Positive Note

Stocks Open the Second Half of 2018 on a Positive Note

by Louis Navellier

July 10, 2018

The S&P rose 1.52% last week with the biggest surge (+0.85%) on Friday. NASDAQ did even better (+2.37%) while the Russell 2000 doubled the S&P 500 with a 3.10% gain. Earlier in the week, market oscillations were caused by air pockets that are common in the summer months and may continue in upcoming weeks. However, thanks to record stock buyback activity as well as dividend increases, the market continues to meander steadily higher. Whenever the market meanders higher on light trading volume, that is a very good sign, since it can potentially go up a lot more when trading volume rises when the second quarter announcement season begins.

If you drove a lot during the long holiday week, don’t get mad about the high prices at the pump. Instead, you can profit from those higher gas prices. Refiners are expected to post very strong earnings from the highest “crack” spreads in approximately three years. Our stocks that receive a double-A grade (“A” in both Dividend Grader and Portfolio Grader) are dominated by refiners like Valero Energy (VLO), which should post exceptionally strong earnings from those spreads.

(Please note; Louis Navellier currently personally owns a position in VLO, Navellier currently owns a position in VLO for client portfolio’s.)

Temperatures Rising Image

I also bet that your weather has been sizzling hot lately!  Not only is the US setting record-high temperatures, but so is Canada, Europe, the Middle East and Asia. This hot weather is helping boost natural gas demand, since much of the US has natural gas power plants designed to meet extraordinarily high air conditioning demand. That means the only weak energy commodity, natural gas, is now resurging, since the weather is expected to remain hot well into September.

Also, multiple “heat domes” around the world are creating tropical depressions, so it looks like this could be a record season for hurricanes, so re-insurance companies like Berkshire Hathaway may be at risk if we suffer more natural disasters, such as the new wave of fires out West.

(Please note; Louis Navellier currently does not own a position in Berkshire Hathaway, Navellier currently does not own a position in Berkshire Hathaway for client portfolio’s.)

In This Issue

Overall, our authors deliver a side of the trade war story that you don’t often hear, and our angle is beginning to resonate with investors who are tired of the scare stories that have dominated the press since January. Bryan Perry begins by showing how the bulls bought stocks big on the day the tariffs were added. Then Gary Alexander shows Trump’s secondary goal of attacking product piracy as well as our trade deficits. Ivan Martchev shows how far more tariffs have been imposed than implemented, while Jason Bodner shows why America is still the best place for your stock money. I’ll return to give you a media report on trade jitters, along with the latest jobs data.

Income Mail:
The Bulls Want to Bust Out of the China Shop
by Bryan Perry
Utilities: A Surprising Summer Sweet Spot

Growth Mail:
Of Doomsday Books and Articles, There Will Be No End
by Gary Alexander
Case in Point: Trump’s Tariffs are Not “Smoot Hawley II”

Global Mail:
What the Goldman Sachs Indicator is Telling Us Now
by Ivan Martchev
Business Cycle Statistical Distribution

Sector Spotlight:
When to Bet on “Impossible” Comebacks – In Sports and Stocks
by Jason Bodner
Leading Sectors for First Half: Consumer Discretionary & InfoTech

A Look Ahead:
All the Scary Tariff Talk is Beginning to Backfire
by Louis Navellier
US Job Growth Soars, But We Need More Qualified Workers

Income Mail:

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

The Bulls Want to Bust Out of the China Shop

by Bryan Perry

The tariff war began last week as foreign markets heaved on the prospect of an unchecked tit-for-tat scenario that could escalate to targeting up to half a trillion dollars or more in mutually-enacted import taxes. After a July 4th recess, Wall Street opened for business and built on Thursday’s pre-emptive deadline rally by adding strong gains in all the major averages. It was as if investors got tired of playing ping pong with the China “trade war” rhetoric and just wanted to bust out and focus on the bullish domestic manufacturing and employment data that underscores the strong GDP momentum for Q2.

China Shop Bull Image

Market analysts have been pontificating for weeks about the glaring headwinds that the stock market has had to contend with, namely the strong dollar, wage inflation, a proactive Fed, spiking oil prices and a brewing global trade war. With all due respect to what is expected to be rock star second quarter earnings, global macro-economic headlines such as stagnant emerging markets can steal the thunder from US record profit growth if investor sentiment would suddenly turn sour.

We saw some of this kind of behavior during first-quarter earnings season when geopolitics had the effect of a cold wet towel over what was a scintillating reporting season. It wasn’t until mid-May that the market started paying more attention to the robust earnings and economic data that took the Nasdaq and Russell 2000 to new all-time highs. Now, tough trade talk has turned into real-time tariffs that had the market back on its heels for the two weeks leading up to the July 4th holiday.

It’s been a “battle royal” between the bulls and bears of late, with the bulls starting to gain the upper hand late last week, but that too could change quickly. News of North Korea playing dodgeball with the terms of June 12 Summit, and a second round of tariffs by China and the US set to be triggered in two weeks could undercut any new rally attempts fueled by strong earnings. Wall Street is digesting every word carefully as both dialogues are important to putting to rest fears of escalation on both fronts.

This back-and-forth whipsaw action by the market has tested the patience of investors since February, given that there is no history of a “tweet-driven” market. At least in a “headline-driven” market, the news was usually out before the opening bell and could be traded accordingly. Today, anytime during market hours tweets by President Trump, other world leaders, hedge funds, activists and government officials in high places sparks extreme bouts of volatility exacerbated by high-frequency traders and program trading.

My take on any stalemate by North Korea on moving forward with the agreements laid out in the North Korea Summit is a function of China pressuring Kim Jong Un to stand down while the trade war is heating up with the US. North Korea remains a puppet state of China and it remains unclear after Secretary of State Mike Pompeo’s visit last weekend where the deal stands on de-nuking, sending home remains of U.S. soldiers and determining a timeline for the destruction of a missile engine test site.

Investors sent a clear message late last week that the US is taking the high road on leveling the global trading field. China will most certainly retaliate in every way they think is effective, but their already highly-leveraged economy is considerably more vulnerable if the velocity of trade with the U.S. slows.

In 2008, China’s total debt was about 141% of its gross domestic product. By mid-2017 that number had risen to 256%. Countries that take on such a large amount of debt in such a short period typically face a hard landing. The speed and size of China’s debt increase in the past decade has been almost without precedent. The few precedents, like Japan in the 1980s or the U.S. in the 1920s, are not encouraging.

Most of China’s debt growth has been attributed to its corporate sector, whose liabilities account for the bulk of debt outstanding. However, as of mid-2017 Chinese households had debts worth about 106% of their disposable incomes. Since 2007 Chinese disposable income has grown 12% per year on average while household debt has grown 23% per year. Clearly, China’s transition to a consumer-driven economy from a manufacturing economy comes under severe pressure if a trade war with the U.S. escalates.

Chinese Household Debt and Income Chart

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

Utilities: A Surprising Summer Sweet Spot

There is a Wall Street saying that if one invests in electric utility stocks they should hope for sizzling hot summers and freezing cold winters. That makes sense from a purely demand-side equation, but outside of the weather pattern, there are also a number of factors that fuel this most impressive recent sector rally.

The notion of trade-war induced slower future growth, bond yields retracing, low prices for coal and natural gas fuel inputs, federal deregulation, M&A activity and surging demand from sweltering temperatures across the U.S. has the utility sector on fire. It’s one of the least likely places investors thought would rise up and lead when S&P 500 earnings are set to soar again in the current quarter.

While the world is full of uncertainty and media hype about all that can go wrong with the market, America’s power grid is making for one of the most unexpected one-month performance that has caught the majority of market participants totally off guard. One month doesn’t make for a trend, but those that held on to their utilities are seeing their portfolios power higher with the hotter weather.

Utilities Select Sector SPDR Fund (XLU) Chart

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

A chart of the Utilities Select Sector SPDR Fund (XLU) says it all. Up and to the right in a big way!

Growth Mail:

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

Of Doomsday Books and Articles, There Will Be No End

by Gary Alexander

As you read this, I’m off to the 11th annual “Freedom Fest” in Las Vegas. I’ve attended all of them as a speaker and panel moderator. Among the most interesting panels I’ll moderate this year is one entitled, “The Assassination of Western Civilization: What’s Causing our Society to Decline?” There are two downbeat assumptions in that title, that society is in decline, and some “assassin” is responsible! It’s not that the conference organizer, Dr Mark Skousen, believes either assumption, but he knows “bad news sells,” so he dreams up these titles to attract large crowds, and I’m sure we’ll have a packed audience.

 

I’ll let you know how it all goes down in next week’s Growth Mail, but I’ve already heard from one panelist, the renowned economist Deirdre McCloskey, who wrote me, in part: “I reckon I'm going to say that Western Civilization is not declining. Rather the contrary. It is massively successful and spreading.” Having read her latest masterpiece, “Bourgeois Equality,” I know she has evidence to back up her claims.

Every week, friends and associates from college and business send me the latest Doomsday articles and wonder what my answer might be. After 40 years of this, I get tired of trying to talk people off their metaphorical suicidal cliffs, because I know (in musical terms) they’d “rather have the blues” than listen to any peppy song I might offer. Somehow, reading about the world’s troubles sounds serious, thoughtful, academic and “caring,” while looking at the positive realities sounds complacent, superficial, ignorant and “uncaring” for all the suffering that still remains in this imperfect world. I understand those concerns.

Last week, a college friend sent me a June 22 article from The Financial Times, by Edward Luce, entitled, “Donald Trump and the 1930s playbook.” He reminded me that many articles comparing the current malaise to the 1930s have come out recently. I reminded him (since he is my age and knows my history) that I was writing these doomsday articles before Edward Luce was born (in 1968) and that books and articles comparing current events to the 1930s have been going on since the 1960s. For instance, I read books by Doug Casey, Howard Ruff and others in the 1970s predicting another 1930s in the 1980s. Instead, we had “another 1950s” in the 1980s. NOBODY predicted another 1950s coming in the 1980s.

Then, at the end of the 1980s, we had Dr. Ravi Batra’s best-selling “The Great Depression of 1990” and then “The Great Reckoning” (in 1991) about the Depression of the 1990s by James Dale Davidson and William Rees-Mogg, a respected British journalist (like Edward Luce). Instead, we had the most explosive growth decade of the century in the 1990s. Nobody predicted Great Prosperity for the 1990s. Nope, predicting “another 1929” or a “Greater Depression” always sells more books than selling hope.

These books were first published in 1985, 1991 and 1992, respectively, right before a huge bull market surge:

Doomsday Books Image

On Friday, somebody sent me a review of “Tailspin,” a new book about “America’s Fifty-Year Fall” and “How to Reverse it,” by Steven Brill, reviewed in the Sunday, July 2, 2018 edition of The New York Times. My first thought was, “Hmmm! A man who thinks America has “fallen” from 1968 ($1 trillion GDP, or $4.5 billion in current dollars) to 2018 ($20 trillion GDP) should probably not be trusted to tell us how to reverse it. (That’s a 50-year 170% increase in real per-capita GDP during America’s “decline.”)

As the reviewer cleverly wrote, “We are living in a golden age of authors telling Americans that we no longer live in a golden age.” I’ve read most of these sour books and can pick them apart, line by line, but who’s listening to me? Most people believe the Doomsday Chorus. According to Gallup, fewer than 40% of surveyed Americans have been “satisfied with the direction of the country” in the last decade. Most Americans (in Pew surveys) think their children will be worse off than them, even though every previous generation of Americans has become better off. We believe what we see, and we mostly see bad news.

Case in Point: Trump’s Tariffs are Not “Smoot Hawley II”

One of the biggest parallels painted by the “this is the 1930s all over again” crowd is that Trump’s new tariffs are like “Smoot-Hawley” all over again, referring to the 1930 tariffs signed by President Herbert Hoover. First off, these tariffs were drafted in 1928 by Congress, hence the bill’s name. Hoover didn’t like them. He called them “vicious, extortionate and obnoxious,” but gave into party pressure to sign it.

Second, and more importantly, when President Trump raises tariffs on China, protecting jobs or lowering our trade deficits is not the end game. President Trump may be even more concerned about China’s long-term record of product piracy and counterfeiting. In 1996, when I was part of an investment newsletter group co-leading 32 subscribers in a tour of “the real China” (primitive and rural one week, in transition to modernity the second week and industrial-coastal the third week), all the way down the Yangtze River from Chongqing to Wuhan and Shanghai, we would see street merchants selling “Disney” or “Apple” products that featured perfect artistic replicas of the brand name but as phony as a bootleg copy of a copy.

United States Counterfeit Seizures Bar Chart

Now, 20 years later, fake products with a fake company label are still on the streets of China, but China is also shipping counterfeit products overseas for sale via the Internet. Craig Crosby, founder and editor of The Counterfeit Report, has detected over two million knockoffs on eBay alone. Counterfeit products are now the largest criminal enterprise in the world, netting $1.7 trillion per year, greater than either illicit drugs or human trafficking. The volume is expected to grow to $2.8 trillion by 2022. China and Hong Kong produce almost 90% of these fakes. The Chinese also steal technological secrets from U.S. companies doing business there, with impunity – until now. President Trump is the first President to strike back, after Presidents Clinton, Bush and Obama basically turned a blind eye to this product piracy.

As for tariffs on our allies in the G7 (Canada, Europe and Japan), there have been some severely uneven tariffs, particularly in automobiles, that need addressing. When the President raises tariffs, he is merely raising the subject in a way our allies will hear and respond. Diplomatic discourse has its time and place, but when it comes to money, Trump is a “wartime consigliore” (in Godfather terms) making them an “offer they can’t refuse.” My prediction all along is that this gutsy tariff strategy will bring about fewer and lower tariffs in the end – as measured in this case by the end of Donald Trump’s first term in 2020.

Global Mail:

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

What the Goldman Sachs Indicator is Telling Us Now

by Ivan Martchev

Every time the stock market is in a precarious situation, there is one stock that becomes more important to watch in the financial sector than almost anything else, Goldman Sachs (GS). This is because as a securities firm its business is more leveraged to the performance of stocks and the economy than any other stock. Technically, Goldman is a bank holding company reorganized in 2008 so it can get instantaneous lifelines from the Fed in times of need (the type of lifelines that were not forthcoming for Lehman Brothers at the time). In practice, it’s more leveraged to capital markets than any other bank.

Among its competitors, JPMorgan Chase (JPM) is in many of the same businesses and is significantly more diversified, so it won’t be as volatile. Goldman Sachs, for example, has very little direct-to-retail business and much bigger capital markets business relative to the total than JPM, while Morgan Stanley, the only similar firm on Wall Street that’s publicly traded after 2008, has a large retail business.

So what is the Goldman Sachs indicator saying now?

(Please note; Ivan Martchev currently does not own a position in GS, JPM or MS, Navellier currently does not own a position in GS, JPM or MS for client portfolio’s.)

Goldman Sachs Group Indicator Chart

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

The Goldman Sachs indicator relative to the S&P 500 SPDR is pointing down, which means that GS stock is weaker than the overall market. That happens when investors are not bullish on the business prospects of securities firms that depend on capital markets revenues. Still, companies like Goldman are enormously hard to forecast when it comes to earnings and sales, as they do proprietary trading, which may benefit from volatility. In other words, when revenues suffer in one part of the company, another part of the company can sometimes pick up the slack.

Be that as it may, rising risk in the stock market typically means weaker GS stock relative to the S&P 500. That was certainly the case when the Fed began to hike rates in 2015, when the Chinese stock market crashed and re-crashed in January 2016. That instance of GS stock price weakness extended all the way into Brexit in mid-2016. Starting in April 2018, Goldman Sachs started a similar cycle of weakness relative to the broad stock market. GS stock is also weak relative to the financial sector, which is telling.

It should not be surprising that financials are weak as the 2-10 spread – one of the more popular measures of the slope of the Treasury yield curve (charted below) – closed at just 29 basis points on Friday. A flattening yield curve is negative for bank profits due to the tendency of banks to borrow short and lend long. That translates into shrinking net interest margins. Every bank is different as there are plenty of ways to earn fee income, but in general banks prefer to see the yield curve as steep as possible.

Yield Curve Chart

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

It does not help that an inverted yield curve has preceded every one of the last five recessions. The last 10 times it has happened, nine have turned out to precede or accompany recessions. Investors see flattening or inverted yield curves as an indicator that the financial sector will have a tougher time producing profits. The same is valid for Goldman Sachs stock, as it has a more volatile P&L statement than the sector itself, hence the recent weakness relative to the financials.

Business Cycle Statistical Distribution

The last time we had similar issues with Goldman stock (from mid-2015 to mid-2016), it went on to make an all-time high. Could the same happen now? Not statistically speaking, if one considers the odds.

Business Cycles Table

As this table shows, there have been 17 business cycles in the past 100 years (since 1919). The longest expansion in US history has been 10 years and the present one is nine years and one month long, so we are “long in the tooth.” A real trade war – not just the threat of one, as we have now – can cut the business cycle short. A shorter business cycle would not be bullish for Goldman Sachs, nor for the financial sector.

I thought it was worth the effort to check if the same dynamic was happening elsewhere in the world and decided to concentrate on Japan. Comparing Nomura Holdings ADR (NMR) relative to Japan iShares (EWJ) would ex-out the performance of the yen, which could be significant over the course of a year.

(Please note; Ivan Martchev currently does not own a position in NMR, Navellier currently does not own a position in NMR for client portfolio’s.)

Voila.

Nomura Holdings versus Japan iShares ETF Chart

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

Nomura Holdings had been weaker than the Japanese stock market in a similar pattern to Goldman Sachs relative to the US stock market. The only difference is that this had been happening for longer.

Far Fewer Tariffs Implemented than Proposed Bar Chart

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

Based on the action of Nomura and Goldman relative to their stock markets, which is similar to other securities firms in those markets, I do not believe that the period of uncertainty introduced by the Trump administration’s tariff strategy is over. While the actually-implemented tariffs are a tiny smidgen compared to those that have been threatened, clearly investors fear that more tariff implementations are likely. I doubt that before this trade situation is resolved the market can sustainably rally.

Sector Spotlight:

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

When to Bet on “Impossible” Comebacks – In Sports and Stocks

by Jason Bodner

In 1993, the AFC Wild Card Playoff game was looking pretty bleak for Buffalo. The Buffalo Bills were playing the Houston Oilers for the second game in a row. During the prior game, Week 17 of the regular season, the Oilers demolished the Bills, 27-3. When halftime rolled around, it looked like a carbon copy of the last game. The Bills trailed 28-3. To make things worse, backup quarterback Frank Reich was intercepted for a touchdown. The Oilers now led by 32 points, 35-3. Like I said, things looked bleak.

Somehow, the Bills staged what was possibly the greatest comeback in sports history. They scored 32 straight points to tie the game, then Steve Christie kicked a field goal clinching the game and eliminating the Oilers, who had trounced the Bills 55-6 in 7 straight quarters. The Bills won the game, 38-35.

Greatest Sports Comeback Image

It felt the same way last week as my three sons and I sat down to watch the World Cup game. Belgium was playing Japan. This was big deal because my wife was born and raised in a small city in Belgium.

The score was tied 0-0 at halftime but we were sure Belgium would win. Suddenly, we were down by two goals and still hadn’t scored. It was quickly turning into one of the biggest upsets in World Cup history.

My middle son, the optimist, said “You never know; we can come back! It’s not over yet!”  This is where I failed, in a weak moment of adult realism: “I don’t know, it seems doubtful. Sorry dude.” 

While driving, 15 minutes later, he said “Oh yeah, Dad? Look now!” I nearly crashed the car when I saw on his phone the score was 2-2. We got home just in time to see Belgium score in extra minutes to win 3-2. Belgium turned what would have been the biggest upset in the World Cup into biggest comeback.

Biggest Upset Turned into Biggest Comeback Image

There’s a point in these comebacks:

Mentally, I gave up on Belgium. There was plenty of time for a comeback. But my mind had written off that possibility and I had given in to the negative. Sure enough, I was dead wrong. Here’s the reality and the lesson: Emotion is the enemy of investors. Despair and fear can make for drastically wrong decisions.

If Belgium were a stock, I would have sold at the exact bottom.

Learning to overcome emotion is probably the hardest part of investing. But possibly the single biggest impediment to our success is our own minds. This is why coolly looking at data is the key for me. It helps me analyze things in a scientific, methodical way, as opposed to being emotional.

Leading Sectors for First Half: Consumer Discretionary & InfoTech

I always start by looking at sectors. The leadership of the market is where the money is made in my opinion. If you want to find the leaders, don’t act on emotion, look to the leading sectors.

Standard and Poor's 500 Sector Indices Changes Tables

Friday capped a solid week for US equities: Dow +0.39%, S&P 500 +0.85%, Nasdaq +1.34%, Russell 2000 +0.87%. US equities logged solid weekly gains after pulling back in each of the prior two weeks. This past week saw Healthcare leading with a huge +3.1% move higher, particularly on biotech strength, specifically Biogen (BIIB), strong on Alzheimer’s data (note: I have a long-term long position in BIIB).

(Please note; Jason Bodner currently does own a position in BIIB, Navellier currently does not own a position in BIIB for client portfolio’s.)

Utilities saw strength with nearly a 2.5% spike. As with Telecom and Real Estate, this is likely due to easing anxiety about rates. The FOMC minutes on Thursday mentioned tariffs often. This may be viewed as a reason to postpone rate hikes. With market rates stable and Treasuries firmer across the board, this means the Fed will likely only gradually continue any rate hikes. This could explain the influx of capital into higher rate-sensitive sectors like Utilities, Telecom and Real Estate.

US economic outperformance is the main theme now. The Financial Times reported that European equity funds saw $2.9 billion of outflows last week, bringing total outflows for the last 17 weeks to $45 billion in the longest period of sustained outflows since 2016. Emerging Markets equity funds also lost $1 billion last week, the seventh straight week of withdrawals, the longest since 2016, totaling $13.3 billion.

As capital flies out of international equities, rates seem less likely to be aggressively rising, and with US company earnings rising at record levels, I pose a single question to you:

“Where else is the money going to go?”

US stocks are the best place to be, in my opinion. And for now, despite jitters about trade wars, tariffs and immigration policy, growth is the place to focus. The economic backdrop of lower taxes and more disposable consumer income is the right recipe for sustained growth.

Just like in many sports games, stocks move up and down, day to day and week to week. The market itself will get bumpy from time to time. We all know this, but we still feel ill at ease when it happens.

It’s what we do at that key moment of seeming despair that really matters in the long run.

Staying focused and committed to your process is the most important thing of all, especially when things get bumpy. The biggest wins come from holding the best stocks over time. They reveal themselves after the volatility subsides. Don’t get distracted by headlines; focus on the data. Emotions cause us to react. Logic dictates that we stay disciplined. Emotion told me that Belgium was done for, but logic said they were the better team. If I had used emotion, I’d have given up at the worst moment. Logic won out.

Dale Carnegie Quote Image

A Look Ahead:

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

All the Scary Tariff Talk is Beginning to Backfire

by Louis Navellier

It’s been almost six months since the stock market staged its first “tariff tantrum” in late January after President Trump announced his first small tariff increases on some washing machines and solar panels.

The seemingly endless stream of negative trade news seems to have claimed its first casualty. CNBC has been trying to convince their viewers for much of this year that tariffs and trade wars would have negative consequences for the U.S. economy. The consequence of this relentless negative news is that viewers have decided to change the channel, so Maria Bartiromo of Fox Business News decisively beat CNBC’s Squawk Box in the second quarter. Bartiromo, who has great instincts on what viewers want, said, “I feel that audiences want something different.”  Overall, Fox Business News had the highest ratings for six of the top seven business show time slots on cable, so I suspect CNBC may have to become more upbeat.

Interestingly, CNBC seems to be suddenly changing its tune. Jim Cramer said last week that Trump is right about tariffs and the U.S. has been taken advantage of by Germany and other countries. Speaking of Germany, U.S. Ambassador to Germany Richard Grenell met the heads of BMW, Daimler (Mercedes) and Volkswagen (Audi, Bentley & Porsche) on Wednesday in Berlin and told them that the U.S. would resolve the brewing trade dispute if they would just abolish their 10% to 25% tariffs on U.S. vehicles. In turn, the U.S. would drop its 2.5% tariff on vehicles imported from the European Union. The German auto heads, not surprisingly, were reported to have “liked” what they heard from Ambassador Grenell.

On Thursday, both British Prime Minister Theresa May and German Chancellor Angela Merkel said that they would be ready to support negotiations on reducing tariffs but “would not be able to do this only with the US,” adding that tariffs had to be “negotiated with all the countries we trade with in the automotive sector.”  Although France does not export vehicles to the U.S., they are not anticipated to be a stumbling block, so it appears that the Trump Administration’s threat to impose tariffs anywhere in the world that there is an “imbalance” could result in free trade with minimal or no tariffs as the most likely outcome. All that tariff gossip and needless speculation that you have heard on television has been misleading gossip, since it is evident that the Trump Administration’s ultimate objective is freer trade.

So far, tariffs have helped reduce the trade deficit. The Commerce Department announced on Friday that the US trade deficit declined 6.6% to $43.05 billion in May, much better than the economists’ consensus estimate of $43.6 billion. Exports rose 1.9% to $144.89 billion, while imports rose 0.4% to $210.68 billion. The US trade deficit is now at the lowest level since October 2016 due partially to booming domestic crude oil production as well as soybean exports, which doubled in May to $4.14 billion.

Soybean Field Image

Effective Friday, China is imposing a 25% tariff on U.S. soybeans, so it will be interesting to see how that impacts future soybean exports. The surge in exports is expected to add 1.4% to U.S. GDP growth in the second quarter, so the key to sustaining strong GDP growth remains narrowing the U.S. trade deficit.

The Trump Administration’s next big move – the upcoming meeting with Russia – is raising speculation that a threat to OPEC’s monopoly may be an alliance between Russia, Saudi Arabia and the US. Russia and Saudi Arabia are big swing producers and the Trump Administration has lobbied them to boost production as sanctions are re-imposed on Iran. Saudi Arabia has already pledged to boost its crude oil production and is all too happy to put pressure on Iran due to the seemingly endless proxy war it is having in Yemen with Iran. Russia will likely have to become much subtler in any help it offers the Trump Administration, since it is unlikely to support any new sanctions on Iran. Instead, Russia will likely try to secure pledges that the US will not interfere with Russian military operations in Syria.

US Job Growth Soars, But We Need More Qualified Workers

While Europe struggles to recover, the US economic news last week was uniformly positive. First, the Institute of Supply Management (ISM) announced that its manufacturing index rose to 60.2 in June, up from 58.7 in May, reaching the second highest reading in the past 14 years and just a bit below the record high in February, 2018. The new orders and employment components indexes remain strong.

On Thursday, ADP reported that 177,000 private sector jobs were created in June, below economists’ consensus estimate of 190,000. ADP also revised May’s private payroll up to 189,000 (from 178,000 previously estimated). Then, on Friday, the Labor Department reported that 213,000 payroll jobs were created in June, better than economists’ consensus estimate of 200,000. The payrolls for April and May were revised up by 37,000 to 175,000 (up from 159,000) and 244,000 (up from 223,000), respectively.

The unemployment rate rose to 4% in June, up from 3.8% in May, due to approximately 601,000 added to the labor force, many from college graduation. The Labor Force Participation Rate rose to 62.9% in June, up from 62.7% in May. Wages rose by only 0.2% (a nickel an hour) to $26.98 per hour. Overall, the jobs report was positive, and the lack of wage inflation may cause the Fed to hesitate before raising rates.

If there is a weak link in the jobs picture, it is becoming harder to find qualified workers. Mark Zandi, the Chief Economist at Moody’s Analytics, said, “Business’ #1 problem is finding qualified workers” and added that “At the current pace of job growth, if sustained, this problem is set to get much worse.”  

The release of the Federal Open Market Committee (FOMC) minutes on Thursday revealed a couple of interesting details. First, the Fed seemed relieved to finally hit its 2% inflation target after failing to hit it since 2011. Second, the FOMC talked about tariffs a lot and may use this excuse to postpone further key interest rate hikes. Frankly, I still think one more key interest rate hike is likely this year, but the fact that market rates remain remarkably well behaved may force the Fed to cut back on planned future rate hikes.


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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