October Washout Robo-Driven

The October Washout is Mostly Robo-Driven Algorithm-Based Selling

by Louis Navellier

October 30, 2018

Computer Trading Image

The best way to explain this October’s market action is that the “tail has been wagging the dog.”  Due to computerized trading, index arbitrage and ETFs are becoming less liquid due to widening discounts and premiums to their net asset value (NAV). My hope is that economic fundamentals and wave after wave of positive earnings announcements will break that spell and disrupt recent computer index arbitrage selling.

Most robo-traders aren’t looking at the fundamentals. They have programmed their computers to sell on key words in various news releases. Thankfully, trading volume was relatively light early last week, but trading volume rose steadily each day. Since Friday’s sell-off had some high trading volume, I saw some “light at the end of the end of the end of the tunnel,” hoping that Friday might be a capitulation day.

I recorded three podcasts last week. (Here is a link to my Friday podcast.) As I have repeatedly said on many of my podcasts, it is very odd for this selling pressure to be occurring during a bullish quarterly earnings announcement season, especially when the average stock in the S&P 500 (so far) has posted 8.3% annual sales growth and 25.3% annual earnings growth. I was especially happy to see how Boeing (BA) and Twitter (TWTR) reacted after posting better-than-expected sales and earnings while providing positive guidance, and I was especially excited about the huge (86.1%) third-quarter earnings surprise ($5.75 per share vs. a consensus estimate of $3.09) for Amazon.com (AMZN). I am not worried that its sales were slightly below some analyst estimates. Amazon remains a great buying opportunity on dips.

(Navellier & Associates holds AMZN, BA & TWTR in managed accounts and a sub-advised mutual fund.  Louis Navellier & his family own AMZN, BA & TWTR via the sub-advised mutual fund and holds AMZN in a separate account.)

In This Issue

I’ll have more on last week’s market mayhem in my closing column. But first, Bryan Perry argues (with President Trump) that the Fed is out of touch with reality in their public statements, while the economic indicators tell a more positive story. Gary Alexander tells the same story, while debating a recent cover article from The Economist about their premature warnings of America’s “Next Recession.” Then, Ivan Martchev updates his junk bond indicator and then compares this October to 1974, 1929, 2008, and most notably 1987. Jason Bodner looks inside the “machine” (literally) to tell us what computers are doing to this market and how human logic will save us in the end. Then I’ll return to amplify what Jason just said.

Income Mail:
The Stock Market Says Fed Policy is Overshooting Inflation Risks
by Bryan Perry
The Numbers Still Support a Healthy Stock Market

Growth Mail:
An October to Remember – or Forget?
by Gary Alexander
The Economist Predicts “The Next Recession” (When None is in Sight)

Global Mail:
Junk Bonds Still “A-Okay”
by Ivan Martchev
The 1987 Comparison

Sector Spotlight:
Computers Made This An “October for the Ages”
by Jason Bodner
This Market is Now Seriously Oversold

A Look Ahead:
When Computers Do Their Thing – Beware of Trading with Them
by Louis Navellier
The Bond Market is More Orderly Than Stocks Right Now

Income Mail:

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

The Stock Market Says Fed Policy is Overshooting Inflation Risks

by Bryan Perry

The stock market can be a larger-than-life enigma during times like this. Investors digest tons of economic and earnings data of what “has been,” but we receive little reliable data of what “will be.”

After four weeks of broad market losses, investors now fear that all the rosy data coming in from the third quarter will give way to signs of slower-than-expected growth from the current quarter.

At least that’s my take on it.

The blame game is everywhere, and it starts with the Fed. The minutes from the September 25-26 Federal Open Market Committee (FOMC) meeting, released on October 17, lived up to their advanced billing, that is, that the FOMC would likely continue to pursue a gradual rate-hike path.

That gradualist policy, however, is of little comfort now as Wall Street has determined that the Fed isn’t on the same sheet of music when sizing up the economy. The target range for the fed funds rate was raised to 2.00% to 2.25% at the September meeting. Meanwhile, the latest projection from Federal Reserve Board members shows the median estimate for the long-run rate is 3.00%, implying there could be at least four more rate hikes; and yet the minutes have left an opening for further additional rate hikes once the 3.0% long-run rate is reached – a message reflected in the following passage from the minutes:

“A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee's 2 percent inflation objective or the risk posed by significant financial imbalances.”

Market participants see this directive as an increasingly hawkish posture, and yet there was the additional commentary stating that incoming data and its implications for the economic outlook would drive future adjustments to the target range for the fed funds rate. That implies this outlook for more rate hikes could be scaled back if the incoming data threatens the FOMC's objective of sustaining 2.0% inflation.

Only time will tell, but for now the minutes have largely confirmed to the stock market that the FOMC expects to keep raising interest rates. Right or wrong, the market perceives that the Fed will tighten, in light of more recent softer housing, auto, and retail sales data. And this same perception has the dollar trading back up to its 2018 highs against most major currencies, adding to the cumulative concerns of the perceived future impact of further rate hikes, forex headwinds, a third wave of tariffs, and the wild card of the Republicans losing the House and/or the Senate, as the mid-term elections approach.

The Numbers Still Support a Healthy Stock Market

Now for the good news. It should be noted that the 10-year/2-year spread has improved to 31 basis points from a low of 19 bps that had everyone on an “inverted yield curve watch” (see chart, below).

Yield Curve Chart

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

Also, the spread between junk bonds is 358 bps, right about where it started the year. If the threat of a serious economic slowdown were looming, junk spreads would be blowing out.

Junk Bonds Chart

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

And lastly, the five-year forward inflation rate is currently 2.20% and below the 2.35% reading in January – a very tame inflation future indicator. Put simply, this is not the stuff of an economy about to roll over.

Five-Year Forward Inflation Breakeven Chart

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

So, by and large, U.S. credit markets are in excellent shape, which can’t be said for the rest of the world, and because of this condition, global fund flows should continue to find their way into U.S. debt and equity assets. And as far as corporate profits are concerned, the market’s angst about next year’s estimated growth rate of 10% being cut in half seems unfounded, at least for now.

With 48% of the S&P 500 companies reporting third-quarter results, 77% have come in above estimates. Looking forward, 41 have issued negative guidance while 15 have issued positive guidance, which is a lower percentage than the historical average (Source: FactSet Earnings Insight – Oct. 26, 2018). With the S&P 500 forecast to earn $178.19 in 2019, the index is trading at a forward PE of 15x – hardly expensive.

Actual and Estimated Earnings per Share Bar Chart

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

In the wake of this month’s stock sell-off, bond yields have retreated along with prices of many leading commodities that, in addition to the rising cost of money and a stronger dollar, were a source of growing concern to corporate profits. Due to lower commodity prices and lower inflation, we’re just not hearing that level of concern from most companies within their post-earnings calls, but that rationale is having little effect on the “sell first, ask questions later” mentality that has gripped investor sentiment lately.

After the second wave of earnings and corporate guidance crosses the tape this week, and the mid-term elections show what should be the Republicans retaining control of the Senate, the market will likely stabilize. But between now and Election Day, the market may be highly vulnerable to further volatility.

Won’t it be nice when the actual numbers that support a bullish U.S. economy and stock market going forward – and not just emotions, based on fear of the unknown – start to matter again?

Growth Mail:

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

An October to Remember – or Forget?

by Gary Alexander

This October has been the worst market month since February of 2009, meaning it has been the worst market month of this entire bull market – barring a huge rally in the last three days of the month.

After telling us that October has been the #1 stock market month over the last 20 years, Bespoke Investment Group now tells us that this October is among the worst 8 or 9 Octobers of the last Century.

Market's Worst Octobers Table

But here’s a shocker. Last April 30 on my college alumni Website page, I made a bet with a stock bear that the S&P 500 would be higher on October 31 than it was on April 30. He gave me all the standard bearish arguments, including the “coming recession” mantra, the “Sell in May and Go Away” rap, and a bit of “Trump Derangement Syndrome” thrown into the mix. We bet a gentleman’s $1 on the outcome.

I’ll bet you think I lost that bet, since the market is down so far in October, right? Maybe so, but not through last Friday. On April 30, the S&P 500 stood at 2,648.05, and on Friday, October 26, it was 2,658.69, up 10+ points. Anything can happen tomorrow, but we had five good months before October.

What changed in October? Growth is still good, earnings are good, the jobless rate is still ultra-low, inflation is low. Could it be…. Politics? Contentious election rhetoric? The Fed raising rates, despite low inflation? Tariffs increasing, slowing global growth? Possibly. Or just algo-traders doing heavy selling?

Market analysts are currently predicting that S&P 500 earnings will grow 22.6% this year, 10.3% next year, and 9.5% in 2020 to $195 per share. Which number in that scenario justifies a market sell-off?

One warning flag is the buildup of inventories in the third-quarter GDP figure, implying that a lot of companies are stockpiling imports before tariffs kick in. After the elections, the President and his team need to get serious about negotiating with China. More specifically, China needs to get serious about negotiating with us, because the U.S. has refused to resume trade negotiations until Beijing comes up with some concrete proposals regarding technology transfers, tariff inequalities, and ongoing product piracy.

President Trump and China’s President Xi Jinping are scheduled to meet in late November as part of the Group of 20 in Buenos Aires. Unless they make progress there, the U.S. could raise tariffs on $200 billion on Chinese imports to 25% (from the current 10%) on January 1. In the end, the U.S. can outlast China in any trade standoff, but everyone will lose if both sides don’t lower the steep tariffs on international trade.

The Economist Predicts “The Next Recession” (When None is in Sight)

It’s always comforting to me to see best-selling books about “the coming crash” or negative magazine covers, since they are so often wrong. That’s one reason I like to reprint those book and magazine covers here. It’s encouraging to know that the bears are out in force making their argument and that the argument is popular enough to sell books and magazines to a nervous public. The President may not be able to build a Wall on our southern border, but the bears are constantly able to build a higher, stronger Wall of Worry.

The philosophy behind magazine covers is that they encapsulate the popular fears that dominate our inner angst, if not our outer, spoken conversations. Books and magazines never hope to change our minds. They merely hope to reflect our inner fears more accurately, to capture a reaction of “Yes, at last! Somebody understands what I’ve been trying to say!” The purpose of a cover is to capture the eyeballs of a passing pedestrian in a busy train station, airport, subway station, bookstore, coffee shop, or other emporium and separate them from $5 or so, in order to generate a longer-term subscription to their struggling little rag.

Economist Magazine Covers Image

Over the years, many magazine covers have marked turning points in the markets. In late 2009, The Economist sported a cover, “Brazil Takes Off,” shortly before Brazil began to fizzle and implode. A couple of weeks ago, The Economist may have made a similar blunder, asking how bad the “Next Recession” will be at a time when the next U.S. recession may be shallow and at least two years off. 

The Economist editors’ main “recession’ concerns are that the Fed and the Treasury are not prepared enough for the next recession, since the Fed still has a bloated balance sheet and Congress is running up a large annual federal budget during boom times. These are legitimate concerns, especially the latter, but the Fed is gradually reducing its balance sheet and President Trump is determined to cut spending in the Swamp and to never sign a bloated spending bill again. (We’ll see if he can keep this promise in the next two years, especially if Democrats take control of the House.). The Economist says America, and indeed the entire developed world, “is ill-prepared to deal with even a mild recession. That is partly because its policy arsenal is still depleted from fighting the last down-turn.” This is true, but we do have some time to rebuild that arsenal before the next recession, by making the right policy decisions in the next two years.

The bigger question is: Why are the editors of The Economist writing about a coming recession when the economy is cruising along at a 3.5% growth rate? There is time to do the right things. Even the Economist editors admit that: “The good news is that banking systems are more resilient than a decade ago, when the crisis struck. The chance of a downturn as severe as the one that struck then is low.” Unfortunately, that kind of balanced and positive conclusion never finds its way into the headlines or the magazine’s cover.

P.S. Here’s what happened to Brazil’s GDP from 2010 to 2015 and how the Economist’s covers changed:

Brazil's Gross Domestic Product Slide Bar Chart

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

Economist Coverage of Brazil Magazine Covers Image

Global Mail:

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

Junk Bonds Still “A-Okay”

by Ivan Martchev

In the last five years, every time the stock market weakened by a similar magnitude as we saw this October, there was notable junk bond credit-spread widening. Even if one goes back further in time and looks at all sell-offs in this bull market that started in March 2009, one would see that sell-offs in the stock market correlate pretty well with sell-offs in the junk bond market – but not in 2018.

There was very marginal widening of credit spreads this month, which is nothing like what happened in the 2015 and 2016 sell-offs and in years prior. In other words, the marginal widening in the past month does not qualify as spreads “blowing out,” as traders like to say. Even though I have never seen a definition of what “blowing out” is, it has to be much larger than a barely observable zig-zag on a chart.

CreditSpreads.png

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

To me, this aggressive selling in the stock market without aggressive selling in the junk bond market says that the problem is not economic, at least not in the U.S. economy. So far, this sell-off in stocks is very similar to what we experienced in February, both in sharpness and magnitude, so I think it too shall pass.

It is my experience that junk bond spreads tend to widen before the stock market makes its high for the cycle. In 2007, the junk bond credit spread widening (not counting the mortgage market) began in June and the stock market made its peak in October. The mortgage market began to show problems more than six months before the selling spilled into the border junk bond market.

None of this type of foretelling action from bonds is happening at present.

To be fair, there are plenty of things that are problematic with many emerging economies, not the least of which is China, but typically externally-generated sell-offs in U.S. stocks tend to be transitory. The only thing that can cause a lasting bear market in the U.S. are problems within the U.S. economy, like recessions or major financial crises, none of which are in the cards at the moment.

Because 2008 is still fresh in investors’ memories, there is the tendency for investors to worry during every sell-off. Still, 2008 was a crash driven by a malfunctioning financial system, which is not an issue we have at present. In fact, there have been only three sell-offs of such magnitude in the past 100 years--2008, 1974, and 1929. Of those three sell-offs only 1929 and 2008 are similar, where 1974 was due to an oil price shock. At present, we do not have out of control oil prices or a malfunctioning financial system.

The 1987 Comparison

Since it is October and we did see a crash in 1987 in the very same month without having a recession, we have to consider that computers may have gone berserk and the same may happen again. I think the present sell-off is very similar to what we experienced in May 2010 when the stock market declined 10% intraday, or the sharp sell-offs in August 2015, January 2016, and February of this year. All these sell-offs were driven by algorithmic trading with other algos and not driven by an economic problem in the U.S.

DJIA-VersusFundsRate.png

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

In 1987 the Fed had just begun to hike interest rates, but the dollar was quite weak (it is strong today). It very well may have been the Fed tightening that caused the 1987 crash and the present sell-off, as the Fed tightening is very different this time, as it involves the running off of bonds in ever larger amounts from its balance sheet. In other words, as Treasury and mortgage bonds mature from the Fed's portfolio, the proceeds are not reinvested in new bonds, up to $50 billion per month, a $600 billion annual runoff rate.

DJIA-VersusBalanceSheet.png

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

It cannot be understated that the problems in the stock market started to get more notable as the Fed balance sheet runoff rate began to accelerate in 2018. Winding up the Fed balance sheet was in effect suppressing volatility in the bond market and by definition in the stock market, so unwinding the balance sheet should in effect be the reverse – increasing volatility in financial markets.

BalanceSheetUnwinding.png

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

Still, there is something that does not quite fit here. One would expect that with all this Fed balance sheet unwinding bond market volatility would rise in 2018. Precisely the opposite has happened. We hit an all-time low in Treasury bond yield volatility in September 2018, so the Fed must be doing a really good job in unwinding its balance sheet, as neither credit spreads have risen nor has bond market volatility.

If I had to make a judgement call, I would say that the present sell-off in the stock market is not the beginning of a bear market. It is similar to what we saw in sell-offs in 2010, 2015, 2016, and in February of this year. It must also be noted that before the 2016 election, the stock market was down in four out of five weeks and the same thing seems to be happening this time. There is one more full week of trading before the midterm election, so I would say that this stock market sell-off is likely close to being over.

Sector Spotlight:

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

Computers Made This An “October for the Ages”

by Jason Bodner

October is home to the worst stock market crashes ever, including 1929 and 1987. Last week may also be remembered as one for the ages. It will go down in history as one of the more violent equity sell-offs we have seen in years. I have even heard comparisons to October of 2008. But what is really going on?

Algorithmic and High Frequency Trading (HFT) firms began selling a few weeks ago, when China’s sinking equity market led to a weak Monday (October 22) here. Selling pushed stocks down and blew out bid/offer spreads. Keep in mind, in a stable trading environment, tape spreads are a penny or less on liquid stocks. When liquidity is drained from the market and the order book is lopsided with sells, spreads can blow-out to 3-4 cents or more on less-liquid stocks. That translates to a 3 or 4+ standard deviation event skewed to the “profit” side of P&L ledgers for a High Frequency Trader. They make their money on spreads repeatedly throughout the day. I know one HFT trader personally who said, “We make our money for the year on days like this.” So, many days in a row “like this” for them means magnums of Cristal. They want volatility to explode and spreads to blow out. They will wait years for “days like this.”

HighFrequencyTrading.jpg

I already mentioned that HFT algos parse news headlines for sentiment and they pay for order flow. Negative sentiment coupled with weak buying equals payday potential. Selling becomes aggressive and eventually pushes through technical sell levels for model managers.

What does all this mean?

The ETF industry has moved from management to asset gathering. With the explosion of ETF products from the 2000’s to now, RIAs and wire-houses made a concerted push to gather assets. Then they moved from in-house to outsourced “model management.” ETF model runners could be paid a percentage of assets gathered by the gatherers to run a strategy. These are often tactical and rule-based with technical floors built in. A stop based on low volatility means a relatively high price floor. When that gets breached by something like HFT firms pushing down prices – they must sell. The rules say so.

In the old days on the trade desk, someone would call me up and say – “J - I need a bid on $250 million of XYZ US midcap equity ETF.”  I’d call my trader and get a bid based on where s/he could buy from the seller and comfortably hedge by selling the components (or an approximation-like futures). In fast markets, the spreads widened, and risk increased for dealers. Bids would go lower to try and maximize a reasonable spread (reward for taking risk). The real idea was to “try not to lose money.”

StockTrader.jpg

Eventually, this whole human-to-human process was replaced by machines running algos as automated market-makers. They too pay for order flow and base their market-making on some input for volatility and pressure one way or the other on the order book. When volume explodes, their bid/offer spreads reflect that. Once they are long from an equity ETF a model manager, they too must hedge. They employ algo-based sell programs for components of the correlated ETF. They sell stocks.

Eventually, levels are pushed low enough to get just about everyone freaked out. We move from a period of relatively widespread optimism (not to be confused with exuberance) to downright despair and pessimism in a few short weeks. When this mentality spreads to Main Street, the flush is nearly over.

The result is that defensive sectors are the only ones with their noses above water.

StandardAndPoors500SectorIndices.jpg

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

This Market is Now Seriously Oversold

All the while, I track my unusual institutional buying versus selling in a ratio. When the breadth dried up a few weeks ago, it said we should expect falling prices. When selling becomes extreme, it eventually hits a point that is unsustainable. That point was Friday morning: the buy/sell ratio plunged below 25%. The data I look at said it fell below 25% only three times prior in the past 6.5 years (1591 trading days).

In the last 6+ years, the ratio spent a total of 20 trading days (including Friday) below 25%:

  • 4 trading days October 15-20, 2014
  • 4 trading days September 24-29,2015
  • 11 trading days February 2-17, 2016 

In these three instances, the average days spent below 25% is 6.3 trading days. This is my expectation for the current event, but with extreme levels of selling we could spend more time below 25%. The important thing is the average return of the Russell 2000 (IWM) is positive 2-8 weeks after the ratio first breached below 25%. That’s why I firmly believe the bottom is here and I expect a market bounce soon.

MapItRatio.png

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

This sell-off started technically by a sudden absence of buying coupled with negative sentiment. My data tells me we are pretty much done. What astonishes me (but shouldn’t) is the rapidity from which we went from “good vibes” to “throw yourself out the window.” The emotional pendulum swung swift and hard.

But again, logic tells me the bull is still alive. At risk of being redundant, I cite record low taxes, record sales and earnings growth, record profits, and a strong dollar helping domestic mid and small cap margins. The 10-Year Treasury yielding roughly 3.08 is taxed at ordinary income rates. The S&P 500 currently yields just south of 2% and is taxed at long-term-capital-gains rates. Money invested in Treasuries offers only a slightly better after-tax return than U.S. equities while offering little potential for capital gains. I think yields aren’t compelling over equities until the 5% range, which is arguably still a long time away.

China’s equity market is volatile. Latin America is very volatile. Europe is facing its own headwinds. Commodities may offer a haven, but we haven’t hit the phase of the bull market that gets me excited about energy and financials. These stocks should see a resurgence when tech and consumer run their course. Not only are we not there yet, but tech and consumer companies are still churning out phenomenal numbers – even if they don’t always meet expectations. There is measurable growth and profitability. A slowdown has not revealed itself anywhere other than the market’s expectation of future prices.

It is important to survey data beyond emotion. The stock market can be both – a Jekyll-Hyde scenario. Right now, we see Mr. Hyde. Remember though, the sell button is pushed more frequently by emotion than by logic. With an oversold market by many metrics, including my own, fundamental strength we haven’t seen in years and unappealing alternatives in the investment landscape, I have to remain bullish on U.S. equities. This sell-off began technically and exploded into an emotional unwinding. Pessimism is everywhere. Doubt, fear, and anxiety can literally be felt in the air. That’s when you want to be bullish.

And I am.

Jesse Livermore had it right: “A stock operator has to fight a lot of expensive enemies within himself.”

JesseLivermoreQuote.jpg

A Look Ahead

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

When Computers Do Their Thing – Beware of Trading with Them

by Louis Navellier

It is very unfortunate that the stock market allows computers to dominate trading and jerk the stock market around, but that is essentially what happened in October. Fortunately, good stocks “bounce” and as more positive third-quarter results are announced, I expect a big rebound in the overall stock market.

During this recent market madness, I have noticed that the premiums and discounts surrounding ETFs have widened dramatically on down days, so trading ETFs in these fast-moving market conditions is not wise due to these excessive premiums and discounts. For more information on this threat, please read a white paper I prepared for our company last year at this time. You can read this report free on-line by clicking on this title: “How the Robo Advisor Revolution May Be Leading Up to an Impending Disaster.”

Basically, individual ETF investors won’t be hurt if they resist the urge to run for the exits during a panic. Naturally, most ETF investors may not realize that their ETFs are lagging market indices because they are trading at discounts to their underlying Net Asset Value (NAV), or what Morningstar calls “Intraday Indicative Value.” Since most ETF investors do not know that their ETFs trade at discounts or premiums to their underlying NAV, they do not realize that they can be “fleeced” if they sell during a market panic.

Unfortunately, on some thinly-traded ETFs, like Alternative Harvest (MJ), Morningstar is no longer publishing the Intraday Indicative Value, probably because it cannot price many of the thinly-traded Canadian “pot” stocks that this ETF holds. Although this is an extreme example, the last time I saw an Intraday Indicative Value for MJ, it traded at a 31.21% premium to its NAV, which is documented in our “Sharks” white paper. This report also discussed how ETF specialists like Cantor Fitzgerald, Jefferies, and Goldman Sachs have all been replaced by algorithms that are now dominated by Citadel. So essentially, computer algorithms are now setting the discounts/premiums on ETFs, and when the spreads widen, it is due to rising volatility, order flow, and execution risk. That’s why I don’t like widening ETF spreads.

Naturally, the computer algorithms that now dominate trading do not look at fundamentals nor do many index and ETF investors in passive products. So even though I care about the fundamentals, apparently I am in a minority compared to all the RoboAdvisors and passive products that now dominate Wall Street.

The good news is that much of the passive index money on Wall Street is “sticky,” so it does not trade that much. I do not expect most passive investors to panic in times like this. On the other hand, the ETF industry and RoboAdvisors have become more active, so it will be interesting to see if they panic, which is why I keep monitoring ETF discounts and premiums to their NAV, since the bigger the discount, the more it may trigger the RoboAdvisors and other ETF investors running for the exit at the same time.

The Bond Market is More Orderly Than Stocks Right Now

Now let me address a much more liquid and orderly market, namely Treasury securities. The bid-to-cover ratio on the 5-year Treasury note auction last week was only 2.3, down from an average of 2.48 in the previous 10 auctions, so the auction resulted in a yield of 2.977%. The good news is that the 5-year Treasury note yielded 3.07% on October 5th, so yields have fallen almost 10 basis points, but I do not like the fact that there are so few bidders. Foreign investors were reported to account for only 41% of bidders at the recent Treasury auctions, so there is speculation that China may no longer be buying new Treasury securities due to the trade spat and their own economic woes. Normally, a strong U.S. dollar would attract more foreign buyers, so I will keep my eye on bid-to-cover ratios at upcoming Treasury auctions.

Interestingly, President Trump has not let up on his relentless criticism of the Fed. Specifically, on Tuesday, President Trump in an interview with The Wall Street Journal, said, “Every time we do something great, he (Fed Chairman Jerome Powell) raises interest rates.”  Trump added that the Fed Chairman “almost looks like he’s happy raising interest rates.”  President Trump is clearly frustrated with the current interest rate environment, since it is impacting the housing market and slowing GDP growth.

Speaking of GDP growth, on Wednesday, the Fed issued its latest Beige Book survey with cautionary comments that tariffs could raise costs and potentially curtail economic growth. The majority of the Fed’s 12 districts reported modest-to-moderate economic growth. Some Fed districts discussed higher prices on Chinese imports due to tariffs and acute labor shortages. This positive but cautious Beige Book is the first sign that the Fed may be looking for excuses to curtail its next key interest rate hike.

NewHomes.jpg

If the Fed is looking for another excuse, the Commerce Department announced that new home sales declined 5.5% in September to an annual rate of 553,000, the slowest sales pace in almost two years. Interestingly, the inventory of unsold homes rose to a 7.1-month supply, which is the highest level in 7½ years (since March 2011). As a result, median home prices may start to moderate due to the abnormally high inventory of unsold homes. I should add that all four major regions in the U.S. reported declining new home sales, led by the West, which had the biggest decline. Overall, the dramatic decline in both new and existing home sales could cause the Fed to consider postponing its next key interest rate hike.

Finally, the Commerce Department issued its preliminary estimate for third- quarter GDP growth on Friday, showing an annual rate of 3.5%, down from the second quarter’s 4.2% annual pace. Consumer spending surged 4% in the third quarter and was responsible for the bulk of GDP growth. A slowdown in both business spending and residential investment was the primary reason the GDP growth decelerated in the third quarter. Unsold goods, namely inventories, added 2.1% to third-quarter growth and may have been attributable to companies buying imported goods before tariffs hit. Anytime inventories build, GDP growth may decelerate in the next quarter, so economists may be revising their fourth-quarter estimates.

The silver lining in the third-quarter GDP report was that the Fed’s favorite inflation indicator, namely the Personal Consumption Expenditure (PCE) index, decelerated to a 1.6% annual pace in the third quarter, down from 2% in the second quarter. Since the FOMC has a PCE inflation target of 2%, the Fed should be more reluctant to raise rates now that inflation is well below its target. So, thanks to slower GDP growth, a big inventory buildup, and inflation decelerating well below the FOMC’s target, the odds of the Fed hitting the “pause” button and not raising rates in December has risen dramatically.

It is now crucial that Treasury yields fall a bit. If market rates decline, the Fed will be much less likely to raise rates – and any dovish Fed comments in the upcoming weeks could spark a dramatic market rally!


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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