Really Believe the Data

Will the “Data-Dependent” Fed Really Believe the Data?

by Louis Navellier

December 22, 2015

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

Naturally, the big news last week was not just the Fed’s widely anticipated 0.25% interest rate hike, but the statement made after the Federal Open Market Committee (FOMC) meeting last Wednesday. In summary, the FOMC statement said the Fed “expects economic conditions will evolve in a manner that will warrant only gradual increases in the fed funds rate.”  The big surprise was that the FOMC statement anticipated “gradual adjustments” in key interest rates as inflation materializes.  Based on the Fed’s forecast that inflation will accelerate from this year’s 0.2% (in terms of the Fed’s favorite inflation index, the Personal Consumption Expenditure, or PCE index) to 1.6% in 2016, many Fed watchers assumed that the Fed would raise rates up to four times in 2016 (according to Bloomberg).  However, the Fed’s past inflation forecasts are notoriously poor, so the Fed may not raise rates in 2016 if they are as “data dependent” as they claim.

What is fascinating to me is that the Fed refuses to acknowledge that there is deflation brewing. They are sticking to their mantra that inflation will soon materialize.  At her press conference, Fed Chairman Janet Yellen said that the FOMC was “reasonably confident” that inflation would rise, despite flat prices now.

Milan Italy ImageI was in Milan, Italy this past week, preselling my management company’s risk-adjusted portfolios, since foreign capital continues to pour into the U.S.  As I had suspected, the view from Northern Italy was that the euro and the U.S. dollar will be at parity sooner than expected.  Furthermore, the fact that our respective central banks are on divergent paths essentially insures that the U.S. dollar will remain strong; especially as long as Treasury yields remain well above equivalent European yields.  Overall, Europe’s fascination with the Fed, a strong U.S. dollar, and falling crude oil prices dominated my conversations.

Finally, I should mention that that the high-yield “bubble” continued to implode last week.  First, most high-yield bond ETFs are now trading at discounts to their underlying net asset value.  In addition, Third Avenue Management on Wednesday obtained “exceptive relief” from the SEC to continue to liquidate its junk bond fund in an orderly manner.

The good news is that there are some bargain hunters in the high-yield arena that are helping to provide liquidity near-term, but the bid/ask spreads on junk bonds remain unusually wide as ETFs and high yield bond mutual funds continue to face persistent selling pressure, making today’s credit markets very fragile.

In This Issue

Ivan Martchev begins Income Mail with a comparison between now and 1937, as applied to commodity prices, Fed policies, and the junk bond market.  Then, Gary Alexander’s Growth Mail will dissect two major fear-laden campaign claims by two of our more Scrooge-like Presidential candidates. Then, Jason Bodner will apply the scientific principles of feedback loops to Energy (a negative loop) and Consumer Discretionary (positive).  Then, I will return to examine the Fed’s persistent blind spot about inflation.

Income Mail:
Monetarist Deja Vu
by Ivan Martchev
The Junk Bond Drama Ain't Over ‘til It’s Over

Growth Mail:
Presidential Candidates Sell Negativity
by Gary Alexander
The Myth of Christmas Present: “Our Country Doesn’t Win Anymore”
The Myth of Christmas Past: The Middle Class is Disappearing

This Week in Market History:
American Business Hits the Roads
by Gary Alexander
Market Milestones Near Christmas

Sector Spotlight:
Feedback Loops in Science and Markets
by Jason Bodner
Markets are Full of Feedback Loops

Stat of the Week:
Consumer Prices Remain Flat in 2015
by Louis Navellier
Deflation Reigns in the Energy Patch

Income Mail:

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

Monetarist Deja Vu

by Ivan Martchev

It is well known in economic circles that the Federal Reserve is credited with the worsening of the Great Depression, in tandem with the misguided Smoot Hawley Tariff Act that had been passed by Congress in 1930.  After the U.S. economy began to recover in the mid-1930s, the central bank began to tighten monetary policy in 1936-37. This helped create another recession after an initial period of stabilization.

This is why I thought it was prescient to see that in 2011 Brown University Professor Gauti Eggertsson posted the following on the NY Federal Reserve website (see June 1, 2011 NYFed.org article, entitled “Commodity Prices and the Mistake of 1937: Would Modern Economists Make the Same Mistake?”).*

“In 1937, on the eve of a major policy mistake, U.S. economic conditions were surprisingly similar to those in the nation today. Consider, for example, the following summary of economic conditions: (1) Signs indicate that the recession is finally over. (2) Short-term interest rates have been close to zero for years but are now expected to rise. (3) Some are concerned about excessive inflation. (4) Inflation concerns are partly driven by a large expansion in the monetary base in recent years and by banks’ massive holding of excess reserves. (5) Furthermore, some are worried that the recent rally in commodity prices threatens to ignite an inflation spiral.”

“While this summary arguably describes current trends, it is taken from an account of conditions in 1937 that appears in ‘The Mistake of 1937: A General Equilibrium Analysis,’ an article I co-authored with Benjamin Pugsley. What we call the Mistake of 1937 was, in broad terms, a decision by the Fed and the administration to implement a series of contractionary policies that choked off the recovery of 1933-37 and brought on the recession of 1937-38, one of the worst on record.”

Professor Eggertsson, of course, refers to a rally in commodity prices, which was the case at the time (in 2011). The trouble is, if he were writing today about those same Great Depression parallels his case would have been even stronger as this past week the Reuters/Jeffries CRB Index dove further below the 40-year area of support around 180; the CRB Index declined as low as 170.06 to close the week at 172.16.

Commodities Research Bureau Index Chart

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

I don't know how far the CRB index can go down, but I do think it can go a lot lower.

Although the CRB Index has been reformulated many times, it is a good representative of commodity demand, which is still deteriorating at a time when a lot of new supply that took years to develop has begun to come online. I think that the CRB Index is a better representation of the situation in China than the Shanghai Composite or Chinese economic data, which do not rhyme well with what the CRB Index is showing. China is the #1 or #2 consumer of most major commodities so this commodity price collapse is showing that the Chinese economy is in trouble. (For more on China’s official statistics, see July 15, 2015 The Economist article: “Whether to believe China's GDP figures”). The most important commodity is oil, which saw the price for January futures decline to $34.26 per barrel last week.

If what is going on in China is worse than what happened in the 1997 Asian Crisis –considering the fact that the Chinese economy is estimated to reach $10.9 trillion size this year, as data compiled by Trading Economics LLC shows – then the global economy cannot handle Federal Reserve rate hikes at a time of global deflationary pressures. The Federal Reserve, like it or not, is a central bank that is in charge of a lot more than U.S. monetary policy. Since the Fed’s policies affect the U.S. dollar, which is still the premier reserve currency of the world, the Fed cannot be indifferent to what goes on in the rest of the world.

It is interesting to note that after the Fed hiked short-term interest rates last week, the U.S. Treasury bond market rallied, resulting in a flattening of the Treasury yield curve (the difference between short-term rates and longer-dated Treasury yields). A flatter yield curve typically means a slower economy and low inflation, which at present is dangerously close to deflation, in my opinion.

Two Year Treasury Constant Maturity Rate Chart

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

As far as I can tell by the action of fed funds futures markets, plus Eurodollar futures and the action in U.S. 2-year Treasury notes (pictured above), the interest rate markets are predicting several more rate hikes in 2016. The U.S. 2-year Treasury note yield is the most sensitive to Fed policy and it has recently risen above 1% after spending several years in sub-1% territory. The difference between 2- and 10-year Treasury note yields is a popular measure of the Treasury yield curve, often referred to as the “2/10 spread.”  So what is the 2/10 spread telling us?

Difference Between Ten Year and Two Year Treasury Constant Maturity Rate Chart

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

The 2-10 spread is now declining. This market-driven measure of the Treasury yield curve has fallen into negative territory before each of the last five recessions. While it is not in negative territory now, the Treasury yield curve is notably flattening due to the rise in 2-year note yields (driven by Fed policy) and the overall suppressed nature of 10-year note yields due to low inflation in the U.S. and a more precarious global economic picture. I am watching with great interest to see if the 2-10 spread will turn negative in 2016.

I don't want to see a negative 2-10 spread, but I know that the possibility is there with several more rate hikes presently priced in by interest rates futures markets. I think the Fed rate hike last week was a major monetary policy error. Furthermore, I think that both the stock and bond markets will reach the same conclusion in 2016.

The Junk Bond Drama Ain't Over ‘til It’s Over

While the U.S. Treasury market rallied on the heels of the Fed rate hike – a fact that should cause most investors to pause and reflect – the junk bond market sold off along with the stock market. Junk bonds are now channeling Yogi Berra’s famous “it ain’t over ‘til it’s over” quip as they continue to tighten credit for riskier borrowers as the Fed nudges short-term risk-free interest rates higher.

Bank of America Merrill Lynch High Yield Junk Bonds Chart

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

It is worth noting that CCC spreads (vs. the relevant Treasuries) are now higher than the time immediately following the NASDAQ crash in 2000 (just before the onset of the 2001 recession), and much higher than at any point preceding the Lehman Brothers spectacular failure. They did go quite a bit higher after the credit markets stopped working in late 2008, after Lehman failed, but I would characterize that as a rare once-in-a-lifetime type of crisis. What we are seeing today in CCC bonds – arguably the junkiest of junk bonds – is a sign of major stress in the riskiest part of the bond market.

Keep in mind that dollar-denominated bonds in the emerging markets are also showing the same spread widening, even though many have better credit rating than CCC junk bonds. This is because many governmental budgets, particularly in Latin America, are tied to the price of oil and other natural resources, which are not done falling, in my opinion.  In 2016, we’re likely to see a wave of junk bond defaults and perhaps a few emerging market bond defaults as well.

It ain't over ‘til it’s over.

Growth Mail:

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

Presidential Candidates Sell Negativity

by Gary Alexander

“How shall I ever understand this world? There is nothing on which it is so hard as poverty, and yet, there is nothing it condemns with such severity as the pursuit of wealth.”

– Ebenezer Scrooge in Charles Dickens’ “A Christmas Carol” (1843)

Borrowing shamelessly from Charles Dickens’ “Christmas Carol,” let me examine two horribly negative misperceptions about America from two old Scrooge-like characters who want to be our next President.

The Myth of Christmas Present: “Our Country Doesn’t Win Anymore”

“Our country doesn’t win anymore. We don’t win on trade, we don’t win on the military…Nothing works in our country.”

– Donald “Scrooge” Trump in his closing statement in last week’s Republican candidate debate

America “doesn’t win anymore,” says Donald Trump.  “We don’t win in trade.” On August 25, according to The Economist (December 19, page 36), Trump said: “They have taken our money and our jobs, our manufacturing. They have taken everything. It’s one of the greatest thefts in the history of the world.”

China has not “taken” our money.  We willingly bought their products and they deposited our dollars in their central bank.  Yes, they have created millions of manufacturing jobs, but China is losing some of those jobs to Vietnam, Cambodia, Laos, Myanmar and other rising Asian powers (see Bloomberg, April 29, 2015: “China is Set to Lose Manufacturing Crown”).  The same thing happened to Japan earlier.  This is the natural growth of an economy from low-paid manufacturing to higher-paid more creative jobs.

America wins a lot.  We have the strongest currency in the world.  We have lower unemployment and higher growth rates than Europe.  Millions of immigrants want to move here. Our military is the world’s best, by far. Our markets are the most liquid, and we have the lion’s share of the world’s top corporations.

As of this writing, the U.S. is home to the 10 biggest stocks (in terms of market size) in the world, led by three West Coast technology giants that were co-founded by two high school dropouts (Steve Jobs and Bill Gates, respectively) and a Russian immigrant (Sergey Brin).  Fortune’s list of the most admired companies is dominated by familiar American brand names, which captured the top 14 spots in 2015.

When it comes to corporate profits, four of the five most profitable companies in the world are based in the U.S. (the exception is #3, a South Korean electronics company), according to mid-2015 data compiled by 24/7 Wall St.  Among the top 10, six are American, two are based in China, one in South Korea and one in Japan.  However, the two flagging Chinese firms have recently fallen out of the top 10 list.

According to PricewaterhouseCoopers (PWC) in a report released last March 31, over half (53) of the top 100 global companies, in market size, are located in the U.S.  China is second with 11, but the U.S. share has grown sharply since the Great Recession – rising from 42 out of 100 in 2009 to 53 of 100 in 2015 – while China’s total has stayed at 11. With the corporate scorecard at 53-11 (U.S. vs. China), how can Trump say that America “doesn’t win”?

The Myth of Christmas Past: The Middle Class is Disappearing

“I start off with the premise that I think is shared by the vast majority of the American people, which is that the middle class of this country over the last 40 years has been disappearing.”

– Bernie “Scrooge” Sanders, at the start of a speech on the floor of the U.S. Senate, August 4, 2015.

Judging from all the “Bernie” buttons I’m seeing around town, Senator Bernie Sanders may be right when he says that his gloomy vision “is shared by the vast majority of the American people,” but his “premise” is wrong.  (See my October 20 Growth Mail for more details).  This week, I want to update my previous critique with new information from a study released December 9, 2015 by the Pew Research Center.

The middle class may be shrinking, but most of that shrinkage comes from a promotion to upper middle class or even “rich.” Between 1971 and 2015, the middle class dropped (not disappeared) from 61% to 50%, but the percent in the richest class more than doubled (from 4% to 9%), while the lowest class rose four points, so for every 11 people moving out of the middle class, seven moved up, four moved down.

Share of Adults Living in middle-income households is Failing Bar Chart

The second chart is even more amazing.  The number of families making an inflation-adjusted $100,000 per year has more than tripled since 1967 – the year I graduated from college. U.S. households making $100,000 a year (inflation-adjusted) rose from 8.1% in 1967 to 24.7% in 2014, while the number earning less than $50,000 slipped from 58.2% to 46.8% in the same time.  The numbers become more dramatic when you consider the smaller size of households today vs. the larger “nuclear” families of the 1960s.

Percent Distribution of United States Households by Income Level Chart

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

There are currently 123.2 million U.S. households vs. a total population of 320 million, for an average household of just 2.6 people.  Thanks to American leadership (which Mr. Trump denies), over 30 million American households earn over $100,000 per year (which Mr. Sanders denies).  So, when somebody tells you the middle class has disappeared, tell them that “2/3 of them disappeared because they became rich.”

The basic problem with bashing-the-rich rhetoric is that its proponents compare the growth rates of the richest quintile (20%) to the growth of the lowest 20% and say the gap is widening, but those quintiles are occupied by different people each year.  Some go-getters grow from the lowest to the top, while some on the top fall into the vast middle.  Statisticians call this “migration within the quintiles.”  Many workers grow from a lower quintile just out of college (I made $5,500 in 1968) to the top brackets by age 60.

Specifically, a University of Michigan study followed 17,000 individuals from 1975 to 1991 and found that “95% of those people who were initially in the bottom quintile in 1975 were no longer there in 1991: 29% of the people who were initially in the bottom quintile rose all the way to the top quintile, while just 5% remained behind in the bottom quintile where they began.  Meanwhile, over that same span of time, those people who were initially in the top quintile in 1975 had the smallest increase in real income by 1991” (“Wealth, Poverty and Politics: An International Perspective” by Thomas Sowell, 2015, p. 179).

A later study by the IRS found those in the bottom 20% of incomes in 1995 saw their incomes rise 91% by 2005.  They nearly doubled their annual income in nine years of low inflation. The same is true of a Canadian longitudinal study from 1990 to 2009, in which “Canadians who were initially in the bottom 20% in income had their incomes increase at both a higher rate, and in a higher absolute amount, than those whose incomes were initially in higher brackets” (Sowell, p, 180).  The poor got richer… faster!

These long-term studies of specific individuals require lots of dollars and 10 or 20 years.  It’s far easier to look at a snapshot of census data or IRS returns and say the poor are getting poorer, but it’s just not so.  A May, 2014 study revealed that 56% of Americans are among the top 10% of wage earners at least once in their lifetime, and 12% of us have reached the dreaded, hated, maligned top 1% at some time in our life.*

At the end of Dickens’ Christmas Carol, Scrooge had a conversion from miserliness to hope and joy, proclaiming proudly: “I will live in the Past, the Present, and the Future. The Spirits of all Three shall strive within me. I will not shut out the lessons that they teach!”  It’s time that some or our leading Presidential candidates stopped shutting out the lessons of the past and present in favor of playing to our primitive fears.

*For more on this timely subject, see Thomas Sowell’s two 2015 books, “Wealth, Poverty and Politics,” and “Basic Economics” (updated 5th edition). Tom Sowell is now 85 and has written over 40 great books. My third candidate for 2015 “Economics Book of the Year” would be “Popular Economics” by John Tamny. Here’s a sample quote: “Income inequality in a capitalist system is truly beautiful. It provides the incentive for creative people to gamble on new ideas, and it turns luxuries into common goods” (page 67).

This Week in Market History:

*All content in "This Week in Market History" is the opinion of Navellier & Associates and Gary Alexander*

American Business Hits the Roads

by Gary Alexander

Unlike Europe, America is a broad continent with an abundance of wide open spaces. The automobile may have been born in Germany or France but it was mass-produced here.  Here are a few milestones:

Harvey S. Firestone was born December 20, 1868, in Columbiana, Ohio.  He worked for the Columbus Buggy Company right out of high school and formed his own company for making tires in 1890 (at age 21). In 1900, he moved to Akron and set up his Firestone Tire company, which soon manufactured pneumatic tires for the Ford Model T. By his death in 1938, Firestone supplied one-fourth of all the tires in the U.S.

On December 20, 1892, Alexander Brown and George Stillman of Syracuse, New York, patented an inflatable automobile tire, softening the bumpy ride of carriages on dirt or cobblestone roads.

On December 24, 1893, Henry Ford finished and tested his first successful gasoline engine.  He tested the engine in his wife’s kitchen on Christmas Eve.  Some guys never know when to take a break.

Passing Controversial Laws Right Before Christmas

On December 23, 1913, Congress passed the Federal Reserve Act, President Woodrow Wilson’s economic initiative for the creation of a national bank to match those that already existent in Europe.

On December 23, 1975, Congress passed the Metric Conversion Act, still a controversial proposition.

On December 22, 1982, Congress passed President Reagan’s unpopular five-cent Gas Tax bill.

Market Milestones in Christmas Week

On December 24, 1914, shortly after the NYSE re-opened following a five-month hiatus, the DJIA fell to 53.17, its lowest reading in the 25-years between 1907 and 1932, providing for a not-so-merry Christmas!

On December 21, 1982, the DJIA gained 25.75 points (+2.5%), from 1004.51 to 1030.26.  It was the last close call to falling below 1000 again – a common frustration dating back to a 995-close in 1966.

On December 21, 1989, Drexel Burnham Lambert pled guilty to charges of mail fraud, wire fraud and securities fraud.  Drexel agreed to hand over a record $650 million in fines and provide evidence against their star bond salesman, Michael Milken, who was indicted in 1990 on nearly 100 counts of racketeering.  In February of 1990, Drexel filed Chapter 11. “High-yield” (junk) bond funds tumbled on the news.

On December 23, 1991, the DJIA gained a gigantic 88 points (+3%).  For the holiday-shortened week of December 23-27, the DJIA gained over 167 points (+5.7%). The DJIA rose in 13 of the final 14 sessions of 1991, rising 305 points (+10.7%), from 2863.82 on December 10 to 3168.83 at year’s end.  It was part of the “mother of all Santa Claus rallies,” much like “the mother of all bull market recoveries” in January of 1991, following the “mother of all battles,” Saddam Hussein’s term for the lightning-fast Gulf War.

On December 22, 1998 (a Tuesday), the Dow gained over 155 points (+1.7%) to pierce 9000.  During the holiday-shortened week of December 21-24, 1998, the DJIA gained 412 points (4.7%): +85 on Monday, +155 on Tuesday, +157 on Wednesday and +15 points on a half-day Christmas Eve session on Thursday.

The Commercial Side of Christmas: A Mall and its Night Visitors

(Sorry, I couldn’t resist that headline) On Tuesday, December 24, 1867, Macy’s department store stayed open to midnight, to serve last-minute shoppers.   The trend obviously caught on in malls all over America.

Sector Spotlight:

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

FeedbackFeedbackFeedbackFeedbackFeedbackFeedbackFeedback?

by Jason Bodner

Have you ever been to (or given) a speech and all of a sudden the sound system starts to hiss with a loud high-pitched tone which quickly overpowers everything? That’s feedback in the audio sense.  Some hate it. Some grew to love it (Jimi Hendrix comes to mind). Feedback is a description of what scientists call “Mutual Causal Interaction.” Basically, this means that one thing affects another thing, which affects the original thing. A speaker is interrupted with offensive feedback when the amplified output leaks back into the microphone and becomes an input – presto! You have a feedback loop, albeit an unpleasant one.

Perhaps the easiest and least destructive feedback loop you can create at home is by taking a hand mirror to the bathroom mirror and holding it opposite and standing between them to see yourself a seemingly infinite amount of times – as demonstrated here in the movie “Inception.”

Inception Image

One interesting thing about feedback loops is that they can be positive or negative.  That is not to say they are good or bad, but that they can increase (amplify) or decrease (diminish) a system.  In the case of a plant dying and falling to the forest floor, it creates nutrients for more plants to grow, which in turn die and foster even more plants. This is a positive feedback loop. In the case of a predator, when it eats its prey, there are fewer prey to sustain a population, which starts to die off. This is a negative feedback loop.

Eventually the system may equalize, ebbing and flowing but continuing steady over time. Fractals are feedback loops in the mathematical sense, but they are present everywhere you look. They can be used to describe the food chain and ecosystems. They can be seen in space, clouds, leaves, cellular structure, and have become indispensable in video games and computer animation. The problem with feedback loops is that they can be really annoying and can even become destructive. They can ruin a speech or a band practice, shatter speakers or glasses, and even perpetuate earthquakes. They can be paralyzing.

Energy’s Weakness Resembles a “Negative Feedback Loop”

Markets are full of feedback loops. Energy has seemed like a negative feedback loop lately. A strong U.S. dollar pressures commodities. Countries that rely on exportation and consumption of commodities begin to feel the pain. These countries can weaken their currencies (as we have seen) to make their commodities more appealing and affordable. This action further strengthens the U.S. dollar, which puts more pressure on commodity prices. We have been witnessing a wicked feedback loop. If we overlap an additional feedback loop of energy production, we get an intensified effect. Producers who flocked to get into the business when crude oil traded above $100 per barrel were motivated by fat margins, and a seemingly endless demand for consumption. As growth slowed, and consumption began to wane, producers would naturally need to sell more quantities at lower prices to maintain some semblance of the margins that were modelled earlier. Therefore, they need to produce more oil. Many producers have debt maintenance tied to output quotas, so this in turn intensifies the need to produce even in the face of a bubbling glut.

Oil Barrels Image

The energy glut has been weighing heavily on the minds of many investors for some time now. Where is the silver lining? Well, as we can see, Consumer Discretionary stocks have been beneficiaries of lower energy costs. The woes of the energy producers are the “wows” of the consumer.  The consumer’s positive feedback loop looks like this: Each month as the price of gas becomes less and less expensive at the pump, the consumer has more and more disposable income in his or her pocket. The heavy burden of fueling the family vehicle has become literally 50% cheaper in the past year or so. This means more meals out, more trips to the mall, and more “me time” dollars spent by the consumer on the consumer.

This past week, we can see that Energy wasn’t necessarily the lead culprit in weighing down the equity markets. Materials lagged significantly. down 3.05% for the week. Utilities saw life as capital flew in, looking for yield.  As pain continues in the high-yield market, utilities are a logical haven. Yet on a daily basis, the largest one-day fluctuation belonged to energy, which was up 2.85% on Tuesday and Utilities gained 2.56% on Wednesday. One need only look at Energy month-to-date (down 12%) and 12 months (down 32%) to see who the Grinch really is. Last Friday being a quad-witching expiry date, volatility could be expected to heighten on top of an already volatile market. Ironically enough, there are investment professionals who trade the “volatility of volatility” as an asset class in itself. An easy way to think about this is trading the volatility of the VIX volatility index.

Standard and Poor's 500 Sector Performance Indices Tables

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

Naturally, feedback loops like these have occurred as long as there have been markets and well before that, in nature. Boom and bust cycles occur over and over again as the loops flare up and dwindle out. Some people debate and pontificate over how or why the recent slide started, applauding those who “saw it coming” and punishing those who didn’t. The reality is less clear, however. One can always pose the question, “which came first, the chicken or the egg?” but the feedback loop goes on…and on…and on…and on.

Stat of the Week:

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

Consumer Prices Remain Flat in 2015

by Louis Navellier

On Tuesday, the Labor Department announced that the Consumer Price Index (CPI) was unchanged in November.  Energy prices on the consumer level declined 1.3% in November, while food prices declined 0.1%.  Excluding food and energy, the core CPI rose 0.2% in November.  In the past 12 months, the CPI has risen 0.5%, the strongest annual pace since December 2014, providing the Fed with the evidence it needs in order to pretend that inflation is brewing.  Housing and medical costs have risen 3.2% and 3.1%, respectively, in the past 12 months and are the primary catalysts for inflation on the consumer level; but the Fed’s favorite inflation indicator – the Personal Consumption Expenditure (PCE) index – has risen only 0.2% in the past 12 months, so according to the PCE, inflation has yet to significantly materialize.

The Fed has been anticipating inflation for some time and refuses to acknowledge that we are mired in a deflationary environment.  Rather than changing their inflation forecast, the Fed has instead kept kicking its inflation forecast down the road. They now expect inflation to materialize in 2016.  I am frankly amazed that the Fed does not acknowledge the fact that a strong U.S. dollar is crushing commodity prices.

For 2016, the Fed expects 2% to 2.4% GDP growth, which is actually quite low, but much more realistic.  Normally, such slow GDP growth would not create significant inflation, so I remain truly baffled by the Fed’s inflation forecasts.  I should add that the Fed made it clear that they would allow the fed funds rate to range between 0.25% and 0.5%.  This essentially means that another 0.25% rate increase is possible at the Fed’s March FOMC meeting.  However, any key interest rate forecasts beyond March are very fuzzy, since inflation would have to materialize for the Fed to continue to raise key interest rates.  Since 2016 is a Presidential election year, the closer we get to the November election, the more reluctant the Fed may be to raise rates, since they do not want to be dragged into the political debate over monetary policies.

The Fed is essentially talking up market interest rates with its mythical inflation forecasts.  The Treasury yield curve resumed rising last week and 2-year Treasury yields “cracked” 1% on Wednesday and settled at 0.97%, while 10-year Treasury yields ended the week at 2.19%.  If the shorter end of the Treasury yield curve continues to rise, the Fed will be forced to continue to raise rates.  Overall, Janet Yellen was very dovish and almost apologetic in her press conference.  She also stressed that the Fed’s actions tend to be lagging in nature, so she signaled that the Fed would likely follow market rates moving forward.

Deflation Reigns in the Energy Patch

Oil Rig ImageIn the meantime, deflation remains very evident, especially in the energy patch.  Last week the American Petroleum Institute and the Energy Information Administration reported that crude oil inventories rose by 2.5 million barrels and 4.8 million barrels, respectively, in the latest week.  The rise in inventories was a big surprise, since analysts polled by Platts were expecting crude oil stockpiles to decline by 2.5 million barrels.  According to MarketWatch on December 16, gasoline supplies rose 1.7 million barrels and distillates (i.e., diesel, jet fuel, heating oil, etc.) rose 2.6 million barrels last week, so the U.S. remains awash in crude oil and refined petroleum.

Interestingly, the biggest declines in energy prices are occurring in natural gas.  According to Marketwatch, writing on December 15, natural gas prices last week traded as low as $1.862 per cubic foot, the lowest level in almost 14 years!  An abnormally warm winter for much of the U.S. has significantly lowered natural gas demand, so the natural gas glut recently hit a record of 4 trillion cubic feet, which is an all-time record.  So essentially, with prices at their lowest level since 2002, the natural gas glut is now even bigger than the crude oil glut.

These ultra-low natural gas prices will insure that utilities will continue to increasingly switch to natural gas turbines for primary as well as peak electricity demand to replace coal-fired power plants in many parts of the U.S.  The fact that the EPA is fining utilities for excess carbon dioxide emissions is also causing the demand for natural gas-fueled power plants to rise. However, even with higher demand for natural gas electricity generation, the weather is still the dominant factor impacting natural gas demand.

In other news, On Wednesday, the Commerce Department announced that housing starts rose 10.5% in November to an annual rate of 1.173 million, which was above economists’ consensus estimate of 1.14 million.  Single family home starts rose at an annual pace of 7.6%, while multi-family starts rose at a much stronger 18.1% annual pace.  The strongest region for housing starts was the South with a 21.3% rise while the Northeast was the weakest region with an 8.5% annual decline.  The Northeast has been weak in recent months, so considering its drag on the overall housing start number, the housing starts report was very strong and a sign that builders are trying to boost their inventories to meet demand.


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.

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

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

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

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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

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