Small Market Gains

Small Market Gains Mask Huge Sector Shifts

by Louis Navellier

April 19, 2016

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

The S&P 500 rose 1% last week, 1.6% for the month so far, and 1.8% for the year-to-date.  Ho-hum!  The stock market may look calm on the surface but underneath I can tell you that it is still churning.  High-dividend stocks continue to rule the roost and are benefitting from cautious institutional investors, like me, who are looking for a good place to get tax-advantaged yields.  Although some dividend stocks were hit with profit-taking in recent days, I expect that the choppier the stock market gets, the more that we’ll see high-dividend stocks firm up and act as ballast to help stabilize a well-rounded investment portfolio.

Lady Shopper Image

Last week’s economic statistics point to slower first-quarter growth.  Specifically: (1) The Commerce Department reported on Wednesday that retail sales declined 0.3% in March – well below economists’ consensus estimate of a 0.1% rise.  Overall retail sales declined 0.1% in the first quarter, which does not augur well for GDP growth.  (2) The Labor Department said on Wednesday that the Producer Price Index declined 0.1% in March (vs. an expected 0.3% rise) and the Consumer Price Index gained 0.1% (vs. an expected +0.2%).

Add in (3) a negative trend in Industrial Production for March (-0.6% versus 0.0% forecast), announced by the Federal Reserve last Friday and (4) the University of Michigan Preliminary Consumer Sentiment for April coming in at 89.7 – the first reading under 90 in seven months – and you can see why we believe that very-low short-term interest rates will likely remain in place for a long time.

In This Issue

This week, Bryan Perry begins our weekly market analysis with a real world look at income opportunities in an age of stealth inflation.  In Growth Mail, Gary Alexander looks at the GDP outlook in light of the latest IMF updates and the possibility of “green shoots” in Spring.  In Global Mail, Ivan Martchev will handicap the June “Brexit” vote and its likely impact on the British pound.  In Sector Spotlight, Jason Bodner dissects high-frequency trading as a high-tech pinball game, and in my Look Ahead, I’ll handicap the price of oil and energy-based investments in light of last weekend’s summit meeting in Doha, Qatar.

Income Mail:
Coping with Rising Costs and Lower Yields
by Bryan Perry
Commodity Deflation is Masking Household Inflation

Growth Mail:
“There Will Be Growth in Spring”
by Gary Alexander
The Brain Trust at the IMF Weighs in Again
The Shifting Economic Leadership of Asia

Global Mail:
Brexit Polls Reflect a “Dead Heat”
by Ivan Martchev
More Bankruptcies like Peabody Energy Coming

Sector Spotlight:
The Market as a Pinball Machine
by Jason Bodner
Financials are the Latest “Tail” to Wag

A Look Ahead:
Beware Overpriced Energy Stocks
by Louis Navellier
Saudi Arabia is Losing Market Share Fast

Income Mail:

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

Coping with Rising Costs and Lower Yields

by Bryan Perry

Across the U.S. millions of families make it a practice to sit down at the kitchen table and draw up the monthly budget. For the great majority of folks, upon tabulating the income versus expenses, there is an ever-dwindling amount of discretionary income left to pick up a few extra items at the mall, or dine out, or take that special trip on the “bucket list” or buy a more reliable vehicle. Despite the panorama of global deflationary pressures that have central bankers staying up at night, the great oxymoron that permeates the economic landscape is that there is a widespread feeling among consumers that it’s getting more difficult to keep up with the rising cost of living. In a world where negative interest rates are not some remote idea anymore, income investors – especially retirees – are fully aware there is a “yield crisis” in the markets.

My view on this topic is derived mostly from anecdotal evidence. I talk with retirees every day in service of the Navellier Private Client Group. Whenever the subject of household inflation comes up, it is an almost universal opinion that it costs more to do just about everything – save for going to the pump to fill up the gas tank. The cost of housing, healthcare, home services, medical premiums, prescription drugs, public transportation, education, travel, veterinary bills, auto repairs, sports venues, or even a movie ticket is all going up. Sure, one can get special “deals” online, but I’m talking about the price tag for things we buy in our local community – the basic essentials of daily life – non-discretionary products and services.

The chart below is a rough allocation of a household bringing in $60,000 per year – quite typical of the vast majority of retirees living on pensions, Social Security, and interest income from their invested assets. This chart does not include revolving debt payments, so one could take the 10% earmarked for retirement and allocate that to debt service. Kudos to those folks that have paid off their homes as that is where the pie chart swings favorably towards spending that extra money for more activities in one’s golden years.

Household Expenses Pie Chart

Some places are seeing radical inflation for life’s essentials. The Bay Area’s largest water district, the San Francisco PUC, announced last month that it plans to increase rates 32% this year on the 26 cities and private companies it delivers water to along the Peninsula, the South Bay, and southern Alameda County. (Source: Government Slaves, April 16, 2016 – “California Water Rates to Skyrocket 30% This Year”)

Commodity Deflation is Masking Household Inflation

Last week’s economic data tell us that inflation is nowhere to be found. The core rates for March, as measured by the Producer Price Index (PPI) and Consumer Price Index (CPI), both came within 0.1% of zero (source: Bureau of Labor Statistics). Why is that? The government has modified its methods of price measurement over the past 35 years. These revisions have tended to reduce the official inflation rate.

Economists continue to debate this subject, but perhaps the most telling indicator – albeit a slightly facetious one – is the Big Mac index, popularized by The Economist magazine. McDonald’s hamburgers are available in many countries and their prices reflect the cost of local food, fuel, commercial real estate, and basic labor. The price of a Big Mac, therefore, can be used to compare the economies of different countries – or serve as a bellwether of inflation in a single country.  Since the recession, the cost of a Big Mac in the U.S. has risen from an average $3.57 to $4.93, about 5% a year, according to The Economist. So the Bureau of Golden Arches tells us that annual inflation is closer to 5% a year than the reported 1%.

Last week, Treasury yields continued to move lower despite the U.S. stock market’s optimism about economic growth. According to CME Group, Fed funds futures are now showing just a 56% chance of one rate hike by the end of 2016. Labor markets continue to be a bright spot as states like New York and California phase in an increase in the minimum wage to $15 per hour – which seems quite inflationary!

Annual Inflation Rate Chart

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

With GDP and the CPI flat, Treasuries appear headed for lower yields; but Bloomberg reported that China just announced better-than-expected first-quarter GDP growth showing the economy expanded 6.7%, in line with forecasts, and down just 0.1% from the December quarter of 6.8%. There is renewed optimism that the government stimulus measures introduced in recent months are beginning to have an effect, most notably in consumption and fixed-asset investment with a still-soft environment for exports and imports.

Critics of the report contend this bump in GDP for China is purely a respite from a longer-term slowing of the world’s second-largest economy and that China has a huge shadow banking credit bubble that, if not managed carefully, could unwind into a hard landing. Global markets this past week chose to believe in a rebounding Chinese economy as emerging markets rallied to their best levels year-to-date, led by the energy sector and its high hopes for a production-freeze agreement over the weekend in Doha.

I would give 50/50 odds to a recovery in the Chinese and emerging markets as we have yet to hear what corporations have to say about demand and pricing in the first quarter. Thankfully, earnings season will give us some important clues. When there is a sense of direction from China, the oil markets, U.S. corporate profits, and Europe’s problem loans, we might see a case for arguing that the global growth slowdown has bottomed out, at which time a chorus of “Oh Happy Day” may be heard on Wall Street.

The yellow flag I see is the temptation of chasing high-yield assets that are more economically sensitive – such as Energy, Materials, and Heavy Industrials – which often carry big dividend yields because some of their share prices are so low. First, I’d like to see if those dividends are safe before counting on paying my rising household expenses and taxes with them. There are few things more damaging to an income investor’s financial health than dividends being slashed. The fact that Kinder Morgan, ConocoPhillips, and most recently National Oilwell Varco have taken a knife to their quarterly payouts should provide ample warning to all investors that there could be plenty more high-profile dividend cuts coming later this year.

In the week or two ahead, big industrial companies like Caterpillar, Deere, U.S. Steel, Honeywell, United Technologies, and General Electric will either substantiate the recent rally in the deep cyclicals and commodities sectors, or they will find themselves on the receiving end of short-term profit-taking.

As I’ve been saying in these columns, an investor’s best defense in a low-interest-rate world is a portfolio of blue chip stocks that grow their dividends by more than the 5% “real world” rate of Big Mac inflation. We try to position clients in stocks that raise their dividends 10% to 20% per year, but at a time like this, I counsel caution. During earnings season I prefer to digest the wide array of corporate reports first, as a spectator, before jumping into the drum line. That, in my view, is the more prudent position at this time.

Growth Mail:

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

“There Will Be Growth in Spring”

by Gary Alexander

“In the garden, growth has it seasons. First comes spring…. Yes, there will be Growth in Spring.”

– Peter Sellers as Chance the gardener, addressing the U.S. President in “Being There” (1979)

The 1971 novel and 1979 movie “Being There” portrays a simple gardener who inherits his master’s classy wardrobe and is mistaken for a wise economic advisor.  When asked whether the President and Congress should craft a stimulus program, “Chance the gardener” (heard as “Chauncey Gardiner”) tells the President the simple truth of the seasons, which the President interprets as great economic wisdom.

Whenever I hear the pronouncements of Fed officials, I think of Peter Sellers in “Being There.”  I guess the fact that Gardner Ackley was Chairman of the Council of Economic Advisors from 1964 to 1968 under President Lyndon Johnson helped to create the verisimilitude necessary to see a gardener as a guru.

The Gardener Chance Image

Chauncey Gardiner was right.  There is more growth in Spring than the other seasons.  If you look at the last 10 years of GDP growth, you can see a seasonal pattern in the quarters – which roughly parallels the four seasons.  Winter growth is flat, Spring marks a recovery, but growth tapers off in the second half:

Here are the inflation-adjusted annualized quarterly GDP growth rates from the BEA for the last 10 years:

Inflation Adjusted Annualized Quarterly GDP Growth Rates Table

The spring recovery was most dramatic in 2009, 2011, and 2014, with an average 5% leap in growth rates from winter to spring.  I wouldn’t presume to be a humble gardener advising the President to believe in spring, but when all eyes are focused on the first-quarter GDP release on April 28, I’ll be looking at some of the “green shoots” that promise a bit faster recovery in the current (second) quarter than in the first.

The Brain Trust at the IMF Weighs in Again

Last week, I wrote about the volatile GDP projections of the Atlanta Fed in their GDPNow statistic, along with the perennially failed growth predictions of the International Monetary Fund (IMF).  Last Tuesday, after MarketMail was published, the IMF released their latest quarterly refinement to their global growth outlook (April 2016 World Economic Outlook, “Too Slow for Too Long”).  Here’s their summary view:

“The baseline projection for global growth in 2016 is a modest 3.2 percent, broadly in line with last year, and a 0.2 percentage point downward revision relative to the January 2016 World Economic Outlook Update. The recovery is projected to strengthen in 2017 and beyond, driven primarily by emerging market and developing economies, as conditions in stressed economies start gradually to normalize. But uncertainty has increased, and risks of weaker growth scenarios are becoming more tangible. The fragile conjuncture increases the urgency of a broad-based policy response to raise growth and manage vulnerabilities.”

The IMF reduced their global 2016 GDP growth forecast from 3.6% last October and 3.4% last January. They also cut their 2016 U.S. GDP forecast to 2.4%, down from 2.6% in January and 2.8% in October.  It’s a safe prediction that the IMF will likely reduce these numbers again in their July update, especially if Britain votes to exit (“Brexit”) from the European Union in a national referendum to be held on June 23.

In releasing that report, IMF Managing Director Christine Lagarde (anagram: Ethical Gardiners) warned of possibly “severe” damage if Britain leaves the European Union.  She labeled the current period of stagnation as “the new mediocre,” a decidedly less attractive description than “Goldilocks economy” (the “old mediocre”?), which denoted economic growth that is neither too hot nor too cold, but “just right.”

In his Morning Briefing last Wednesday (“Too Slow for Too Long,” April 13), economist Ed Yardeni compared this latest IMF report to a list of the “10 plagues” on ancient Egypt.  Today’s plagues, he wrote, include “Brexit, large-scale refugee flows into Europe, depressed commodity prices, and even El Niño.”

The Shifting Economic Leadership of Asia

Until recently, China was the world’s fastest-growing economy.  That is changing.  Last week’s IMF report predicted China slowing from 6.9% growth last year to 6.5% this year, and 6.2% in 2017.  India is the new global growth leader.  The IMF expects India to grow 7.5% this year and next year, on top of 7.3% last year.  Meanwhile, Japan is expected to grow just 0.5% this year and decline -0.1% next year.

Chinese Economy and Exports Chart

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

Just last week, I was looking through my archives of early writings in international economics from almost 50 years ago.  Fresh out of college in 1967, I researched and co-authored a three-part series on the new economic juggernaut in Japan.  The first installment covered Japan’s rising industrial power, the second covered its concomitant pollution and crowding problems, and the finale covered “Japan’s New Role in Asia.” Overall, it was a work of admiration for their hard work, innovation, and drive to recover from the worst destructive bombing onslaught the world had ever seen, including two atomic bombs.

My 1967-68 survey of Japan’s economy sounded like it could have been written about China last year: “Based on Japan's fantastic economic growth rate of 8% a year — the fastest in the world — a leading American economist has predicted that Japan will rise to the top position of per capita national income in the 21st century. The 21st century, he said, will be Japan’s!”  Everything seemed to be “Made in Japan” back then, similar to the recent “Made in China” dominance.  As it turns out, Japan’s growth continued into the 1980s, when their assets (stock and land) turned into a bubble; but Japan has suffered slow-to-no growth for the last 25 years now, while China has taken its place and India is poised take China’s place.

China recovered from its own Dark Ages – Mao’s Great Leap Forward and Cultural Revolution, when tens of millions died – as rapidly as Japan recovered from the carpet-bombing of its nation in 1945.  When my wife and I and 30 other investors toured China in 1996, there was construction everywhere.  My wife just returned from a textile-based tour of India in March.  She said the same is true of India now – rapid new construction blankets the nation.  India is also attempting to develop a cleaner form of growth than in Japan in 1967 or China in 1996.  My wife visited one industrial cluster of 20 textile companies that joined together to build an environmentally friendly and sustainable park for textile production.

IndiaGrossDomesticProduct.jpg

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

Watch out, China.  Here comes India.

Global Mail:

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

Brexit Polls Reflect a “Dead Heat”

by Ivan Martchev

With a little over two months to go before the Brexit referendum on June 23, the polls in Britain are dead even. The latest Economist poll shows 39% in favor of staying in the European Union (EU), 39% in favor of leaving, and 12% undecided. In fact, polls have changed little since the referendum date was set. Other polling parties show slightly different numbers, but it is fair to say that all polls are within the margin of error of a virtual dead heat on the future of Britain’s EU membership.

United Kingdom's European Union Referendum Poll

Since the poll figures are little changed over the last six weeks, the GBPUSD exchange rate has also been little changed. This oldest of cross rates in the currency exchange world is dubbed “cable,” since the data for this exchange rate was carried across the Atlantic by a large cable used for currency quotations.

The British pound was the world’s reserve currency before the dollar assumed that role, and the loss of Britain’s reserve currency status after World War II cost it dearly in terms of the exchange rate.

British Pound Versus United States Dollar Chart

One can see how the U.S. Civil War rubbed negatively on the U.S. dollar in the 1860s, but the U.S. economy and the dollar stabilized after that war. It has been downhill for the pound ever since the 1930s. World War II and the loss of reserve currency status was a big catalyst for further pound weakening.

British Pound Versus United States Dollar Index Chart

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

From a shorter-term perspective, the pound weakened going into the Scottish referendum, compounded by the resurgence of the dollar against multiple global currency pairs with the tapering of QE. Of late there has been another leg lower upon the announcement of the Brexit referendum date.

The key question is: Will the recent low of 1.3833 hold?

I seriously doubt that the pound will hold above that level by June 23, even if the polls stay “as is.” I think people may feel similarly to the Scottish referendum, where we had a dead heat going into the voting week, even a slight advantage for the independence vote, but ultimately cooler heads prevailed. I think dead-heat polling data will bring the pound below $1.30, while a rise in Brexit support polling numbers may even bring it close to $1.20. While there has been a precedent for countries leaving the UK – like Ireland – there has never been a precedent for countries leaving the EU.

I think the rebound in the commodity markets, which is led by the seasonal uptick in oil prices, is helping many commodity-oriented currencies gain ground against the U.S. dollar and in that regard pressuring the Broader Trade-Weighted Dollar Index. Pressure on the dollar from multiple fronts is helping the pound temporarily, but as the referendum approaches I think the pressure on the pound will intensify.

Commodities Research Bureau Index Chart

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

The rebound in commodities, as depicted by the CRB Commodity Index, can only be described as a dead-cat bounce. Granted, it has caused quite the furious short squeeze in many natural resource-producing companies, primarily in the metals and energy space. This rebound is also tradeable in nature and may have a little more room to run. But I do believe that it will be completely unwound, this fall at the latest, similar to other seasonal rebounds in the CRB Commodity Index that can be seen in 2015 and 2014.

Euro Versus United States Dollar - Monthly OHLC Chart

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

I cannot imagine that the Brexit referendum is positive for the euro, which after falling rather rapidly from $1.40 to $1.05 has spent most of the time over the past year confined in a trading range of $1.05 to $1.15. The reasons have been that the ECB has been less aggressive than hoped and the likelihood of four U.S. rate hikes in 2016, as originally expected at the time of the first rate hike in December 2015, has greatly diminished. It is possible that all four rate hikes get cancelled, but since central bankers’ great egos are known for having trouble admitting being wrong, another misguided rate hike may still be in the cards.

Just like Greece leaving the euro was a negative for the common currency, the UK leaving the EU (after it already left the electronic predecessor of the euro, courtesy of George Soros’ massive bet in 1992) is still a negative for EURUSD exchange rate. This is because it sets a bad precedent. If other countries follow suit, this great confederate experiment will be in danger of collapsing and so will its common currency.

More Bankruptcies like Peabody Energy Coming

The largest U.S. corporate bankruptcy of the year (so far) happened last week. The level of its debts listed in federal court was $10.1 billion. This shows what happens to over-leveraged commodity producers in a bear market for their underlying commodities. The Peabody bankruptcy is a derivative of the bursting of the Chinese credit bubble and its effect on the prices of energy commodities, one of which is coal.

Peabody Energy Corporation Index Chart

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

The price of metallurgical coal has tumbled about 75% since its 2011 peak. Peabody spent $4 billion in 2011 to acquire Australia’s MacArthur Coal Ltd. to expand its sales to the steel industry at precisely the wrong time, just as the Chinese economy was beginning to downshift. (See Bloomberg April 13, “Coal Slump Sends Mining Giant Peabody Energy into Bankruptcy.”) Even though the Australian operations aren’t part of the bankruptcy, the slowdown in China, which is far from over in my view, sunk Peabody. (Please note: Ivan Martchev does not currently own a position in BTU. Navellier & Associates does not currently own a position in BTU for any client portfolios.)

Market Vectors Coal Exchange Traded Funds Chart

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

While I would admit that the rebound in many coal producers may not be over, if one looks at the Market Vectors Coal ETF (KOL), I think after the short squeeze fizzles out we are in for a retest of the low at $5.30, similar to the way we retested the low in 2008. KOL is a global ETF where the U.S. coal producers come third in the weighting, but since the situation in China transcends boundaries I expect more repercussions globally if we see a Chinese recession, as I expect to be the case. (Please note: Ivan Martchev does not currently own a position in KOL. Navellier & Associates, Inc. does not currently own a position in KOL for any client portfolios.)

KOL Country Weightings Pie Chart

There is a well-known overcapacity in the steel industry in China. China’s Industry Ministry plans to reduce annual steel capacity to about 1.1 billion tons by 2020 while domestic consumption is unlikely to exceed 700 million tons. China has been dumping steel on global markets at a rate of 100 million tons annually. But this increase in steel exports is putting pressure on other global steel producers. (See Financial Times, April 10, “China says its steel overcapacity will remain.”) I think that the estimates from China’s Industry Ministry do not factor in a Chinese recession, which I think is likely. If that happens it is difficult to see a bottom for steel prices, iron ore, or coking coal for that matter.

Sector Spotlight:

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

The Market as a Pinball Machine

by Jason Bodner

The name Bagatelle might evoke images of a restaurant with loud DJ music and patrons dancing on the tables. If you don’t happen to live near New York, Miami, Sao Paolo, St. Bart’s, or Las Vegas, where these popular French restaurants do exactly that, then Bagatelle may have no meaning at all; but it was the original name of a game which may contain some valuable lessons in how to play market volatility.

Table Dancing at Bagatelle Restaurant Image

In France, during the reign of Louis XIV, billiard tables were narrowed with wooden pins at one end of the table. Players would shoot balls with a cue stick from the other end, not unlike bowling. But the pins took a long time to reset when knocked down. Eventually someone had the bright idea to fix them permanently to the table. Holes in the bed of the table became the targets for the balls. Players could ricochet balls off the pins to get to the more difficult holes. In 1777 a party was thrown in honor of Louis XVI and his queen, Marie Antoinette, at the “Château de Bagatelle.” The highlight of the party was this new game with a table and cue sticks where players shot ivory balls up an inclined playfield. The game was dubbed “bagatelle” by the count (the brother of the king) and it quickly swept through France.

The offshoot game, “Billard japonais” (or Japanese billiards) was invented around the same time. It used thin metal pins and replaced the cue at the player's end of the table with a coiled spring and a plunger. The player shot balls up the inclined playfield toward the scoring targets using this plunger. This paved the way for modern pinball machines (which still uses the plunger to this day), and pachinko.

Keith Moon Playing Pinball Image

Bagatelle gave birth to the ubiquitous pinball machines that we see in arcades to this day, but these early pinboards also grew to have a different, more scientific function. English Scientist Sir Francis Galton (1822-1911) used the same idea to demonstrate a normal probability distribution curve. He contributed much to modern day science (and thus finance) by creating the statistical concept of correlation and “regression to the mean.” He took a board like the one below, dropped balls in, and observed them taking a seemingly random path downward. After dropping many balls, a normal distribution curve emerged.

Galton Board Generates Standard Deviation Bell Curve Image

We have all had some experience with a distribution curve. Imagine taking a sample of children, plotting their heights and weights on a graph. Like most things in nature, the majority of observances tend to clump towards the middle to form a curve. The “tail” events (with small numbers of observances) are the rarities, like that nephew you have who is taller than 99% of all the other kids, or that little fella that is so underweight that he is “zero percentile for weight” because 99% of all the other kids are bigger than him.

You may be intrigued at the history of pinballs and normal distributions but you may be wondering what bearing this has on the market. Well, it’s no secret that a huge percentage of the volume traded on any given day is done by algorithmic High Frequency Traders (HFTs). These are essentially computer programs built upon normal distributions and regression to the mean. The programs seek to identify inefficiencies and recognize patterns to create profit opportunities. If we think of the market this way, it may help explain why Energy has rallied so fiercely and why the weakest sectors are leading the market.

How are “real investors” responding to HFTs? One interesting place to look is actually in the prices of options. Having spent 14 years on equity derivatives trading desks at investment banks, I learned a lot in that time. One of the more interesting properties of options prices is what they can tell you about market direction, volatility, and sentiment. As the volatility in the market or in a specific asset increases, so does uncertainty. And, as uncertainty increases, options premiums increase. Imagine selling home insurance in Arizona against hurricane damage. The cost of that policy should be significantly cheaper than, say, in Florida. A frequent barometer of volatility is the CBOE Volatility Index or the VIX which is closely linked to options prices. Friday’s close on the VIX of 13.62 is near its lows. In fact, it’s within sight of its 10-year low of 9.89 in 2006. A low VIX value signifies low options prices, which signify complacency.

CBOE Volatility Index Chart

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

So what does that mean? It means that you can't keep a good market down! It may also mean that you can’t keep a bad one down, either. The global equity indices are all breaking out of their three-month ranges, signifying bullish activity across the globe. But I still wonder what has changed fundamentally. The economic data is not exactly something to dance in the streets about – and oil is still plenty plentiful.

Financials are the Latest “Tail” to Wag

The week’s big story was the Financials sector staging a nearly 4% rally, as short covering may still be fueling that sector’s rise. Wednesday’s bullish action was largely attributable to Financials, followed by Industrials, Tech, Consumer Discretionary, and Materials. They were also the best performers for the week. The market is still very much tied to crude prices, which also rallied from their lows, due in part to normal spring surge in demand, but the 12-month performance of energy remains abysmal, down 26.8%.

Looking at the 12-month scorecards, we don’t exactly see hallmarks of market health. Energy, Materials, Financials, and Healthcare remain the weakest performers. The strength is in Utilities and Telecom.

Standard and Poor's 500 Sector Indices Changes Table Image

Standard and Poor's 500 Yearly Sector Indices Changes Charts

So when you are trying to make sense of the market and justifying its rallies, just remember those normal distribution curves. Returns have a way of scattering themselves in an orderly way – in a way that people think they can predict. Those people can have machines to do all the analysis and employ the strategies. Those strategies look for “tail” events, like when the market plummets 10%, and they look to identify a reversion to the mean. Once that observance starts, it can almost become a self-fulfilling prophecy.

Those market tails are a great place to find opportunity. But keep in mind the words of Mark Twain, who once said that “a man who carries a cat by the tail learns something he can learn in no other way.”

A Look Ahead:

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

Beware Overpriced Energy Stocks

by Louis Navellier

Reno was very green last week, due to all the melting winter snow and persistent precipitation.  Lake Shasta and major reservoirs like Lake Oroville are full, so their water is being released earlier than normal.  That is the good news.  The bad news is that California still has a big water shortage.  Apparently this is due to the fact that too many trees in the Sierra are sucking up too much water.  I grew up in Berkeley where trees were favored over the timber business, so I am confused.  I must have missed something, since the New York Times now effectively says the trees in the Sierra Nevada are evil, water-sucking sponges.

If environmentalists can complain about the presence of trees, I guess I can complain about the markets.

The stock market remains overbought.  The leadership since the lows of February 11 – namely, energy stocks and some financial stocks – remains poised for a fall, since crude oil prices are expected to stall and many big banks are now announcing disappointing first-quarter results.  The stock market’s recent trend of rewarding sectors and stocks with dismal earnings is unquestionably affiliated with the algorithmic traders who essentially use the high-frequency trading (HFT) systems to front-run order flows.  They are short-term opportunists, not investors; but in this strange new world where algorithms have replaced market makers, the fundamentals can be overlooked from time to time.  Still, as more first-quarter earnings are announced in the upcoming weeks, I expect that the algorithmic traders will be running for cover as market volatility picks up while positive sales, earnings, and guidance propel selected stocks higher.

I say that energy companies are at risk because crude oil futures remain temporarily high due to persistent rumors that crude oil production will be curtailed.  Early last week, there were persistent rumors that Russia and Saudi Arabia had agreed to production cuts.  It was just a rumor, since on Wednesday, Saudi Arabia Oil Minister Ali al-Naimi played down the prospect of oil producers taking action on crude output at a key meeting of major crude oil producers on Sunday in Doha, Qatar.  Specifically, when asked about potential production cuts, al-Naimi said, “Forget about this topic.”  That’s not a very positive response.

Donkey Head Pumps Image

The crude oil inventory glut persists.  On Tuesday, the American Petroleum Institute said that U.S. crude oil supplies rose by 6.2 million barrels in the latest week.  On Wednesday, the Energy Information Agency confirmed that trend by saying that U.S. crude oil supplies rose 6.6 million barrels in the latest week.  As a result, the crude oil storage facilities in Cushing, Oklahoma remain abnormally high.  Crude oil is merely following its normal seasonal pattern of going up in the spring as seasonal demand rises, but I also expect that crude oil prices will decline again in the fall when worldwide seasonal demand ebbs.

Saudi Arabia is Losing Market Share Fast

The Financial Times recently reported (in “Saudi Arabia loses oil market share to rivals in key nations,” March 28) that Saudi Arabia is losing substantial business in nine of its 15 major markets.  Specifically, China, South Africa, South Korea, Thailand, Taiwan, and the U.S. are all now buying less crude oil from Saudi Arabia as Angola, Iraq, and Nigeria have increased their crude oil exports.

The attached charts illustrate that Iraq’s production increase has been the most dramatic and now Iran is ramping up its crude oil production.  Both Iraq and Iran have been trying to crowd out Saudi Arabia from their lucrative Asian customers by offering discounts in exchange for long-term commitments.

Incremental Oil Production Chart

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

Iran Crude Oil Production Chart

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

In the meantime, Saudi Arabia is buying more stakes in overseas refineries to protect its eroding market share.  The bottom line is evident from the fractious outcome of Sunday’s meeting in Doha: OPEC members will continue to fight over market share; so crude oil prices will likely remain under pressure long-term, especially when worldwide demand turns down in the fall.  The tension between Iran and Saudi Arabia is so high that Iran’s oil minister will not be attending the Doha summit.  The fact that Iraq, Iran, and other nations continue to ramp up production means that crude oil prices are destined to remain well below normal for the foreseeable future as new supplies continue to outstrip demand.


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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.

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