Last Week's Rally

Is Last Week’s Rally the “Real Thing” or Another Fake-out?

by Louis Navellier

February 23, 2016

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

Oil Refinery ImageWe saw another wild week, with a net rise of +2.84% in the S&P 500 and a lot of short covering along the way.  Many energy stocks may have bottomed out after the recent short covering.  Energy stocks were helped by the fact that crude oil prices rose after Iran, Russia, Saudi Arabia, and Venezuela indicated that they would support proposed production caps.  These talks about freezing production are apparently still ongoing.  Iran supports other countries capping production, but they may not freeze their own production.

Crude oil prices may settle down in the upcoming weeks as the supply glut continues.  The Energy Information Administration announced last week that U.S. crude oil supplies rose by 2.1 million barrels to an all-time high of 504.1 million barrels.  This is the first time U.S. crude oil inventory exceeded 500 million barrels, according to the EIA.  In the meantime, major oil producers keep trying to talk prices up.

The Federal Open Market Committee (FOMC) minutes were released on Wednesday, revealing that many Fed members were very worried about recent global financial conditions and recent market gyrations. Specifically, the FOMC minutes said that “waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent.”  Additionally, some of the more outspoken doves on the FOMC said that they want to see “direct evidence” of rising inflation before raising key interest rates.

In addition, St. Louis Fed President James Bullard, who had earlier called for a March interest rate hike did an “about face.”  In a Wednesday speech, Bullard said that “two important pillars of the 2015 case for U.S. monetary policy normalization have changed” and added that “the risk of asset price bubbles over the medium term appears to have diminished.”  After the recent market swoon, you can say that again!

In This Issue

In Income Mail, Bryan Perry will examine the shifting mood at the Fed and argue for staying in “ultra-defensive dividend-paying stocks and not reach aggressively for outsized yield.”  In Growth Mail, Gary Alexander will examine the latest trends in retail sales as they impact GDP and corporate earnings this quarter and this year.  In Global Mail, Ivan Martchev profiles a currency that has fallen off the radar of most traders – Russia’s ruble – along with Warren Buffett’s oil market bets.  In his Sector Spotlight, Jason Bodner will assure you that order will eventually emerge from this chaos, despite the recent topsy-turvy flips in various sectors.  And finally, I will examine the latest trend in corporate stock buy-backs.

Income Mail:
Market Narrative Spins “180” at the Fed
by Bryan Perry
Which Way Will She Lean in March?

Growth Mail:
The “Invisible Consumer” May Rescue This Market
by Gary Alexander
U.S. GDP May Expand 3% in 2016
Washington’s Birthday in Market History

Global Mail:
Bigger Trouble with the Ruble
by Ivan Martchev
Warren Buffett as an Oil Market Timer

Sector Spotlight:
Creating Order Out of Chaos
by Jason Bodner
Yesterday’s Leaders Continue to Lag

A Look Ahead:
Stock Buy-back Activity Resumes
by Louis Navellier
Average S&P Stock Performance by Credit Rating

Income Mail:

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

Market Narrative Spins “180” at the Fed

by Bryan Perry

There has been a noticeable shift in the Fed’s policy tone from saying that an accelerating economy would justify four rate hikes before the end of 2016 to a narrative about the U.S. economy at risk of falling into a recession that might induce a look at negative interest rates. When one considers the size of the U.S. economy (about $18 trillion), this shift in the narrative over less than two months is incredible. A string of weakening global data points, ever-widening spreads in debt markets, and cascading equity prices in most markets around the world can impact even the most ardent discourse regarding interest rates.

As the following chart shows, high-yield spreads have been diverging from the S&P 500 throughout 2015. The rollover in high-yield credit is thus not a healthy sign for equity performance. The two don’t tend to diverge for too long. Typically, when credit spreads widen, equity markets endure volatility as bondholders are demanding higher compensation for the risk they take. Widening credit spreads have been leading indicators for recession in the past 25 years, while a narrowing could be a major buy signal.

Standard and Poor's 500 versus United States High Yield Credit Spreads Chart

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

That said, QE and other tools used by central banks since 2008 were not in use in prior downturns and thereby, in theory, reduce the implied risk of any kind of hard landing for the U.S. economy. At the same time, investors should respect how history has repeated itself regarding widening credit spreads as a bellwether of economic headwinds.

Taken at face value, the economic calendar of the past week shows the domestic economy behaving better than the economies in Europe, Asia, and Latin America; but we have to remember that a contracting global economy will eventually pull down GDP in the U.S., and this is what the fed funds futures market is signaling to a Fed that doesn’t fully see it that way. The Fed has left the fixed income markets in limbo, toying with the idea that another rate hike in March remains a viable option. On Friday, the Bureau of Labor Statistics released readings of the Producer Price Index (0.1% vs -0.2% est.) and Consumer Price Index (0.0% vs -0.1% est.); both came in higher than forecast, coupled with a higher reading for January Industrial Production (0.9% vs 0.3% est.).

Through January, the total PPI is down 0.2% year-over-year on an unadjusted basis while the core PPI is up 0.6%. January’s readings would seem to reflect a PPI headed in the right direction in the Fed's mind. The total CPI is up 1.4% year-over-year on an unadjusted basis while core CPI is up 2.2%. In fact, that is the highest 12-month change in core CPI since June of 2012 and it exceeds the 1.9% average annualized increase over the last 10 years. The Fed favors the PCE Price Index when discerning inflation trends, yet it will certainly view the CPI data as a marker of progress toward achieving its 2% inflation target.

Federal Funds Target Rate Chart

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

Which Way Will She Lean in March?

With the door open for another quarter-point bump in the fed funds rate, I would expect markets to pause before adding to the recent gains, while a break back below $30/bbl for WTI crude will invite downside pressure. Currently, the fed funds futures market assigns only an 8% probability to a rate hike in March, meaning there is an obvious disconnect at work that could be highly disruptive to equity markets if the Fed hikes. (See February 19, 2016 MarketWatch.com article, “Treasury Yields Snap Three-Week String of Declines.”) Because of the current dislocation of the fed futures market and a more hopeful view by Janet Yellen at her latest two-day testimony, I would expect various Fed officials to voice policy path expectations before the March FOMC meeting in an attempt to rein in the bearish fed funds futures market, pointing to the recent data noted above as evidence that warrants a more optimistic outlook.

The fed futures market represents the view of credit markets and has historically provided strong guidance to express the market’s views on the likelihood of changes in U.S. monetary policy. Fed fund futures allow banks, fixed income portfolio managers, and investors to hedge against unexpected shifts in short-term rates. If the Fed elects to raise the overnight rate from 0.25%-0.50% to 0.50%-0.75% when the fed funds futures market is so convinced it won’t, then you have Ms. Yellen & Co. essentially dictating to the market its course of policy action when the market is clearly opposed to it. My sense is that a quarter-point rate rise would be quite negative for markets as well as for the Fed’s credibility.

When Fed rhetoric and markets are seeing the future from two very different perspectives, it’s best to stay invested in ultra-defensive dividend-paying stocks and not reach aggressively for outsized yield.

The market may be forming a bottom, but it will be a volatile bottom in the making. There has been a lot of talk of oil production freezes, more QE, and stabilizing of bad debt by central banks, which has the S&P back up to 1915 from a low of 1810 in just a week’s time. That said, nothing is for sure at this time and thus income investors should be patient and look for headlines that provide a rationale for upping one’s risk profile into higher-yielding assets.

Until then, I believe it is prudent to have a decent weighting in the best-of-breed utilities, telecom providers, data center REITs, self-storage REITs, skilled care REITs, and consumer staples companies paying dividend yields of 3% to 5% which fit this strict profile as several stocks within these sectors are trading to new all-time highs in this chaotic market. My take on this kind of performance is to not buck the trend, but rather go with the flow, as in money flow. Big institutions and fund managers are content to add to these sectors on any and all dips.

Managing an all-weather portfolio paying a blended yield of 4.0% that is trading steadily higher is where invested capital is being best served in a market full of unknowns that are about to unfold. Now is not the time to be aggressive, but rather exhibit patience and redirect monies to the best positioned blue chip companies that provide essential goods and services to consumers and businesses. The market tempest will eventually pass. However, before it does, there is risk of more damage that can take a further toll on one’s portfolio and such damage can be avoided by taking necessary and proper action.

Growth Mail:

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

The “Invisible Consumer” May Rescue This Market

by Gary Alexander

Last Tuesday, after the Grammy Award winners were announced the night before, I ordered the jazz category winners for airing on my radio shows this week.  As a “prime” customer, I routinely receive my orders two days later, but this package was not like the others: It had a nearly-blank mailing label.

The mailing label for my CDs only listed my small town – no name and no address.  The local delivery service couldn’t find any name or address via the tracking number, so they opened the package to see if there was an order slip or receipt with an address.  No such luck.  But when they saw the four jazz CDs inside, they knew I was the local jazz DJ, so they knocked on my door and asked, “Did you order this?”

Those are some of the benefits of living in a small town.  When my parents lived here in the 1980s, my mother used to get mail addressed only to “The Quilt Lady” – with just the town; no name or address.

We live in a miraculous world where you can order almost anything you want and get it in two days.  With such an advantage, why ever drive clogged streets to a crowded parking lot and a long walk into a confusing array of stores, only to be disappointed and walk away with nothing?  If you ever wonder why some stores are closing and some malls look empty, consider invisible consumers (like me) for a minute.

My wife and I look forward to receiving package deliveries almost daily.  We cut down on driving, wasted time, and frustration that way and we’re not alone. Online is the cutting edge of consumer demand.

Last Wednesday, the U.S. Commerce Department reported that online sales grew 14.6% last year and averaged 15.8% annual growth over the last six years.  In the last 10 years, total Web sales have grown by a phenomenal 275%, averaging 14.1% per year, even growing (at a slower rate) during the Great Recession of 2008-09.

Web Sales Table

By contrast, total retail sales grew only 1.4% in 2015, rising from $4.63 to $4.69 trillion, not including food service, restaurant, and bar sales.  Online sales, therefore, only accounted for 7.3% of total retail sales in 2015.  Despite its relatively small size, online sales accounted for two-thirds (66.4%) of total retail sales growth in 2015.  If you factor out the lower cost of gas by eliminating the sales of automobiles and fuel (not usually bought online), online sales accounted for more than 100% of all retail sales growth in 2015.

U.S. GDP May Expand 3% in 2016

The S&P 500 rallied strongly – up 1.65% or more per day for three straight days – starting on Lincoln’s Birthday, February 12, when the Commerce Department revised last December’s retail sales up to a 0.2% gain, reversing the 0.1% decline previously estimated.  Excluding sales of autos and gasoline, core January retail sales rose 0.4%.  With December’s revision, retail sales have now risen for four straight months.

While those numbers may look small on the surface, that’s because they are measured month-to-month, not annualized.  Any positive gain in a deflationary environment is good, but Ed Yardeni reported that, “adjusted for a 0.7% estimated drop in the goods CPI during January, real retail sales rose at a 6.9% annual rate during the three months through January,” (from Yardeni’s Morning Briefing, February 16).

We also heard some good news on GDP on February 12, when the widely-watched Atlanta Fed GDPNow model forecast for the real GDP this quarter was raised to 2.7%, up from 2.5% the previous Tuesday:

“The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 2.7 percent on February 12, up from 2.5 percent on February 9. After this morning’s retail sales report from the U.S. Census Bureau, the forecast for first-quarter real consumption growth increased from 3.0 percent to 3.2 percent.”

– Atlanta Federal Reserve, February 12, quoted in Yardeni’s Morning Briefing, Feb. 16.

If 2.7% GDP growth seems optimistic, consider the cover story in the February 22 Barron’s (“This Storm Will Pass”) by their Economics Editor, Gene Epstein, who says the economy should grow 3% this year – 2.8% in the first half and 3.2% in the second half.  Although Barron’s sees a cyclical bottom of $20 oil in April, they also see crude rising to $55 by December, boosting earnings in the troubled energy sector.

Earnings growth will likely drive the market more than GDP growth alone.  According to Thomas Black, writing in BloombergBusiness (February 18, “Wall Street Gloom is at Odds with Profit Gains”), fourth-quarter earnings were down 4.9% (with 404 of the S&P 500 companies reporting), but factoring out energy companies, earnings grew 1.2%, or up to 5% when excluding industrials and basic materials.

Retail sales should expand since employment growth is solid, jobless claims are low, wages are rising, and so are the number of “quits,” as workers seek better jobs.  The housing market is also strong. Gasoline is cheap, putting more money in the consumer’s pocket.  Meanwhile, consumer balance sheets are stronger, as U.S. household debt as a share of disposable income is at the lowest level since 2002.  (Data from “Investors just went bonkers, so you know it’s time to buy stocks,” Marketwatch, February 18, 2016).

So…let’s shop!

Washington’s Birthday in Market History

When I was in school, we celebrated Washington’s Birthday on February 22 – his actual birthday.  Lincoln’s birthday was not a holiday but in 1968 Congress passed the “Monday Holidays Act” (a business-friendly gambit) to move the official observance to the third Monday in February.  It was still called Washington’s Birthday until the 1980s, when merchants lobbied for a generic “Presidents’ Day.”

George Washington was our first celebrity, and almost our first King, but he resisted all attempts to turn his election into a coronation, or a dynasty.  Still, Americans decided to launch new ideas on his birthday – like new political parties, new national boundaries, and the launch of the very first public stock offering.

On February 22, 1775, with Revolution in the air, the first U.S. joint stock company offered shares of a cloth-making concern.  The new shares cost 10 pounds, issued on General Washington’s 43rd birthday.

Several political parties were born on Washington’s Birthday, probably for propaganda purposes.  On February 22, 1854, the Republican Party was born in Michigan.  They held their first national meeting on February 22, 1856 in Pittsburgh.  On February 22, 1872, the first national convention of the Prohibition Party (and the Labor Reform Party) was held in Columbus, Ohio.  On February 22, 1878, the Greenback Labor Party was formed in Toledo, and on February 22, 1887, the Union Labor Party was organized in Cincinnati.  Ohio is the Birthplace of Presidents (8) but it is also the Birthplace of doomed Parties (4).

Turning to business, on February 22, 1879, Frank Winfield Woolworth opened his first 5-Cent Store in Utica, New York.  In the ultimate Washington’s Birthday sale, he pledged to sell nothing that cost more than a nickel.  The store failed, but he succeeded when he opened another discount variety store later that year in Lancaster, PA.  Expanded to include items that cost a dime, he called it a 5-and-10-cent store.  By 1904, he had opened 120 stores in 21 states; but by 1997, F.W. Woolworth closed its last of 400 stores.

25 years ago this week, on February 24, 1991, the 100-hour Gulf War land attack began, ending in victory on February 28, at a cost of only 125 American lives, plus 21 more missing in action.  The DJIA rose 500 points (+20%) during the full six weeks of Gulf War action.  While the headlines were focused on Iraq, on February 26, 1991, Tim Berners-Lee presented an early version of his Web browser to a work group at the European Particle Physics Laboratory (CERN) in Geneva.  He invented a way for scientists at different universities to share information.  Very soon, he released his Web browser on the Internet.

On February 26, 1993, shortly after noon, a 1,210-pound truck bomb exploded in a parking garage of the World Trade Center in New York, leaving a crater 200 feet-wide, killing six, injuring several hundred and causing a hasty evacuation of 50,000 others into a cold Friday afternoon snowstorm.  Sheik Omar Abdel-Rahman, who planned the attack, was across the Hudson in New Jersey.  He now serves a life sentence in prison, but that 1993 bomb perhaps placed an idea in the head of Osama bin Laden and other terrorists.

On February 26, 1995, another kind of financial bomb exploded, as the 233-year-old finance house of Barings failed, after huge losses were run up in Singapore by a renegade trader named Nick Leeson, age 28.

Global Mail:

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

Bigger Trouble with the Ruble

by Ivan Martchev

The worst performing major currency in the world in 2016 happens to be the Russian ruble (or “рубль” as the Russians call it). According to Barchart.com’s Forex Year-To-Date Highs/Lows – Major Rates data. It is always a little tricky measuring those performance numbers as the Russian ruble is quoted in rubles per dollar (like the yen) so more rubles per dollar reflects a weaker ruble. Regardless of whether you measure it in rubles per dollar or cents per ruble, it is not a pleasant experience to go from over 3.6 cents per ruble (under 30 rubles per dollar) five years ago to under 1.2 cents (over 85, see chart).

United States Dollar versus Russian Ruble - Weekly OHLC Chart

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

The trouble with the ruble, as with all commodity- and energy-dependent economies and their currencies, is oil (in green). I described the situation in my Marketmail commentary on August 4, 2015 (see “More Trouble with the Ruble”), including this passage:

“Tell me where the oil rout may stop and I will tell you if there is more downside to the Russian ruble and Russia’s stock market. If indeed oil is headed under $20/bbl. in due course as the Chinese situation unravels, the ruble may break 100 on the USDRUB cross rate. The Russian dollar-denominated RTS index is at 858 at the close last week. I think it is entirely possible that it ends up in the 400-500 range.”

The USDRUB exchange rate was at 58 when those comments were made. On January 21, 2016 the ruble hit 85.09. Given that the dollar-denominated RTS Index was at 858 at the time, where was it on Friday? 725.98 (and we have been as low as 607 on January 21).

Russian RTS Index - Monthly OHLC Chart

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

The outlook for the Russian stock market and the ruble remains bearish. As a matter of principle, I believe one has to short with the bears and run with the bulls, as difficult as that may be. Playing favorites does not work in stocks or bonds and neither does it work in commodities or currencies. Permabears and permabulls have the same faults – being “perma” means being stuck in one position.

Russia Government Budget Chart

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

I think we have better-than-even odds of USDRUB at 100 and an RTS Index at 400 or so simply because I am not convinced that oil will hold at $20/bbl. Russia remains the most leveraged economy to the price of oil, which is perhaps why it is so conservatively run from a fiscal standpoint. The Russians would make most countries look ridiculous with their low level of indebtedness and conservative budgets. Even though we have a generational collapse in commodity prices that is greater than 2008, their budget deficit is tiny (-0.5%) and much smaller than what they ran in the 2008 Great Financial Crisis.

Russian and Chinese Foreign Exchange Reserves Chart

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

Furthermore, as the Chinese forex reserves are collapsing while trying to control the peg on the yuan, with the flight of capital out of China running at $100 billion a month, Russian forex reserves are rising amidst a collapse in commodity prices. This is because the Russians learned the $200 billion lesson from 2008 (that’s how much they lost in forex reserves, see chart), that managing the ruble exchange rate is very costly if the price of crude oil is not there to support it. So instead of throwing good money after bad, the Russians have high interest rates to support the currency, even though that is not helping much at the moment, given the situation with crude oil.

The Chinese situation is highly relevant to all of China’s close trading partners and all major commodity producers, like Russia. The fact that commodity prices are low does not mean they cannot go lower, as we learned in the Asian Crisis in 1997-1998. The issue this time is that China has a GDP of $11 trillion, much larger than during the Asian Crisis of the late 1990s.

The question of China arose again in a conversation with investors last week where one that had visited China in the 1980s was sharing with me that it was surreal that there is smog and pollution in Beijing today and then there was nary a car on the road.

“They are very industrious people,” he said of the Chinese. “You have to admire that.”

“I know and I do admire it,” I noted. “But I see a problem in people connecting an impossible-to-manage credit bubble that is presently unravelling in China and their industriousness. One has nothing to do with the other.”

I hope the Russians understand that difference as it is costing them dearly at the moment.

Warren Buffett as an Oil Market Timer

News that Warren Buffett’s Berkshire Hathaway (BRK/B) added an investment in Kinder Morgan (KMI) during the fourth quarter was being spun as him betting on a bottom in oil prices. Berkshire held 26.5 million shares of the company as of December 31, valued at $395.9 million at the end of 2015. In that regard, I would like to point out that oil was down a lot in the first quarter and the trades were made in 4Q; and Warren has two star managers making large investments in stocks on behalf of Berkshire, so it may not be him making the KMI investment and it may not be a bet on a bottom in oil at all. (See February 16, 2016 Bloomberg: “Buffett's Berkshire Hathaway Discloses Stake in Kinder Morgan.”)

Light Crude Oil - Spot Price Chart

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

Kinder Morgan was still rising for quite some time after oil began declining in 2014, the idea being that it is a toll booth operator and as long as there was pipeline volume the price of oil was less relevant. Then, investors realized that there is a lot of high cost oil flowing in those pipelines and sooner or later that was going to impact volumes.

To be fair to Buffett (or his managers that may be making those investments), KMI now trades at close to book value (1.14). But Kinder’s bigger stakeholders are not its shareholders but its bondholders. KMI has a stock market value of $38.7 billion but an enterprise value (equity plus debt) of $82.9 billion so the bondholders have a bigger say in matters. No, they don't “own” Kinder (yet), but every time a company has to dramatically cut dividends (-75%) in order to make coupon payments it is clear who runs the show.

Another energy company Berkshire is increasing its stake in is Phillips 66 (PSX). Berkshire disclosed in August that it held more than 10% of the oil refiner’s stock and made regular purchases since then. PSX is more like a Warren Buffett stock: As the price of oil is declining faster than gasoline (or other refined products’ prices), the spread between those two product categories (called the crack spread) is increasing. Rising crack spreads mean rising profits for refiners. So when Phillips 66’s former parent ConocoPhillips (COP) is cutting dividends PSX is maintaining them and growing them over time. The point it is that rising stakes in PSX and KMI at the same time does not lead to the conclusion that Buffett (or his managers) are timing a bottom in oil. If they were, they would probably not be holding PSX too.

The KMI purchase may be a political maneuver. Berkshire may make money over time with KMI but it may not be trying to call a bottom in oil or banking on short-term gains. His purchases of Goldman Sachs (GS) and General Electric (GE) warrants and preferred stock in late 2008 were aimed to express his support of the companies in times of trouble and not necessarily time a bottom in either’s share prices, which declined precipitously after he injected capital in both firms. His famous October 16, 2008 New York Times opinion piece (“Buy American. I am,”) was not meant to time the bottom in the market either.

I don’t believe that increasing Berkshire’s KMI stake is an attempt to time a bottom in crude oil.

(Please note: Ivan Martchev does not currently own positions in BRKB, KMI, PSX, COP, GS, or GE. Navellier & Associates does not currently own positions in BRKB, KMI, or GS; these positions have been holdings in past client portfolios. Navellier & Associates does currently own positions in PSX, COP, and GE for some client portfolios.)

Sector Spotlight:

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

Creating Order Out of Chaos

by Jason Bodner

The Big Bang scattered all that we know in a chaotic explosion which over time organized into individual systems of galaxies which are collectively known as the universe: first chaos, then order. Stars die in spectacular supernovae. They explode and launch material everywhere, which births new stars and heavy metals – chaos then order. New science suggests that a 1.5C increase in global temperature could thaw the Siberian permafrost. This could release significant amounts of carbon stores which will in turn raise temperatures and release methane stores until global warming spirals hopelessly out of control. What would eventually result would be some new kind of world which we can’t yet fathom.

As Friedrich Nietzsche succinctly explained chaos theory: “Out of chaos comes order.”

Just to show how futile it may be to try and impose order on chaos, consider the following: Researchers worked on an experiment using a network of loosely connected pendulums (oscillators). An oscillator is anything that swings back and forth rhythmically when prompted and almost any object, including individual atoms, can be an oscillator. The scientists found that when they exerted force with a regular rhythm the group of pendulums behaved chaotically and swung out of sync. Yet when they applied forces at random intervals the pendulums swung in sync.

Pendulums Image

The spirit of this column, Sector Spotlight, is to identify and highlight trends early in their development. This has been a difficult task lately, as sector rotations seem to be happening on almost a weekly basis.

It’s mere rhetoric to say that market volatility and economic uncertainty is high and rising, but we can certainly say that it’s more chaotic than orderly. It may seem futile to try to spot the next trend in an environment like this, but it is often at the least predictable times that a trend reversal and order out of chaos occurs. It could literally be any day now that we begin to see new leadership emerge that will lift us out of the current downtrend. It could be tomorrow, or in a year, or it could have happened last week!

Although this is possibly true, I am not yet quite convinced. The performance we saw last week feels good, and we all knew a “snapback rally” would come; but it pays to look under the hood at what was really driving the rally and there is no question that it could be summed up in two words. Short covering.

In its weekend report, Bespoke Investment Group (“The Bespoke Report,” February 19) published a chart showing the high correlation between last week’s performance and short interest. If short interest as a percentage of float was higher, the positive performance for the week was higher. This means the worst stocks of the past month or so were the best performers last week.

The negatives about last week’s rally were short covering, weak technicals (the broad indices are trading well below 50-day MA), a murky backdrop clouded with fear, negative interest rates, and economic contraction. The positives were that the U.S. economy is still technically growing, it is seemingly “best in show” and the low-rate environment bodes well for asset flows into the equity markets. This is especially true when S&P 500 dividends yield more than Treasuries or long-term bank deposits.

My tone may suggest that this rally was not meaningful, but in fact many bull runs have begun this way. As the shorts cover, the rallies are wicked. This attracts attention and can reverse the whole downtrend swiftly. Time will tell; but in the meantime, let’s look at the sectors for the last week, quarter, and year.

Yesterday’s Leaders Continue to Lag

Standard and Poor's 500 Sector Indices Tables

As we can see, the best performers in the last three months were last week’s laggards. In the table left above, we see utilities and telecom were the worst performers, but they have been the strongest sectors for the past three months. Consumer discretionary, which has taken a significant beating for three months, was the strongest for the week. Even financials put in a strong showing as some much-needed cheer worked its way through the system. Below we can see this echoed with the 1-year and 1-week charts of the S&P 500 Telecom Services Index and the S&P 500 Consumer Discretionary Index, respectively.

Standard and Poor's 500 Telecom and Consumer Indices Charts

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

On another positive note, I spoke at length to a friend who was formerly a CEO for a niche division of a multinational mining company. Now a consultant, he is currently advising on large companies divesting some assets as they look to shore up bottom lines and “get closer to home.” The current environment of depressed commodity prices isn’t all bad. It is setting up quite well for bargain hunters of all kinds: specialist companies are looking to acquire business units that may be weighing some big companies down. For example, a large mining company may be looking to launch some of its weaker divisions and slash its labor force in an effort to shore up its balance sheet and weather the storm caused by crashing commodity prices. Yet those with a longer-range investment time horizon are becoming giddy with the current climate as they eye fire-sale prices. “What is one man’s junk is another man’s treasure.”

So it goes in the equity market as well. As price levels and moods become depressed, we should begin seeing some bargain hunters getting ready to snap up some “unjustly punished” stocks. As stocks gyrate wildly each week, and we all clamor to follow their moves, remember one important thing: Nature has a remarkable track record of creating order out of chaos. Keep that thought in mind as all of us struggle to make sense of these chaotic markets. Order may be upon us at any moment…

A Look Ahead:

*All content in this "A Look Ahead" section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

Stock Buy-back Activity Resumes

by Louis Navellier

Last week, I spent a few days with some brokers on a rainy Oregon golf course.  I must say I was impressed about how they dressed up in their Gorton Fisherman Outfits with special gloves and played in 60-knot gusts with stinging rain and hail.  Men in the Pacific Northwest are a lot tougher than I thought.

I sat out one day of golf to tend to the markets, but that night I got them to reveal what their near-death golf experience was all about.  Interestingly, they all said that golfing was better than going to work in these wild markets.  The brokers told me they had nothing to buy, and the wholesalers told me they had nothing to sell, so golfing in the Arctic-like tundra felt more comfortable than watching these markets.

I told the brokers that since the S&P 500 dividend yield was 50+ points above the 10-year Treasury yield recently, it was bargain-hunting time, but it was also time to be selective.  I told them what I tell investors in my workshops.  The keys to making smooth, powerful returns in this challenging market environment are (1) strong sales growth, (2) expanding operating margins, (3) a high return on equity, (4) strong cash flow, (5) rising dividends, and (6) a stock buy-back program.  These are the fundamental factors I monitor.

This week, I want to look at key #6 – stock buy-backs.  Last Tuesday, Apple announced that it would issue up to $12 billion in new corporate bond debt to buy back their outstanding shares and pay dividends. IBM and Comcast, two companies with very generous dividend yields, also announced that they would issue new corporate bonds.  Corporate America is stepping up to issue more debt to buy back more shares.

As it turns out, the Fed’s single rate increase last December may be the only rate increase they announce for a long time; so the stock buy-back frenzy may continue for a while, fueled by low interest rates on high-quality corporate bonds.  These buy-backs should help shore up the overall stock market.

Speaking of stock picking, a Bespoke report published last Wednesday illustrates clearly that the higher a company’s credit rating, the better its performance over the last year and the first six weeks of 2016.  (That trend sharply reversed in the last week, as the following table shows.)  Naturally, the higher a company’s credit rating, the cheaper it can borrow in the bond market to buy back its outstanding stock.

Stock Performance by Credit Rating Table

This table shows that the companies with higher-rated (by S&P) debt have performed better than lower-graded companies over the last year and in the first six weeks of 2016, but then the worst-rated companies outperformed the best-rated companies in the three-day 5.2% S&P 500 recovery from February 12 to 17.

This bodes well for companies with lots of cash and a high credit rating, but it does not bode well for the battered energy sector.  As a result, I was buying a lot of high-quality dividend growth stocks last week.

So, in summary, corporate stock buy-back activity, bargain hunting, and investors seeking high yields in quality dividend stocks have temporarily put a floor under the stock market.  We are not yet entirely out of the woods, but stock picking remains much more crucial to an investor’s success than sector selection.


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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