Media Missed Meaning

The Media Missed the Meaning of Last Week’s Market Decline

by Louis Navellier

December 11, 2018

Brexit Exit Troubles Image

Essentially the stock market likes to “react” first and “think” second. For example, last Monday, the market liked the trade truce with China, but on Tuesday, the financial media said investors had second thoughts about the trade spat with China and triggered a market selloff. But I think they missed what really happened. The catalyst for Tuesday’s market selloff came from Europe. First, British Prime Minister Theresa May suffered a humiliating defeat in the House of Commons and is expected to be similarly rejected by Parliament, so Britain may be getting a new Prime Minister due to the Brexit mess. Second, the worst protests in Paris in 50 years – over an increase in the tax on diesel in a carbon tax revolt – resulted in French President Emmanuel Macron doing a rare about face, postponing higher diesel taxes.

Both Italy and Germany suffered negative GDP growth in the third quarter. Italian unemployment surged by 139,000 in the past two months and its unemployment has reached 10.6%, up from 10.1% two months ago. So, not only is the British pound weak, but the euro has also been weak, triggering more capital flight into the U.S. dollar, which in turn is pushing U.S. Treasury yields down. These events on Tuesday triggered a “flight to quality” that caused the 10-year Treasury bond yield to finally collapse below the 3% level. Here are the links to my Tuesday and Thursday podcasts explaining last week’s market events.

In This Issue

Bryan Perry writes about the manipulation of this market going on in the “Algo” shops, the silence of the SEC and the possibility that the Uptick Rule could help police the manipulators. He also urges the Fed to do “nothing” next week. Gary Alexander overlooks the current market malaise to address the widespread denial of the good news in global wealth and health – ignored by almost everyone. He’ll give a test to see how well you know some of these facts. Ivan Martchev covers two felonious events uncovered last week to see if they might have an impact on the market to match “real” economic news, like recessions. Jason Bodner looks beneath the red paint in the sector snapshots to see unusual institutional buying eclipsing selling, an advance sign of a market recovery. I’ll cover some of the same territory in my closing remarks: The disconnect between good news and market panics, and the importance of next week’s Fed meeting.

Income Mail:
Fighting the Fed and the Algo Shops
by Bryan Perry
History is Not on the Side of the Fed

Growth Mail:
Let’s Address “Global Wealth & Health Denial” in 2019
by Gary Alexander
The Correct Answers: See How You Scored

Global Mail:
Two Felonies as Economic Events
by Ivan Martchev
The Huawei-Cohen 1-2 Punch

Sector Spotlight:
Unusual Institutional Buying is Now Outpacing Selling
by Jason Bodner
Another Sea of Red Hit Most Sectors Last Week

A Look Ahead:
Why the Great Disconnect Between Good News and Market Panics?
by Louis Navellier
All Eyes Are Now on the Fed

Income Mail:

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

Fighting the Fed and the Algo Shops

by Bryan Perry

This past week, the extreme level of market volatility painted a pretty clear picture of some glaring flaws in both the Fed’s fiscal policy and the way the SEC is loosely allowing the stock market to rapidly morph into a financial “Wild West.” The top news story circulating after Friday’s close was an interview with JP Morgan’s quantitative analyst Marko Kolanovic, who said, “we trace the disconnect between negative sentiment and macroeconomic reality to the reinforcing feedback loop of real and fake negative news.”

Kolanovic cited a combination of domestic political groups, analysts and foreign actors who are amplifying negative headlines to sow discord and erode faith in markets. There are ‘specialized websites’ that present a blend of real and fake news and distorted write-ups of financial research, he said, without citing the specific sites. “If we add to this an increased number of algorithms that trade based on posts and headlines, the impact on price action and investor psychology can be significant,” Kolanovic said.

Marko Kolanovic Image

Marko Kolanovic; Source: CNBC

Let’s assume that Mr. Kolanovic is right and this activity has been going on for months, if not years. Has anyone – or any regulatory body (especially the SEC) – intervened and come up with any legal solution to counter this wretched phenomenon? No. And why not? I don’t have the answer to that question. While everyone is creating these headline/key word forms of algorithm-induced manipulation that incite high-frequency front-running, there is no mention from the “smartest guys in the room” of what to do about it.

While one pundit and portfolio manager after another is trotted out onto CNBC, Bloomberg or Fox Business News to openly complain about this dilemma, they offer no remedies, and yet they remain fully invested, as if this problem will somehow disappear into thin air. It’s a bit surreal and naïve to surmise that somehow, rational and logical thinking will be restored to bridge the “yawning chasm between the real U.S. economy and how markets are behaving”, as Mr. Kolanovic so correctly put it.

If short-sellers and high-frequency front-running proprietary trading firms are raking in hundreds of millions of dollars from this activity, why would they stop this market manipulation now, when there are no checks or plans of any checks to be put into place? Hedge fund manager Leon Cooperman gave an interview last Thursday on CNBC where he called for the re-instatement of the Uptick Rule, which was eliminated in July 2007 – right before the S&P plunged 35% in 2008, with short-sellers leading the way.

The Uptick Rule was put in place with the S.E.C. Act of 1933 & 1934. It was enacted to prevent “bear-raids” on stocks. Syndicates could sell a stock short and continue selling it, thereby driving it down in price. This helped cause the Crash of 1929. The Uptick Rule stopped the bear-raids. However, the Uptick Rule was repealed in 2007. This is part of the reason we have seen “mini flash-crashes” in stocks recently.

The SEC's Office of Economic Analysis established a pilot program in 2004 to determine whether the Uptick Rule was still effective. In doing so, it suspended the Uptick Rule for one-third of the stocks in the Russell 3000 Index while maintaining the rule for the remainder of the stocks. In so doing, it was able to compare results from two groups of securities under identical market conditions.

Results from that pilot program demonstrated that although the elimination of the Uptick Rule increased the volume of stocks shorted, it did not increase the overall short interest in a security. And since the interest in shorting a particular security remained undiminished, the study concluded that the Uptick Rule had no real ultimate impact. Following the results of this study, the Uptick Rule was repealed in 2007.

The SEC concluded that,“The general consensus from these analyses and the roundtable was that the Commission should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation.” For 2004, the Russell 3000 gained 10.4%, meaning that this study was conducted in a rising market and was thereby not stress-tested during a declining market.

Since the elimination of the Uptick Rule and the subsequent financial crisis of 2008-2009, and several flash crashes since then, Wall Street veteran Muriel Siebert, former SEC Chairman Christopher Cox, former Senator John McCain and former Fed Chair Ben Bernanke have all argued to restore the Uptick Rule. On January 20, 2009, Congressman Gary Ackerman (D-NY) received a letter from Chairman Cox—written the day he left the SEC—in which Cox said he supports the reinstatement of an uptick rule.

The 2009 letter read:

“I have been interested in proposing an updated uptick rule. However, as you know, the SEC is a commission of five members. Throughout 2008 there was not a majority interested in reconsidering the 2007 decision to repeal the uptick rule, or in proposing some modernized variant of it. I sincerely hope that the commission, in the year ahead, continues to reassess this issue in light of the extraordinary market events of the last several months, with a view to implementing a modernized version of the uptick rule.”

That was nearly 10 years ago and here we are today dealing with wild market gyrations with no guardrails in place. Fake news can’t be fixed, but much can be done to fix the volatility born of algorithmic trading.

History is Not on the Side of the Fed

My other great concern, while not a certainty, is that even if the Fed were to pause their planned policy course and stop raising rates, they cannot undo the economic damage that they may have already done. Monetary policy errors are never obvious when they are made, but they emerge with the passage of time.

Historically, there is a lag period of between 8 to 12 months of when an interest rate hike takes place and when its effects upon the overall economy are fully felt. Therefore, of the Federal Reserve’s eight rate increases during the current tightening cycle, the cumulative economic impact of the last four have yet to be fully measured. For investors, these potential policy miscalculations have unwittingly and significantly increased the perceptive risk of a recession within the next year and a half.

The current investment outlook will remain very fluid, as there is the very real possibility that positive developments and events could be either realized or achieved before year end. Any resolution of the ongoing trade and tariff dispute with China, or a signal from our central bank that there could be a pause in their planned rate hikes, would easily trigger a significant and broad-based market rally.

While it is always easy to paint any investment outlook with the broad-brush stroke of being overly positive or negative, the reality of how and where we choose to invest is actually much more nuanced. Prudently navigating this ever-changing economic landscape is the byproduct of the Fed’s monetary policy, which is to promote maximum employment (done), stable prices (done) and moderate long-term interest rates (done). As Dallas Fed President Robert Kaplan stated last Thursday, “one of the key tools we have at the Central Bank is patience, and I think we ought to be using that tool.”

The best outcome the market can hope for is for the FOMC meeting on December 18-19 to be brief and accommodative. Based on the full interview Mr. Kaplan gave to CNBC economist Steve Liesman, it’s not by any means too late to do nothing next week. And nothing is exactly what they should do.

Growth Mail:

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

Let’s Address “Global Wealth & Health Denial” in 2019

by Gary Alexander

It’s time for some New Year’s Resolutions. First, let’s clear up some obsolete language – like developing vs. developed nations. According to a new book, “Factfulness,” by Hans Rosling, the number of nations called “developing” (poor) is now down to only 13 countries, representing only 6% of global population.

Rosling has been urging this change of language to the World Bank since 1999. After 14 talks there in 17 years, the World Bank finally changed its language in 2016. The United Nations still retains its binary “us” vs. “them” paradigm because it suits their class-warfare model, but the idea is so 20th Century.

Next, let’s clear up some false impressions of the world around us – that “everything is getting worse.” If you don’t think this belief is widespread, let me give you the results of a quiz designed by Mr. Rosling.

Although he died in 2017, Rosling’s son Ola and Ola’s wife Anna are carrying on his work. The Roslings crafted a 13-part quiz, each question with a 3-part multiple choice answer. That means chimpanzees can score 33% right, but experience has shown that far fewer than 33% of humans can find the right answers.

Chimpanzees Image

This control group beat 90% of human contenders, getting 33% of the answers right; source: Jane Goodall Institute

Here are about half of the 13 questions – the odd-numbered ones (due to space constraints). See how well you do. See if you can beat the world (which scores about 10%) or the chimps (33%). The answers follow.

Question #1: In all low-income countries across the world today, how many girls finish primary school?

  1. 20 percent
  2. 40 percent
  3. 60 percent.

(Please note: I’m only asking the odd-numbered questions, due to space constraints)

Question #3: In the last 20 years, the proportion of the world population living in extreme poverty has... 

  1. Almost doubled
  2. Remained more or less the same.
  3. Almost halved.

Question #5: There are two billion children in the world today, aged 0 to 15 years old. How many children will there be in the year 2100, according to the UN?

  1. 4 billion
  2. 3 billion
  3. 2 billion

Question #7: How did the number of deaths per year from natural disasters change over the last 100 years?

  1. More than doubled
  2. Remained about the same
  3. Decreased to less than half

Question #9: How many of the world’s 1-year-old children today have been vaccinated against some disease?

  1. 20 percent
  2. 50 percent
  3. 80 percent

Question #11: In 1996, tigers, giant pandas and black rhinos were all listed as endangered. How many of these species are more critically endangered now?

  1. Two of them
  2. One of them
  3. None of them

Question #13: Global climate experts believe that, over the next 100 years, the average temperature will...

  1. Get warmer
  2. Remain the same.
  3. Get colder.

The Correct Answers: See How You Scored

In 2017, the Roslings asked 12,000 people in 14 nations all 13 questions. Over 85% got the Question #13 right. Ignoring that one, the respondents averaged only two correct answers to the first 12 questions (the chimpanzees would have gotten four right). Nobody got all 13 right. Only one person got 11 out of the first 12 right. A stunning 15% got zero out of 12 right. Only 10% performed better than the chimpanzees.

Here are the answers to the seven questions I listed. See if you can beat the world – or the chimps.

Question #1: The correct answer is C: 60% of girls (now 63.2%) finish primary school. Almost 90% of girls of primary school age attend school vs. 92% of boys – almost no difference: Only 10% in the U.S. answered this right, and an average of just 7% in 14 countries got it right.

Question #3: The correct answer is C: Global poverty in the last 20 years has fallen from 34% in 1993 to 10% in 2013. Longer-term, the global population living on an inflation-adjusted $2 a day or less is down from 50% in 1966 to 9% in 2017. Only 5% in the U.S. and an average 9% in 14 countries got this right.

Question #5: The correct answer is C: two billion children: This is already a proven trend. As societies get richer, women have fewer children. Only 10% in U.S. and an average 14% in 14 countries got it right.

Question #7: The correct answer is once again C: Decreased to less than half (actually down 75%). The world’s population is five billion higher than 100 years ago, so the per capita death rate from all natural disasters (including floods, earthquakes, storms, droughts, wildfires, plus displacements and pandemics) is only 6% of what it was then. Only 11% in the U.S. and an average 10% in 14 countries got the right. The chimpanzees – who don’t watch the news – did three times better.

Question #9: The correct answer is (broken record) C: 80%, and now closer to 90%. Only 17% in the U.S. and an average 13% in 14 nations got it right.

Question #11: The correct answer is (surprise) C: none of them, but it is sadly in the best interest of fund-raisers to scare us into thinking that more species are going extinct. Only 12% in the U.S. and an average 9% in 14 nations got this right.

Question #13: The correct answer is obviously A: Get warmer: 81% of Americans and an average 87% in 14 nations got this right, so seven of eight global citizens know that the world is getting warming but fewer than one in seven thinks the world is getting wealthier and healthier (and smarter and safer).

The World as 100 People Charts

Source: Our World in Data, by Max Roser

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

Conclusion: The world is in not in climate denial. The world is in wealth and health denial.

How did you do? From the title of this column, maybe you cleverly guessed the most positive answers. Maybe you did better than the chimps since you’re been reading my columns, so you expected the good news (mostly “C”) to be the right answer, but the general public, the media and the experts got it wrong.

Yes, the media are just as bad. Rosling addressed a group of film documentary journalists from several leading producers – BBC, PBS, National Geographic, the Discovery Channel and others – asking three of the questions listed above. For questions #1 (women’s education), #5 (future children) and #9 (child vaccination), only 15% of these journalists and documentary film-makers got the right answers.

Highly-intelligent people did just as badly on these tests. There is a super-brainy group of Mensa-type skeptics who are proud of their critical thinking skills. They call their group “The Amazing Meeting,” an annual gathering of people who love scientific reasoning. They scored just as badly on the Roslings’ 13 questions as everyone else. Readers of the highly-respected science journal, Nature, scored just as badly.

Lindau Noble Laureate Meeting Image

Nobel Laureates fared worse than the public in knowledge of global health statistics; source: Daily Recap

Amazingly enough, Nobel laureates and Nobel hopefuls scored even worse! Hans Rosling writes:

“I had the honor of attending the 64th Lindau Nobel Laureate Meeting, addressing a large group of talented young scientists and Nobel laureates in physiology and medicine. They were the acknowledged intellectual elite of their field, and yet on the question about child vaccination they scored worse than any public polls: 8 percent got the answer right. (After this I never take it for granted that brilliant experts will know anything about closely-related fields outside their specialty.)”

In the field of women’s rights, Rosling asked 292 “brave young feminists” who traveled to Stockholm from across the world to coordinate their struggle to improve women’s access to education about women’s rights, but “only 8% knew that 30-year-old women have spent on average only one year less in school than 30-year-old men.” And that was in a multiple-choice quiz with a 33% chance of success.

As you can see, there is far more “global prosperity denial” and “global health denial” than there is “global warming denial,” and in this case we are talking about established facts, not models or guesses about the future. If 87% are sure about the future of the weather but the same 87% are wrong about vital facts from the recent past, what does that tell you about the quality of our schools and our news media?

Global Mail:

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

Two Felonies as Economic Events

by Ivan Martchev

It was truly bizarre to watch the carnage in financial markets last week upon the arrest of the Huawei CFO in Canada and hear the explanation from the Canadian Prime minister that this was a routine arrest at the request of the U.S. Justice Department and thus it was not politically motivated. While technically that might be true, the stock market sure did not buy it, as the market proceeded to disappear into a black hole, with the retail investors’ favorite index, the Dow Jones Industrial index, declining up to 800 points.

Dow Jones Industrial Average Chart

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

While the alleged felony of the Huawei CFO caused great confusion for investors, who aggressively sold after the market gapped down on Thursday, the index found a low before noon and rallied impressively into the close. In the investing business, you prefer a bad open and a good close to be relatively sure that the market is close to finding a bottom. Things looked good at the close on Thursday – until Friday, when Felony #2 hit the market.

Friday’s admitted felonies (which amounted to eight counts of financial crimes) belonged to Michael Cohen, President’s former personal lawyer, whose announced misdeed derailed the stock market Friday. Cohen admitted to committing these crimes at the direction of “Individual No.1,” and despite cooperating with the Special Counsel's office, he must serve serious time behind bars with only minimal leniency. The Special Counsel’s court filing said so itself. If I were “Individual No.1,” I sure would be worried…but, as it is the policy of the Justice Department, a sitting President should not be charged with a crime.

Then the question arises: If this is just a “policy” and not the law, could that policy be changed? If I were Individual No. 1, I sure don't want to hear a positive answer to that question.

So now we have a wild week of trading where the market gapped up on the good news of the China trade war truce – which became a textbook invitation to sell, after a sizeable run up in the preceding week – and then a market not reacting well to Michael Cohen’s felonies. In baseball, they would call that a curve ball.

The Huawei-Cohen 1-2 Punch

I don't have great experience in how to analyze felonies as economic events, but I know something about macroeconomics and security analysis after 20 years in the trenches in the fascinating world of finance. In my experience, if the alleged Huawei CFO felony and the admitted Michael Cohen felonies do not turn out to be economic events, the market should rally because we are way too far away from a recession, and the economic backdrop is still positive. But I think the potential for the Huawei CFO alleged felony to turn into an economic event is large and difficult to forecast as to how much it might spiral out of control.

A Washington Times article (“Huawei arrest threatens global markets, Trump-China trade truce”) quoted David Dollar, a senior fellow and China scholar at the Brookings Institution, saying “the move was what U.S. officials said it was: a move to punish Huawei for trading with Iran in defiance of U.S. sanctions.”

The same article also quoted Dean Cheng, senior research fellow at the Heritage Foundation’s Asian Studies Center, who spelled out what is on most investors’ minds: “Both sides are looking at this through their respective lenses and seeing it verifies what they think. It will make it much harder to trust each other. The two largest economies are eyeball-to-eyeball in a showdown, and now you have the CFO of one of the primo companies from one country seized in a third country and awaiting sentencing. What does the rest of the world make of all this?” Mr. Cheng also pointed out that the ripple effects are significant, especially for European countries already confronting Washington over the Iran deal.

I genuinely hope that President Trump will finish his first term, get a trade deal with the Chinese, and denuclearize the North Korean peninsula, but the repercussions from his erratic nature, so far contributing to the felony conviction of his former personal lawyer, Michael Cohen, is contributing to this stock market volatility. And the arrest of the Huawei CFO in the middle of an important trade negotiation with China looks like one hand of the administration does not know what the other hand is doing.

Even if President Trump did not know that the Huawei CFO was about to get arrested in Canada as he was shaking President Xi Jinping’s hand, he must appreciate how this is perceived by the investing community. I don't know if President Trump can do anything about the release of the Huawei CFO – after all, she is still in Canada and that is a decision for the Canadians – but it strikes me a compromise worth pursuing in order to get a very important trade deal done. It is also possible that President Trump knew about the arrest and by facilitating the release of the Huawei CFO he would get on the good side of China.

The Art of the Deal Image

Source: Penguin Random House

I certainly would not put that type of maneuver past the person who inspired Trump: The Art of the Deal.

Sector Spotlight:

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

Unusual Institutional Buying is Now Outpacing Selling

by Jason Bodner

It’s important to find the bright side of seemingly cataclysmic market action. Supernovas birth all the heavy elements in the universe. The iron in our blood was born from the death of a giant star.

Last week was unsettling. The one-week change for major U.S. indexes was around -4.5%. Much destruction occurred on Tuesday, citing distrust of the China-trade resolution. When trading resumed on Thursday, it was prefaced with a massive S&P 500 futures sell program at around 7 am when news broke of Huawei CFO’s arrest in Canada. That sell order cratered futures by about -1.64%, instantly triggering 40 trading pauses on the CME. Hedge fund liquidations were blamed, and the indexes opened down by about -2%. The intraday reversal was encouraging because stocks caught a bid and the NASDAQ finished the day positive. That’s what I like to see – a high-volume reversal with buying into the close. In my research, 1,200 stocks out of 1,400 tripped triggers for unusual volume and volatility on Thursday. I felt this was bullish, but I was too early. On Friday, the carnage was ugly, and we hit new lows on volume.

Hidden in the data lies something different. The MAP-IT ratio I follow measures unusual buying versus selling. What we see is an increasing ratio, meaning unusual buying is outpacing unusual selling. Hard as it may be to be believe, my data shows that more stocks were bought unusually than sold last week. In other words, I saw unusual institutional buying activity more meaningful than unusual selling.

Russell 2000 Chart

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

Sometimes the market catches a cold, and sometimes it catches pneumonia. Whatever it is, it’s not good. Yields continue to compress. Tuesday the market was freaking out because the 3-year “inverted” over the 5-year, that is, near-term rates yielded more than medium rates. The news seized on this as a bearish sign.

Yield Curve Chart

Source: colotrust

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

Some thoughts on that: I read that the 3/5 Treasury inversion is the least reliable spread indicator for a recession. With 73 instances of this happening over 64 years, there have been only nine recessions. The 2/10-year Treasury is more reliable, and it is not yet inverted. This week saw yields compress as capital flew from equities into bonds. The 10-year bond yields 2.85% taxed as ordinary income while the S&P yields 1.99% taxed as long-term capital gains. The case for equities becomes more compelling as prices recede. I think dividend-growth stocks will lead the market higher when sanity returns to the market.

Another Sea of Red Hit Most Sectors Last Week

It’s unsurprising seeing Utilities and REITs catching a bid, and they were the only positive sectors last week. These rate-sensitive stocks offer compelling yields when sellers throw the baby out with the bath water. Weak spots were Financials, Industrials, and Materials. The Financials Index posted a dismal -7.08% for the week, followed by Industrials -6.29% and Materials –5.20%.

Standard and Poor's 500 Sector Indices Changes Tables

Source: FactSet

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

I am still bullish on equities. The data is strong for a continued bull case, but emotions trump everything. Speaking with friends and colleagues, it’s clear that everyone is glum. Unfortunately, people can get overly concerned about finding the bottom instead of asking, “What stocks are selling off unfairly?” There are great stocks out there, but when the market acts irrationally, it’s easy to lose sight of opportunities.

Will buyers ever buy stocks again? Of course. Has buying on market dips been rewarded in the past 5+ years? Clearly, yes. Are we at levels where I think we should be nibbling on stocks? I believe we are.

I continue to cite the data: low taxes, record sales and earnings growth, record profits, a strong dollar, and a strong economy. Clearly, the forward worry of slowing growth and recession has gripped the wheel and shunned logic. The Q3 figures for the S&P 500 were +9.3% sales growth and +25.9% earnings growth. The forecast for Q4 is +6.8% sales growth and +13.4% earnings growth. While these are solid numbers, market volatility reflects a forward distrustful view of sales and earnings growth, perhaps a recession fear.

Interest rates cast more clouds. Dovish comments from Fed chair Jerome Powell last week were also not enough. Now we must wait for the Fed meeting on December 18-19. Likelihood of a rate hike is lower as yields crumble along with equity prices. If there is a hike, the language investors want to hear is ‘that’s it.’

Another unknown keeps appearing. The Mueller probe is front-and-center, and Trump is reportedly nervous. I constantly hear two divergent opinions: “There is nothing there” and “the sharks are circling.”

Regardless, I focus my research on finding stocks with superior fundamentals likely being bought by big institutions. This will happen even if volatility continues as investors must deploy capital. Diamonds reveal themselves in the rough when markets are choppy, as investors must become choosier.

This brings me to my final point: When markets firm up, I think we will enter a stock-picker’s market. Investors will be more selective. Unlike the “Trump-Bump,” which gave way to a widespread rally for 24 months, it likely won’t be a market where everything goes up. Only superior stocks will make the cut.

I’ve picked some phenomenal stocks and some dogs in my career. The key is to keep playing. If fear stops the process, that’s when the losing begins. Looking back, pressured markets are when consistency matters most. Stay grounded, find the sanity, and the opportunities will emerge. As Ed Seykota said, “There are old traders and there are bold traders, but there are very few old, bold traders."

Ed Seykota Quote Image


A Look Ahead

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

Why the Great Disconnect Between Good News and Market Panics?

by Louis Navellier

J.P. Morgan’s top quantitative analyst, Marko Kolanovic, on Friday blamed the financial media for the stock market’s recent volatility by saying that there is a yawning chasm between the real U.S. economy and how the markets are behaving. In his 2019 Outlook, Kolanovic wrote that strong corporate profit growth and consumer spending signal that the economic expansion isn’t about to end, in contrast to future P/E estimates and institutional equity holding levels near five-year lows. Kolanovic added that “Positive GDP and earnings are the ‘reality,’ which is currently starkly disconnected from equity sentiment, valuation, and positioning.” Kolanovic added, “To some extent, we trace the disconnect between negative sentiment and macroeconomic reality to the reinforcing feedback loop of real and fake negative news.”

Kolanovic cited a combination of domestic political groups, analysts and foreign actors who are amplifying negative headlines to sow discord and erode faith in financial markets. He said there are “specialized websites” that present a blend of real and fake news and distorted write-ups of financial research. Kolanovic concluded by saying, “If we add to this an increased number of algorithms that trade based on posts and headlines, the impact on price action and investor psychology can be significant.”

Whitewater Rafting Image

Yikes!  I am glad that Kolanovic said it, because I could not have said it better. The truth of the matter is that trading algorithms are jerking the stock market around almost daily, as well as increasing the volatility of crude oil and natural gas prices, which are all too often based on planted fake news stories. In fact, I would also add that when the financial media locks in on topics, such the China trade spat or Fed interest rate hikes, they beat every fear factor to death and refuse to adjust their tune to the proven facts.

My favorite economist, Ed Yardeni, wisely pointed out last week how computer-driven algorithmic trading continues to trigger dramatic one-day selloffs by dumping ETFs in essentially a “sell everything” trade. Investor bargain hunting after these big machine-driven selloffs has been tepid, since investor confidence has been undermined by not only the algorithmic trading, but also the fact that many popular ETFs continue to trade at discounts to their Intraday Intrinsic Value (essentially their net asset value). 

Stocks initially surged last week on the G20 news that President Trump and China President Xi agreed to a 90-day trade truce, which effectively postponed the new 25% tariffs (which are currently 10%) on $200 billion worth of Chinese imports. The official statement said, “Both parties agree that they will endeavor to have this transaction completed within the next 90 days. If at the end of this period of time, the parties are unable to reach an agreement, the 10% tariffs will be raised to 25%.”  Furthermore, the White House said, “China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other products from the United States to reduce the trade imbalance between our two countries. China has agreed to start purchasing agricultural product from our farmers immediately.”

Clearly, there is a lot of work to be done to resolve the current trade spat with China, but a good outline is currently in place, so Treasury Secretary Steven Mnuchin and his trade negotiators now have a lot of work to do with their Chinese counterparts. Although the U.S. has the greater leverage with China, the Chinese trade negotiators are smart and think differently than their Western counterparts. Specifically, the Chinese are always looking to continue their trade dominance in selected markets. Furthermore, the fact that GM is not closing their plants in China but are closing multiple plants in Canada and the U.S., is a sign that big multinational companies continue to work with China vs. boosting North American trade.

Both President Trump and Chinese President Xi are going to want to say that their respective countries have “won” when any trade resolution is announced in the upcoming months, so it appears to me that the U.S. will most likely win on farm exports while China will likely win on its manufactured goods.

All Eyes Are Now on the Fed

Too many in the financial media are talking about how “falling interest rates and a flattening yield curve are ominous signs of a potential recession.”  All this proves that the U.S. remains the global oasis! First, so as long as long-term rates are falling, that is a good sign, regardless of the “tilt” of the yield curve.

Here is a sample of how fast and far the Treasury yields have declined in the first week of December.

Treasury Yields Table

Second, now that interest rates have fallen in a flight to quality, dividend growth stocks are expected to lead the overall stock market, since the S&P 500 now yields almost 2% and is largely tax-advantaged (i.e., taxed at a maximum Federal rate of 23.8%), so yield-hungry investors and dividend growth stocks are expected to initially lead the stock market recovery. Overall, the financial media continues to fail to see the forest for the trees by refusing to point out how the S&P 500 continues to boost its underlying dividends and corporate stock buyback activity. We may see $1 trillion in stock buybacks during 2018.

All eyes are now on the Fed and their upcoming Federal Open Market Committee (FOMC) meeting next week. I am now expecting a dovish FOMC statement due largely to falling Treasury yields and hope that the FOMC statement will essentially act as a “launching pad” for the stock market to stage a powerful year-end rally. Investors hate uncertainty, so if the Fed can remove interest rate uncertainty and signal that the FOMC is unlikely to raise key interest rates further due to slowing economic growth (e.g., autos, housing and global factors), moderating inflation (due to lower crude oil prices) and lower market rates (falling Treasury yields), I expect an “explosive” reaction and a “melt up” in the stock market.

On Wednesday, the Fed released its Beige Book survey in preparation for its upcoming FOMC meeting. Most of the Fed’s 12 districts reported “modest” or “moderate” growth. The Dallas and Philadelphia Fed districts noted “slower growth.”  Unlike previous Beige Book surveys, this one acknowledged weakness in existing and new home sale, which means the upcoming FOMC statement will most likely be dovish.

The Labor Department on Thursday reported that productivity rose to 2.3% in the third quarter, up from 2.2% previously estimated. Normally, stronger productivity helps to boost wages, but between higher productivity and lower labor costs, inflationary pressures are clearly moderating.

Finally, the Labor Department on Friday announced that only 155,000 payroll jobs were created in November, substantially below economists’ expectations of 198,000. The October payroll report was also revised down to 237,000, from 250,000 previously estimated. The unemployment rate remains at 3.7%, a 49-year low. Average hourly earnings rose 0.2% (6 cents) to $27.35 per hour, up 3.1% in the past 12 months. The average workweek dipped by 0.1 to 34.4 hours, which may signal a hiring slowdown.

Overall, the stock market will be taking its cue from next week’s FOMC statement. Due to falling Treasury yields from international capital flight, plus moderating inflation fears, the Fed can pause raising rates in 2019. The Fed never fights market rates and I expect the upcoming FOMC statement will ignite a strong year-end rally. Hopefully this momentum from a more dovish Fed will continue in January when another round of strong quarterly earnings announcements should propel stocks substantially higher.

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