Pay No Attention

Pay No Attention to the Fed’s Flip-Flops & Failed Forecasts

by Louis Navellier

March 22, 2016

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

Dove ImageThe big news last week was that the Fed “blinked” and cut their December interest rate forecast in half.  Last Wednesday, the Federal Open Market Committee (FOMC) said that their consensus forecast for the federal funds rate at the end of 2016 has fallen to 0.875%, which implies that they might add only two 0.25% interest rate increases this year vs. the four such 0.25% rate increases they indicated in their December meeting.  Naturally, these interest rate increases are still “data dependent,” meaning that the next interest rate increase (if any) would depend on “realized and expected economic conditions.”

Translated from Fedspeak, the doves on the Fed do not want to raise rates, but will do so only if inflation and market rates force their hand.  The FOMC statement also said that recent market developments and the global outlook “continue to pose risks.”  This is essentially an admission that the Fed is watching global events, such as the European Central Bank’s aggressive quantitative easing and negative interest rate policy.  Not surprisingly, U.S. Treasury yields declined in the wake of the Fed’s latest guidance.

I think the Fed is usually overly optimistic with both its inflation and economic growth forecasts.  Even though 2016 is not quite three months old, the FOMC has lowered its 2016 GDP forecast to an annual rate of 2.2%, down from its 2.4% forecast in December.  The Fed also lowered its 2016 inflation forecast to 1.2%, down from its 1.6% forecast in December.  In my experience, the Fed has been so bad at making its GDP and inflation forecasts that it cannot even find the barn, much less hit the broad side of that barn.

Frankly, I wish that the Fed would re-examine its inflation forecasts, since deflation is now the dominant trend – not inflation. Last Tuesday, the Labor Department reported that the Producer Price Index (PPI) declined 0.2% in February, the fifth monthly decline in the past seven months.  Wholesale energy prices declined by 3.4% (gasoline prices declined 15.1%) and wholesale food costs declined 0.3%. The next day, the Labor Department reported that the Consumer Price Index (CPI) declined 0.2% in February, due largely to a 6% decline in energy prices (gasoline prices declined 13%).  In the past 12 months, the CPI has risen just 1%, well below the Fed’s 2% target, so the Fed is under no pressure to raise interest rates.

Before getting into the nuts and bolts of the market, I want to take this opportunity to invite you to join me in an hour-long Teleforum called “Dividend Oasis Stocks for 2016.”  It starts at 6:30 pm (Eastern) today.  Registration closes at noon today and the call is on my nickel, so I hope you can join us later today.

In This Issue

The theme of our columnists this week is the bi-polar personality of the stock market in 2016’s first quarter – depressingly down for the first six weeks and then up (but super-selectively) in the latest six weeks.  Bryan Perry asks if this “remarkable rally” is for real.  Then, Gary Alexander recounts the similarly bi-polar nature of investors – super-cautious when stocks are low and then complacent near market peaks.  Next, Ivan Martchev lays out a litmus test for Fed policy, while examining the disappearing stock market in Cyprus and (perhaps) Greece.  Jason Bodner examines the frustrating recovery of last year’s weakest sectors as a phony style of leadership, unworthy of a true bull market, and then I return with a look forward at oil prices, the S&P 500, and an opportunity to meet with us personally later today.

Income Mail:
A Remarkable Road to Recovery
by Bryan Perry
The Rally in Cyclicals – “Is it live, or is it Memorex?”

Growth Mail:
Fear is Crippling Too Many Investors
by Gary Alexander
Four More Bricks in the Wall of Worry

Global Mail:
How to Know if Yellen Failed
by Ivan Martchev
Can Stock Markets Disappear?

Sector Spotlight:
Why the Financials Have Lagged the Other Laggards
by Jason Bodner
How Long Will This “Leadership of the Laggards” Continue?

A Look Ahead:
Oil is Up but Could it Decline Again?
by Louis Navellier
The Folly of Settling for S&P Index Funds

Income Mail:

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

A Remarkable Road to Recovery

by Bryan Perry

Two Fridays ago, Treasuries got hammered after the release of February’s employment report, which showed that nonfarm payrolls were growing above expectations despite global economic issues. But the move lower in bond prices was met with strong buying interest and the trend toward lower yields resumed, which in turn kept the rally for equities in place. Stocks ended the week with the S&P 500 getting back to a “flat line” for the year, but bumping against key overhead technical resistance at 2050.

If stocks and crude oil continue to trade higher, Treasury yields may give way to some rotation. Although yields have come up off the February reaction lows, bond buyers aren’t bailing out, with the 30-year T-Note currently paying out 2.65%. The rally in stocks has been dominated by the deep cyclical sectors, which makes the resilience in the bond market that much more impressive, as yields typically rise sharply when money is flowing into economically sensitive stocks. The 30-year yield has now moved up to its long-term (down-sloping) trend line that has defined the broad macro deflationary landscape, and that will only change if the 30-year yield breaks above 3.2%.

Thirty Year Treasury Yields Index Chart

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

The rally in Treasuries in January and February has made an indelible impact on investor sentiment. During the first six weeks of the year, oil prices were collapsing, economic data was coming in short of expectations, high-yield bond spreads were widening in a big way, global equity markets were imploding, faith in central banks was lacking, earnings estimates were declining, and the presidential political parade was getting ugly in a hurry. The prevailing fear was that the U. S. economy might slip into a recession and that falling oil and commodity prices might lead to a protracted period of deflation.

Now, six weeks later, the 30-year yield has retested its February 2015 low and is pushing higher. The U.S. labor market continues to take up slack and one would think that wages will have to move higher at some point even though the latest read on hourly wages for February was down -0.1% versus forecasts of 0.2% (source: Briefing.com). Regardless of the latest pause in wage inflation, the disinflationary effects of the dollar rally and oil decline are beginning to diminish and yields have bumped higher as a result.

This past week saw the FOMC meeting conclude with no change in the Fed Funds rate and the Fed stating that it is likely to raise interest rates only two times this year instead of four. The chance of a rate hike at the June meeting has increased due to the stabilization in financial markets and some reassuring economic data with upward revisions for GDP, jobs, and the rebound in oil and junk bonds.

The Rally in Cyclicals – “Is it live, or is it Memorex?”

Though there is little empirical data to support the rally in the deep cyclical sectors, investor sentiment has seen a huge shift from extreme fear and bearishness to that of buying steeply sold-off cyclical stocks, with the notion that an earnings trough will occur in the first quarter and the rest of the year seeing a pickup in top-line revenue and earnings growth. At this point, this notion is purely built on the perception that the bazooka-like QE measures announced by the European Central Bank, Bank of Japan, and Peoples Bank of China will stimulate those economies which in turn will boost U.S. export trade. The jury is still out as to whether this scenario will materialize; but there is no question that momentum in the cyclical sectors, led by a rebound in oil prices, morphed into a lot of momentum fueled by massive short covering.

Historically, a recovery in the corporate debt markets is a good indicator for the equities represented in the same sectors. This past month has seen shares of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), which is laden with bonds representative of deep cyclical companies, rally smartly by 9.7% off its recent low. This may not seem like much compared to the move in the related stocks; but for debt markets, 9.7% is very impressive. From the chart of HYG below, it’s clear that the rally in junk bonds is coming up against the long-term downtrend, very similar to the charts for the 30-year Treasury Bond.

iShares High Yield Corporate Bond Exchange Traded Fund Chart

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

My take on this pre-emptive rally in front of earnings season is to raise the caution flag and not chase the move in the commodity and deep cyclical spaces. Bullish perception can be quickly vanquished if we see more headlines like “Coal giant Peabody Energy warns it may seek bankruptcy,” (from The Wall Street Journal, March 16, 2016). Peabody Energy (BTU) said it had filed a “going concern” notice with regulators. Peabody has opted to exercise the 30-day grace period with respect to a $21.1 million interest payment due last Wednesday on its 6.50% notes due in September 2020, as well as a $50 million interest payment due the same day on its 10% senior secured second lien notes, due in March 2022. Costs and lost business to tougher coal regulation were cited. So much for America’s largest coal producer. (Please note: Bryan Perry does not currently hold a position in HYG or BTU. Navellier & Associates does not currently own a position in HYG or BTU for any client portfolios).

Bond rating agency Fitch says energy issuers may be headed for $40 billion in defaults this year. That number likely heads further north when deeply indebted materials, mining, and metals companies are factored in. Then again, maybe the market has priced in this expected wave of defaults.

How this all plays out will likely be determined by first-quarter earnings season set to kick off in the first week of April. With the S&P moving off of its February 10 intraday low of 1810 to a recovery level of 2050 last Friday, a good deal of expectation has been built in; but if earnings aren’t there to support the rally, then a pullback to 1900-1950 will likely follow. I’d rather see how the deep cyclicals trade through earnings season before getting bullish on the sector. If this rally in commodities, mining, metals, and industrials is for real and not a bull trap, then there will be plenty of upside in the corporate bond market worth getting in on. But we wouldn’t see major central banks offering negative interest rates and the Fed extending out their time line for normalizing rates here in the U.S. if the global economy was improving.

That is why this rally remains suspect in my view and why I continue to believe more defensive income strategies – where the risk/reward ratio is skewed more to lower risk – remain the right path for income investors. There is a time to press one’s exposure to emerging markets and commodities, but I do not believe now is that time. There still could be a hard landing for many of the “heavy metal” stocks that led this rally. Perhaps that time will come in late spring, when the old saying of “sell in May and go away” might take on a whole new meaning.

Growth Mail:

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

Fear is Crippling Too Many Investors

by Gary Alexander

“Dow 5000? There’s a Case for It… Earnings Point to 1995 Levels for Stocks”

--Headline in The Wall Street Journal, March 9, 2009, when the DJIA closed at a 12-year low of 6547

On Monday, March 9, 2009, when the DJIA and S&P 500 reached their lowest point in the last 19 years, America’s leading financial newspaper was making the case for a further decline to 1995 prices – i.e., Dow 5000.  The opening line of that article asked: “Just how low can stocks go?”  The newspaper was reflecting the public’s fears of lower lows. According to Charles Rotblut, Vice President and editor of the AAII Journal, the bearish sentiment figure in their weekly American Association of Individual Investors poll “reached a record high of 70.3% on March 5, 2009, just as the bear market was reaching a bottom.”

More important than how investors think is how they act. Fears of “another 2008” were so great in 2009 through 2013 that investors were net equity sellers for four years after this bull market began.  They tiptoed into stocks in 2014, after the bulk of the bull’s gains were already in the books.  Then, after sharp market declines last summer, investors became net sellers again, accelerating their sales in early 2016.

On March 9 of this year, Bloomberg published a bull market birthday analysis (“What Doesn’t Kill Bull Market in Stocks May Make it Stronger”). Bloomberg called this the “Most-Hated Bull Market” in history.  I have been saying basically the same thing for nearly seven years here – since my first column at Navellier in May of 2009.  Too many investors are staying away from stocks when they should be buying.  I have cited sentiment polls to show how the number of bears has remained consistently high throughout the bulk of this seven-year bull market.  The Bloomberg analysis bears out this sad fact:

Most Hated Bull Market Chart

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

With just 10 days left in the quarter, we’ve seen a Jekyll & Hyde stock market so far in 2016.  In the first six weeks, the S&P 500 fell over 10% to 1810, but then it recovered by over 13% to close near 2050 last Friday.  The end result is a microscopic gain of 0.28% for the year-to-date through last Friday’s close.

Jekyll and Hyde Market of 2016 Table

The S&P reached its 2016 low on February 11, when bearish sentiment peaked at 48.7%.  That was also the day that oil hit bottom at $26 and gold rose $50 in a day to $1240 – the day of maximum pessimism. The proportion of bears in 2016 more than doubled at just the point when they should have been buying.

When people withdraw money from equity funds, stocks tend to rise!  According to data (stretching back to 1984) compiled by Bloomberg and the Investment Company Institute, “in the 12 instances when funds experienced monthly outflows that were at least two standard deviations from the historic mean, the S&P 500 rose an average 7.1% six months later, compared with a normal return of 3.9%.”  Fear robs investors of those outsized gains.  That is happening once again in 2016. According to the Investment Company Institute, reporting on February 25, the net new cash flows out of all domestic equity funds declined for 11 months in a row as of January, 2016, for a net outflow of $192.9 billion over the last 12 months.

Four More Bricks in the Wall of Worry

Fear is not usually based on analysis.  Fear is a gut response to the prevailing news and expert warnings.  Lately, we’ve heard very vocal concerns about (1) slowing global growth, (2) volatility in the oil patch, (3) flat corporate earnings, and (4) vacillating central bank policies.  These are legitimate concerns, but I would argue that they are overblown.  The press seeks out the most dramatic spokesman for the worst-case scenario, but history teaches us that most such problems contain the seeds of their own eventual solution.

China has made great progress transitioning from its inefficient, debt-laden, state-owned enterprises (SOEs) to the private market.  It’s a miracle that the world’s largest nation has transitioned from three decades of destructive Communism to become one of the fastest-growing economies on earth.  China is currently undergoing a difficult transition from an export-dominant economy to one focused more on domestic consumption.  By comparison to past challenges, however, this crisis is relatively manageable.

It’s also worth mentioning that Europe is not in a recession. Eurostat confirmed last week that the 19 countries in the euro zone grew by 0.3% in the final quarter of 2015. For all of 2015, they grew 1.6%, much better than the 0.9% growth in 2014. Europe and America are still growing, although slowly.

In commodity markets, like oil, the solution to low prices is…low prices.  When gold fell in price, many gold mines shut down, cutting off new supply.  Now, gold is rising again.  Over time, flat or rising demand absorbs cheap over-supply. With oil, there is a huge overhang in storage and many oil producers keep producing to meet debt payments, so the recovery will take time; but the cycle of commodities has always been a swinging pendulum between high supply/low demand giving way to lower supply/rising demand.

Corporate earnings are also a function of supply and demand.  According to BloombergBusiness on March 13, S&P 500 companies are on pace to purchase $165 billion of their stock this quarter. In essence, investors are selling shares to corporations.  With so many companies buying their own shares, there are fewer outstanding shares, creating higher earnings per remaining share, even if nominal earnings are flat.

Gross Issuance of Stocks Minus Standard and Poor's 500 Buybacks Chart

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

Regarding our vacillating Fed, no news is good news.  As we pause to parse the conundrum of whether the Fed will or won’t raise rates, let’s consider the peak rates we faced 35 years ago (1980-82) – inflation at 15%, a fed funds rate of 20%, and unemployment at 11%.  Those numbers add up to 46.  The numbers today are 1.0% CPI inflation, 0.4% fed funds rates, and 4.9% unemployment, adding up to six.  Isn’t it easier to face the Fed’s current array of low single-digit “threats” than a raft of double-digit demons?

The market seems overbought right now, but don’t forget to buy after the next big correction!  In the meantime, as Louis says, this is a time to be more selective in stocks with superior fundamentals.

Global Mail:

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

How to Know if Yellen Failed

by Ivan Martchev

There is no doubt that last week’s FOMC statement was hailed as dovish. Both bonds and stocks rallied after the Fed made a note of international risks, which I take as them being worried about China. They more or less implied that they are willing to let inflation run for a while rather than tighten prematurely.

At the time of the December 2015 Fed rate hike, many market participants thought the Fed was signaling four rate hikes in 2016. Now there is a consensus for two rates hikes. Perhaps the Fed is afraid of making an embarrassing U-turn and so they are calibrating expectations lower for the time being. Still, I think that any rate hikes in 2016 would be a big mistake.

Thirty Day Fed Funds - Daily OHLC Chart

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

The December 2016 Fed funds futures contract settled on Friday at 99.40. That ZQZ16 price implies a fed funds rate at 60 basis points (100 less 99.40). The present fed funds target rate is ¼ - ½ % and the effective fed funds rate settled at 0.38% on Friday. So the ZQZ16 fed funds futures contract implies at least one more rate hike by December 2016, even though this is an actively-traded financial instrument. Those market-based probabilities may change, as that same contract was calling for a rate cut a month ago.

I think more rate hikes would be a mistake as I think we have a global deflationary problem at a time when most market observers are worried about inflation. Market participants have had these misguided worries for a long time. On November 1, 2013, I penned a piece for Marketwatch called, “How to Know if Bernanke Failed.” In it I explained that the greatest monetary experiment on the face of the planet – i.e., quantitative easing – cannot necessarily be celebrated as a success since it has not yet been unwound.

At the time, I wrote that few investors outside of the Federal Reserve understand quantitative easing. I gave an example of how mainstream economics research firms were making a fundamental mistake in the interpretation of the effects of QE. Many market observers think that because money multipliers and monetary velocities have dropped, the Fed was drawing a “lucky straw,” since QE was working, at least for the time being. As I said then, this implied that as the velocity of money and the credit multiplier simply revert to the mean on their own, there will be trouble on the interest-rate and inflation fronts.

So, where is inflation today?

It is nowhere to be found.

Total Monetary Base Chart

Most observers think that because of the explosion of the monetary base, which is a function of QE, there will be a hyperinflationary outcome. I won’t bore you with the mechanics, but the more QE the Fed does, the more the monetary base goes up. The trouble is that most observers do not realize that as long as the Fed pays interest on excess reserves at a rate higher than the fed funds rate, those excess reserves (that are part of the monetary base, pictured above) do not multiply in the financial system. Excess reserves are never lent in the fed funds market as excess reserve interest paid by the Fed is always higher – on purpose.

In other words, the QE money has no credit multiplier. This is all by design, so it is the Fed that controls the monetary velocities and the credit multiplier in the U.S. financial system. It is not a stroke of luck.

Velocity of M1 Money Stock Chart

Due to the dovish stance by the Federal reserve, as exhibited in their March 16 FOMC statement, the U.S. dollar also sold off and commodities continued their rebound with the front-month May 2016 WTI crude oil futures closing at $41.14/bbl. on Friday. As I have elaborated previously, I believe this is a seasonal rebound in oil. The oil price is also heavily inversely correlated with the Broad Trade-Weighted Dollar Index, which was down on the week as the seasonal oil rebound continues.

Crude Oil Prices - West Texas Intermediate versus Trade Weighted United States Dollar Index Chart

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

I have heard it said many times recently that “the dollar has not done anything for a year” and “the dollar has probably topped out.” The Broad Trade-Weighted Dollar Index hit a multi-year high of 126.23 on January 20, when oil was first testing $26. (The components of this index are the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile, and Colombia.)  It is natural for the U.S. dollar to be inversely correlated to oil as many competing currencies in the broad dollar index are commodity-based currencies.

Saudi Arabia Riyal versus Chinese Yuan Chart

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

I think the Broad Trade Weighted Dollar has not topped out, since I believe (1) this is only a seasonal rebound in oil which will test the February lows again after the seasonal demand factors fade away and 2) several of the pegged currencies in the index are likely to be devalued. Two good examples where a devaluation is coming is the Chinese yuan and Saudi Arabia riyal, and they are somewhat correlated.

I think the Chinese will devalue the yuan (as they did in 1994 by 34%) as their banking system is not operating properly due to the busted credit bubble there, as I have explained numerous times over the past year. I think the Saudis may have to devalue the riyal too, even though it has been hard-pegged to $3.75 for over 25 years with very few variations in the exchange rate. The decline in the oil price is wreaking havoc in Saudi finances and if the riyal were free floating it would have looked more like the Russian ruble, rather than a “pancake.” A devaluation for the Saudi riyal may simply be a matter of time as the hard landing in China I envision may drive down the oil price to a fresh low.

United States Dollar versus Russian Ruble Chart

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

As I noted on November 1, 2013, a good yardstick to judge if Bernanke has failed is if the U.S. goes into deflation, pushing the 10-year Treasury yield to a fresh all-time low. Since Janet Yellen has continued the policies of Ben Bernanke, the same yardstick applies to her. On February 11, 2016, the 10-year Treasury yield came down to 1.57%, which was 18 basis points away from the all-time low of 1.39%, set in 2012. I don't recall another instance when long-term Treasury yields dropped by about 75 basis point so soon after a fed rate hike. I took that as bond traders voting with their checkbooks against more rate hikes.

I think we have better than even odds of a new low in 10-year Treasury yields by the end of this year as a Chinese devaluation is a high probability event, which I believe will be highly deflationary for the global economy.

Can Stock Markets Disappear?

Some once-thriving stock markets have historically disappeared. The vibrant stock market in Russia at the beginning of the 20th century disappeared after the 1917 Revolution, even though it was resurrected after the dissolution of the Soviet Union. There was no restitution of property rights in Russia, unlike so many other Eastern Bloc countries; so for all intents and purposes, the whole 1917 Russian stock market was wiped out. There have been many similar cases where there has been a revolutionary end to markets.

Cyprus Stock Market versus Greece Stock Market Chart

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

The trouble is that some recent markets have disappeared for practical purposes, without a revolution. A case in point is the Cyprus stock market. The Cyprus market (as denoted by the Cyprus General Index) reached an all-time high of 5518.50 in October of 2007 and a record low of 63.85 in February of 2016 according to data from the Cyprus Stock Exchange For statistical aficionados, this is a decline of 98.84%. Granted, this is not technically disappearance; the stock market is still “there,” but for all intents and purposes this is a wipeout. Keep in mind that Cyprus uses the euro, so currency devaluation is not an issue for these stocks; economic mismanagement is.

Its larger cousin, the Greek stock market, is faring little better. Historically, the Greek stock market (as denominated by the Athens Stock Exchange General Index) reached an all-time high of 6355.04 in September of 1999, according to data from the Athens Stock Exchange. Last Friday it closed at 548.68. From the all-time high, that stock market benchmark index is down 91.4%. Greece is certainly better off than Cyprus, but that’s putting it graciously.

In the case of Greece, it is again economic mismanagement, in my opinion, as the banking system was beginning to function somewhat normally when radical left-wing Syriza came to power in January 2015 and caused yet another bank run. (For more of my comments on Syriza, read the July 7, 2015 Marketmail “Gruyere Souvlaki.”) Greek bank stocks have for all intents and purposes gone the way of Cyprus stocks with numerous reverse splits and recapitalizations that have wiped out their shareholders.

National Bank of Greece Stock Market Chart

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

The reverse split effect can be seen in the chart of the National Bank of Greece (NBGGY) ADR, above, but others like Piraeus Bank that don’t have ADRs look similarly dismal when quoted in Greek terms. (Please note: Ivan Martchev does not currently hold a position in NBGGY. Navellier & Associates does not currently own a position in NBGGY for any client portfolios).

As can be seen in Cyprus and Greece, one does not need a revolution for stocks to go the way of the dinosaur. The key ingredient is economic mismanagement on a grand scale.

Sector Spotlight:

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

Why the Financials Have Lagged the Other Laggards

by Jason Bodner

You may have heard of “Pretty Boy” Floyd – not to be confused with the 80’s Glam Rock band of the same name. Charles Floyd (1904-1934) was an American bank robber who gained a lot of press attention in the early 1930s. He earned his name when a payroll master described one of the perpetrators of a bank heist as “a pretty boy with apple cheeks.” Floyd hated his nickname. To many he was a notorious gangster and a prolific bank robber of the Great Depression era. But despite being an armed robber and a murderer, he was a bit of a Robin Hood to the down-trodden public at the time. When robbing a bank, he would find and destroy their mortgage documents, absolving many of their debts. He was so revered that somewhere around 30,000 people attended his funeral, which remains the largest funeral in Oklahoma history to this day. Five years after his death (he was gunned down by authorities in a cornfield), Woody Guthrie penned a song, “The Ballad of Pretty Boy Floyd,” which was performed and recorded by the likes of Bob Dylan, Joan Baez, The Byrds, Woody’s son Arlo Guthrie, and even James Taylor. Pretty Boy Floyd even made it into The Grapes of Wrath several times.

Pretty Boy Floyd and Band Image

In honor of Pretty Boy’s love of banks, I’ll go over a brief history of banking. Banking as we know it is thought to have had its roots around 2000 BC in Babylonia and Assyria. These earliest banks made grain loans to farmers and those who traded goods between cities. A good while later, Ancient Greece and the Roman Empire were also active lenders. These two cultures, however, added two distinct differences, which significantly affected the banking system. These two revolutions were (1) accepting deposits and (2) changing money. China and India during this time frame were also active moneylenders.

The banking system underwent its most significant development in Renaissance Italy, specifically in Florence, Venice, and Genoa. In the 14th century, the Bardi and Peruzzi families dominated banking and opened branches all across Europe. Italy was so prominent in the advancement of the banking system, that the oldest bank still operating is Monte dei Paschi di Siena, which has been around since 1472.

Monte Dei Paschi Di Siena - Oldest Operating Bank Image

With all this talk about banks and financials, it’s interesting to note that even though this immense market rally since the February 11 lows has been led by last year’s weakest sectors, financials haven’t really participated to the same level as other formerly-weak areas. Financials haven’t gotten the love that energy, industrials, and materials have seen lately. All one has to do is look at the past week, six months, and 12 months to see that banks are still unloved. Last week, which capped off one of the strongest weeks the market has seen in a while, was led by the S&P 500 Industrials, Energy, and Materials Indexes.

How Long Will This “Leadership of the Laggards” Continue?

As we have been harping on for some time now, the recent winners have been some of the weakest sectors of the last year. Industrials have seen a significant rally of late, while Energy and Materials, two of the biggest losing sectors of the past 12 months, came in at #2 and #3 last week.

Standard and Poor's 500 Sector Indices Tables

Healthcare seems to have had a hard time getting out of bed this past week. It all seemed to intensify on Tuesday as Valeant Pharmaceuticals reported earnings with a big miss from street estimates. The S&P 500 Healthcare Index was negative for four out of the five trading days of last week. Telecom reigned supreme for the past six months and 12 months, but last week’s positive price action was once again dominated by the weakest groups, which seems to be based on short covering as the main catalyst.

Let’s take energy, for instance: According to data from Bloomberg, the S&P 500 Energy Index is up 7.37% in the past three months. The physical price of crude oil has risen this spring, but oversupply and relentless production persist. Hopeful headlines of output caps and the possibility of coordinated efforts to curtail output have fueled the fervor, but in reality, very little if anything has changed.

Standard and Poor's 500 Yearly Sector Indices Table

So this begs the question: “Should we really be excited about this rally?” If the market rebound is propelled by weakness bouncing hard off of lows, is that the healthy kind of recovery that we need to see?

I, for one, would feel the price action would be much more constructive if it were on the backs of strong companies with growing revenues and earnings and solid balance sheets. But look at the top performers for the past month. A respectable profile is conspicuously absent. If the collective equities comprising the S&P 500 Energy, Materials, and Industrials Indexes are rallying in spectacular fashion, it seems logical to ask “why?” Perhaps the selling pressure became so exhausted that many were just waiting for the inevitable snapback. When investors started asking, “How low can it really go?” the bargain hunters begin stepping in. Dividend yields became so attractive that short-covering rallies fueled yield-hungry buyers.

Let’s not overlook the fact that many energy companies’ dividend stability remains questionable. As the price of oil plummeted, profit margins evaporated for companies. If dividend payments were getting to be a less comfortable percentage of cash flow even when oil was above $60 (which was already severely depressed from $100), they must be unnervingly uncomfortable now. If companies wish to maintain their dividends, they risk credit downgrades, which affect their ability to borrow. This dilemma will continue. This is not the backdrop for cheery price action. This is the backdrop for continued dividend cuts.

While the markets forge on and recover, we reach heavily overbought territory. Will it continue or will it meet its end, like Pretty Boy Floyd met his? This all brings to mind a great exchange in The Matrix:

Cypher: I know this steak doesn't exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After nine years, you know what I realize?

[Takes a bite of steak]

Cypher: Ignorance is bliss.

Cypher Eating Steak Image

A Look Ahead:

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

Oil is Up but Could it Decline Again?

by Louis Navellier

May 2016 WTI crude oil futures closed at $41.14 per barrel on Friday.  I was in Houston and New Orleans last week and even though oil prices were up and gasoline inventories have dipped a bit due to seasonal demand, there is still a lot of anxiety about what will happen next to crude oil prices, especially in the fall when seasonal demand drops.  The consensus from energy experts in both Texas and Louisiana was that crude oil prices may have firmed up due to seasonal pressure and higher worldwide demand, but there remains tremendous anxiety about where to put all that crude oil, since most storage facilities are full.

The folks in Louisiana agreed that much of the excess oil should be put away in the Strategic Petroleum Reserve.  We should also export more oil.  They told me how the offshore docks are being changed to boost crude oil exports.  Overall, there was tremendous concern about the long-term direction of crude oil prices, since the supply glut persists.  There was no euphoria that I could notice in the U.S. oil patch, since they (and I) expect the price of oil to start declining again this fall, after the summer driving season.

The Folly of Settling for S&P Index Funds

Last week, Morgan Stanley lowered its 12-month target for the S&P 500 to 2,050, down from its previous target of 2,175.  Since the S&P 500 closed at 2,049.58 on Friday, Morgan Stanley is not anticipating any net appreciation for the S&P 500 in the next nine months!  This reinforces my argument that 2016 is not the year to ride index funds, simply because the S&P 500 is not properly structured for the strong U.S. dollar environment that has crushed so many commodity-based and multinational stocks since mid-2014.

Thanks to the algorithmic traders, what was once down is now up, so the “washing machine” market cycle continues.  The stock market is now grossly overbought, near-term; so buckle up for a correction, which will hit the index funds and the former high-flyers the hardest, in my view.  All this will be sorted out during the first quarter’s earnings announcement season, which will commence in early April.

In the meantime, dividend growth stocks remain good near-term buys as investment grade (BBB) bond yields continue to fall.  Investors seem to be hungry for companies that are still boosting their dividends, despite the S&P 500’s ongoing sales and earnings woes.  Speaking of dividend growth stocks, we are holding a Teleforum today at 6:30pm EDT.  Check out the links in this MarketMail to participate.


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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

Marketmail Archives Trade Summary

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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

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