Keeps Absorbing Blows

The Market Keeps Absorbing Blows, Relentlessly Rising

by Louis Navellier

October 17, 2017

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

Last year at this time (October 18, 2016), my headline was “Making Sense of a Tense and Directionless Pre-Election Market.” The Dow had fallen 1.25% in the first half of October 2016. Unlike most polls and pundits, we predicted a very close election. Now, it’s hard to believe the surprise Trump victory happened less than a year ago, but the Dow is up 26.4% in the last 12 months, from barely 18,000 to 22,871.72.

There is a lot of “melt up” talk on Wall Street as we head into the heart of the third-quarter earnings announcement season. Ironically, while ETF inflows remain strong, ETF trading volume is declining, signaling that investors are increasingly complacent. Specifically, The Wall Street Journal reported last week that daily trading in exchange traded funds averaged $66 billion in September and was near the lowest level in three years. All too often, it gets quiet before the storm, so the eerie silence in ETF trading is causing me a bit of concern, even though we are entering the seasonally strong time of year for stocks.

We are still cleaning up from a terrible hurricane season, but the latest tragedy from the ongoing fires in Napa and Sonoma counties is truly devastating. I know some folks who have lost everything. The smoke from these fires even blankets our offices in Reno, Nevada. Previously, I planned on buying a home east of Silverado Trail, high in the hills above Napa Valley, but I never bid on any homes there since I was trying to figure out how to evacuate during a fire – as these homes had only one way in and one way out.

Seedling Image

The insurance claims following three major hurricanes, plus the property damage from the worst fire in California history, will severely dent the earnings of reinsurance companies, since the California property insurance claims may rival Hurricane Harvey’s extensive swath of property damage. Our hearts go out to residents in California, Texas, Florida, Puerto Rico, and other communities devastated in recent months.

In This Issue

After crude oil fought its way back above $50 per barrel, Bryan Perry and Ivan Martchev both concentrate this week on the variety of factors that will likely impact the supply and future of crude oil prices. In the meantime, I will examine the earnings landscape, in light of depressing energy earnings last quarter. Also, Gary Alexander delivers a contrarian view of why the stock market fell 22.6% in one day 30 years ago, and in Sector Spotlight, Jason Bodner outlines several reasons why this bull market should continue.

Income Mail:
The Disconnect in the Energy Patch
by Bryan Perry
Houston, We Have a Problem

Growth Mail:
What Caused the 1987 Crash?
by Gary Alexander
Political Mistakes – not Economic Fundamentals – Panicked the Market

Global Mail:
The Saudi-Russia Factor in Crude Oil
by Ivan Martchev
The #1 Risk to Crude Oil Prices Remains China

Sector Spotlight:
Putting Scary News in Context
by Jason Bodner
Five Pillars of the Current Bull Market

A Look Ahead:
Energy Sector Brings Earnings Growth Down
by Louis Navellier
U.S. and Global Growth Rates Continue Climbing

Income Mail:

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

The Disconnect in the Energy Patch

by Bryan Perry

The Organization of Petroleum Exporting Countries (OPEC) oil cartel said on October 11 that it sees the glut in oil supplies that has hammered crude prices disappearing as global economic growth picks up, but costs are expected to remain stable. In its regular monthly report, OPEC said that “increasing evidence that the oil market is heading toward rebalancing” had led to increases in oil prices last month (source: Reuters Oct. 11, 2017 – “OPEC again raises demand forecast for its oil, points to 2018 deficit”).

Higher demand coupled with OPEC production cuts has created hopes for a supposed rebalancing of the global oil supply and a potential floor at around $50 per barrel. The price of WTI crude has responded, rallying from a recent low of $45 per barrel to its current level of $50-$51 after trading briefly above $53.

The peak price for a barrel of oil hit $53.44, its highest value since July of 2015. The cartel raised its forecasts for global oil demand due to the improving outlook for economic growth, which increases thirst for crude and other sources of energy. Increasing demand for oil will be matched by added supplies, but OPEC's forecasts for the balance of supply and demand foresee a greater reliance on the cartel's output.

West Texas Intermediate Crude Oil Chart

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

The four-month rebound from a June low of $43 is impressive. Compliance with the production cuts has been the driving factor but, in my view, that is a temporary fix as OPEC members and non-members like Russia are likely to raise production levels to shore up their sagging economies. It’s just a matter of time.

Investors who want to allocate capital to the energy sector should look at the integrated companies that have upstream, midstream, and downstream operations – the best avenue for risk-adjusted returns.

Following the oil price rise, shares of major international integrated oil companies have rallied sharply. Dividend yields for the five leading oil stocks range from 3.6% for Chevron to 6.15% for Royal Dutch.

Rallies in these stocks are not based entirely on the hope of higher prices for crude going forward, but also on rising demand for refined products, primarily gasoline, diesel, and jet fuel. The global reflation trade that is lifting all economies, both developed and emerging, is a shot in the arm for the refining business, which unlike the exploration and production sub-sector of the energy sector, has limits to output capacity.

Houston, We Have a Problem

After the Iran Nuclear Agreement was signed, millions of barrels per day of Iranian oil returned to the market. That’s when the oil-price rout resumed with a vengeance. Last November, it seemed that the global oil glut was coming to an end, and optimism soared as OPEC committed to speed up the process by limiting its production. Oil prices were expected to quickly move to $55 and $60 per barrel. The rig count rose, oil jobs began to return in Houston, and a burst of oil-market optimism spread through the local economy. But it has since become another false start. Both oil markets and Houston’s business community watched oil prices falter through the spring, and optimism waned rapidly.

As if Houston didn’t have enough of a burden to deal with from Hurricane Harvey, the city remains unrivaled as a center for the American energy industry. It is the world's leading center for oilfield equipment construction. It is headquarters for 17 energy-related Fortune 500 companies and is home to more than 3,600 energy-related businesses. Houston is home to 13 of the nation’s 20 largest natural gas transmission companies, 600 exploration and production firms, and more than 170 pipeline operators.

Even at $50 per barrel, price expectations measured by the futures market for West Texas Intermediate have fallen back to levels well below those that prevailed before the OPEC accord. The domestic rig count has peaked for now, and the big investment houses forecast a decline in U.S. drilling this quarter.

While the tone of the conversation surrounding the energy patch has turned somewhat more bullish about the demand side of the equation – which should ultimately support higher organic pricing – there is a very notable disconnect in the overwhelming underperformance of the oil and gas infrastructure sub-sector. These volume-based businesses are principally involved in the gathering, processing, transportation, and storage of crude oil, natural gas, natural gas liquids, and refined products and typically generate and distribute substantial cash flow to their owners and are well positioned to benefit from future expansion of U.S. energy infrastructure. In short, the energy infrastructure (aka: pipeline) stocks are trading like a bag of soggy shoes, bumping along the 52-week lows even though these MLPs sport tax favored distribution yields averaging 6% or higher. A good illustration of this is the Alerian MLP ETF(AMLP). Its set of holdings are comprised of all the most widely-respected and widely-held names in the energy MLP space and despite WTI crude closing above $50 last Friday, the energy infrastructure sector showed fresh technical downside damage. It was one of those ‘sell first, ask questions later’ weeks for the sector.

(Please note Bryan Perry does not currently hold a position in the above mentioned security. Navellier & Associates does not own a position in the above mentioned security for client portfolios.)

Alerian MLP Exchange Traded Fund Chart

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

The lack of participation by the MLPs seems to reflect a growing view that oil prices will slide markedly lower in the months ahead, that the sector has priced in capacity of both the number of miles of pipeline in place and future pipelines to be constructed – or there is an unknown fear that the end demand for oil and gas in the U.S. is peaking with the advent of renewables taking more share of various markets.

Maybe it’s a combination of these fears, or maybe there are other reasons that account for the softness, but the way some of the leading stocks in the MLP space are trading, it’s my view that investors should be careful to not be tempted by the steep discounts these stocks are now trading at. The tale of the tape is telling me to avoid the majority of these MLPs for the time being. This is especially true at year end when tax-loss selling kicks in and investors pair off winners with losers to minimize their taxes to Uncle Sam.

I certainly hope the sector comes back to life as it is truly one of the great income streams for investors to embrace. But when the underlying prices of the stocks are trading at or near 52-week lows in a sector that just enjoyed a torrid rally in the very commodity it is built on, then the caution flag is raised until the sector trades more constructively. A good yield is only as good as the price stability of the company that is paying it. More insight as to when investors should raise their exposure to the MLP pipeline sector is necessary and over the next few months we’ll all have an opportunity to determine whether it is a great buying opportunity or something more fundamentally bearish that isn’t yet obvious but is in the works. 

Growth Mail:

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

What Caused the 1987 Crash?

by Gary Alexander

On October 19, 1987, 30 years ago, the stock market fell 22.6% in one day – almost twice the decline of the previous worst day on Wall Street, which was Monday, October 28, 1929 – the now-forgotten Black Monday between Black Thursday (October 24) and Black Tuesday (October 29). What caused this crash?

The answer seems like “settled science.” Investopedia says, “The cause of the stock market crash of 1987 was primarily program trading.” Barron’s (“Computers in Control,” October 16, 2017) says the culprit was “portfolio insurance, a quantitative tool designed to use futures contracts to protect against market losses.” This, they said, creates “a poisonous feedback loop as automated selling begat more of the same.”

I beg to differ. Saying that a market crash is caused by computerized trading is like saying the California wildfire was caused by a localized fire that spread fast. But what sparked the fire and fueled its growth?

Let me offer a longer-term, three-stage explanation – using three “P” words. In chronological order, the core cause of the crash was Prosperity (rapid GDP growth and a huge 50% market surge in the previous year), exacerbated by Politics (a series of bone-headed mistakes, mostly by Congress, a Secretary of State, and a rookie Fed Chairman), and then Panic, when fear stalked the market floor, creating a selling frenzy.

Blaming computers focuses only on the final panic day, paying no attention to what caused the record declines in two of three previous trading days (October 14/16) and what made Monday much worse.

In short, the market crashed in mid-October 1987 because it had risen too far too fast, based on rising prosperity caused by two major tax cuts, the 1981-82 Kemp-Roth tax cuts and a major 1986 tax rate cut.

The first thing to remember about historic panics is that they generally follow parabolic increases during “manic” episodes of over-hyped greed. In the biggest crashes last century, namely 1907, 1929, 1987, and 2000, the market was already too high, but then it shot 50% higher in a year or so. Back in 1985 and 1986, the market was rising to all-time highs almost every month. Then it took off in a hockey-stick rise:

Dow Jones Industrial Average Chart

On October 22, 1986, a year before the crash, President Reagan signed the Tax Reform Act of 1986 into law. The top rate was cut dramatically from 50% to 28%, giving us the closest thing to flat taxes we’ve seen in the last century. The Dow Jones index was 1805 on October 21, 1986, but it rose 50.8% in 10 months, to 2722 on August 25, 1987, based in part on the euphoria over those drastic tax rate cuts.

Going back further, the Dow had risen 250% in five years after the first Reagan tax cuts. The GDP was soaring each year in the mid-80s, starting with a huge 7.8% real gain in 1983. After a deep recession in 1981-82, real GDP rose 25 years in a row (1983-2007) with the mid-80s (1983-88) averaging +4.8%.

Political Mistakes – not Economic Fundamentals – Panicked the Market

When the market crashed in 1987, there was no fundamental reason for the crash. There was no recession in sight; earnings were strong, and inflation was under control, but the rapid rise in stock prices had created fears of an exploding bubble. Specifically, there were widespread fears of a recession, slower earnings, and rising inflation, when there was virtually no evidence for any one of those three major fears.

Right before the market peak, on August 11, 1986, economist Alan Greenspan was sworn in as Chairman of the Federal Reserve Board. Within a month, on September 4, Mr. Greenspan made a rookie mistake, firing a pre-emptive strike against relatively tame inflation by raising the Discount Rate 50 basis points. The Dow fell 62 points on that news, while the Prime Rate rose from 8.25% to 9.25% by early October.

Then, another political blunder emerged on Wednesday, October 14, 1987, when a tax bill was introduced in the House Ways and Means Committee that would severely limit tax deductions for interest paid on debt used to finance mergers or hostile takeovers (which had been running rampant throughout 1987).

Bonds had already fallen 13% in the previous six months, but the bond market got hit particularly hard that week. On Friday, Treasury bond rates rose to over 10% and contributed to Friday’s record down day.

On Saturday, U.S. Secretary of the Treasury James Baker III told the Germans to “either inflate your mark, or we’ll devalue our dollar.” Then, Baker went on some of the Sunday morning talk shows to say the U.S. “would not accept” the recent German interest rate increase. An unnamed Treasury official added that we would “drive the dollar down” if necessary. This led European markets to fall on Monday.

In summary, blunders by two political appointees caused the 1987 crash. First, the rookie chairman of the Federal Reserve Board, Alan Greenspan, made it his first order of business to announce his presence by raising the Discount Rate. Then, Secretary of the Treasury James Baker talked tough to the Germans about the dollar, causing global markets to crash. Between Baker’s currency wars, Greenspan’s tight money, a new tax bill that punished businesses, and more threats of protectionist legislation, the problem was too much, not too little, federal government intervention in a fairly smoothly-running economy.

In the morning after the crash, Greenspan tried to undo all the damage he had helped to cause. He cut the Discount Rate to where it was before he took office. As a result, Tuesday, October 20, 1987 set a record for the largest single-day gain (102.27 Dow points) and a 55-year record for daily percentage gain (+6%). Both records were then decimated on Wednesday, October 21, with a 10.1% gain of 186.84 Dow points.

After the crash, Congress reversed itself on their corporate tax grab. They reduced the corporate income tax rate from 40% to 34%, giving business a firmer footing for their financial planning, resulting in stronger earnings growth and net GDP growth the following year. For all of 1987, the Dow actually rose 2.2% and we reached a new all-time high within two years – as if the crash had never happened.

In 1987, Wall Street feared a drying up of corporate profits, but corporate profits soared in 1988 after the corporate tax rate was sliced from 40% to 34%. This can happen again. Applying all these lessons from 1987, we can (1) create a new boom by lowering personal tax rates (while repealing most deductions). We can also (2) avoid a crash by not punishing businesses for their success, and we can (3) revive a slow economy by reducing corporate taxes and regulations, giving businesses more reasons to expand and hire.

Could 1987 happen again?  It’s not likely now, but a stock “melt-up” following a major tax reform bill this year or next could push the market up too fast. If the Dow rose to 27,000 or higher in a year, that would be too-far, too-fast, but we’re highly unlikely to see a major crash without seeing manic gains at record highs amidst a new wave of panic-buying and greed. We’re nowhere near those manic levels now.

Global Mail:

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

The Saudi-Russia Factor in Crude Oil

by Ivan Martchev

Given the historic summit between Saudi Arabia and Russia in early October – with the first-ever case of a sitting Saudi king visiting the Kremlin – one cannot help but notice the bid under the price of oil as the two countries are constantly in a tight race for the spot of #1 global producer. The Russians have come a long way since crude oil production imploded after the collapse of the Soviet Union and they are making their presence felt on the global stage both geopolitically and in the energy markets.

Russian Crude Oil Production versus Saudi Arabian Crude Oil Production Chart

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

The Saudis have finally realized that they will have to deal with Vladimir Putin. The fact that they signed a memorandum of understanding for the purchase of a highly advanced S-400 air defense system shows a key turning point in Saudi-Russia relations as the desert kingdom had previously sourced most of its defense purchases from the United States and the United Kingdom.

It has to be noted that Moscow is a top supplier of advanced weapons systems to Iran, which has long been challenging Saudi Arabia for dominance of the region. I would not be surprised if in due course Russia emerges as a mediator in the long-standing Saudi-Iranian conflict as they have made the strategic decision that the Middle East is very important to their national interests.

It had been a while since I had looked at the detailed maps (from the Institute for the Study of War) covering the Syrian conflict, as I had seen multiple headlines that the “tide had turned” against ISIS.

I had to look hard to find ISIS-controlled territories on the map. They had practically disappeared. And it’s the Russians who get the credit, after they decided to intervene in late 2015.

Territorial Control in Syria Image

The oil market has definitely taken note of this Russian geopolitical maneuvering and so has the Russian ruble, which has a notorious correlation to the price of crude oil. (The Saudi riyal probably would have matched the Russian ruble if it were not pegged.) Saudi Arabia and Russia are similar in the way crude oil composes a disproportionate contribution to their government budgets and overall economic growth.

This Russian ruble volatility disproportionately affects the performance of Russian investments listed on foreign exchanges. Not only are Russian ADRs skewed towards energy and the materials sectors but they get more significant currency translation than your average ADR, given how volatile the ruble is.

Russian Ruble versus Crude Oil Price Chart

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

Still, I am wondering if this is not a dead-cat bounce in the price of crude oil as it tends to have negative seasonality in the fall and winter months. We did not get a seasonal rebound in the spring and summer months, so I am not quite sure how we will get a price spike in crude oil when seasonal demand is weak, geopolitical risks notwithstanding. There is no doubt that a warming of Saudi-Russia relations is a positive in the long term for crude oil prices, but in the short term there are serious risks that remain.

The #1 Risk to Crude Oil Prices Remains China

The #1 risk to crude oil prices remains China, which is not in a particularly stable economic situation. In fact, with China being the #1 consumer of oil, I don't think that any Saudi/Russia handshake can keep the price of oil up if the Chinese economy delivers a hard landing.

Iron Ore versus Crude Oil Price Chart

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

The significant price declines in crude oil and other key commodities in the 2014-2016 period coincide with the downshift in economic growth in China. Recently, the price of iron ore has again dramatically weakened while crude oil has rebounded. I know that key commodities are not perfectly correlated, but they do give us an independent indication of how the Chinese economy is performing. I have never been fond of official Chinese economic statistics that frankly can be “cooked.” This is why when I see prices of key commodities – where China is the #1 global consumer – weaken, I take notice.

I am of the opinion that Chinese authorities pulled out all the stops to stabilize the Chinese economy for the 19th Congress of the Chinese Communist Party (CCP) that opens tomorrow (October 18). I do not think that the Chinese authorities can plug the air of a credit bubble in the Chinese economy that has already popped. What we see in China today is a temporary stabilization due to the CCP Congress, but later they may face a hard landing due to years of rising debt levels that are not sustainable in the Chinese economy.

In a strange way, the price of crude oil has been caught between warming Saudi-Russia relations on the supply side, and a Chinese economy (in a not-too-stable condition) on the demand side. In the short term, demand side shocks could have a disproportionate effect on prices, particularly in weak demand months.

Sector Spotlight:

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

Putting Scary News in Context

by Jason Bodner

Bad news sells when people are scared and cranky. Happy news doesn't pay the publisher’s bills because, sadly, no one wants to hear happy news. In a perfect illustration of the desperate appeal to fear, several news outlets covered a story last week under a headline like this: “Yellowstone super volcano may erupt sooner than thought, potentially wiping out life.” You have to read deep to find the truth: “Fortunately, the Yellowstone volcanic system shows no signs that it is headed toward such an eruption in the near future.” Real message: “You have nothing to worry about.” Hidden message: "Ha-ha, Made Ya Look!"

Absolutely Nothing is Happening Image

It's no mystery that what we are told is only one version of the truth. Going back 1,900 years, the Roman Empire was the largest and most dominant in history, but now it is only the 19th largest empire in history.

The Roman Empire at its Greatest Extent Map Image

It's natural to take things at face value and accept them as reality; I riffed on this last week. Another example: Many Americans associate South Africa with racial inequality through apartheid. Interracial marriage was outlawed there for 36 years, but interracial marriage was illegal in the U.S. for 191 years.

Emotionally, when a key outcome is uncertain, causing stress, people want to be told that things will get better, but most people don’t actually feel better until an actual resolution comes. As a kid, when something bothered me at school, it felt good to hear my mom say, “Don't worry honey, it will be fine,” but until I got the added information that I needed to confirm her diagnosis, I never quite felt OK.

Depending on which news outlets a reader follows, the Trump administration is a tale of two cities. Many paint a picture of incompetence, chaos, and pending collapse. Others portray a no-nonsense, finely-tuned machine, getting down to business and powering the markets higher. Trump can take credit for the higher market, and Obama can take credit for the market rise in his years, but Presidents aren’t omnipotent. You can take credit, too, if you bought stocks. More importantly, what is the real reality (the actual data) vs. perceived reality as it pertains to the stock market? I think reality supports a continuing bull market. Why?

Five Pillars of the Current Bull Market

  1. We have continued globally-engineered economic stimulus. Interest rates continue near historical lows and have not been sharply inclining, nor are they perceived to rise sharply in the near future.

    Ten Year Bond Yields Since 1790 Chart

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

  2. Sales and earnings of companies largely continue to grow and improve. If we look at consecutive quarterly performance of companies reporting earnings and sales, we see a clear uptrend. Below is a graph of the S&P 500 change in forward 12-month EPS vs. change in price. Granted, it indicates a higher P/E ratio, but it also illustrates the growth of sales and earnings.

    Standard and Poor's 500 Price to Earnings Ratio Chart

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

  3. Market breadth remains strong as the broad-based equity indices continue to set record highs. The ratio of highs-to-lows is high across all time tables:

    Broad-Based Equity Indices Table

  4. Dividend rates are growing. Naturally as companies grow sales and earnings, many stockpile cash which they elect to pay out as dividends. The dividend yield on the S&P 500 index is 1.89% according to multpl.com. If we compare it to the 10-year Treasury, which has a yield of 2.28% and we factor that bond interest is taxed as ordinary income while dividend income is long-term capital gains, then even with this wide spread between dividend rates and yields, stock dividends still win! Where is money going to go? Historically speaking, stocks offer a superb likelihood of capital appreciation and a lower tax rate.

    Standard and Poor's 500 Dividend Trends Chart

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

    With dividends remaining high, stocks represent a new form of “carry trade,” which historically means borrowing in a country with low rates and lending in one at high rates. Assuming your currency fluctuation risk was hedged, it was a beautiful strategy that lasted years. Well, the new carry trade opportunity comes from borrowing any of several currencies at low rates, investing in stocks, and then earning a higher effective rate through dividends at more efficient taxation.

  5. Synchronized global economic growth is bolstering specific sector strength. As we have discussed in deep detail, week after week, despite a few recent cracks signaling potential overheating, tech continues to power the market higher. Following suit, health, financials, industrials, consumer discretionary, and materials are all also chugging along quite nicely.

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

Downbeat news keeps us busy with worry. North Korea, Hurricanes, Racial tension, Russian meddling, sound attacks in Cuba, tweets, rants, even a new type of angst during the national anthem at sports games ... I'm exhausted just trying to hit the main talking points. Here’s the truth: News and media companies are making a lot of money spraying this avalanche of bad news. But looking at the data shows there is a clear and inherent bid for the stock market. Overheating will take place, and the market will need to breathe with a healthy correction from time to time, but overall I believe that stocks are headed higher.

There are actually three sides to every story – yours, mine, and the truth. The media is incentivized to stir fear to attract viewers. The TV and Internet “talking heads” interpreting these stories are incentivized to endlessly debate and discuss the events taking place. The real story, however, is usually buried in the data. So, if we look at data, there is fake news and real truth. The only incontrovertible fact that we can rely on is the actual data. That is the real news. And as far as fake news goes, comedian Mitch Hedberg may have figured it out after all saying: "My fake plants died because I did not pretend to water them."

Mitch Hedburg 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.*

Energy Sector Brings Earnings Growth Down

by Louis Navellier

Last Friday, the Labor Department announced that the Consumer Price Index (CPI) surged 0.5% in September, due largely to a 13.1% surge in gasoline prices. Excluding food and energy, the core CPI rose only 0.1%. Clearly, Hurricane Harvey distorted gasoline prices and now that there is a growing gasoline glut again, inflationary prices are expected to ebb over the upcoming months.

The deceleration of the S&P 500’s third-quarter earnings momentum to a forecasted 4.3% annual pace is largely attributable to the energy sector, which is facing more challenging year-over-year comparisons.

Last Tuesday, OPEC Secretary General Mohammed Barklindo called for U.S. shale oil producers to take “shared responsibility” to help curb the global supply glut. On the same day OPEC leader Saudi Arabia announced that it would reduce it monthly crude oil exports by 7% in November in an attempt to stabilize crude oil prices. In the 1970s, the U.S. was at the mercy of OPEC. Now, the center of power seems to have shifted in the other direction. This shocking OPEC request shows how nervous crude oil producers get in the fall, when global crude oil demand naturally drops due to cooler weather. Barklindo said that “some extraordinary measures” may be needed to balance the global supply and demand for crude oil.

The global supply glut and the fact that we are now in a seasonally weak time of year for crude oil demand tell me that energy prices will likely start to retreat soon, cutting into energy sector earnings.

The rise and fall of energy prices has an effect on inflation and hence the Fed’s interest rate policies. The truth of the matter is that inflation tends too cool in the fall (due largely to slumping energy demand) and then rise in the spring (due to rising energy demand). I agree with most pundits that the Fed will likely raise key interest rates in December by 0.25%, but many Fed members want to wait until inflation returns.

On Wednesday, the Fed released minutes from its last (September 20) Federal Open Market Committee (FOMC) meeting. The most revealing tidbit was that several FOMC officials questioned whether or not another key interest rate hike is necessary in December, due primarily to the lack of inflation. One leading dove on the FOMC, Minnesota Fed President Neel Kashkari, vocally argued that no additional rate hikes are needed until inflation re-approaches the 2% level. Another big dove, Chicago Fed President Charles Evans, said that he wanted an open debate in December about a potential key interest rate hike. And if Janet Yellen wants to be re-nominated by President Trump as the Fed Chair for a second term, I suspect she also wants to look dovish, since it would spur robust economic growth going into mid-term elections.

U.S. and Global Growth Rates Continue Climbing

The first look at third-quarter U.S. GDP will come out in 10 days, on October 27. In their preliminary analysis, the Atlanta Fed’s “GDPNow” model shows third-quarter GDP components pointing to a 2.7% growth rate (as of October 13, 2017), up from 2.5% the previous week. The gain was due to the better-than-expected September retail sales report, which pushed consumer spending growth from 2.2% to 2.5%.

Car Sales Image

The Commerce Department announced last Friday that retail sales soared 1.6% in September, the largest monthly increase in 2-1/2 years due largely to strong replacement vehicle sales and higher gasoline prices from Hurricane Harvey. Excluding vehicle sales, retail sales rose 1% and excluding both vehicle sales and gasoline sales, overall retail sales still rose a respectable 0.5%. Now due to Hurricane Irma and the devastating fires in California, retail sales will likely be artificially boosted for the next few months. Overall, consumers are still spending steadily, when extraordinary items are stripped away.

On Tuesday, the International Monetary Fund (IMF) raised its forecasts for global GDP growth to 3.6% in 2017 and 3.7% in 2018, up 0.1% (for each year) from its previous estimates. Maurice Obstfeld, the IMF chief economist said that “the current global acceleration is also notable because it is broad based, more so than at any time since the start of this decade.” China, Japan, Europe, Canada, and the U.S. are all causing upward GDP revisions, as are emerging market economies. Only Britain’s GDP growth is expected to slow down in 2018 due to Brexit concerns. Interestingly, the IMF also lowered its global inflation forecast to 1.7% for the next two years, so the current Goldilocks scenario of low inflation and steady worldwide GDP growth appears to be a global phenomenon. Due to confidence in global GDP growth, the Financial Times reported on Friday that $6.6 billion flowed into global equity funds in the past week, so the melt-up in many Chinese-based ADRs and other international stocks persists!


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.

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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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