Holiday Euphoria

Holiday Euphoria May Lift the Market Even Higher

by Louis Navellier

November 22, 2016

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

The overall stock market has begun to stabilize as the post-Presidential election short-covering rally in financial, industrial, and material stocks begins to fizzle. Last Friday’s Bespoke Report (“Shuffle Up and Deal,” November 18, 2016) called the last two weeks “one of the biggest sector rotations in memory,” due to traders betting that “single party control of Washington will result in major deals on the issues businesses care most about, namely taxes and regulations.” Bespoke analyzed the S&P 500’s performance in the first eight trading days following the election and found that the 50 stocks (10%) with the highest short interest surged 8.13% while the 50 stocks with lowest short interest rose only 2.22%, reflecting the power of the recent short-covering rally. Meanwhile, the 50 smallest-capitalization stocks in the S&P 500 surged 8.78% vs. a 1.87% rise for the 50 biggest stocks in the index. Bespoke analysts also found that the 100 stocks with the lowest price-to-earnings ratios surged 8.22% vs. 1.30% for the 100 highest-P/E stocks.

Holiday Meal Image

The overall S&P has risen by just under 2% since November 8th. According to Bespoke, the best S&P sector since Election Day was Financials (+10.8%), followed by a distant second for Industrials (+5.1%).  The worst-performing sectors were Utilities (-6.4%), Consumer Staples (-4.4%), and Real Estate (-3.6%).

Fortunately, the seasonally strongest time of year is now just beginning. Another report by the Bespoke Investment Group (“Thanksgiving Returns,” November 16, 2016) shows that in the last seven years of the current bull market, the S&P 500 has risen by an average 1.55% during the week following Thanksgiving and an average +3.68% for the five-week span from Thanksgiving to New Year’s Eve. Longer-term, in the 70 years from 1945 to 1915, the S&P 500 has averaged +1.98% from Thanksgiving to year’s end.

Happy Holidays!

In This Issue

In Income Mail, Bryan Perry stages a one-man debate with Goldman Sachs regarding their latest forecast for 2017. In Growth Mail, Gary Alexander compares the investment landscape after the revolutionary elections of 1980 and 2016. In Global Mail, Ivan Martchev updates us on the strong U.S. dollar vs. a trend down in the euro, gold, and German bunds. In Sector Spotlight, Jason Bodner uses sectors (and the recent election) to show us that “things are seldom what they seem.” And in my final word I’ll cover the suddenly-reviving U.S. economy and what that may portend for the markets and the U.S. dollar in 2017.

Income Mail:
Analyzing Goldman Sachs’ Revised 2017 Forecast
by Bryan Perry
Throwing a Flag for “Piling on” Too Much Debt

Growth Mail:
Will 2017 Mark a Major Turning Point in U.S. Growth?
by Gary Alexander
Reagan was Maligned Then as Much as Trump is Today

Global Mail:
What’s Behind the Dollar Breakout?
by Ivan Martchev
How ‘Bout that “Short of the Century”?

Sector Spotlight:
Things Are Seldom as they Seem
by Jason Bodner
Sector Swings Signal a “Totally Different Era”

A Look Ahead:
The Economy is Beginning to Hum Again
by Louis Navellier
Impact of the Dollar’s Recent 14-Year High

Income Mail:

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

Analyzing Goldman Sachs’ Revised 2017 Forecast

by Bryan Perry

The post-election rally of the last two weeks propelled the Dow Jones Industrial Average higher by over 650 points with shares of Trump nemesis Goldman Sachs (GS) ironically benefiting the most, gaining about 16%. You would think that Goldman’s CEO, Lloyd Blankfein, who grew up in a Brooklyn housing project and is now worth an estimated $1.1 billion (source: businessinsider.com), would send President-elect Trump a thank you note – not just because his stock is at a 52-week high, but because of all the potential deals that his company may be able to create during a pro-business Trump administration. (Please note: Bryan Perry does not currently own a position in GS. Navellier & Associates, Inc. does not currently own a position in GS for any client portfolios. Please see important disclosures at the end of this letter.)

Last week, Goldman Sachs listed 10 market themes it is forecasting for 2017 in a note to clients on Thursday, November 17th. With each forecast, I’ll lay out my view as to whether the company’s outlook seems rational, especially in light of Goldman Sachs’ reputation for being very smug and unapologetic (i.e., complicit in the mortgage crisis of 2007-2010).

#1: “Expected Returns: Only Slightly Higher.” The firm’s 2017 year-end forecast for the S&P 500 is now 2,200, updating the position of Goldman’s Chief Investment Strategist, David Kostin, who said as recently as September 29, 2016 that the S&P would end 2017 no higher than 2,100 (see Bloomberg – “Goldman Sachs Slashes S&P 500 Target, Sees Negative Return for US Stocks”). The S&P punched out a new all-time high last Thursday of 2,193 and we haven’t seen a “Santa Claus rally” yet. Not only will he eat crow this time next year, but my guess is that if he doesn’t change his tune, he will be made to step down in lieu of someone with a brighter view of the economy and stock market. After all, it may be better for business.

Goldman Sachs Sky Walk Image

#2: “U.S. Fiscal Policy: A Pro-Growth Agenda.” Gee, it seems like the right hand at Goldman isn’t talking to the left hand. In an outfit where each partner can earn about $3 million to $6 million per year (source: qz.com/smaller-bonuses-for-some-of-goldman-sachs-elite-partner), you'd think they could put out something a bit more creative than what Joe Six Pack is already astutely aware of. But again, this is the same company that sent an internal memo to employees forbidding its partners from donating to the Trump campaign while apparently not restricting its employees donating to the Clinton campaign (Fortune Magazine, September 6, 2016, “Goldman Sachs Bans Employees from Donating to Trump”).

#3: “U.S. Trade Policy: Concerns are Likely Overdone.” I agree with this position. In his first phone conversation with President Xi Jinping of China, Trump appeared to set aside his China-baiting critiques from the campaign trail, vowing that the two nations would have “one of the strongest relationships,” according to a statement released by Trump’s transition office (source: Reuters, November 14, 2016). This diplomatic and productive dialogue at a high level may dispel some of the over-hyped fears about a massive trade war and all manner of new tariffs, when a re-working of the current trade agreements is more likely in the cards.

#4: “Emerging Markets Risk: The ‘Trump Tantrum’ is Temporary.” This prediction is a toss-up as some forces are inherently bearish for emerging markets, namely a “king dollar” rally that had the Dollar Index (DXY) trading at a new 14-year high last week against a basket of five other major global currencies. The United States will be deemed the engine that pulls the global economic train out of the tunnel of global deflation, but foreign exchange currency headwinds could wreak havoc on profit margins.

#5: “Trump and Trade: Hedge with RMB” (RMB = China’s official currency, the renminbi). I agree with this positon. China will continue to manipulate its currency to benefit its exchange rate with the dollar. The yuan (a more popular name for the RMB) was trading at just under 6.40 to the U.S. dollar a year ago, and today it’s 6.90. A further devaluation of the yuan benefits the Chinese economy greatly, so they can export more goods to an improving U.S. economy, where consumer spending accounts for two-thirds of GDP.

United States Dollar Versus Chinese Renminbi Currency Exchange Rates Chart

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

#6: “Monetary Policy: Focusing the Toolkit on Credit Creation.” I would expect that the loosening of certain elements of Dodd-Frank will encourage the banks to take on more risk. This is only natural, as long as it doesn't go to the pre-2007 level of “drunken sailor” lending practices and the pre-2007 political mantra that “everyone deserves to own a home.” These practices pushed the economy over the edge.

#7: “Corporate Revenue Growth Recession: Signs of Inflection.” Goldman and the other research shops are rapidly modifying their earnings outlook for 2017 after the Trump victory. Lower corporate taxes, repatriation of capital on attractive terms, and the dialing back of deregulation for small business, energy, and a push to actually implement large-scale infrastructure spending will likely create higher-paying jobs and generate more take-home pay. All these trends support a brighter outlook for growth.

#8: “Inflation: Moving Higher Across Developed Markets.” Goldman must be making this statement after looking through the rear-view mirror. Costs for rents, health care, home repairs, college education, senior assisted living, taking your pet to the vet, and travel and leisure have been going up all year. If you are buying laptop computers or rail cars that carry coal, inflation is barely budging. But if you are simply paying for household expenses and services, the inflation genie has been out of the bottle for a while.

Throwing a Flag for “Piling on” Too Much Debt

The huge and growing public debt is the elephant in the room, but it is buried at #9 on Goldman’s list:

#9: “The Next Credit Cycle: Kinder and Gentler.” Nobody can possibly have a crystal ball on this issue. While home equity lines of credit have declined on a marginal basis, huge increases in auto loan and student loan balances could trigger some stress on markets, although it’s way too early to tell.

United States Household Borrowing Chart

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

If interest rates rise much further, the biggest credit bubble of concern will be managing interest on the national debt, now at $19.8 trillion. As rates return to more normalized levels, the amount of interest that must be paid for the government to service its debt will rise substantially. Data from the Congressional Budget Office (CBO) website predicts that the yield on the 10-year Treasury will rise to 4% by 2019. As a result, the cost of servicing the federal debt will more than triple from $250 billion in 2016 to more than $800 billion in 2026. By 2023, interest will represent more than 14% of the federal budget (vs. 6% now) and continue to climb. A one-percentage point increase costs the country $1.6 trillion over the next decade.

Total Federal Spending in 2015 Pie Chart

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

#10: “The ‘Yellen Call’ 2.0: Now with a Contingent Knock-in.” The “Yellen call” is the opposite of the so-called Greenspan or Bernanke “put” that investors once thought underpinned share prices. And while that was supportive in its day, the “Yellen call” is likely to keep stocks in check for some time.

I wholly disagree with Goldman’s position here because as rates normalize, it’s indicative of an economy that is expanding with rising earnings prospects, hence a continuation of the bull market for stocks.

In conclusion, the “big picture” for the Trump administration is to bring long-term debt totals down to more manageable levels. This will require a comprehensive plan to address the major drivers of our debt. Reforming the tax code, slowing the growth of entitlement spending (and other spending), and helping the economy through corporate incentives are all necessary to put debt on a downward path.

Many scholars and economists support the school of thought that argues the government is not a business and shouldn’t be thought of as such because non-revenue-generating elements are part of its structure. I disagree. At no time in our nation’s history have we needed to run our government more like a business than now, so we don’t end up like every other great civilization before us, in an irreversible decline.

I think we’re fast approaching a point where we need to call a time-out on the constant political attacks that characterized the campaign rhetoric, so that the brains in the Trump administration and the brains at the likes of Goldman Sachs and other high-level economic think tanks can sit down in the same room and carve out a successful economic plan for the next decade. If investors see any inkling of genuine seriousness by Trump, Congress, the Treasury, the Fed, and Wall Street to address the elephant in the room (our national debt), then all our 401(k) plans will outperform in a manner that not only keeps up with the inflation genie but puts our great nation on a course that is ahead of the curve – for a change.

Growth Mail:

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

Will 2017 Mark a Major Turning Point in U.S. Growth?

by Gary Alexander

At the New Orleans Investment conference in the last week of October, we had a special panel honoring two newsletter pioneers who died within the last year, Canada’s Ian McAvity, editor of “Deliberations” since 1972, and Richard Russell, editor of Dow Theory Letters for a phenomenal 58 years, since 1957.

With the death of Howard Ruff last week, we’re seeing an end of an era in the financial newsletter world that I have followed for nearly 50 years.  In the late 1960s, I began following my first of many maverick newsletter editors, Harry D. Schultz (now retired at age 92). The reason these newsletters were important is that the mainstream investment advice of the 1970s wasn’t working. Stocks were falling sharply in real (after-inflation) terms. Bonds and savings accounts also earned negative real returns. But “gold bugs” like Schultz, Russell, and Ruff (editor of Ruff Times) had winning advice and a loyal following back then.

Unlike Schultz, Russell, and some other early gold bugs, Ruff was an extrovert with a winning personality so he also started a TV show, “Ruff House.” Since mainstream advisors were way behind the curve of the inflationary realities of the 1970s, I eagerly bought their books and letters and watched Ruff’s TV show.

In 1979, Ruff wrote a #1 best-seller that remained on the New York Times best-seller list for over a year, “How to Prosper During the Coming Bad Years.” His book proved to be good advice for 1979 but not in the 1980s, since America made a generational sea-change with the election of Ronald Reagan in 1980 – a maverick Republican with “dangerous” ideas. That election was easily as controversial as Trump is today.

In the 1980s, I published my own letter, “Alexander’s Monthly Economic Newsletter” (AMEN), which I modeled after Kiplinger’s four-page typed letter of telegraphic facts and witty insights. I sent it out to other “hard money” editors and offered to swap subscriptions. This way I got the benefit of their insights at little cost. Then, during Reagan’s first year in office, I began working for a major financial publisher in Washington, DC, where I at last had access to all the major investment newsletters and financial resources available at the time. I was a consulting editor for a major investment publisher. Along with two other consultants, we decided what articles made the cut for the most widely-circulated newsletter of the day.

There was great conflict on our staff about whether Reaganomics would work, whether gold would soar or tank, whether the U.S. dollar would rise or fall, whether exchange controls would be imposed, and other big issues. These great debates also dominated the early investment conferences I attended, including Harry Schultz’ summit in Freeport (Bahamas) in May 1980, the New Orleans investment conferences of 1981, and our own company’s offshore conferences, held in the Bahamas, Costa Rica, and Canada in 1981-82.

Let me share just a few recollections from my “AMEN” newsletters of late 1980 and 1981:

I opened my December 1980 issue describing the dismal economy: “The Prime Interest Rate escalated to 18.5% today, a quantum leap from 17.75%, and up from 10.5% in early August. It is the surest indicator that we are in for a double-dip recession, which this letter predicted all along.” Next paragraph: “Inflation is back up to a 13% rate in September and October, following a hopeful 4% rate in July and August.”

Then, I began my survey of newsletter advice: “The stock in trade for newsletter writers seems to be a set of specific predictions. I read about a dozen newsletters regularly and scan a few dozen others. I’m sometimes amazed at the temerity of the predictions these writers make, and the gale of silence that follows their failures of foresight.” I then offered a section “Gold Price Roulette,” in which newsletter writers “feel obligated to pick a number between $400 and $3,000.” I quoted four newsletter samples, starting with Howard Ruff (in Ruff Times, October 15), who predicted a rise to $900, then a fall to $400, then a wild run up to over $2,000 by mid-1982.” Sadly, gold never rose above $510 from 1982 to 2005.

Stocks Versus Gold Chart

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

I covered my first (1981) New Orleans Investment Conference as a correspondent for another financial publisher. Held November 18-22, in a time of financial crisis, I began my report by noting “a general air of restraint and perhaps even hopelessness at this year’s convention. Not only were we suffering a full-fledged recession – perhaps the beginning of Doug Casey’s ‘Greater Depression’ – but also the price of gold, collectibles and other traditional inflation hedges were dormant at best.” The “Gold Price Roulette” contest that year was “played on the downside,” with various projections of a new base at $282 to $338.

At that 1981 conference, I began to be a contrarian after seeing 500 investors crowd into a room where the gold prediction was $3,000 per ounce, vs. just a handful in Harry Browne’s competing workshop, since he had publicly stated that gold had peaked for now. That’s when I thought Harry might be right.

The 1981 conference’s closing afternoon featured an impressive talk by George Gilder, author of a best-seller at that time, “Wealth and Poverty.” He said prophetically that “China is now magnetized toward capitalism.” Gilder characterized the coming decade as the “Roaring Eighties, in which small technical companies, such as Intel” will be the Nifty Fifty of the 1980s. He also pointed to the Kemp-Roth tax cuts as “harbingers of boom times.” He and others predicted Reaganomics would work, and they were right.

Reagan was Maligned Then as Much as Trump is Today

The election and first year of Ronald Reagan’s presidency tested the resolve of investors and working Americans alike. Reagan had a few simple ideas – break the back of inflation, defeat the Soviet Union without firing a shot, and make Americans proud to be Americans again. He succeeded at all three.

His critics were equally as vitriolic as Trump’s critics now. Here are a few examples:

  1. “We sometimes have the feeling that we are living in the time preceding the election of Adolf Hitler.”
  2. “The United States has embarked on a course so deeply reactionary, so negative and mean-spirited, so chauvinistic and self-deceptive that our times may soon rival the McCarthy era.”
  3. “Voters who supported him were like the ‘good Germans’ in Hitler’s Germany.”
  4. “…the climate we’re in—rising violence, the Ku Klux Klan—it is exceedingly frightening.”
  5. He is “as unscrupulous and as irresponsible as Hitler. In a sense, he is potentially more dangerous than the German Nazi leader because he has a much more powerful military arsenal at his disposal.” *

*All these quotes are from 1980 about Reagan (see “The Great Liberal Freakout,” by Steven Hayward, Nov. 9, 2016)

Also in 1980, the Bulletin of Atomic Scientists, which keeps the Doomsday Clock (which purports to judge the risk of nuclear annihilation), moved the hands on the clock from seven to four minutes before midnight.

The economic situation today is far different than it was in 1980, but the mood of the nation is the same. Like investors in 1981, we are at a crossroads again. Will we believe the negative rhetoric of what might happen, or will we trust in the perseverance and creativity of the American people to prevail once again?

On July 5, 2016, Ed Yardeni reported on his meeting with the noted Reagan-era economist Art Laffer:

“Art, who is known as one of the founding fathers of supply-side economics and greatly influenced Reagan’s economic policies, predicted that Donald Trump would win the presidency in a landslide. He noted that when Ronald Reagan ran for President, he also was spurned by his own Republican Party establishment because he was an outsider in many ways, like Trump…. [Laffer] acknowledged that he wasn’t happy with Trump’s anti-trade rhetoric, but believes that Trump really doesn’t mean it….”

“Art was right about the election result. Now he will almost certainly be right about the radically different economic and political consequences of Trump’s stunning victory…. It should be much more Reaganesque than the burlesque of the campaign season…. House Speaker Paul Ryan vowed last Wednesday to help lead a ‘unified Republican government’ with Donald Trump as President, promising Americans that the entire party can now work ‘hand in hand’ to solve the country’s problems.”

--From Yardeni’s Morning Briefing, “Welcome to Brave New Trump World,” November 14, 2016.

Trump enjoys a lot more party unity than Reagan faced in 1981, with a hostile Democratic Congress and a deep recession. Today’s economy is slow-growing but not rapidly shrinking as it was when Obama took office, so Trump’s goal of getting America growing again may be more realistic than many pundits fear.

Global Mail:

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

What’s Behind the Dollar Breakout?

by Ivan Martchev

The reason for the massive sell-off in U.S. bonds and the spike in long-term interest rates is clearly the Trump election victory, as too many investors got caught with a wrong-way bet that interest rates in the U.S. were likely to remain subdued, given that they are some of the highest in the developed world.

The Trump policies are pro-growth and can only be compared to what Ronald Reagan did when elected president at a time of double-digit interest rates and very high inflation. In contrast, the 10-year Treasury note hit an all-time low of 1.31% in July. While most of the developed economic world is mired in a deflationary malaise, the U.S. has so far been spared from such a deflationary outcome. Suffice it to say that this is a very different environment than when Ronald Reagan took over in 1981.

United States Ten Year Government Bond Chart

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

It is a bit premature to think that 1.31% will hold as the all-time low in U.S. interest rates, although I would admit that the Trump economic agenda may cause rates to stay at elevated levels for the intermediate term, until investors can judge how serious he is about spending cuts, tax cuts, and overall federal deficit management. For the time being, the 2.5% to 3.0% level on the 10-year Treasury note yield could be considered major “resistance,” as traders like to say – a level which has not been breached yet.

If commentators tell you that the U.S. bond market is “breaking down” and long-term interest rates are “breaking out,” I would point out that we suffered one spectacular false breakout in the 10-year Treasury yield above 5% in 2007 (see chart, above). Nine years later, we hit an all-time low. The deflationary dynamics of debt-driven economic cycles in most of the developed economies and most notably China – where faster debt growth equals slowing GDP growth – are still with us today, despite Trump’s election.

One unintended consequence of Trump’s victory has been the decided breakout of the U.S. Dollar Index above the key resistance level of 100, which has defined its consolidation range since March, 2015. One could have thought that deficit spending under a Trump administration might have pulled the dollar lower, but when one factors in potential protectionist trade policies and the overall global deflationary environment, one could see that the recent dollar move has the potential for a much bigger upside.

United States Dollar versus Gold Chart

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

My 120 target for the U.S. Dollar Index (DXY), mentioned previously in this column, is still in effect, particularly given the deflationary consequences of Brexit that should keep pressure on both the euro (57.6% of DXY) and British pound (11.9% of DXY). Looking forward, Europe also has to deal with an Italian referendum scheduled for December 4, 2016, in which voters will be asked to approve amending the Italian Constitution to reform the appointment and powers of the Parliament of Italy, as well as the partition of powers of State, Regions, and administrative entities. So far it looks like the Italian Prime Minister may lose the referendum vote, based on trends in recent polls, which would give more power to the populist Five Star Movement and be an election result similar to Trump/Brexit. All of this is rather bearish for the euro as it weakens Europe to the core. A weak euro is, by definition, bullish for the U.S. dollar.

Euro versus United States Dollar Exchange Rate Chart

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

The euro closed last week at $1.0584 and has been down 10 straight trading days (starting on the Monday before the U.S. election). It will almost certainly take out support at $1.05. An anti-establishment victory in the Italian referendum should serve as a further catalyst for a euro decline, which I believe is destined to reach parity to the dollar in 2017. Deflationary dynamics in Europe suggest that parity would not hold and the ultimate test of the 83-cent low against the dollar (right after introduction) is in the cards.

What about gold – that old “barbarous relic,” as Keynes defined it? Before the election, the gold market held up very well in a bear market for commodities that was generational in nature. That said, I have great difficulty seeing the gold market holding up if the U.S. Dollar Index is indeed en route to 120. Presently, gold bullion has weakened and is barely holding at $1,200 which is unlikely to remain a support for long.

The expected inflationary impact from the new Trump policies is unlikely to arrive soon, but higher interest rates and a stronger dollar are already here. Both are negative for gold bullion. Barring a new crisis, it is easy to see gold in 2017 delivering a complete unwind of the rally we saw in the first half of 2016.

How ‘Bout that “Short of the Century”?

In April of 2015, Jeffrey Gundlach of DoubleLine Capital called German bunds the “short of the century” while Bill Gross of PIMCO fame termed them “the short of a lifetime” (see May 2, 2015 Barron’s, “German Bunds: The Short of the Century”). With over a trillion in losses reported globally with the latest backup in global interest rates after the Trump victory, could they have been right?

German and Japan Ten Year Government Bonds Chart

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

My short answer (pun intended) is “no.” Even though both 10-year German bund yields and Japanese JGB yields have turned positive, closing last week at 0.27% and 0.04% respectively, they are way below the levels reached in mid-2015 right after those bond bearish forecasts had been made.

It is too early to say if the Trump election victory was the ultimate inflection point for global interest rates. I suspect it wasn't. I do not believe that the President of the United States, who arguably holds the most powerful job in the world, has enough power to turn back the tide of global deflation. There are highly deflationary outcomes yet to materialize, like a hard (no trade deal) Brexit and a hard (overnight) Chinese devaluation. Assuming that a Trump victory can overcome those is rather naive, in my view.

This is why I have maintained my 1% target on the 10-year Treasury, with the caveat that it may not happen in 2017, as I once thought. The timing will depend in part on the Trump policy agenda.

Sector Spotlight:

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

Things Are Seldom as they Seem

by Jason Bodner

“Things are seldom as they seem. Skim milk masquerades as cream…
Gild the farthing if you will; yet it is a farthing still.”

--From Gilbert & Sullivan’s HMS Pinafore (1878)

Things are not always what they seem, and recent events clearly exemplify that fact. Consider that Hillary Clinton was a favorite in nearly every poll leading up to the election, but Trump won.

In campaigns, things are often intentionally made to be ‘not what they seem.’ Consider that “Crowds on Demand” is an American publicity firm where you can hire a lot of strangers to attend your event. The owner of the company has even admitted that people running for Congress, the Senate, and even the Presidency have used his services to appear to have more supporters. “Our business is about cultivating perception. It’s basic marketing,” founder Adam Swart said in The Atlantic (“1-800-Hire-a-Crowd”). Early on, the article says, the Trump campaign hired actors for his appearances. This may or may not have had a part in the recent political ‘black swan’ event that occurred, but it was a tactic many employ.

Crowds on Demand Image

Having someone else make things ‘not what they seem’ is one thing, but doing it to yourself is another thing. Consider that Facebook is under fire because of not only the “fake news” phenomenon, but also what I call the algorithmic bubble effect. If you are not familiar with this, Facebook has “smart algos” that identify what you like to see and feed you similar information while suppressing opposing information. This potentially has far-reaching effects, allowing a tremendous segment of the population to see life through rose-colored glasses of their own making. This is especially true of the recent presidential election. We obviously need to reassess and come to terms with our new information age – one where facts seem to have less value and ‘eyeball time’ has more value. “Spin” seems far amplified compared to prior eras. Perhaps there will be a shift back to traditionally unbiased media, if there is still such a thing.  (Please note: Jason Bodner does not currently own a position in FB. Navellier & Associates, Inc. does currently hold a position in FB for some client portfolios. Please see important disclosures at the end of this letter.)

Walking in a Bubble Image

Sector Swings Signal a “Totally Different Era”

Two weeks ago, it seemed that Financials, Industrials, and Healthcare were cursed to spend their days dwelling near the bottom of the worst-performing sectors lists. Well, once again things are not what they seem. Looking at the past few weeks’ performance of Financials alone, it would seem that we are in a totally different era altogether. The rotations in the market have been violent and eye-catching. Specifically, last week’s market looked very different from the market of three weeks ago.

Standard and Poor's 500 Daily and Weekly Sector Indices Changes Tables

The Standard & Poor’s Financials Sector Index has rocketed more than 12% since the beginning of November. For a sector that seemed unloved for so long, this change is certainly refreshing to many.  Banks have been leading the charge as Trump’s victory may have positive implications for banks in regards to Dodd/Frank regulations. The Federal Reserve’s stated reasons for procrastination regarding interest rates now seem less convincing. The data is more positive and the election is out of the way.

Standard and Poor's 500 Monthly Sector Indices Changes Table

Naturally, this has had a more negative effect on sectors sensitive to rates as we have been discussing for a while now.  Real Estate, Telecommunications, and Utilities have been punished substantially for the past three months, as has Consumer Staples. What was previously the strongest sector, Information Technology, has taken a clear back seat to first Financials, and now Industrials.

Standard and Poor's 500 Quarterly Sector Indices Changes Table

Creeping up on us is the shockingly inspiring nine-month performance of Financials, much of which can be attributed to action in the most recent weeks. Financials, Industrials, Energy, and Technology (despite facing recent pressure) seem to be where the focus of inflows is now.

Standard and Poor's 500 Nine Month Sector Indices Changes Table

Things are not what they seem. Politicians like to create perceptions. We create, even if unknowingly, our own perception. Almost everywhere you look, what lies beneath the surface is not what we expected.

The markets themselves are not always what they seem. Whether you supported Trump or not, he is our President-elect. The public has spoken and this election was voted on and decided the same way our prior elections have been. Our freedoms entitle us to support our new President – and also to voice our opinions for things we don’t agree on. That’s what makes America the place it is. Given that a Trump victory was supposed to tank the markets – and didn’t – that perception is also not what it seemed. The markets clearly like a Trump victory, or at the very least they like the end of the uncertainty behind the election.

As we struggle to make sense of a dynamically undulating market, we must view everything with healthy skepticism. Short covering in weaker sectors, for instance, may not just end there. These weaker sectors may now possibly become the engines of a new bull market. Only time will tell, but there is much to be excited about in terms of sector rotations now. It will be interesting to see what unfolds, to say the least.

We have a habit of constructing reality around perceptions. This becomes tricky when our perceptions are created for us by others, or even worse, by ourselves. Michelangelo said: “If people knew how hard I worked to get my mastery, it wouldn't seem so wonderful at all.”

The Finger of God 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.*

The Economy is Beginning to Hum Again

by Louis Navellier

“The federal government and our democracy is not a speedboat, it’s an ocean liner – as I discovered when I came into office.  It took a lot of really hard work for us to make significant policy changes – even in our first two years, when we had larger majorities than Mr. Trump will enjoy when he comes into office.”

– President Obama, in his press conference, November 14, 2016

Presidents can’t turn an economy on a dime, especially when they won’t take the oath for another two months, but the market and economic indicators certainly have turned up sharply in the last two weeks.

Last Tuesday, the Commerce Department announced that retail sales surged 0.8% in October and a revised 1% in September.  Not only were retail sales stronger than economists’ consensus expectation, but the last two months represented the biggest two-month surge in retail sales since 2014!  Excluding strong auto and gas station sales, which surged 1.1% and 2.2% respectively, October retail sales still rose an impressive 0.6%, as 11 of 13 sectors posted gains.  This was truly a great sign that consumer spending is picking up, which means that economists will likely revise their third-quarter GDP estimates higher.

Then, on Thursday, the Commerce Department announced that new housing starts in October rose by 25.5% to an annual rate of 1.32 million, the strongest annual pace in nine years!  Behind this stunning surge was a whopping 68.8% increase in multi-family starts.  Construction activity was strong in all regions, especially in the Midwest and Northeast, where housing starts surged 44% in October.

Finally, I should add that with all this robust economic activity, inflation may finally be brewing.  The Labor Department announced on Thursday that the Consumer Price Index (CPI) surged 0.4% in October, due largely to higher prices for electricity, gasoline, and housing costs.  Excluding food and energy, the core CPI rose only 0.1% in October.  In the past 12 months, the CPI has risen 1.6%, while the core CPI has risen 2.1%.  Consumer prices have risen for six of the past seven months.  With the 12-month core CPI near the Fed’s 2% inflation target, the momentum of consumer inflation essentially insures that the Fed will raise key interest rates 0.25% in December.  Not surprisingly, Fed Chair Janet Yellen gave Congressional testimony on Thursday saying that the case for a Fed rate increase has “strengthened.”

Impact of the Dollar’s Recent 14-Year High

With mounting evidence from these indicators that U.S. GDP growth is accelerating, the U.S. dollar hit a 14-year high against a broad basket of currencies, so I expect that domestic, small-to-mid-sized stocks will have an advantage over multinational, large-capitalization companies.  In addition, an early “January effect” typically starts around Thanksgiving, making small-to-mid capitalization stocks stronger between Thanksgiving and mid-April due to year-end pension funding and pension funding in the New Year.

Chinese Demi God Statue Image

The Chinese yuan last week hit its lowest level in eight years relative to the U.S. dollar.  Immediately after the U.S. Presidential election, the Peoples’ Bank of China (PBOC) allowed the yuan to steadily weaken, possibly in anticipation of a confrontation with President-elect Trump, who has called China a “currency manipulator.”  It appears that Chinese authorities are willing to let the yuan continue to slide relative to the U.S. dollar so that they have a competitive advantage when it comes time to negotiate any future trade deals with President Trump.  In the meantime, China’s exports will likely be boosted by the weaker yuan, so I expect a big turnaround after six consecutive months of declining Chinese exports.

A strong U.S. dollar is also pushing commodity and import prices lower, so I fully expect that deflation will re-emerge in the upcoming months.  Crude oil prices remain amazingly firm heading into the next OPEC meeting on November 30th.  No matter what OPEC members say, I do not expect any production caps, since OPEC members have been ramping up their respective production, almost if they were trying to beat any production cap.  Even if OPEC agrees to a production cap, OPEC members like Algeria, Iraq, Iran, and Nigeria have a history of cheating and ignoring any production caps.  Furthermore, non-OPEC members are also boosting their crude oil production, which should help to put a lid on crude oil prices.

Speaking of crude oil production, there is a lot of excitement in the U.S. about new discoveries in the Permian Basin, especially the Wolfcamp formation, which is estimated to hold 20 billion barrels of crude oil within four layers of shale in West Texas.  Literally half the drilling rigs in the U.S. are in the Permian Basin and, at current prices, the crude oil that is trapped between shale deposits is profitable to extract.

Furthermore, when the pipeline from North Dakota is completed, the U.S. will be well on its way to being energy independent.  Without a pipeline, high transportation costs have curtailed North Dakota’s production.  In the meantime, the American Petroleum Institute (API) and the Energy Information Administration (EIA) reported that U.S. crude oil inventories rose 3.65 million barrels and 5.3 million barrels, respectively, in the latest week.  This glut many diminish a bit in the Spring when worldwide demand rises, but it appears that crude oil prices will remain relatively low at least through mid-February.


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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

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