Hurricanes Destroy Some Jobs

Hurricanes Destroy Some Jobs – But Will Add Many More

by Louis Navellier

October 10, 2017

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

October began strongly with 1% or greater gains in most major indexes last week. Today, the S&P 500 should set a record for consecutive trading days (334) without a 5% decline – despite recent hurricanes!

Due to disruptions from three major hurricanes in September, the Labor Department reported last Friday that a net 33,000 payroll jobs disappeared in September, the first monthly payroll decline since September of 2010, ending seven straight years of monthly payroll job growth. Ironically, the unemployment rate in September declined to 4.2%, down from 4.4% in August, due to a temporarily “disappearing” workforce.

New Hire Image

On the positive side, the Institute of Supply Management (ISM) announced that its manufacturing index rose to 60.8 in September, up from 58.8 in August, reaching the highest level since May 2004! Even more impressive, the new orders component rose to 64.6 in September, up from 60.3 in August. Fully 17 of the 18 industries surveyed reported growth in September, which is good for third-quarter GDP growth. Then, on Wednesday, ISM announced that its service index surged to 59.8 – its highest level in over 12 years.

Despite Hurricanes Harvey and Irma, the U.S. manufacturing sector did not miss a beat. Furthermore, due to all the insurance claims for home repair (dry wall, flooring, etc.) and vehicles, manufacturing activity is expected to remain robust for the foreseeable future, which should help boost fourth-quarter GDP growth. Vehicle sales surged 6.3% in September, after declining every previous month this year. GM’s sales rose 17%, Toyota rose 15%, and Ford & Nissan each rose 9.3% in September due to strong light truck sales.

Speaking of GDP growth, the Commerce Department reported on Thursday that the trade deficit declined 2.7% to $42.6 billion in August, down from $43.6 billion in July, reaching an 11-month low. A weaker U.S dollar helps boost exports and shrink the trade deficit, which is also good for overall GDP growth.

In This Issue

In Income Mail, Bryan Perry sees the fundamentals pushing the S&P 500 to 2800 by early 2018, but with a possible correction first, due to rising Treasury rates. In Growth Mail, Gary Alexander looks back to the panic market low 15 years ago today, and how optimism once again repaid investors’ patience. In Global Mail, Ivan Martchev agrees with Bryan that we may take out the recent 2.62% high in 10-year rates, but he maintains his prediction of seeing much lower rates by the start of 2021. In Sector Spotlight, Jason Bodner highlights some recent strength in the Software & Services sub-sector and in the end, I take a little extra time to explain the inside workings and looming dangers of the bizarre ETF trading protocols.

Income Mail:
Taking the Global Reflation Trade to Task
by Bryan Perry
A Fresh Breakout to Upside in Treasury Yields

Growth Mail:
Triumph of the Optimists – Updated
by Gary Alexander
Warren Buffett’s “1,000,000 Dow in 2117” is Conservative

Global Mail:
Intensifying the Fed’s Balance Sheet Drama
by Ivan Martchev
Fed Impact on the Dollar

Sector Spotlight:
Creating a Collective View of Reality
by Jason Bodner
Separating Long Trends from Short-Term Sector Noise

A Look Ahead:
Confessions of a Top Fund Manager
by Louis Navellier
Price Execution is the Key
The Crash I Fear Most is an ETF Crash

Income Mail:

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

Taking the Global Reflation Trade to Task

by Bryan Perry

The stock market rally is running hot, buttressed by three main factors – all of which have yet to be verified. They include (1) the passage of a tax reform, (2) the appointment of a new dovish Fed Chairman, and (3) the fate of the global reflation trade that has been lifting all the world markets, thanks to rising economic growth rates in developed and emerging economies. It’s like having perfect growing conditions for exotic flowers. By focusing on these three factors, the market doesn’t really care about North Korea or crossing the $20 trillion debt threshold for the U.S. federal debt – and several other long-term concerns.

The assumption that one, two, or even all three of these market catalysts come to pass is now being priced into stocks. If they all come true, that opens the way for S&P 500 earnings to grow by another 10% or more. The market’s broad sector participation is yet another reason to stay enthused about the potential of seeing another strong leg up. Translated, the S&P 500 index could trade up to 2,800 by January of 2018.

However, there is one widely-followed and widely-respected key technical indicator flashing a short-term overbought reading and it has a pretty solid track record of being a precursor to rallies and pullbacks.

The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum oscillator measuring the speed and change of price movements. The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30. The current RSI reading is bumping up against 90, indicating some steam might have to come off this rally before surging again.

Being a market timer is a thankless task, and I’m not suggesting that we should even try. As the market sets new highs most weeks, some hedge funds that are shorting this rally are getting met with margin calls. Most of us have heard the famous quote by economist John Maynard Keynes, “The market can stay irrational longer than you can stay solvent,” meaning the markets can act perversely in the short-term.

Keynes reportedly traded currencies using 10:1 leverage. That kind of leverage is still available today for bond traders and accredited stock traders. There are two kinds of margin; the most common being Reg-T Margin where $500k controls $1 million, and Portfolio Margin where $500k controls $5 million. Imagine the financial pain exacted on short-sellers using Portfolio Margin and betting against the Nasdaq. Can the major averages keep running hot without a correction in the near term? Absolutely. Don’t bet against it.

Every day we see and read about analysts asking what will be the trigger or set of circumstances that trips up the market’s torrid uptrend, aside from a black swan event, like an attack on North Korea or a massive earthquake in a city like Tokyo or Los Angeles. I would venture to say that the looming cattle grate that could slow the bullish stampede in stocks is, ironically, a sudden shift in how the bond market trades.

Cow Crossing Cattle Guard Image

The economic calendar has been serving up a string a data points, many of which are at lofty levels not seen in over 10 years. These indicators certainly got the bond market’s full attention last week.

I have been noting in recent weeks how the Dollar Index (DXY) has tested long-term technical support at 91 in early September (91 held). Today the DXY trades around 94 on the back of much-stronger-than-expected Durable Goods Orders, plus the Chicago PMI and ISM Indexes that paint a very healthy factory and business investment picture. These and other data points coupled with the Federal Reserve starting to trim its $4.5 trillion balance sheet tells us that the Fed wants to actively get rid of some bonds it owns.

Purchasing Manager's and Institute for Supply Management Indices Charts

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

The new dot plot, which shows FOMC members' expectations for future rate hikes, signaled one more hike in 2017 and three in 2018. In the longer term, the median member expected rates to settle at around 2.75%, down from 3% (probably in 2019; source: BusinessInsider.com Sep. 20, 2017 “Fed to Unwind Financial-Crisis Emergency Measures and Begin Shrinking its $4.5 Trillion Balance Sheet in October”).

So, not only has the dollar gotten a fresh bid with the upbeat data and the Fed reversing course from printing money to retiring debt, Treasury yields have jumped back up to levels not seen since July. Though we’ve been through more than one bout of bond selling in the past two years, this time around feels like the selling may build on itself because of the global reflation of economic conditions.

A Fresh Breakout to Upside in Treasury Yields

As a result of these forces, I would argue that a pop in yields to the previous 10-year high of 2.62% will cause the stock market to pause or undergo a healthy pullback. Here’s where yields stood last Friday:

United States Treasury Yields Table

Granted, the normalization of the Treasury yield curve is supposed to be a good thing, as it represents more economic prosperity, but when money becomes more expensive it also has a negative effect on investor psychology. And we’ve been spoiled by cheap money for nearly a decade now. Therefore, we should be on the lookout for how the near-term action in the bond market impacts the behavior of the stock market. I think we will find them to be highly correlated going forward.

One more thing. If there is a global reflation trade in the works, then investors should pay close attention to how copper trades. Not only is copper the most widely-utilized metal for industrial and commercial purposes, but it is also a major component in the big push towards electric cars throughout the world. Even China has stated that it is thinking about phasing out cars with traditional combustion engines.

This means a huge amount of copper is going to be in demand in the future, as most of the major auto-makers are starting to expand their electric vehicle product lines. As a byproduct of this transformational shift in the auto industry, electrical components are going to require copper, which over the longer-term could cause supplies to shrink and prices to rise. A quick look at the iPath Bloomberg Copper Subindex Total Return ETF (JJC) shows a massive reversal off a multi-year low following the Trump win that is now stair-stepping higher with the prospects of rising global GDP growth and driverless vehicles.

iPath Bloomberg Copper Subindex Total Return ETF (JJC) Chart

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

Inflation has yet to rear its ugly head in any meaningful way, but there are some tea leaves on the path to global growth that are more prevalent now. With labor markets now showing some shortages in select markets, we might have seen lows for the cycle in both bond yields and inflation as measured by the Personal Consumption Expenditures (PCE) Inflation Rate, a major yardstick of Fed policy.

Growth Mail:

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

Triumph of the Optimists – Updated

by Gary Alexander

How vividly I recall that moment 15 years ago this morning, at 10:10 am on October 10 (quadruple 10s) in 2002 (a palindrome year). The Dow reached 7,181.47, ending a 30-month bear market. The Dow took off at that moment, as if by ESP, as traders poured back into the market in strength (I bought shares, too).

As you may recall, the bull market that followed lasted exactly five years and nearly doubled (+99%, to Dow 14,280 on October 10, 2007). But how many recall the relentless ratcheting down in mid-2002?

After the tech-stock crash of early 2000, followed by a second decline during the conflicted election of 2000 (Bush/Gore), there was a slight pick-up in early 2001, erased by the tragedy of 9-11. The market recovered by year-end 2001, but then the most disheartening phase of the bear market began to unfold.

Nasdaq Downturn of 2002 Chart

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

NASDAQ had already fallen from over 5,000 to under 2,000 in two years, but then it fell another 46% from early January to early October 2002. A relentless market decline raged from May to July of 2002.

From April 2000 to October 2002, I verbally “held the hands” of worried investors, trying to keep them from selling all stocks prematurely. When NASDAQ first collapsed in April 2000, I began sending out a weekly letter of encouragement in the form of a “Frequently Asked Questions” (FAQ) column, fielding 20 to 40 subscriber questions per week. Ultimately, I wrote that weekly column for nine years. Then, in the first full month of this bull market (April 2009), I began writing similar weekly advice for Navellier.

Near the end of the terrible July 2002 decline, I received this letter from a far-sighted and wise subscriber:

Letter to Gary Alexander Image

At the time I received this heartening letter, the market had just completed another terrible downdraft in July, but this thoughtful subscriber sent me a gorgeous $90 coffee-table sized “Triumph of the Optimists” reference book, which documented 101 years of market returns (1900-2000, inclusive) in over 20 global markets. It was thoroughly written and researched by three economists at the London Business School.

Triumph of the Optimists Image

This impressive study showed that – despite wars, a Great Depression, and other global calamities – stock markets in stable democracies outperformed bonds, cash, and other forms of investment, worldwide.

Warren Buffett’s “1,000,000 Dow in 2117” is Conservative

Recently, Warren Buffett made headlines by predicting 1,000,000 Dow in 100 years, with some bears scoffing at the Sage, but actually that’s a downgrade from his previous prediction of 7-digit Dow by 2100.

Mario Gabelli has computed that a one-million Dow in 2117 would roughly amount to a 3.9% compound annual growth rate (CAGR), a relative snail’s pace, since the actual CAGR since 1917 is closer to 6%.

Dow Jones Industrial Average with 4% - 6% CAGR Paths Chart

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

A century ago, America entered World War I against Germany. The Dow industrials declined to 65.95 before closing 1917 at 74.38. The Dow sank lower (under 42) in 1932 and remained under 100 in early 1942, so it wasn’t all smooth sledding at first. The Dow also dipped under 4% CAGR in the 1970s through 1982, but then it was off to the races. Even 2008 did not take the long-term CAGR below 5%.

As of last Friday, the Dow stood at 22,773.67, a 306-fold gain (+30,518%). A similar gain in the next century would take the Dow to nearly 7,000,000, so Mr. Buffett is a relative Bear! He only sees the Dow growing to a single million in the next century instead of nearly 7 million (barring global catastrophe).

Measured from the last day of 2016, a 5% CAGR will bring the Dow to 2,729,000 by year-end 2116 and to over 7,000,000 Dow at a CAGR of 6%, according to calculations by Joe Abbott at Yardeni Research:

Dow Jones Industrial Average with 2% - 6% CAGR Paths Chart

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

These calculations are based on Dow 19,763 at the end of 2016. If you take into account the Dow’s 15% rise so far in 2017, you can add 15% to Abbott’s projections – namely 3 million (at 5%) or 8 million (at 6%). These calculations don’t account for inflation, but neither do they account for dividends. Over time, re-invested dividends tend to offset long-term inflation. Using the S&P 500, Yardeni calculates that total returns (with reinvested dividends) have risen 9%-11% (CAGR) since 1950, or 6% to 8% after inflation.

Since 10:10 am on 10-10-02, the Dow and S&P 500 have each more than tripled and NASDAQ is up six-fold. That’s not bad – it’s slightly above the long-term averages. A tripling in 15 years may sound fairly tame, but the math is magical – reaching 9-fold in 30 years, 81-fold in 60 years, and 729-fold in 90 years.

Global Mail:

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

Intensifying the Fed’s Balance Sheet Drama

by Ivan Martchev

Another week, another all-time high for the stock market and another uptick in the interest rate markets, due to the long-awaited start of the unwinding of the huge $4.5 trillion balance sheet of the U.S. Federal Reserve. This maneuver is also pushing the U.S. dollar higher, fueling what looks like the beginning stages of a major intermediate rate move to the upside that is likely to fuel fresh multi-year highs.

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

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

What is most intriguing about these interest rate moves is that while the 10- year Treasury yield has moved higher, the 2-year Treasury note yield has moved higher even faster. This has resulted in the slope of the Treasury yield curve generating an overall declining trend, now reaching multi-year lows of near 82 basis points (0.82%), even with 10-year Treasury yields rising from 2.03% in September to 2.36% now.

Treasury Yield Curve Chart

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

Flattening yield curves are a part of life and they happen towards the end of economic expansions. This is completely normal. In most cases, the yield curve flattens because of Federal Reserve monetary policy as they push short-term interest rates higher (and unwind the balance sheet). We have had an inverted yield curve in every one of the last five recessions and I suspect this time will be no different.

The yield curve remains suppressed even as we seem to be getting details on the Trump administration tax plan, which seems to be politically timed with the midterm election cycle in 2018. If the Republican majority passes sensible tax reform by the end of 2017 (ambitious) or early 2018 (more likely), the supposed economic boost should help them win those midterm elections. I think there may be an infrastructure program in 2018 right after the tax plan, which makes for great election slogans.

It will be interesting to see how the yield curve situation develops if both a tax overhaul and infrastructure plan are passed. If we get a flattening or inverted yield curve, that would mean the bond market would not have “bought into” the election promises of the Trump administration. There was some yield curve steepening after the 2016 election, but it completely unwound as the chaos of the White House political agenda hit the front pages and made formerly boring news programs must-watch reality TV. Since there has been no change in that dynamic, there is no reason to suspect that it will get better in 2018.

I am on record saying that the 10-year Treasury is likely to hit 1% or lower before Mr. Trump's first term runs out in January 2021 simply because of the statistical distribution of economic cycles in the past 240 years. Since there has never been an economic expansion longer than 10 years, and the present expansion is 8 years and 4 months long, the odds are that we will see a recession before Mr. Trump’s first term ends.

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.

But first we have to worry about this balance sheet unwinding, as it sure started with a bang last month.

I think that as larger amounts of Fed balance sheet bonds are allowed to run off, the call that the Fed may overshoot will get louder, even though this is not getting in the way of the stock market at the moment. My guess is that a whiff of panic becomes notable on a move of the 10-year Treasury yield above 2.63%.

Fed Impact on the Dollar

Waiting on the dollar to find a bid in 2017 was like waiting for Godot, until September, when Godot decided to show up for a visit. The dollar had marginally undercut “support” near 92 and just as the markets like to test any bull or bear, it turned around on a dime and has not looked back since.

The catalyst, in my opinion, is the commenced Fed balance sheet unwinding.

United States Dollar Index Chart

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

How high can the dollar go? Significantly higher, particularly if the 10-year Treasury yield can rise above 2.63% and stay there for a while. I did not anticipate the move lower in the dollar from a high of 103.88 in January to a low of 90.99 in September. The move lower came for two reasons, the first of which is a wave of pro-EU election victories in the Netherlands, France, and Germany. The second of course is the White House chaos that has brought few of Mr. Trump's election promises into action, so far.

Since I don't see any more political developments in Europe in 2018 that would help push the Euro higher and as a consequence the dollar lower, we have one obstacle to the dollar rallying removed. And since the Republican majority in Congress has maximum motivation to get the legislative ball rolling for the 2018 elections, I suspect more will get done on the infrastructure and tax fronts than what we’ve seen so far.

Given that most hurdles to the dollar rally have been removed, I think the only way for the greenback is up in 2018.

Sector Spotlight:

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

Creating a Collective View of Reality

by Jason Bodner

I admit it, when I was a kid, I spent a lot of time looking up beyond our atmosphere towards what else was out there. It was always an especially fun exercise as a kid to imagine my weight on other planets. For instance, today I am 170 lb. here on earth. Due to different gravity on other celestial bodies, I would weigh 28 pounds on the Moon, 64 pounds on Mars, and 430 pounds on Jupiter. If I found myself on the surface of the Sun I would weigh a sizzling 4602 pounds!

There is a really cool set of scales calibrated this way at the Rose planetarium in the New York City Museum of Natural History that allows you to see what you would weigh on other worlds.

Your Weight on Jupiter Image

The thing that boggled my mind was realizing that reality was not absolute and was actually different from different vantage points. That is, reality was actually nothing more than a collective common experience: a perceptual construct, if you will. Truth be told, gravity affects everything including how we experience time. So, time, weight, age, are all just constructions of the human experience here on earth.

Realities can change over time. Reality was once that the Earth was the center of the universe and that the Milky Way was the only galaxy in space. Now, reality says there are possibly trillions of galaxies, each with hundreds of billions of stars. There was a time when Americans thought Martians could invade us. The collective assumption in 1900 was that the global population could not grow bigger than the 1.5 billion people on earth at the time. There was also a Cold War with heightened tension for decades.

If we can construct a collective reality in scientific fields, could we not construct a reality for our financial markets? If so, wouldn't it be merely a reflection of how we see our world? The bad news is that we humans often get bogged down with worry and anxiety. Look at the news headlines, both mainstream and financial. Fear sells, driving our instinctual behavior. Longer-term the good news is that most of us are optimistic in nature. This dichotomy of the human condition can be easily observed in a few charts.

Looking first at a chart of the S&P 500 from July through October of 2011, it looks like a horror story with a sizeable 15.8% drop. Fear was high, negativity was rampant, and it was reflected in that summer’s price action. That was reality for a brief time but when we explode that section out from a chart of the S&P 500 over the past 90+ years, chances are you wouldn’t even think to zoom in on the 2011 non-event.

Standard and Poor's 500 Stock Market Index Charts

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

The broader reality is that there is an underlying bid in the market, or at least there has been for 75+ years.

Separating Long Trends from Short-Term Sector Noise

When sectors move short term, how do we know when there is a real shift, or if it’s just noise? How do we know a quick reversal is either a bump in the road or the beginning of a longer-term trend?

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

The first four days of last week brought a 1%+ move in four different sectors on four different days. The broad market indices finished a strong 1-week performance across the board as they all added to what has been some terrific year-to-date showings thus far. Materials, Financials, Consumer Discretionary, Info-Tech, Health Care, and Industrials all posted 1%+ performances for the week. Energy saw some pressure while Telecom was the only noticeable sore-spot (again, a tiny sector with a low number of constituents).

One good area to watch is what institutions do. They are armed with money, the best research, and a staff of sharp professionals who can usually outmaneuver pretty much any individual investor. When they step into something, especially in-concert, that's a great point to take notice. One metric I look at points to continued institutional accumulation in Information Technology, Industrials, Materials, Health Care, Financials, and Consumer Discretionary stocks. The single biggest instance of unusual inflows is into Software & Services, so these are where I focus my search to find the best stocks in terms of growing earnings and sales with strong profit margins. This is where the wind is at our proverbial backs at this point in time.

Short-term rotations should generally be viewed more as a momentary blip. It’s when the story changes for an entire sector that one should take notice. When the tech bubble of the 1990s came crashing down, it was because investors finally wised up that infinite P/E ratios were unsustainable. The market may be frothy here once again, but the P/E multiples are within reach and the growth is real and consistent.

For these reasons, my view of reality is that the market has the underlying fuel for continued growth. I would be mindful of the market getting ahead of itself, overheating, then correcting. This may indeed be around the corner as the pace of buying has been accelerating, and there are only so many sellers around.

Here’s the deal: Reality is just a word assigned to the observational construct of our minds. Some will think the market is overheated and headed for disaster, some will think it’s chugging higher with potential for a correction. Either way, the best way to approach reality is understanding it can change any moment.

Nikos Kazantzakis wisely said, “Since we cannot change reality, let us change the eyes which see reality.”

Nikos Kazantzakis Quote 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.*

Confessions of a Top Fund Manager

by Louis Navellier

We know what we are doing in the ETF world, since we happen to have four 5-star ETF portfolios according to Morningstar Advisor. Also, our Cavalier Fundamental Growth Fund (CAFGX) was up 14.45% last quarter and +27.92% for the year-to-date, according to Morningstar data, earning it a place in the “10 top performing mutual funds and ETFs for the 3rd quarter of 2017” (Investment News, October 2, 2017).

The primary reason that our stock portfolios are outperforming our highly-rated ETF portfolios is simply because we purposely “front run” the 90-day smart Beta and equal-weight ETF rebalancing that occurs at the end of each quarter. Since we know how ETFs are rebalanced every 90 days, we can profit from the “Robo Advisor Revolution” and the big brokerage firms which push their own ETF model portfolios.

Here’s how it works. On September 24, 2017, The Wall Street Journal featured an interesting article entitled “Meet Wall Street’s New King Makers: The ETF Strategists,” which said that “as much as 12% of the $150 billion investors poured into iShares ETFs this year through the end of July came through ETF model portfolios.” In other words, Robo Advisors and the ETF model portfolios at large brokerage firms are now controlling an increasing share of the flow of funds into the $3 trillion ETF business.

If you act before they act, you are essentially the “nose of the dog,” but if you wait for them to act first, you become “the tail of the dog.” The view (and performance) are far superior in front of the pack!

Price Execution is the Key

Now it is time for another confession. As you might imagine, we are being courted to get access to our four 5-star ETF portfolios, but there is a big problem, which is the “pecking order” of ETF order execution. To be successful, we have to complete all our ETF trades within one day – and in a silent and stealthy manner.

On the other hand, the big ETF managers typically rotate their trades over up to a 3-day period, which can have disastrous consequences, since ETFs can be fragile and trade at “discounts” to net asset value (NAV) when you sell them, as well as “premiums” to NAV when you buy, especially when unscrupulous traders see your ETF orders coming up to three days in advance. This is the dirty secret in the ETF world, which is why major brokerage firms are all gravitating toward ETFs, since their respective trading desks can “pick off” naïve investors that are blindly following Robo Advisor and ETF model portfolios!

In a recent white paper, Sharks, High Frequency & ETFs, one of my editors, Jason Bodner, explains in detail how professional traders can “pick off” ETFs, especially when they can see big blocks coming from multiple trade rotations over a few days. Jason is an ex-trader who specialized in big ETF block trades at two large Wall Street firms and he clearly exposes the premium/discount mechanics relative to net asset values and how ETFs have had severe pricing problems during fast market conditions. After you’ve read Jason’s white paper, you may never buy an ETF again, since professional traders have a big advantage.

If we sold our four 5-star ETF portfolios to a big brokerage firm or large ETF manager, they would simply destroy the performance of our highly-rated portfolios by pushing too much money into our fragile ETF portfolios, which need to be traded extremely carefully. In other words, too many Robo Advisor and ETF model portfolios are designed, created, and launched to systematically ‘churn’ ETFs, so that trading desks, ETF trading specialists, and specialists on the NYSE can systematically profit from the 90-day ETF balancing as well as the persistent flow of funds into the $3 trillion ETF industry.

Now I know what you are thinking. Aren’t ETFs cheaper than mutual funds and managed accounts? The answer is usually “yes,” based on internal management fees, but mutual funds and managed accounts trade at net asset value, while ETFs on the other hand all too often trade at a significant premium or discount to NAV. That means ETFs are more expensive to buy and sell than are stocks. This has been documented in an excellent academic publication entitled, “Is There a Dark Side to Exchange Traded Funds (ETFs): An Information Perspective,” by professors at Arison School of Business in Israel, Stanford University, and UCLA. The result is that trading desks, ETF trading specialists, and specialists on the NYSE can make money via the premiums and discounts that they charge relative to NAV!

The Crash I Fear Most is an ETF Crash

I’m not one to warn about stock market crashes, but I am concerned about an ETF crash. For example, Jim Rogers made the following ominous prediction: “When we have the bear market, a lot of people are going to find that, ‘Oh my God, I own an ETF, and they collapsed. It went down more than anything else.’ And the reason it will go down more than anything else is because that’s what everybody owns.”

A similar warning came from Allianz’s Mohamed El-Erian, who said that the proliferation of cheap ETFs in the financial system has created a “huge risk of contagion.” What Rogers and El-Erian are talking about is that in a big correction when investors run for the exits, the “discounts to net asset value” of ETFs will likely plunge, so ETF investors will get burnt big time, possible up to 35% or more intraday.

This has already happened. In our white paper, Did The Government Really Cause The 2008 Crash? we featured a chart of the iShares Select Dividend (DVY) ETF, which traded in a 34.95% intraday range on August 24, 2015 during an exceptionally volatile trading day. Equally-weighted ETFs from other major ETF firms also had an especially horrific day and traded at massive intraday discounts. So if an investor can get “picked off” 35% intraday, just how badly could ETF investors be picked off during a real market crash? Is a 70% collapse possible? The answer is definitely yes, due largely to the fact that ETFs do not trade at net asset value and would likely trade at a deep and massive discount during a major panic sell-off.

In conclusion, why would you want to buy a bundle of stocks and pay a premium to buy (or a deep discount to sell) at the wrong time? This is the dirty secret of the ETF industry. We learned it first by having our own smart Beta ETF and watching how investors unwittingly pay premiums and discounts relative to net asset value. Our success as an ETF manager is due to (1) picking sectors well, (2) finding good, smart Beta ETFs, and (3) having an exceptional trading desk that does not pay significant discounts or premiums to net asset value. Unfortunately, the next big correction will likely hurt ETF investors, potentially losing 40% or more, even though the underlying stock market will not correct by anywhere near that amount!


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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