the first Boeing 727 took off, and it was a success. It was the first commercial airplane to break the 1,000-sales mark, ending up with 1,832 planes by 1984, when production ended.  The 727 was so successful that in 1967, Boeing’s payroll topped 100,000, but then it fell on hard times.

On February 9, 1969, the first Boeing 747 jumbo jet took its inaugural flight.  The company bet the store on the 747, too, but it was not a success at first. Boeing did not receive a single new order from any U.S. airline for 17 months. Then, in March 1971, the Senate rejected funding of the Boeing SST (supersonic transport). Boeing’s job roles dipped to 32,500 by November, 1971, when D.B. Cooper hijacked a jet and became a grim folk hero. My dad, who had worked 30 years for Boeing at the time, kept his job but most didn’t.  As a result, some clever local real estate agents put up a billboard in 1971: “Will the Last Person Leaving Seattle Turn out the Lights.” (See The Seattle Times, November 3, 1996, “Lights Out, Seattle.”)

Another form of transportation fell on hard times in the 1960s. On February 10, 1966, 50 years ago this week, on the same day the Dow last touched 1000 in the 1960s, Ralph Nader, speaking before a Senate committee, testified that the U.S. car industry was socially irresponsible. Nader’s late-1965 book, Unsafe at Any Speed: The Designed-In Dangers of the American Automobile, had shocked Detroit and the nation.

The Senate hearings brought us the National Traffic and Motor Vehicle Safety Act, which later mandated seatbelts. Then came German and Japanese competition. Detroit learned lessons about competitiveness and safety. By the 1980s, U.S. cars were much better made, but The Big 3 were complacent in the 1960s.

In retrospect, we can see why the Dow was overpriced at 1000 on February 9 & 10, 1966. By 1966, America had been a clear world leader for 20 years following the end of World War II – a devastating conflict that left huge parts of Europe and Asia in ashes, fighting for their survival even after the war.  American know-how rescued the Japanese economy and rebuilt Europe through the Marshall Plan. But along with our leadership came a certain arrogance, reflected in the 1958 book, “The Ugly American.”

This arrogance was beaten out of us by Vietnam, Watergate, urban and racial riots, a decade of stagflation (slow growth with high inflation), and numerous other social upheavals. Our confidence later returned under Reagan in the 1980s and Clinton in the 1990s, but the last 15 years have humbled us once again.

American business, at its best, is still a big gamble, a new jet taking off into the unknown. Investors still need to examine the fundamentals of each company and place their bets on those with the best game plan.

Global Mail:

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

The Flattest Yield Curve

by Ivan Martchev

The decent employment report that finally showed some wage gains was the catalyst for a stock market sell-off last Friday. The market acted as if future fed fund rate hikes are coming back into the picture – but in my opinion they aren’t. At the beginning of the year, fed fund futures and other short-term interest rate markets like euro-dollar futures were pricing in four rate hikes. As January progressed those rate hike probabilities vastly diminished. You can see that in the plunge in 2- and 10-year Treasury note yields so far in 2016.

Two Year United States Treasury Yield Chart

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

The 2-year (red) and 10-year (black) Treasury note yields peaked right after the terribly misguided Fed rate hike in December. They closed last Friday at 0.74% and 1.85%. It is worthwhile pointing out that on Friday the 2-year note yield was up (due to some evident wage cost pressure in the employment report) while the 10-year note yield was down (probably due to the global deflationary outlook). It is also worth noting that the 2/10-spread – the difference between those two benchmark interest rates, otherwise referred to by its technical term, the slope of the yield curve – is the flattest it has been since January 2008 when the Fed was already embarking on a series of panicky rate cuts at the onset of the Great Recession.

Ten Year Treasury Constant Maturity Rate Chart

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

It is a fact that inverted yield curve situations have preceded every one of the last five recessions and so have Fed rate-hiking cycles. While we are far from an inverted yield curve, we are definitely seeing a flattening yield curve, which typically signifies a slowing economy. A slowing economy in the U.S. at the time when the global economy is even slower is not an environment for Fed rate hikes, in my opinion. The fact that 2- and 10-year Treasury note yields dropped like rocks in January means that the bond market is signaling to the Fed that they have made a major mistake with the rate hike. It is also a warning to the Fed that they should stop before they do any more damage.

The flattening yield curve can also be seen in the performance of the financial sector, which has been notably under pressure in 2016. The KBW Bank Index would be a good gauge for the sector while a more tradeable ETF equivalent would be the Financial SPDR (XLF). Banks hate flattening yield curves, which tend to hurt their profitability. Banks borrow short and lend long, so the steeper the yield curve, the fatter their net interest margins. Another reason why banks don’t like flatter yield curves is that they represent slower economic growth, or even recessions, which tend to produce more losses for their business.

(Please note: Ivan Martchev does not currently own a position in XLF. Navellier & Associates, Inc. does not currently own a position in XLF for client portfolios.)

Financials Select Sector Exchange Traded Fund Chart

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

Banks notably underperformed the S&P 500 in the fed rate hiking cycle at the turn of the last century in 1998-2000. They also notably began to underperform in the Greenspan-Bernanke rate hiking cycle in 2007, even though the problems in the mortgage markets were so large that no rate cutting by the Fed could have saved them in 2008. The banking sector was notably under pressure in 2011 in the eurozone crisis for fear of contagion and is embarking on another such cycle of underperformance in the great global deflation scare of 2016, this time in large part driven by China.

Banks hate deflation because their net interest margins tend to contract, but also because nonperforming loans (NPLs) tend to climb as deflation – falling prices in the global economy – tends to increase the real value of debts while corporate and governmental revenues are weak and falling. Japanese banks are good examples of what happens when deflation sets in, as they could never really embark on more sustainable profit growth cycles after 1990. Recently, a lot of large global European financials are beginning to remind me of the Japanese banks in the 1990s as some have taken out their 2008 financial crisis lows (according to Barchart.com) – like Deutsche Bank (DB), Banco Santander (SAN), and Credit Suisse (CS) – while others are rapidly approaching those 2008 lows, like HSBC (HSBC), Barclays (BCS), and Societe Generale (SCGLY).

(Please note: Ivan Martchev does not currently own positions in DB, SAN, CS, HSBC, BCS, or SCGLY. Navellier & Associates, Inc. does not currently own positions in DB, SAN, BCS, or SCGLY; these positions have been held in past client portfolios. Navellier & Associates, Inc. does currently own positions in CS and HSBC for some client portfolios.)

In that regard, the U.S. banking sector is faring much better, given what is going on with banks globally; but my point is that U.S. monetary policy affects the whole world, whether the Fed likes it or not (I think they do), so the last thing the world needs in the present environment is more Fed rate hikes.

The Ultimate Financial “Canary” Stock

Every time we get into some financial market turbulence, I tend to keep a close eye on a particular stock. Sure, the financial sector is important; but there is a particular company that has leverage to the economy and financial markets’ performance globally that makes for a better “tell” about where things stand, and where they are headed.

That company is Goldman Sachs (GS).

Apart from the conspiracy theories that have given them the nickname Government Sachs – after all, senior Goldman Sachs executives served as both Bill Clinton’s and George W. Bush’s Treasury Secretaries – this venerable Wall Street firm is famous for outmaneuvering its rivals over the past 20 years. Just look at this relative chart of Morgan Stanley (MS) and Goldman Sachs and you may reach the conclusion that its closest rival is habitually a day late and a dollar short. Meanwhile, the former GS rivals are either bankrupt (Lehman) or have been bought out at cents on the dollar (Merrill).

Goldman Sachs Group Morgan Stanley Chart

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

So what is the Goldman canary saying now?

Goldman Sachs Incorporated NYSE Chart

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

Goldman almost (but not quite) made an all-time high in 2015 and appears to have completed a head and shoulders top with the “head” at $217 and the “neckline” at $170. That technical pattern implies a move down to $120 or so. But, as readers of this column know, I cannot place my faith blindly in squiggly lines alone. I think global deflation is bad for Goldman Sachs as it will make their overall business much more problematic, be it investment banking, asset management, or capital markets/trading.

Many investment firms, including Goldman, used to blame QE for the lack of volatility in financial markets for years, which caused them to lay off plenty of traders in their fixed income trading units. They are finding the results of the Chinese curse “may you find what you are looking for” as the Fed is trying to normalize monetary policy – at a highly inopportune time, in my opinion – while volatility in fixed income, bonds, and commodities is exploding.

So the next time you wonder if the stock market is on firmer footing, pull up a quote for GS. Given this is still the best-run Wall Street firm, its stock says as much about Wall Street as about the company itself.

(Please note: Ivan Martchev does not currently own positions in GS or MS. Navellier & Associates, Inc. does not currently own a position in GS for client portfolios; this position has been held in past client portfolios. Navellier & Associates, Inc. does currently own a position in MS for some client portfolios.)

Sector Spotlight:

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

Surviving a Gamma Ray Burst

by Jason Bodner

Looking out into the night sky fills me with wonder. Familiar constellations are scattered across the sky in a peaceful and tranquil scene. They are, however, like a handful of sand grains in the middle of the Sahara Desert. We can only see a fraction of the 100 billion or so stars in our own Milky Way galaxy. Beyond our galaxy are 100 billion or more galaxies! Yet, lurking within those galaxies are terrors of destruction which come from dying stars.

Night Sky Image

All stars will die one day and there are a few different ways for them to go out. Some just burn off and cool to a brown dwarf. Some turn into a red giant and blow out their outer layers after swelling to a huge size. The bigger stars can collapse in on themselves and explode in a supernova. When a gigantic star many times the mass of the sun crumples under its own weight after it has run out of fuel, it instantly becomes a black hole and shoots out jets of intense energy at the speed of light.

Gamma rays are the most energetic forms of light in the universe. Gamma-ray bursts (GRBs) are brief, intense explosions of high-frequency electromagnetic radiation. In anywhere from milliseconds to minutes these events give off as much energy as the sun during its entire 10-billion-year lifetime. If a gamma-ray burst was aimed directly at the earth, we would be doomed. Some scientists actually think gamma-ray bursts may even possibly have been responsible for mass extinctions on the earth millions of years ago. They are the most powerful explosions of energy in the cosmos since the Big Bang itself; the equivalent of a thousand Earths vaporized into pure energy in a matter of seconds.

Gamma Ray Burst Image

We often worry about the latest headline that comes along. Naturally some things are just not in our control. I'd imagine many of you will not worry about a GRB vaporizing life as we know it because we can’t do anything about it. But there are many who do worry if global financial markets are about to crash, vaporizing some portfolios. It seems clear that a lot of the market volatility is not attributable to the everyday investor building a retirement portfolio. I doubt IRA investors are trading in and out of stocks many times a week. But many hedge funds do slip in and out of the market many times in a day, hour, minute, or second. So most of this whippy action is due to the professional funds trading in and out, and as each day goes by, more and more algorithms are accounting for more and more of the volume.

Feedback Loop Image

It seems to me that we are currently in a feedback loop. The anxiety of witnessing wealth destruction and global uncertainty breeds indecision. The indecision causes paralysis, which in turn breeds anxiety. This loop feeds back until the “uncle” point is reached and the towel is thrown in and capitulation selling happens. Our current market is definitely causing anxiety and indecision. Is it just a dip, or is this the last sideways channel before we drop off a cliff? These questions seem impossible to answer as each day brings drastically different action. Just look at Wednesday where some indices were down more than 2% intraday only to finish positive on the day. The volatility is wicked and the emotional fluctuations are tough to endure. The undercurrent, however, is a global slowing of growth and earnings.

Crude oil continues to hog the headlines as it supposedly drives equity markets, but looking into the sectors we have seen financials as the latest point of pressure for stocks. Banks and Insurance companies continue to take a beating over fear that the energy price collapse will cause a default contagion. This has been the leading visible fear for weeks now – until Friday's assault on technology.

Some high growth multiple stocks of the past few years reported earnings on Thursday and sank after hours as much as 40% to 50%. The justification for a “growth premium” is vaporizing as if growth encountered a GRB. There is no more tolerance or optimism towards companies with erratic earnings and unreliability in their growth patterns. NASDAQ suffered the most on Friday with a downright ugly performance (-3.25%). There was however a positive in the sense that Friday’s selling displayed some efficiency in the ETF market. The QQQs did not trade at a significant discount to NAV the way we saw on August 24th of last year. Another relative positive is that despite closing only three-cents away from the August 24 lows, Friday’s QQQ volume was significantly lower than on August 24th.

(Please note: Jason Bodner does not currently own a position in QQQ. Navellier & Associates, Inc. does currently own a position in QQQ for some client portfolios.)

Sector Scorecard for Last Week (and the Last Three Months)

Let's see how the sectors behaved in the latest volatile week – per day, total weekly, and 3-month trends:

Standard and Poor's 500 Sector Indices Tables

Let’s look above at 1-year charts of the recent best and worst performers among the sectors. As if taken out of “the defensive market playbook,” Utilities have been performing very well in the past few weeks. As market pressure comes, we have seen many times in the past a flight to lower volatility and stable dividend stocks like Utilities. Telecom services have also been a star performing sector in recent weeks.

It goes without saying that Energy has continued its weakness weighing on the entire market which has spread to the Financial sector. As we have been discussing for a while, the banks and lenders exposed to energy debt, have been punished in anticipation of crisis. The last chart in this group is the Infotech sector which has been fairly resilient until January hit. Friday was a significant setback for Infotech.

Standard and Poor's 500 Sector Indices Charts

We tend to fear things we can’t control. The markets are spookily volatile and this is causing much in the way of anxiety and indecision, which feeds back and amplifies. The markets will eventually stabilize and new leadership will emerge. It just may not be anytime soon. There may be more shocks coming soon.

So the next time a wave of fear grips you when you turn on CNBC and see a sea of red, remember Woody Allen’s famous line: “I’m not afraid of death; I just don't want to be there when it happens.”

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.*

Job Growth Slows, but Wages Rise

by Louis Navellier

Last Friday, the Labor Department announced that payrolls rose by 151,000 in January, substantially below economists’ consensus estimate of 185,000. The unemployment rate declined to 4.9% from 5%, and is now at the lowest level in eight years. Due to minimum wages rising across the country in January, average hourly earnings rose 0.5% (12 cents) to $25.39 per hour. In the past 12 months, average hourly earnings have risen 2.5%. Another positive sign was that the average workweek rose to 34.6 hours, and the labor force participation rate rose slightly to 62.7%. In addition, December’s robust payroll growth was revised down 30,000 to +262,000, while November’s payroll was revised up 28,000 to +280,000.

I should add that on Wednesday, ADP reported that 205,000 private payroll jobs were created in January, down from a revised 267,000 in December. Most of the one-month deceleration in ADP job growth was in large companies, but the growth at small- to mid-size companies remained strong. Overall, the January payroll data was encouraging, but not enough for the Fed to continue raising key interest rates in March.

Trade & Manufacturing Statistics Remain Weak

The other big news on Friday was that the Commerce Department announced that the trade deficit rose 2.7% in December as exports declined 0.3% to $181.5 billion and imports rose 0.3% to $224.6 billion. Since trade is a major component of GDP calculations, the December trade data will likely result in a downward GDP revision. A strong U.S. dollar is having a negative impact on exports, since overall exports declined 4.8% in 2015, the first year that exports declined since 2009. The fact that the manufacturing and farming sectors are struggling will be another reason why the “data dependent” Fed will not likely raise key interest rates in March.

Oil Derrick ImageThe news on the manufacturing front remains weak, which puts downward pressure on crude oil and other commodities. China announced last Monday that its official (government-compiled) Purchasing Managers Index (PMI) declined to 49.4 in January, down from 49.7 in December. This represents the sixth straight monthly decline in the China PMI. Since any reading below 50 signals a contraction, China’s mighty manufacturing sector is clearly struggling. It was also announced that in 2015, profits at Chinese state-owned companies fell 6.7%, railway freight fell 6.7%, and construction of new floor space plunged 14%. China’s government continues to lower borrowing costs for businesses. They have implemented six interest-rate cuts, stepped up fiscal spending, and made several reductions in required bank reserves over the past 15 months.

Interestingly, China’s corporate debt has soared in the past several years and is now equivalent to 160% of GDP, up from 98% in 2007, according to Standard & Poor’s. Until, China’s economic growth improves, most economists expect that the People’s Bank of China will continue to cut its key interest rates.

On Tuesday, the Institute of Supply Management (ISM) announced that its manufacturing PMI rose to 48.2 in January, up from 48 in December. Despite this slight improvement, this was the fourth straight month that the ISM manufacturing PMI was below 50, which signals a contraction. Additionally, only eight of the 18 industries tracked by ISM reported growth in January, so manufacturing remains weak.

The Commerce Department reported on Tuesday that consumer spending was flat in December. Clearly, growth remains weak and further downward revisions remain possible. Then, on Wednesday, ISM reported that its service sector index declined to 53.5 in January, down from 55.8 in February, which is the slowest pace in two years. So the service sector is still growing, but at a significantly slower pace.

Gold Bars ImageDue to sputtering worldwide economic growth and concerns about central bank policies, gold is re-emerging as a safe haven. Gold has risen almost 10% so far in 2016 vs. the Reuters-Jefferies CRB commodity index, which is down 8.13% year-to-date, with oil and natural gas down more than that. The other safe haven is Treasury bonds, but the 10-year Treasury bond now yields just 1.86%, a 9-month low.

There was also a very interesting development on Wednesday when the Japanese finance ministry cancelled its 10-year government bond auction for retail investors on the apparent fear that there would be no buyers. Previously, 2-year and 5-year note auctions have been cancelled for retail investors, but this is the first time the 10-year bond auction has ever been cancelled. Currently, interest rates are negative in Japan going out eight years, and the 10-year Japanese government bonds currently yield a scant 0.02%.

Please note: With the market in such turmoil in recent weeks, I’ve decided to delegate my future “Stat of the Week” report to Bryan Perry and our other fine columnists while I take you inside the workings of the market, as I see it, in subjects ranging from ETF pricing to High Frequency Trading (HFT) to the “bubble stocks” I see in danger of popping, to dividend trends and the other major market trends happening now.


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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