Markets Revive

Markets Revive as Central Bankers Postpone Action… Again

by Louis Navellier

September 27, 2016

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

The market responded positively to the “no action” vote by the U.S. Federal Reserve and Bank of Japan (BOJ) last Wednesday.  Nasdaq set an all-time high on Thursday and the S&P 500 rose 1.2% for the week.

As Wednesday dawned in Japan, the BOJ announced that it would keep short-term interest rates at -0.1%, but added that it would start targeting 10-year government bond yields to fight deflation.  This move was designed to lift rates above zero, but after the announcement 10-year Japanese government bond yields rose from -0.06% to just -0.03%.  In other words, deflationary expectations continue to reign in Japan.

Inflation Image

Later on Wednesday, the Federal Open Market Committee (FOMC) said that although “the case for an increase had strengthened” they “decided for the time being to wait for continued progress toward our objectives.”  However, three of the 10 voting members of the FOMC – two hawks and a former dove – voted to raise rates in an obvious challenge to Fed Chair Janet Yellen’s leadership.  Even more telling, seven of 17 FOMC members expect the fed funds rate to be 0.25% higher in December and four FOMC members expect the fed funds rate to be 0.50% higher by year’s end.  However, these FOMC dissenters have no idea what economic growth, inflation, unemployment, and wage growth will look like by then. Any December rate hike will mostly depend on the economic data coming out in the upcoming months.

Speaking of central bank policies, the Organization for Economic Cooperation & Development (OECD) warned on Wednesday (in “Global growth warning: Weak trade, financial distortions”) that very low and negative interest rates are distorting asset markets and threatening the stability of financial systems.  In this report, the OECD said that a revival of trade would boost global productivity and bolster economic growth, but the ongoing backlash against globalization is condemning the global economy to a “low growth trap.”  The OECD report recommends any newly-imposed protectionist measures be reversed.

By the way, the Fed’s “quiet period” is definitely over.  According to this week’s Barron’s (September 26th edition), Minneapolis Fed President Neel Kashkari and Dallas Fed President Robert Kaplan delivered major speeches yesterday, while Fed Presidents James Bullard, Charles Evans, Esther George, and Loretta Mester will speak tomorrow, along with Fed Chair Janet Yellen, who will be testifying to a Congressional panel.  Get ready for more confusion from the warring factions on the “Federal Open Mouth Committee.”

In This Issue

As the third quarter draws to a close on Friday, there will be “window dressing” galore on Wall Street.  After last night’s Presidential debate, we may have a better idea of who will be the next President.  This could help remove much of the uncertainty that has been plaguing the market this year.  In Income Mail, Bryan Perry says the Fed’s decision clears the deck for positioning our portfolios, no matter who wins. Then, Gary Alexander takes a fresh look at the Big 3 economic statistics – GDP, inflation, and jobs.  Ivan Martchev updates the strange case of the rising yen and the falling odds of a Fed rate increase.  After that, Jason Bodner and I will dissect the new S&P Real Estate sector and the outlook for other market sectors.

Income Mail:
Taking the Fed at Face Value Keeps the Markets Guessing
by Bryan Perry
Greenspan, Gundlach, and Gross – Big Bear, Baby Bear, and Goldilocks
Positioning Portfolios for a Post-Election Market

Growth Mail:
A Fresh Look at the “Big 3” Economic Indicators
by Gary Alexander
The Fed’s Daunting “Dual Mandate” (More Jobs and Low Inflation)

Global Mail:
The Yen Conundrum Revisited
by Ivan Martchev
How the Markets Forecast Fed Policy Now

Sector Spotlight:
Every Story Has Another (Often Unseen) Side
by Jason Bodner
Inside the New S&P Real Estate Sector

A Look Ahead:
Birth Pangs of the New S&P Real Estate Sector
by Louis Navellier
Why I’m Bullish on Builders

Income Mail:

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

Taking the Fed at Face Value Keeps the Markets Guessing

by Bryan Perry

After all the hype and buildup, the Fed voted 7-3 to leave the fed funds target range unchanged at 0.25% to 0.50%. The dissents came from Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester, and Boston Fed President Eric Rosengren, each of whom preferred to raise the target range a quarter-point, to a range of 0.50% to 0.75%. The three dissents stand out as a pretty good indication that the market is going to keep getting tossed and turned by ongoing rhetoric from Fed officials between now and the December 13th-14th Federal Open Market Committee (FOMC) meeting.

In the post-meeting commentary, the language was pretty noncommittal in terms of their likely next steps. Without using the term “data-dependent,” the market received their message as being data-dependent, and since most of the recent data leading up to the FOMC meeting was light of forecasts, it stands to reason that the Fed will take a three-month hiatus on the bench, giving the markets a green light to trade higher.

The S&P 500 Index rose 1.2% last week as investors reacted bullishly to the FOMC’s decision to leave rates alone. The FOMC has now held off on raising the federal funds rate for six consecutive meetings. Investors like this low-rate environment but also want to see economic progress, even if such progress can lead to higher rates; last Wednesday’s policy statement gave the market some reassurance on both fronts.

In a week in which every sector rose, utilities posted the biggest gain of the week on a percentage basis.  The real estate sector, which was added on September 16th with the index's annual rebalancing, gained over 3% in its first week. S&P Dow Jones Indices said the addition of a separate real estate sector “recognizes its growing position in today's global economy.” Previously, real estate was a part of the financial sector.

Greenspan, Gundlach, and Gross– Big Bear, Baby Bear, and Goldilocks

A day after Bill Gross said central bank support limits the downside for long-term government debt, former Federal Reserve Chairman Alan Greenspan called the bull market in Treasuries unsustainable. (See Bloomberg, July 22, “Greenspan Warns Bond Rally Untenable as Bill Gross Says Go Long.”) Previously, new reigning bond king Jeff Gundlach of Doubleline Funds said that it’s time to get defensive in bonds (Bloomberg, September 8, “Gundlach Says it’s Time to Get Defensive as Rates May Rise.”)

The market’s response? The yield on the U.S. 10-year note fell to the lowest level in two weeks, even as Greenspan warned it may rise in the long run to as much as 5 percent. “Whenever you have a bull market, it looks as though it is never going to turn,” Greenspan said in an interview on Bloomberg Television September 22nd, but he added the warning that “this is a classic case of a peak in a speculative security.”

Bull Market Continues as Treasuries Rally Chart

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

Investors seem to be regarding monetary policy with more skepticism, doubting that there’s anything more central banks can do to stoke inflation and economic growth. The European Central Bank triggered a global sell-off this month after signaling it wouldn’t pursue further stimulus. Asset-purchase programs and negative interest rates have pushed yields on over $9 trillion of government securities worldwide below zero, according to Bloomberg Barclays index data (see Bloomberg, September 22, cited above).

Going almost totally unnoticed was the Bank of Japan’s decision to shift the focus of its stimulus to controlling bond yields. These actions prompted Bill Gross, manager of the $1.54 billion Janus Global Unconstrained Bond Fund, to say that he favors longer-dated sovereign debt. Last Wednesday, Gross said he was extending duration by buying longer-term debt amid persistent signs of slow global economic growth and subdued inflation. Longer-term maturities have a higher duration, meaning that they gain more in price when interest rates decline. “The timing of a bond bear market has certainly been delayed,” Gross said in an interview on Bloomberg TV September 21st. The BOJ’s plan “provides what I call a soft cap on Treasuries and on gilts and on bunds,” and signals limited downside in terms of price.

“You can’t fight central banks,” he concluded.

What matters from all of this central bank chatter and bond kingpin spin is the Yield Curve itself. The difference between Treasury two- and 30-year yields fell for a fifth day, declining to about 1.56 percentage points. That gap, a gauge of the yield curve, has flattened over the past year as traders bet the Fed would increase short-term rates, curbing the long-term outlook for inflation and economic growth.

An $11 billion auction of 10-year Treasury Inflation Protected Securities saw strong demand from investors Thursday, with the highest bid-to-cover ratio at a sale of the securities since May of 2014.

Any normalization of rates that might be initiated in December is still apt to occur at a gradual rate. The median projection for the fed funds rate is 0.6% for 2016, 1.1% for 2017, 1.9% for 2018, and 2.6% for 2019. Notably, the median projections for 2016-2018 have been reduced by 25 to 50 basis points from the projections made in June and this pushing out on the timeline and pushing down of the expected level for rates on that timeline continues to confound the Fed, but not the equity or high-yield markets.

As everyone is well aware by now, one can't assign deep value to any Fed projection, knowing that the Fed doesn't have a very good forecasting record. So let’s put aside Janet Yellen’s convoluted commentary for now.

Positioning Portfolios for a Post-Election Market

Investors remain in a position of having to continue to play the guessing game about the Fed, but now we know that such speculation shouldn’t be a serious topic of discussion until after the November elections.

Without a Fed rate hike, bank stocks will likely underperform, along with energy and commodities. If Hillary Clinton’s poll numbers improve, healthcare stocks will tend to lag, due to her well-publicized attacks on Big Pharma. For investors seeking yield, the narrowing of the field of sectors likely to outperform would include large cap tech, aerospace and defense, consumer discretion, data center and self-storage REITs, professional services, food products, floating rate commercial lenders, capital exchange operators, natural gas utilities, and the selling of covered calls against these sectors on strength.

In terms of overall market leadership, the widely-traded Technology Select Sector SPDR Fund (XLK) shows a very bullish uptrend following a long base-building period. Why be mired in a broader index like the S&P, where inherent risks face the energy, financial, and healthcare sectors, when capital can target a breakout sector like technology? A picture says 1,000 words and this bullish chart can mean real money:

Technology Select Sector SPDR Fund Chart

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

Opportunities are available for spicing up one’s income portfolio by being invested in the best performing tech stocks, especially where an active covered call strategy is in place – be it the leading semiconductors, cyber security, IT services, e-commerce, digital payment, optical network components, Internet software, online game publishing, or cloud computing software companies. (Please note: Bryan Perry does not currently own a position in XLK. Navellier & Associates, Inc. does currently own a position in XLK for some client portfolios.)

With the Fed on hold and the elections keeping a lid on the market, keeping capital hard at work in the one sector where there is earnings momentum, relative strength, and takeovers being reported almost daily, it should be no surprise that leading tech stocks are the go-to sector of choice.

There’s always a bull market somewhere.

Growth Mail:

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

A Fresh Look at the “Big 3” Economic Indicators

by Gary Alexander

The “Big 3” statistics I’m referring to in my headline this week are released in a regular monthly cycle:

  • Unemployment: The jobs report comes out on the first Friday of each month.
  • Inflation: The major inflation indexes are released around the middle of each month.
  • GDP Growth: Quarterly GDP figures are announced or updated at the end of each month.

All eyes are now on the third (and final) iteration of the second-quarter GDP figure to be released this Thursday.  It will probably be right around 1%, a boringly low number.  But isn’t it more important to know what the economy is doing now, this quarter – which ends Friday – than what it did last quarter?

According to the Atlanta Fed’s latest (September 20, 2016) GDPNow calculations, third-quarter GDP is estimated to be about +2.9% (annual rate).  For most of the last two months, their estimate has been over 3% (see chart, below), a far sight better than the 1.2% economists’ estimate for second-quarter growth.

Evolution of Atlanta Fed GDPNow Real Gross Domestic Product Forecast Chart

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

The next GDPNow estimate will come out tomorrow.  I will follow that more closely than looking at the “final” second-quarter GDP estimate – a number that will likely be continually revised in future months.

Now, let me turn to the other two numbers – which are often labeled as the “dual mandate” of the Fed:

The Fed’s Daunting “Dual Mandate” (More Jobs and Low Inflation)

Originally, the Federal Reserve was formed back in 1913 to become a bank regulator and lender of last resort, but in 1977 the Federal Reserve Board (then under Chairman Arthur Burns) was given a new three-part mandate after Congress amended The Federal Reserve Act to define the Fed’s monetary policy objectives as “maximum employment, stable prices and moderate long-term interest rates.”

Ironically, the Fed can’t control long-term interest rates.  The Fed can only set short-term rates, and even those can be vetoed by the bond market, as we saw last January.  The Fed has no major influence on the job market, either; but they are somewhat equipped to fight inflation, since they control the money supply, which can influence price inflation.  Still, it seems like the 1977 Congress was abdicating their own role in creating deficits and job-killing regulations by putting the burden of the economy on the Fed’s shoulders.

The next year, 1978, Congress passed and President Carter signed into law the Humphrey-Hawkins bill, which mandated that “by 1983, unemployment rates should be not more than 3% for persons aged 20 or over and not more than 4% for persons aged 16 or over, and inflation rates should not be over 4%. By 1988, inflation rates should be 0%” (source: Wikipedia, “Humphrey-Hawkins Full Employment Act.”).

With the jobless rate now under 5% and inflation under 2%, you would think that the Fed has done its job well, but there are problems with how we count both numbers.  Most inflation indexes are a measure of a subjective “basket of goods and services.”  For instance, oil prices may be falling while health care costs are rising.  The overall “average” can be deceiving.  Whether or not you suffer from inflation depends on whether you are a long-haul truck driver or a patient in need of costly drugs and long-term medical care.

In his morning briefing last Tuesday (September 20, “What About Inflation?”), economist Ed Yardeni said there is a “good” kind of inflation “that stimulates demand by prompting consumers to buy goods and services before their prices move still higher,” but the kind inflation the U.S. is now experiencing “isn’t the kind that stimulates economic growth.  On the contrary, it has been led by rising rents, and more recently by rising health care costs.”  These kinds of costs can’t be bought in advance, like stockpiling goods when they’re cheap.  You can’t “rush to the hospital to get a triple-bypass today because it will be more expensive tomorrow!”  This makes higher rents and health care costs “akin to tax increases because they reduce the purchasing power available for other goods and services.”  Obamacare also has a role:

“100% of households rely on our health care system. August’s CPI had some really bad news on this front. There were big increases in health care prices as the overall health care index jumped 1.0% m/m (the most since February ,1984) and 4.9% y/y (the highest since January 2008). It’s not clear why the surge occurred during August, but it may be related to the expansion of healthcare coverage under Obamacare. There has certainly been an increase among the population with pre-existing conditions, which has significantly boosted costs for all.” –Ed Yardeni (September 20).

What is the best measure of inflation?  We’re familiar with the Producer Price Index (PPI) and Consumer Price Index (CPI) – which both include a “headline” (overall) number and a “core” rate (minus food and energy).  There are several other inflation measures, but the Fed most closely watches something called the Personal Consumption Expenditures Deflator (PCED), which ignores energy and food price changes.

The PCED also tends to under-estimate health care costs, since the PCED (according to Yardeni’s post last Tuesday) “doesn’t include health care spending paid for by the government through Medicaid and Medicare.”  The August PCED will be released on Friday.  It will be interesting to see if it exceeds the Fed’s 2% target, thanks to rising rents and health care.  In August, rent was up 3.8% in the CPI, so we’ll see how it impacts Friday’s PCED.  (Rent accounts for 5% of the core PCED and 10% of the core CPI.)

Personal Consumption Expenditures Price Index Chart

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

Both core and headline inflation have been below 2% since 2012, so the Fed can stand pat… for now.

The third leg of the statistical tripod is unemployment, which I wrote about three weeks ago here in “A Labor Day Look at America’s Army of Idle Men.”  I stressed the sharp decline in the U.S. Labor Force Participation Rate, especially among men of working age.  Since the “headline” unemployment rate measures only those working or looking for work, a low (sub-5%) unemployment rate can be misleading.

As for those still looking for work, our major Presidential candidates are implying that cheap labor in Mexico and China has taken our good-paying manufacturing jobs away from us, but in his Wednesday briefing (“Forward Ho”), Ed Yardeni says that “a skills mismatch might actually be more to blame.”

Last April, I cited a National Review article by Scott Lincicome (April 11, “The Truth about Trade”) which said, “There remains no evidence that imports are the primary driver of U.S. manufacturing-job losses.”  He showed how U.S. manufacturing workers began dropping as a share of the labor force in the late 1940s, a half-century before the NAFTA trade deal or China’s emergence as an exporting colossus.

A June 2015 Ball State University study (“The Myths and the Reality of Manufacturing in America”) attributed nearly 90% of U.S. manufacturing job losses in the 21st century to productivity gains, concluding: “Had we kept 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.”

We can also blame political policies – such as $15 minimum wages for entry workers, onerous licensing obligations, high taxes, endless regulations, and other political roadblocks for our shrinking Labor Force.  As I showed three weeks ago, businesses have plenty of job openings but few qualified candidates apply.

That brings me to another important statistic to be released soon – the Fiscal 2016 U.S. Budget Deficit.  The federal fiscal year ends on Friday.  Since our Presidential candidates promise more spending, we have to wonder how this slow-growing economy can generate enough tax dollars to keep our deficits at bay.

But that’s another story for another day.

Global Mail:

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

The Yen Conundrum Revisited

by Ivan Martchev

Last Wednesday – when both the Federal Reserve and Bank of Japan (BOJ) were expected to unleash a firestorm on financial markets – nothing much happened. The Nasdaq Composite made a fresh all-time high on the news that the Fed is staying on the sidelines, and the Japanese yen ended less than one point from triple-digit territory at 100.87. It is my opinion that if the Federal Reserve chooses to hike U.S. short-term interest rates in December, they will be forced to reverse course in 2017 as the global deflationary forces are simply too strong to allow for such a monetarist maneuver to work out.

Japanese Yen Versus the United States Dollar Chart

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

It is quite comical to see the Federal Reserve mulling when to raise the fed funds rate while the BOJ and the ECB (European Central Bank) are at a loss how to fight the deflation that is plaguing their economies. In that regard, the BOJ shifted the focus of its monetary stimulus from expanding the money supply to controlling interest rates. Some point out that this is further evidence that the BOJ has reached the limits of its monetary policy options. Still, there is always the “helicopter money” option that former Fed Chair Ben Bernanke reportedly discussed with BOJ Chair Kuroda last April, which looks to be off the table at the moment (see Marketwatch, August 4th, 2016, “The point of no return for quantitative easing is getting closer).

Postponing the helicopter option for now, the BOJ underwhelmed financial market expectations. The yen has been rallying all year, from 120 to 100 per U.S. dollar, but it did not budge on the BOJ news. (Note: In the yen chart, above, fewer yen per dollar means a stronger yen.) The BOJ is running a QE program that is three times more aggressive than the Fed’s old QE program, relative to the size of the Japanese economy, yet the yen keeps rallying. Originally, when this Japanese QE monster was unleashed in 2013, the yen fell from under 80 per dollar to above 125 (see chart, above). It has been unwinding that decline through 2016 and the new BOJ measures do not seem to be having any effect on reversing that trend.

The BOJ said last week that it would adjust the volume of its asset purchases, as necessary, to control bond yields, while keeping the purchase program at about 80 trillion yen ($780 billion) a year over the long term. I am in the camp that believes that open-ended QE policies have their limits, but since such experiments are yet to break the financial system, central bankers keep pretending QE can last forever.

Japanese Ten Year Government Bond Chart

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

The BOJ also scrapped a target for the average maturity of its holdings of government bonds so that it can have more flexibility in its operations. The goal is for the BOJ to manage the impact of its purchases on Japanese banks, whose profits have been squeezed by a collapsing Japanese Government Bond (JGB) yield curve. When the BOJ announced negative short-term policy rates in late January, that collapsed the JGB yield curve. Japanese banks came under severe pressure, but on the latest monetarist change of QE strategy their shares rallied. I take that as a positive sign, as the BOJ is adjusting course, but there is no getting out of the deflationary situation with a weakened banking system harmed by BOJ policy.

Be that as it may, the most peculiar action in financial markets last week did not come from 10-year JGBs that still ended with a negative yield (see chart, above), but from the Japanese yen, which looks ready to break the psychological 100 barrier. The yen has traded marginally under 100 several times this year, as 100 has been a major area of resistance, but the rebounds above 100 have been getting smaller. The yen is beginning to look like a coiled spring – in traders’ terms, forming a “descending triangle” – which is a classic consolidation pattern, suggesting a break in the direction of the prevailing trend, which is down on the USDJPY chart (meaning a stronger yen, due to the inverted nature of the exchange rate).

The BOJ is running the printing presses, causing the Japanese archipelago to run out of trees, but the yen is still rallying. What gives? I think the yen is appreciating despite aggressive BOJ actions not because of the situation in Japan, but because of the situation outside of Japan. I think the best illustration of the global economic situation is the oil price, which in early 2016 took out the Great Recession low of 2008. In my view, in 2017 the oil price has a rather legitimate chance of taking out its January 2016 low. A falling oil price in the present context means a weak global economy at a time of surging supply.

Crude Oil Price Chart

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

The yen is rallying in spite of BOJ policy as institutional investors are unwinding carry trades – which is the practice of borrowing in yen (due to the ultra-low funding costs), then selling the yen and buying foreign currency assets with higher yields. Such carry trades have been popular for many years as the BOJ has been running an ultra-loose monetary policy for a long time. When there is economic trouble in the world, the yen begins to rally as those carry trades get unwound. The presence of many yen-funded carry trades creates a massive short squeeze in the yen as when they are unwound foreign currency assets need to be sold in order to repay the yen borrowings.

Although this may seem like an overly technical explanation for why the yen is rallying despite poor fundamentals, these carry trades remain a powerful force in global markets. Every time I see the yen rallying, I think of the big money circling the wagons as it unwinds its carry trades.

This typically is a warning to be on high alert as a major asset repricing may be coming.

How the Markets Forecast Fed Policy Now

A forecast is imperfect by definition. In the end, the good forecasts are less inaccurate than the bad ones but all are far from perfect. In September 2014, December 2016 fed funds futures (ZQZ16) were predicting a fed funds rate of around 1.8% (100 less the ZQZ16 price of 98.20 at the time). Fast forward two years and here we are in September 2016. That same fed fund futures contract is now predicting a fed funds rate of 0.485% (100 minus the ZQZ16 Friday close of 99.5150). Clearly the markets have changed their minds about the path of Fed policy as the Fed has guided them towards fewer and fewer rate hikes.

Thirty Day Fed Funds - Daily OHLC Chart

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

You can see the squeeze of the December 2017 fed funds futures (in green, above) and the December 2016 fed funds futures (in black) as fewer Fed rate hikes are being priced in. That squeeze became tighter in January of 2016 with the oil price near $26 and right after the Brexit vote on June 23rd, while of late “the squeeze” has been getting looser, as more rate hikes are again being priced in.

If we follow the Fed funds futures market (vs. more liquid markets like eurodollar futures, which also predict the path of Federal Reserve policy), the December 2016 contract right now predicts no fed rate hike for 2016, while the December 2017 contract predicts just one. The calculation works as follows: 100 less the ZQZ17 price of 99.3050 predicts a fed funds rate of 0.695% in December 2017, while the present fed funds target is 0.50%. This represents an increase of just one 0.25% rate increase by late 2017.

It is my opinion that if the Fed hikes in December 2016, against market expectations, they will be forced to reverse course in 2017, particularly if the Chinese recession I envision materializes next year.

Sector Spotlight:

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

Every Story Has Another (Often Unseen) Side

by Jason Bodner

“That’s one small step for (a) man; one giant leap for mankind.”

– Astronaut Neil Armstrong, July 20, 1969

These iconic words were uttered as the first man made his first step on the surface of the moon. It evokes unforgettable images of men in spacesuits walking, working, and even playing golf on the surface of our moon, which is just shy of a quarter million miles away. Like most big and important events, these iconic moments were metered out for what NASA and the government felt the public could absorb and what would be informative and entertaining. But consider that moments after becoming the first human on the moon, Armstrong dropped a bag of trash on the surface of the moon and kicked it under the lunar lander.  In fact, the first picture Neil Armstrong took from the surface features this piece of litter front and center:

Lunar Landing Image

How many times have you heard, “There are two sides to every story”? Or three sides to every argument: Your side, their side, and the truth? Well, when it comes to mass media claiming to represent impartial truth, we know the truth of these sayings. The fact is that humans are impressionable and believe what they want to believe, regardless of fact, even if proven in excruciating detail. Therefore, it should not be surprising that some Americans still believe that the moon landings were an elaborate hoax.

When we take into account how the news affects the markets, it is important to remember how difficult it is to get the whole story. The reality is that as uncertainty remains high, the news has a more profound impact on the market than ever. Headlines can jerk around prices with more ferocity, especially when investor sentiment is unsteady. And while the financial news media’s job is technically to report the facts, the more relevant fact is that they need to generate more viewers to justify their sales of advertising. It is not realistic to expect an undistorted or unfiltered reporting of events. As the market continues to show strength, trading at (or near) all-time highs on shaky fundamentals (with some exceptions), the reporting continues to be skewed toward the positive, because that’s what most investors want to hear right now.

Even so, equity market strength seems to have potentially stalled or, at a minimum, taken a breather.

I have been discussing my concern over the recovery of weak sectors propelling much of this year’s rally, while highlighting the fact that Information Technology has become a shining light. (Recall that in the July 26th edition of Marketmail I said that Info tech was breaking out and should be watched:

“…looking at the S&P 500 Information Technology index, we can see a clear breakout. This, in particular catches my eye because these stocks are often synonymous with growth. The real fuel for the engine for a bull market is growth, signifying the economy is sufficiently healthy to spur and foster growth based on revenues and not cost cutting and staff reduction.”

The 12-month chart of the tech sector at the time looked like this:

Standard and Poor's 500 Twelve Month Information Technology Sector - Daily Area Chart

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

The six-month chart of the tech sector now looks like this:

Standard and Poor's 500 Six Month Information Technology Sector - Daily Area Chart

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

The S&P Information Technology Sector Index continues to be the one to watch. But before we look at how it and others fared this past week, let’s discuss the launch of the new GICS Real Estate sector.

Inside the New S&P Real Estate Sector

As I mentioned at the first of this month, MSCI created a sector index for real estate while Standard & Poor’s decided to wait until September 16th to chart it. Now we know that this newly created sector has caused some wrinkles in the ETF world, including some real confusion as well.

The S&P Real Estate sector encompasses Real Estate Investment Trusts, while Financials presumably have let go of the REITs. But as of August 31st according to the circular published by GICS, Financials still encompassed Mortgage REITs, while Real Estate incorporated the following sub-industries:

  • Diversified REITs
  • Industrial REITs
  • Hotel & Resort REITs
  • Office REITs
  • Health Care REITs
  • Residential REITs
  • Retail REITs
  • Specialized REITs
  • Diversified Real Estate Activities
  • Real Estate Operating Companies
  • Real Estate Development
  • Real Estate Services

Confused? You’re not the only one. To make matters a bit murkier, Diversified REITs and Retail REITs are still making their way into the financial sector in many financial data vendors such as FactSet, Bloomberg, Thomson Reuters, etc. So it seems that no one is 100% clear on this transition process.

I suspect that some of these kinks will be worked out in the days and weeks to come.

Here’s the tale of the tape for the now-11 S&P sectors from each market trading day last week:

Standard and Poor's 500 Daily Sector Indices Changes Table

Wednesday’s strength helped all sectors finish the week on a positive note. Looking at the leaders, though, the action was defensive, as Real Estate, Utilities, and Telecom were the top three performers:

Standard and Poor's 500 Weekly Sector Indices Changes Table

Tech has been sluggish during September, relative to months prior, however it is still the second best performer month-to-date. Financials and Materials are the clear laggards this month:

Standard and Poor's 500 Monthly Sector Indices Changes Table

Stepping back three months, we see again the clear winner by far is Information Technology:

Standard and Poor's 500 Quarterly Sector Indices Changes Table

The market visibly seems to be in good shape. We are approaching the final month of a presidential election – love it or loathe it – and stocks seem to have shaken most of their volatility until recently, but beware of accepting all the news at face value. The first picture man took on the moon featured a garbage bag. This is clearly not the story that made it to national TV, since moon litter is a minor issue compared with the massive accomplishment of having made it there in the first place. But it’s still an example of how issues important to some may not even make it to the foreground. While the current focus seems to be on good news, ironically it’s usually the bad news that sells better… As Bill Murray recently tweeted:

“The Evening news is where they begin with ‘Good evening,’ and then proceed to tell you why it isn't.”

Bill Murray 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.*

Birth Pangs of the New S&P Real Estate Sector

by Louis Navellier

The most interesting news last week was the awkward launch of the new S&P Real Estate sector index, which was spun off of the S&P Financial sector index.  There was clearly a lot of confusion over this index change, since trading in the Guggenheim S&P Equal Weigh Financials (RYF) ETF was canceled last Monday before the stock market opened, since the ETF prices did not accurately reflect the S&P adjustments for the new Real Estate sector.  Specifically, NYSE, Bats Global Markets, and the Financial Industry Regulatory Authority canceled all trades in RYF executed before the market opened on Monday. (Please note: Louis Navellier does not currently own a position in RYF. Navellier & Associates, Inc. does not currently own a position in RYF for any client portfolios.)

Dave Nadig, director of ETFs at FactSet Research, said, “A whole bunch of people who were trading this thing this morning didn’t get the memo…so we ended up with all these spurious trades before the open.”

In the past, I’ve talked about the extreme volatility of ETF discounts or premiums during the “flash crash” that happened last summer – specifically on August 24, 2015, a day of extreme market volatility.  At one point, over 1000 stocks were halted from trading, but many of the ETFs with those same stocks as part of their underlying portfolios kept right on trading.  Specialists can make a lot of money on the arbitrage in such crisis situations.  Some ETFs fell straight down to a deep discount, creating a 35% intraday range.

Something just like that happened on a smaller scale after the Brexit vote on June 23rd.  A large fund that at the time managed $4.8 billion halted all trading from 9:30 to noon on the day after Brexit passed.

In that regard, my management company is finalizing a new White Paper called, “Sharks, High Frequency, and ETFs,” which exposes the inefficient pricing in ETFs.  That is why I am not surprised about the embarrassing ETF pricing errors that occurred with the pricing of the newest S&P sector last week.

Why I’m Bullish on Builders

On Tuesday, the Commerce Department reported that housing starts declined 5.8% in August to 1.14 million, slightly below economists’ consensus estimate of 1.18 million; but virtually all of the weakness was in the South, since housing starts rose 4.2% when the South was excluded.  It appears that the catastrophic floods in Louisiana helped to push housing starts down 14.8% in the South in August.

The demographics of America are in favor of homebuilding.  America has more babies than Europe and more immigrants than any other nation on earth.  Meanwhile, our households are getting smaller, driving the demand for new residences.  With rents rising fast (see Growth Mail, above), buying is a better option.

Not surprisingly, as the inventory of available homes gets tighter, home prices naturally rise.  In the past 12 months, median home prices have risen 5.1% to $240,000.  And now, the Fed’s decision to keep rates at historically low levels near zero will also help make the financing of these new homes more affordable.

Overall, I expect that housing starts will rebound impressively in the upcoming months.  As a result, I remain very bullish on many homebuilding, building material, and home improvement companies.


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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

Marketmail Archives Trade Summary

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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

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