Opens with Huge Switch

October Opens with a Huge Switch from Small-Cap to Big-Cap Stocks

by Louis Navellier

October 9, 2018

Hanging On Image

We remain in a nervous “mean reversion” market, since many previously-hot small-capitalization stocks consolidated last week (after being strong in the last week of September), while big multinational stocks firmed up. Specifically, Bespoke Investment Group broke down the S&P 1500 by 10 deciles of market capitalization. The 150 largest (top 10%) rose 0.08% last week while the smallest 10% were down 3.74%.

The S&P 500 fell 0.97% last week, but the Nasdaq 100 was off 3.2% and the small-cap Russell 2000 fell 3.8%. Small-cap growth was down -4.58%. Among the sectors, Consumer Discretionary, Technology, and the new Communication Services sector were hit hard, while Energy, Financials, and Utilities rose.

I’ll cover more about the market’s “reversion to the mean” in my closing column this week, or you can hear my analysis of the market’s latest downdraft in a podcast on our home page.

In This Issue

Bryan Perry opens with the good news on the economic front, along with the dangers and opportunities in the latest rise of 10-year Treasury rates above 3.2%. Then, Gary Alexander looks at Europe’s economic and banking malaise and finds they haven’t truly recovered from the 2008 financial crisis. Ivan Martchev is more concerned over the emerging market currencies, once the dollar resumes its inexorable rise, than he is over the latest U.S. bond moves. Jason Bodner covers the latest sell-off and sector swings along with a look at the media’s false narrative vs. the longer-term realities driving this bull market. Then I’ll return to cover the commodities, notably oil, and the premature release of the likely-lowball monthly job totals.

Income Mail:
The “Too Good to Be True” Economy (According to Fed Chair Powell)
by Bryan Perry
The Bond Market Bends on Latest High Yields

Growth Mail:
Europe May Be Entering its Third Stagnation in a Decade
by Gary Alexander
Why Europe Can’t Seem to Recover from 2008

Global Mail:
No Time for a Big Bond Bear
by Ivan Martchev
U.S. Dollar Rally to Accelerate Soon

Sector Spotlight:
An Unexpected Bill Comes Due
by Jason Bodner
Three Drivers Behind this Choppy Market

A Look Ahead:
A “Mean Reversion” Pushes Commodities Up & Stocks Down
by Louis Navellier
Can’t Anybody Around Here Count Jobs Right?

Income Mail:

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

The “Too Good to Be True” Economy (According to Fed Chair Powell)

by Bryan Perry

Federal Reserve Chair Jerome Powell said last Tuesday in a speech at the annual meeting of the National Association for Business Economics (NABE) in Boston that the U.S. economy is in the midst of a “remarkably positive” period, unprecedented in modern history. “This historically rare pairing of steady, low inflation and very low unemployment is a testament to the fact we remain in extraordinary times.”

New data from the Fed is now predicting that unemployment will remain below 4% through 2020 and that inflation will stay low, averaging around 2% during that time. This has never happened in modern history. The last time unemployment was that low for several years was in the 1960s and it ultimately triggered high inflation, but Mr. Powell and the Fed majority do not think that will occur this time.

Unemployment Rate and Overall Inflation Rate Chart

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

Powell doesn’t believe inflation is going to jump anytime soon, even though the labor market is tight, and wages are rising at their fastest rate in 10 years, as labor markets tighten further. He argues that the Fed is aware of the risks and is doing a more active job of managing inflation expectations than in the 1960s.

Add to this mix the fact that stock buy-backs for 2018 may exceed one trillion dollars by November and that 2018 is also on track for record dividend hikes, and the picture for the U.S. stock market gets pretty bright heading into the end of 2018, even at these near-record levels.

The Bond Market Bends on Latest High Yields

This past week, the bond market heaved on the release of a single data point. The Institute of Supply Management (ISM) Non-Manufacturing (Service) Index is an index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation. This index is valuable for providing insights into the business conditions in the service sector, which has gained importance because these non-manufacturing sectors account for a majority of the economy.

The ISM Non-Manufacturing Index provides significant information about factors that affect total output growth and inflation. When used alongside the ISM Manufacturing Report, the industry coverage between the two reports accounts for almost 90% of the GDP. When this index is increasing, the stock market should increase because of higher corporate profits. The opposite can be thought of the bond markets, which may decrease as the ISM Non-Manufacturing Index increases because of sensitivity to potential inflation. And this past week, bonds gave up some ground on the latest ISM readings.

Last Wednesday, the ISM Non-Manufacturing Index checked in at 61.6 for September (vs. a consensus 58.2% expectation), up from 58.5 in August. According to ISM, that is the highest reading since the inception of the index in 2008. The dividing line between expansion and contraction is 50.0. That means business activity is strong for the service-providing sector of the economy. Some details within the report:

  • The New Orders Index increased to 61.6 from 60.4.
  • The Employment Index jumped to 62.4 from 56.7, the highest reading since the inception of the Employment Index in 1997.
  • According to ISM, the past relationship between the Non-Manufacturing Index and the overall economy indicates that September’s reading corresponds to a 4.6% annual increase in real GDP.

Historically, the ISM Non-Manufacturing Index has been a low-impact report to market direction, but not this time around. In fact, when the headline crossed the tape at 10:00 am EST, the 10-year Treasury was yielding 3.10%. By 10:30 EST, the yield had spiked to 3.26%, representing a fresh three-and-a-half year high, which in turn led to the stock market rout on Thursday and Friday.

From the 20-year chart (below), the move was sudden and technically significant. Going back to 2000, when the yield on this cycle topped out at 6.9%, a straight line catching the tops shows last week’s up move to penetrate that sloping overhead line and butt right up against the long-term 200-week moving average that comes into play right at 3.25%. A break above this level could (and probably will, in my view) invite further technical-related selling by computer-driven program trading platforms.

Ten Year Treasury Note Index Chart

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

Needless to say, this week’s inflation data in the form of the release of the Producer Price Index (PPI) and Consumer Price Index (CPI) for September, both of which are forecast to a modest increase of 0.2% for the month, will be closely watched. The recent rise in energy prices could factor big in the data, given that oil prices rose throughout the entire month of September, as per the chart below of WTI crude oil, which saw the WTI price top $75 per barrel last week before mild profit taking set in.

West Texas Intermediate Crude Oil Price Chart

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

So, while the chartists are waving caution flags of higher yields ahead, there is some limited evidence of widespread inflation to support an unwinding of the bond market. Growth outside the U.S. is anemic and U.S. bond yields are tantalizingly high relative to those of other developed nations. Even if the Chinese have reduced or stopped altogether their purchases of U.S. Treasuries, as evidenced by the lower bid-to-cover ratio (now at 2.4x, down from 2.8x), there are plenty of buyers of U.S. debt at current levels, supported by our rising GDP and a rising valuation of the dollar against nearly all other currencies.

Only time will tell if the Fed’s viewpoint pans out, but if they are right, this longest bull market in history is likely to go into double-overtime.

Growth Mail:

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

Europe May Be Entering its Third Stagnation in a Decade

by Gary Alexander

While we have been proudly boasting of U.S. growth rates exceeding 4%, European growth rates have been receding. Europe’s second-quarter 2018 cumulative 12-month rate is 2.2%. (The following chart measures quarter-over-quarter increases, so the preceding four quarters added together equal 2.2%.)

European Union Gross Domestic Product Growth Rate Bar Chart

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

The Eurozone’s Economic Sentiment Index has been sinking all year long from a high of 115.2 last December to 111.3 in September. This index closely tracks Europe’s GDP growth trend (downward).

In addition, Europe’s Manufacturing PMI is down to 53.2 in September, the lowest reading in two years. New export orders are the lowest in 63 months and business confidence is the lowest in 35 months.

European markets have reflected this malaise. In August, while U.S. stocks were soaring, Europe’s stocks as measured by the EMU MSCI index fell 2.7% (in euros), tying Latin America for the worst-performing regional index that month. Italy’s MSCI index fell 9% in August and Greece’s MSCI dropped 9.5%.

Year to Date 2018 Stock Markets Performance Table

While the Eurozone unemployment rate has been coming down all year, it is still stubbornly over 8%, while the U.S. rate is less than half that, at 3.7%. Germany is doing slightly better than the U.S., with 3.4% jobless, but the European rate is bloated by 19.1% jobless rates in Greece and 15.2% in Spain.

European Union Unemployment Rate Bar Chart

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

It has now been a decade since the debacle of 2008. While the United States has kept growing – albeit too slowly under Obama – Europe suffered a second recession in 2011 and then a series of financial crises in Greece and the other PIGS (Portugal, Italy, Greece, and Spain). Now, a new crisis is looming with the Italian banks. It seems like Europe has never fully recovered from the 2008 financial crisis. Why not?

Why Europe Can’t Seem to Recover from 2008

This week marks the 10th anniversary of the most traumatic week of the 2008-9 financial crisis, October 6-10, 2008, when European banks were hit far harder, and for far longer, than American banks were hit. That message comes through loud and clear in a massive (686-page) new book by Columbia University History Professor Adam Tooze in “Crashed: How a Decade of Financial Crises Changed the World.”

Here’s what happened. On Monday, October 6, 2008, equity markets lost $2 trillion in value and world leaders decided to call an impromptu gathering of the G7 and G20 finance ministers at the U.S. Treasury on October 10-11. But before they could meet, the share price of RBS – touted as the “largest bank in the world” the previous spring – collapsed on Tuesday and trading had to be halted. British Chancellor of the Exchequer, Alistair Darling, launched a bank bailout package the next day after some all-night wrangling.

On Thursday, October 9, the Dow fell 733 points, the second-worst daily collapse in history. Ironically, that was the one-year anniversary of the Dow’s peak in 2007, and its previous bear-market low in 2002.

On the same day, Iceland imploded, after that very small nation of 334,000 people, with bank deposits of 14.437 trillion krónur in the second quarter, 2008 (equal to more than 11 times its national GDP) realized that there were very few assets backing the massive balance sheets in their three leading national banks.

The following day, Friday, October 10, stock markets crashed in Asia and Europe. Russian markets remained closed, but London, Paris, and Frankfurt dropped 10% within an hour of opening and again after Wall Street opened. On Wall Street, the Dow fell 697 points in the first five minutes to its lowest level since March 17, 2003. It was the worst single day since October 19, 1987. Traders rallied at the close, but the Dow was still down over 18% for the week and -40% from its record high on October 9, 2007.

The weekend meeting of the G7 and G20 leaders didn’t help much. On Monday, October 13, markets were closed in Japan and the bond market was closed in the U.S. In Europe, Britain nationalized Lloyds and RBS. European leaders, meeting in Paris, announced recapitalization plans for many European banks.

On Monday, October 13, the stunned CEOs of America’s nine largest banks were called into Washington DC and told to accept a pro-rated amount of Troubled Asset Relief Program (TARP) money or else lose their FDIC guarantees. It was a “take it or leave it” offer. At the Freedom Fest in Las Vegas, I’ve heard from two of those CEOs who were present that day (Wells Fargo’s Richard Kovacevich and BB&T’s John Allison) who didn’t need or want the money but were forced to take it or else be put out of business.

Here’s the “offer the bankers couldn’t refuse,” put to them in blunt Godfather terms:

“When Wells objected to bailing out New York banks, Paulson coolly pointed out that Wells Fargo was sitting opposite its regulator. If they did not take the capital on offer that afternoon, they would be notified the following morning that they were undercapitalized. They would find themselves locked out of capital markets. When they came back to Paulson for help, the terms would be less attractive than those available that afternoon. The CEOs were then dismissed to call their boards. Within a matter of hours, they had all agreed.”

– From “Crashed,” by Adam Tooze, page 197

Call it a Mafia squeeze play or not, the U.S. government had a lighter touch on U.S. banks than the EU had in their nationalizations of eurozone banks. In recent columns here, Bryan Perry has written about the problems facing Italian banks, and Ivan Martchev has written about the dismal fate of Deutsche Bank. European banks got deeper into bad debts than American banks did, and they are still carrying bad debts:

Europe's Non Performing Loans Bar Chart

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

In the early 2000s, European banks bought an outrageous percentage of the U.S. mortgage market: HSBC boasted of servicing 450,000 U.S. mortgages, to the tune of $70 billion. Deutsche Bank had a cozy relationship with mortgage-giant Countrywide and issued a glowing press release about owning the bottom rung of the U.S. mortgage capital market, which provided “significant competitive advantages.”

“In 2007, the three largest banks in the world by assets were all European – RBS, Deutsche Bank and BNP.* Combined, their balance sheets came to 17 percent of global GDP. The balance sheet of each of them came close to matching the GDP of its home country – Britain, Germany and France – the three largest economies in the EU. In tiny Ireland the situation was far more extreme. The liabilities of its banks added up to 700 percent of GDP.” (*RBS is Royal Bank of Scotland, and BNP is Bank Nationale de Paris)

– from “Crashed,” by Adam Tooze, page 110

All this accumulation of bad debts came crashing down 10 years ago this week. Europe kept suffering due to their overload of bad debts, and then the Federal Reserve had to come to the rescue of Europe’s banks.

“QE is generally thought of as the quintessential ‘American’ policy, the symbol of the Fed’s adventurousness. It would earn Bernanke regular scolding by conservative policy makers in Europe. But after what we have already said, it will come as no surprise that 52 percent of the mortgage-backed securities sold to the Fed under QE were sold by foreign banks, with Europeans far in the lead. Deutsche Bank and Credit Suisse were the two largest sellers.”

– from “Crashed,” by Adam Tooze, page 210

The Fed issued $10 trillion in liquidity swap lines of credit from December 2007 to August 2010. Over 95% went to central banks in Europe: $8 trillion to the ECB and nearly $1 trillion to the Bank of England.

No wonder Europe swiftly sank into a second recession in 2011, and the U.S. didn’t (to be continued) …

Global Mail:

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

No Time for a Big Bond Bear

by Ivan Martchev

While the 10-year Treasury note yield closed Friday at a multi-year high of 3.22%, launching talk of a bear market in bonds, I have to remind readers of this column that we have been there before. The latest decisive move above 3% may seem dramatic, but it is no more dramatic than the move above 5% in the summer of 2007 that caused many market participants to say that the bull run in the U.S. Treasury market that began in 1981 was over. As Yogi Berra liked to say in such situations, “It ain't over till it's over.”

United States Ten Year Government Bond Chart

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

It is true that if one were looking at a long-term chart, the 10-year Treasury yield has “broken out” from the long-term downtrend that started in 1981, just like it did in 2007. It is also true that if one were to put the 10-year Treasury yield on a logarithmic scale, no long-term downtrend has been broken (see below).

United States Ten Year Treasury Yield Index Chart

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

This causes a bit of a problem for bond bears, as the economic cycle in the U.S. is very mature and we are probably not at the right time for a big bear market in bonds. The present economic expansion is nine years and four months old, while the all-time record is exactly 10 years (March 1991-March 2001). While I am confident we will beat the all-time record come next June 2019, I am not sure by how much.

The question then becomes, how much of the Federal Reserve balance sheet can be unwound? The rate of unwinding may be $600 billion per year in 2019, based on the runoff rate from October 2018, which was just upped to let $30 billion in Treasuries run off and $20 billion in mortgage-backed securities, for a total of $50 billion per month. Could this runoff rate go even higher? It sure could, but when combined with higher deficits due to the tax cut, this may create a problem in the Treasury market.

BalanceSheetVersusFundsRate.png

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

All these monetary machinations raise interesting questions as to the slope of the U.S. Treasury yield curve and how predictive it will be this time, given that in all prior cases of inversion, long-term U.S. interest rates were market-driven. This time around, the Fed is meddling so much in the U.S. Treasury market that it can affect where the Treasury market goes. If the Fed wants higher long-term interest rates, it just makes sure that the balance sheet run off rate is higher, so the yield curve does not invert.

YieldCurve.png

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

Also, because of the high amount of leverage in the financial system, materially higher U.S. interest rates may create a problem. Rising interest rates do not matter (until they do). No one is really sure how high those levels are on the 10-year Treasury or the fed funds rate. I guess we'll find out soon enough.

YieldCurveInversions.png

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

U.S. Dollar Rally to Accelerate Soon

Along with the big move in bonds last week came a renewed upward pressure on the U.S. Dollar Index, which closed the week at 95.62, even though we were above 96 at one point on Friday. The high for 2018 so far has been a hair shy of 97 and I think we have plenty of time to take out 100 before the end of 2018.

EuroVersusDollar.png

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

Keep in mind that the old U.S. Dollar Index includes no emerging markets currencies, which have become much more important in this Fed tightening cycle, given how much emerging economies have grown in the 21st century. The JP Morgan Emerging Markets Currency Index hit an all-time low in September and, despite a marginal rebound, it is probably headed for another all-time low before the end of 2018, given how fast U.S. interest rates are rising.

TurkeyTenYearBond.png

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

So far, this move in the dollar has not yet produced a genuine emerging markets crisis, but the potential is clearly here as there has been a massive increase in borrowing in U.S. dollars in the past 10 years and those debts will have a hard time being serviced with much weaker emerging markets currencies. There has been a rout in emerging markets currencies, bonds, and now stocks, which was started by the change in Federal Reserve policies. Since the Fed does not appear to be done, neither is said rout.

Sector Spotlight:

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

An Unexpected Bill Comes Due

by Jason Bodner

Sometimes, life hands you a bill you don’t expect.

Such was the case for Ernest Thompson Seton, one of the founding members of the Boy Scouts of America. On his 21st birthday, his father presented Ernest with an invoice. It detailed every expense connected with his childhood. His father even included the fee charged by the doctor who delivered him into this world. His dad also applied 6% interest per year.

Seton paid the bill, $537.50 in 1881 ($12,500 in today’s dollars) and never spoke to his father again.

ErnestSeton.jpg

He did learn a vital lesson, though. He described his father as the most selfish person he ever knew, and as “one who knew the price of everything and the value of nothing.” The key words are: price vs. value.

Last week the market faced a late-week round of stiff selling. The Russell 2000 was down 4.6% for the week as of mid-day Friday before rallying to close down 3.8% by the end of the day. The big blue chip indexes fared better, with the S&P down 1% and the Dow declining just 11 points (-0.04%) . This type of behavior is amplified when we dig beneath the surface and look at individual stocks. Some stocks have faced heavy pressure this past week, far more than the indexes. Many stocks that I traffic in have gone up multiples of the market, so it’s understandable that some of them may come down further than the market.

When we see red in the markets, we can get a little edgy. But these are the times to resist acting like Ernest’s dad. Let’s focus on value and not so much on price. This is where we can look at longer-term trends in sectors and the health of the market’s fundamentals to give us some guidance. If we focus on price alone – we might say “it’s time to bail.” That would be a huge mistake.

The fact is that the market is reacting to some new level of uncertainty and markets don’t like uncertainty… Yet, the volatility we’re seeing is normal and necessary. In fact, this dip could be a buying opportunity.

On Monday and Tuesday, we saw selling pressure. The market firmed up Wednesday, and we saw a nice bounce in growth stocks. Then on Thursday and Friday, things got bumpy again. The S&P 500 and Dow both outperformed the Nasdaq and the Russell 2000 for the week because the Nasdaq and Russell are full of domestic, small-cap companies, while the S&P 500 and the Dow are full of large-cap, multinationals.

StandardAndPoors500SectorIndices.png

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

Three Drivers Behind this Choppy Market

The way I see it, there were three main drivers behind last week’s choppy market…

The “New NAFTA” Trade Deal: The market started soft Monday when Trump announced that he had reached a new free trade agreement with Canada and Mexico to replace NAFTA. If approved, the deal is good news for multinationals, as it will ease trade tensions. The market overreacted to this news – it sold U.S. small caps and bought stocks with international exposure. Small-cap companies generate most of their revenues from home. Tariffs and other trade barriers don’t hurt their bottom lines like they do with multinationals. U.S. small caps have been a safe-haven while investors shunned multinational companies.

Rising Interest Rates: The rate on the benchmark 10-year Treasury note rose above 3.2% last week, a seven-year high. The 30-year bond also hit a four-year high. When yields rise, that signals a possible rate hike. On top of rising rates, there are fewer buyers of U.S. Treasuries. There’s also talk that China—the biggest buyer of U.S. bonds—will stop buying in retaliation against sanctions on Chinese exports to the U.S. Fewer buyers and lower bids mean higher rates, which make owning U.S. stocks less compelling.

Rising Uncertainty: Next, we have media distractions causing rising uncertainty. The main saga last week involved the confirmation vote of Supreme Court Justice nominee Brett Kavanaugh. The next hurdle will be the midterm elections. Meanwhile, the slowly-escalating trade dispute still hangs overhead.

Despite these uncertainties, the major indexes are all still within spitting distance of their all-time highs:

  • The S&P 500 is within 1.3% of its high.
  • The Dow Jones Industrial Average is within 1.2% of its high.
  • The Nasdaq is within 3.1% of its high.
  • The Russell 2000 is within 5.5% of its high.

That’s why you should ignore the headlines and look at the bigger picture. The economy is still firing on all cylinders. Here’s just a short list of what the mainstream press is choosing not to focus on:

The economic news is really good. Both the Institute for Supply Management (ISM) and ADP, the human resources management firm, released strong employment numbers last week. The U.S. Labor Department also reported that the unemployment rate is at its lowest level since 1969. Even Federal Reserve Chair Jerome Powell said that things are “almost too good to be true.” And as far as U.S. stocks go, the story hasn’t changed. We’re about to kick off third-quarter earnings season later this week, in which we expect to see a third straight quarter of 10% sales growth and 24% earnings growth for the S&P 500.

Hoping to beat those very-high hurdles, we focus on stocks which average double-digit multiyear sales growth, earnings growth, and gross profit margins. This was our goal yesterday, and it will be our goal tomorrow as well. But events like the ones I discussed above have caused people to “trade the news.”

I’ve seen it countless times when I sat on trading desks on Wall Street, but panic selling is usually just an excuse to push stocks around. Portfolio managers chase performance based on headline news, but markets usually overreact. Great stocks will still be great, despite the news. The market is either handing us a bill or it’s handing us a gift. One week the prices may say “buy,” or it may say “expensive,” depending on your perspective. The next week, it may say “sell” or “cheap,” depending on your mindset.

Don’t let the media head-fake you into getting bearish. The environment is great and there is much value to be had in this market. Warren Buffett said, “Price is what you pay, and value is what you get.” Don’t be like Ernest’s dad: Know the price of some things but focus on the value of everything.

A Look Ahead

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

A “Mean Reversion” Pushes Commodities Up & Stocks Down

by Louis Navellier

It was quite a “mean reversion” last week in many markets. Commodities rallied, while Treasuries fell and interest rates rose. Outside the U.S., most stock markets fell 2%-3% and India fell by a jarring 9%.

Sudden oscillations in the previously-strong U.S. dollar are triggering algorithmic trading systems to sell the Russell 2000 and buy large capitalization multinational stocks. In other words, computerized trading is largely responsible for last week’s small capitalization underperformance and late week sell-off.

The strength of the U.S. dollar caused a big currency headwind for the S&P 500 for most of this year, since approximately half the S&P 500’s sales are outside of the U.S. So essentially, the dip in the U.S. dollar late last week triggered algorithmic buying pressure in large-capitalization multinational stocks. This algorithmic trading may persist until the dollar gets its “mojo” back and resumes its previous steady appreciation. I believe that will happen since the U.S. has (1) very strong economic growth, (2) a central bank that is raising rates vs. flat rates in Europe in Japan, and (3) a strong leader in President Trump.

The good news for investors is that money is not leaving the stock market. Instead, it is merely being reshuffled. Furthermore, stock buy-back activity remains incredibly strong. In the second quarter, stock buy-backs in the S&P 500 rose to a new all-time record of $190.6 billion vs. the previous record in the first quarter. After two quarters of record stock buy-back activity in the S&P 500, in the past 12 months, stock buy-back activity has risen by an amazing 58.7%. If stock buy-back activity continues to accelerate this year, we could see at least $800 billion (and possibly $1 trillion) in stock buy-backs for all of 2018.

Oil Industry Workers Image

One part of the U.S. economy that is expected to continue to create plenty of jobs is the energy sector. Big companies like ConocoPhillips (COP) have expanded operations in the Permian Basin, where the number of uncompleted wells has soared 80% to 3,630 in the past year. The transportation infrastructure in the Permian Basin cannot handle the booming output, so more natural gas is being flared and trucks are increasingly transporting crude oil. Clearly, more pipelines need to be added to West Texas, since shale producers must increasingly discount their crude oil due to expensive transportation costs.

Currently, shipping crude oil by pipelines costs $4 per barrel; rail costs $8 to $12 per barrel, and trucks cost $15 to $25 per barrel. I should add that 15 new mines to supply crude oil producers with fracking sand have been created in the Permian Basin in just the past year, so U.S. crude oil production is expected to steadily rise, especially after the transportation infrastructure catches up with these new wells.

On Wednesday the Energy Information Administration (EIA) reported that crude oil inventories surged by 8 million barrels in the latest week, the largest weekly rise in crude oil inventories this year. China is no longer importing U.S. crude oil, so some of this inventory rise could have been due to the trade spat. Furthermore, crude oil demand tends to ebb in the fall as the weather in the Northern Hemisphere cools.

On Wednesday, Bloomberg reported that Saudi Arabia has “significantly” increased its crude production to 10.7 million barrels per day, according to Energy Minister Khalid Al-Falih, which is near an all-time record. Bloomberg also reported that Saudi Arabia “appears to be bowing” to pressure from President Trump to boost production to offset the impact of sanctions on Iran. Naturally, the upcoming mid-term elections is another reason that Trump would like to see prices at the pump to temporarily moderate a bit.

Can’t Anybody Around Here Count Jobs Right?

The big economic news last week was the September payroll report, in which the Labor Department announced that 134,000 new payroll jobs were created, substantially below economists’ consensus estimate of 180,000, but there was also a huge upward revision for July and August, with payrolls revised up by 69,000 to 270,000 in August (from 201,000 previously estimated) and up 18,000 to 165,000 in July (from 147,000 previously). This makes me wonder why they even bother to announce the job totals so early every month if they must revise the last (August) totals by 69,000 jobs (+34%) just one month later!

The September totals might be revised higher, too. Hurricane Florence may have cut the September job totals, so September jobs may be revised higher next month. Another reason that I expect the September payroll report to be revised higher is that on Wednesday, ADP reported that 230,000 private payroll jobs were created in September, which was substantially above economists’ consensus estimate of 179,000.

The jobless rate declined to 3.7% in September, down from 3.9% in August, reaching the lowest level in 49 years. Average hourly earnings rose 8 cents to $27.24 per hour and up 2.8% in the past 12 months.

The Institute of Supply Management (ISM) reported last week that its manufacturing index slipped a bit to 59.8 in September, down from a robust 61.3 in August, which was a bit below economists’ consensus expectation of a reading of 60.7. The culprit behind the decline in the index was that new orders slipped by 3.3 points to 61.8 and the prices component declined by 5.2 points to 66.9. Since any reading over 50 signals an expansion, manufacturing activity remains very healthy, so these oscillations are likely trivial.

On Wednesday, the ISM non-manufacturing (service) index surged to 61.6 in September, up from 58.5 in August. Economists were expecting the ISM service index to slip to 58 in September, so this was truly a big surprise!  This is also the highest reading ever recorded for the ISM service index since it was created in 2008. Since the service sector accounts for approximately 70% of GDP growth, it will be interesting to see if economists revise their third-quarter GDP estimates higher; they are currently hovering around 4%.

No wonder Fed Chairman Jerome Powell said on Tuesday that there was a “remarkably positive outlook” for U.S. economic growth! However, that raises concerns that the Fed may need to raise rates further.

On Friday, the yield on the 10-year Treasury bond hit 3.24%, breaking its previous high-water mark from July 2011. The 30-year Treasury bond on Friday yielded 3.42%, a four-year high. I remain concerned that the bid-to-cover ratios at the recent Treasury auctions slipped to 2.4 to 1, down from 2.8 to 1, so Treasury yields are now meandering higher due to fewer bidders. The fact that China may no longer participate in our Treasury auctions due to the escalating trade spat, may be another reason that Treasury bond yields are steadily rising. At this point, a December rate increase by the Fed is becoming increasingly likely.

Before closing, I should add that on Thursday the Commerce Department announced that factory orders rose 2.3% in August, the biggest monthly gain in 11 months. In the past 12 months, factory orders rose 8.6%, so the manufacturing sector is clearly booming. The component for motor vehicles rose 1% in August after increasing 1.6% in July, which bodes well for the automotive sector. The transportation sector is booming, especially since orders for commercial airplanes and parts surged 69.1% in August, so overall transportation orders rose 13.1% in August. I should also add that Boeing (BA) and Heico (HEI) continue to rank very well in my StockGrader and are my top two transportation stocks.

(Navellier & Associates holds BA, COP, and HEI in managed accounts and a sub-advised mutual fund.  Louis Navellier and his family are invested in this sub-advised mutual fund that owns BA, COP,  and HEI.)


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

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