Small Stocks are Up

Small Stocks are Up Nearly 16% in Just Three Weeks!

by Louis Navellier

November 29, 2016

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

Last week, the S&P rose 1.44%.  So far in November, that benchmark index is up 4.1%, but small-capitalization stocks have done much better, since the market is now in the midst of an early “January effect,” which tends to favor such stocks.  Through last Friday, the Russell 2000 is up 15.8% in just three weeks!

Christmas Present Image

We are also in the middle of the strongest market time of the year.  In November and December, we gather with family and friends for food, festivities, and football.  Consumer sentiment naturally rises in December and this tends to rub off on investor sentiment with a seasonal rise toward the end of the year.

There is also growing optimism that GDP growth is about to break out of its sub-2% growth rates of the past year.  We’ll find out more when the second iteration of the third-quarter GDP comes out today, but the Republican sweep of Congress and the White House has given some investors renewed hope for better GDP growth rates in 2017.  Some of this optimism is due to the spirit of bipartisanship and the anticipated stimulus for the first 100 days of the Trump Administration.  New Senate Minority Leader, Chuck Schumer, has already signaled that Congress intends to work to pass an infrastructure spending bill.  After several years of gridlock, bipartisanship may prevail for a few months, until infighting inevitably returns.

In this Issue

Our first two panelists quote songs to illustrate their market perspectives – Bryan Perry talks about the “Wind of Change” for Income Investors while Gary Alexander analyzes the Fed’s “Little Brown Book” in Growth Mail.  In Global Mail, Ivan Martchev updates Japan’s supercharged QE (QQE) and its impact on the yen.  Jason Bodner celebrates a short market week with a few short words about a short man, and short rallies.  Then I’ll conclude with my reflections on share buy-backs and Fed policies after the election.

Income Mail:
Winds of Change for Income Investors
by Bryan Perry
The Rise and Fall of Sentiment and Fear – A Contrarian Pivot Point

Growth Mail:
What’s Inside the Fed’s “Little Brown Book”?
by Gary Alexander
December – Usually a Very Good Market Month

Global Mail:
Rekindled Dollar Yen-Vy
by Ivan Martchev
Gold is Doing Better in Non-Dollar Currencies

Sector Spotlight:
Short Words about a Short Man
by Jason Bodner
Is the Short-Covering Rally Finally Over?

A Look Ahead:
Share Buy-backs Could Return Soon
by Louis Navellier
A Fed Rate Increase in December is Now Very Likely

Income Mail:

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

Winds of Change for Income Investors

by Bryan Perry

“The future’s in the air
I can feel it everywhere
Blowing with the wind of change”

--From “Wind of Change” by The Scorpions

It would be hard to find a better way to express the market change than the words of this song. As the great unwinding of the bond market began in earnest the day after the election, fixed-income investors and holders of what are deemed to be ‘equity bond equivalents’ (such as preferred stocks, utilities, most REITs, and consumer staples stocks) have been involved in a slow-motion train wreck with leveraged closed-end municipal bond funds suffering the steepest losses in valuations.

Case in point – a half-point move up for the 10-year Treasury has inflicted roughly a 13.5% hit on shares of one of Nuveen’s flagship tax-free closed-end bond funds, reflected in the post-election collapse below:

Nuveen Flagship Tax-Free Closed-End Bond Fund Chart

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

So much for the safety of the bond market. Any bonds with maturities beyond seven years are feeling the pain of constant selling pressure that started in early October as the market began to price in a December rate hike well before the post-election turmoil, which simply fueled another leg lower for bonds. (Please note: Bryan Perry does not currently own a position in NVG. Navellier & Associates, Inc. does not currently hold a position in NVG for any client portfolios. Please see important disclosures at the end of this letter.)

What lies ahead for income investors requires understanding how so many catalysts have emerged so suddenly. The fast tracking of a major infrastructure project spending bill with the blessing of soon-to-be Senate Minority Leader Chuck Schumer, the passing of broad cuts in corporate and personal income taxes, a reworking of Obamacare, proposed deregulation of certain banking laws (like Dodd/Frank), a tax holiday for corporations to repatriate capital held outside the U.S., and the renegotiation of major trade deals incited the animal spirits to get the bullish wagons rolling.

But if these prospective plans, of which none have fully materialized yet, weren’t enough, the economic calendar has delivered a bevy of solid data points clearly showing an economy already shifting into another gear well before anything related to Trumponomics kicks in. This past week’s data showed better-than-expected reports for durable goods, business spending, Black Friday sales, and existing home sales.

Anecdotal evidence from my Black Friday trip to Tysons Corner Shopping Mall in McLean, Virginia at 10:00 am quickly showed that by noon consumers were not just looking but instead were already weighed down by several bulging shopping bags. It looks like it’s going to be a robust Christmas shopping season.

Against all this new-found optimism, bond yields have spiked. The 10-year Treasury yield closed the week at 2.37% and the 30-year Treasury finished at 3.02% with the Dollar Index (DXY) rising to a 14-year high of 101.50. In any other week (preceding the election, that is), these two situations would have been viewed as decidedly bearish, simply because the prospects for growth had been so low that these headwinds would most certainly be a rally killer. But the winds of change coming to 1600 Pennsylvania Avenue have market participants turning what looks like a “blind eye” to these potential and very real headwinds of a breakout U.S. dollar and higher interest rates that add stress to borrowing costs. We’ll know just how stiff these headwinds are when forward corporate guidance is made public in January.

Until then, income investors trying to stay ahead of the curve – the yield curve, that is – are rapidly shortening up bond maturities and rotating heavily into dividend-paying cyclical stocks. There has been great consternation by bond and stock investors alike as they anxiously wait, almost desperately, for a short-term sell-off so they can reposition their portfolios into shorter-term instruments and up their weightings in rate-sensitive dividend stocks. The quandary facing them is that the market already has this totally figured out, nary giving an inch but rather forcing the hand of nervous holders into capitulation as the market continues to trade against them in a manner that is resulting in a serious erosion of capital.

The Rise and Fall of Sentiment and Fear – A Contrarian Pivot Point

Optimism about the short-term direction of stock prices continues to rise, reaching its highest level in 21 months. At the same time, neutral sentiment fell to a two-year low in the latest AAII Sentiment Survey. Pessimism is also lower. Bullish sentiment – i.e., the expectation that stock prices will rise over the next six months – jumped by 7.8 percentage points to 46.7%, which is very close to the February 19, 2015 high of 47.0%. (The historical average for AAII bullish sentiment is 38.5%.)

AAII Sentiment Survey Chart

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

Bearish sentiment – defined as the expectation that stock prices will fall over the next six months – declined by 2.8 points to 26.6%. (The historical average is 30.5%.) During the past two weeks, optimism has risen by a cumulative 23 points—the 14th largest such move in the 29-year history of the AAII survey. There isn’t a clear trend as to how the market has performed following such unusually large two-week increases in bullish sentiment, but the median six-month gain for the 13 periods in which there was a larger two-week increase in optimism was 5.9%.

This radical shift in a short period has all but removed any evidence of fear about any sort of near-term market risk-off event, as the closely-watched CBOE Volatility Index (VIX) has tanked to a reading of 12.34 on November 25. From the charts of both the AAII Survey and the VIX (below), such readings tend to denote short-term peaks and troughs that precede an uptick in volatility and a downturn for stocks.

CBOE Volatility Index - Daily OHLC Chart

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

My guess is that when the Trump honeymoon fades and the tough reality of making good on his many campaign promises is met with all manner of special-interest resistance, some of the bloom will come off the rose-colored rally; but the inevitable correction will not be significant enough that it changes the new trend in place that plays to higher interest rates and a higher rate of GDP growth for the U.S. On the positive side, Trump won a populist-style election and he owes no one any special favors. As such, he will have greater freedom to build support in both the House and Senate to act favorably on his agenda.

British economist John Maynard Keynes was famously quoted as saying, “The markets can remain irrational longer than you can remain solvent.” And there is a lot of truth to that saying, especially for those using margin to leverage their bond exposure. We’re in one of those periods that could well frustrate fixed income investors and holders of defensive stocks right through December as professional fund managers scramble to window-dress portfolios to reduce weightings in these sectors. It’s a massive unwinding of a very crowded trade and just goes to show that when the winds of change are in the air, it pays to turn down the music and get busy making the necessary changes to protect one’s nest egg.

Growth Mail:

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

What’s Inside the Fed’s “Little Brown Book?”

by Gary Alexander

“My Little Brown Book
With the silver binding,
How it keeps reminding me
Of a memory that’s haunting me.”

--The opening lines of “My Little Brown Book” by Billy Strayhorn (1915-1967)

Billy Strayhorn was born on today’s date, November 29, 1915, in Dayton, Ohio.  As a teenager, he wrote one of the most jaded, world-weary, complex, and gorgeous tunes you would ever want to hear, “Lush Life.”  It is so difficult to sing that Frank Sinatra gave up on it.  (On YouTube, check out Sarah Vaughan’s 1956 version or Johnny Hartman & John Coltrane’s classic in 1963.)  As a young student at Pittsburgh’s Westinghouse High School, Strayhorn wrote a musical, Fantastic Rhythm, which featured another one of his great early classics, “My Little Brown Book.”  (Check out Dianne Reeves’ version of this and Lush Life in a 2011 CD compilation of Strayhorn’s best songs by various artists, “Billy Strayhorn: Lush Life.”)

In 1938, Strayhorn went to hear Duke Ellington in Pittsburgh and audaciously showed the Duke how he would have voiced the harmonies better.  Intrigued, Duke said to “look me up the next time you are in New York,” giving the kid instructions to “Take the ‘A’ Train” from Penn Station to Harlem.  Strayhorn showed up with a song by that title as a gift.  He and the Duke were linked in music the rest of their lives.

The Federal Reserve also has a “little brown book” that “keeps reminding us of a memory that’s haunting us,” – namely, this slow-growing economy that has haunted us for the last decade, especially since 2015:

United States Gross Domestic Product Annual Growth Rate Bar Chart

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

This post-Thanksgiving week is slated to include several important statistical releases when it comes to measuring the growth rate of the U.S. economy.  The Fed’s Beige Book – published eight times per year, the same frequency as the Federal Open Market Committee (FOMC) meetings – is scheduled to be released tomorrow, November 30.  Before that, today, we will see the second iteration of the much-watched third-quarter GDP growth rate.  Then, on Friday, we’ll see the monthly jobs report for November.

The Fed’s Beige Book basically contains a regional economic summary from each of the Federal Reserve’s 12 Districts.  The latest Beige Book was released October 19.  As Louis Navellier noted in the October 25 MarketMail, “The Beige Book survey essentially said that the U.S. economy for most of the country is growing at a modest to moderate pace.  The word ‘election’ was mentioned eight times in the Beige Book survey as a reason that business spending and other economic activity has been postponed.”

I looked up those eight references in the last Beige Book.  All but one (#4) were cautionary.  They referred to corporations and investors delaying their decisions until after the election uncertainty was cleared up.

Here are all eight Beige Book passages including the word “election” from the last (October 19, 2016) edition.

(1) “…contacts in a few Districts expressed concerns about economic uncertainty surrounding the upcoming presidential elections.... (2) Contacts in several sectors cite the upcoming presidential election as a source of near-term uncertainty, delaying some business decisions…. (3) Political uncertainty in advance of the national elections may be delaying leasing decisions…. (4) Several cite low interest rates and the impending presidential election as motivation for potential homeowners to buy now…. (5) Several builders indicated that their customers are postponing investment decisions until after the presidential election…. (6) Business loan demand remained subdued, which some contacts attributed to uncertainty surrounding upcoming elections…. (7) Auto contacts were rather pessimistic in their outlooks, with concerns about how the presidential elections will impact consumer spending…. (8) Outlooks among services firms were positive overall, but tempered by concern for continued low oil prices, weakness in the global economy, and uncertainty surrounding the presidential election.”

The Fed's Beige Book Image

Now that we’ve seen a Republican sweep of the White House and both Houses of Congress, it might be safe to say that most of the angst over our long wait is over, so this week’s Beige Book (and the next few editions) should reflect more enthusiasm for investing during the expected business expansion in 2017.

Donald Trump promised 5% growth if he won – then averaging 4% a year for the next decade.  Like most of his promises (the Wall, deportations, repealing Obamacare, etc.), this one will likely be devalued in the light of the realities and obstacles he will face; but if his tax bill repatriates $1.3 trillion in corporate cash stored overseas, taxing it at 10%, that’s $130 billion that can be ear-marked for infrastructure spending.  The remaining 90% of that $1.3 trillion will be retained by corporations for shareholder-friendly moves like buy-backs, dividends, and mergers, as well as worker-friendly moves like hiring, raises, and expansion.

December – Usually a Very Good Market Month

We’re entering December this Thursday.  According to CBS Marketwatch last Thursday, “Jeff Hirsch of the Stock Trader’s Almanac notes that December is the single best month of the year for the S&P 500 and the second-best month for the Dow, with the indexes seeing average gains of 1.6% since 1950.  It’s also the top month of the year for the Russell 2000 small-cap index,” due in part to the early “January Effect.”

Stock Trader's Almanac Image

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

History is no guarantee, of course.  The last two Decembers have been slightly down.  The S&P 500 lost 0.42% in December of 2014 and then turned down again (-1.75%) in December of 2015.  Bah, humbug!

Although monthly moves are insignificant in the grand scheme of things, a down December is rare.  The S&P 500 rose for six straight Decembers (2008 through 2013), and December rose in 25 of the 30 years from 1984 through 2013.  The only significant (over 3%) decline in any recent December was a 6% drop in December 2002.  Anything can happen, but history shows it’s unwise to bet against Santa Claus.

Global Mail:

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

Rekindled Dollar Yen-Vy

by Ivan Martchev

While the strong showing of the U.S. Dollar Index (DXY) is all over the news, since most currencies in the index are heading south, that has not always been the case. The Japanese yen has weakened sharply to 113 at last count, yet we have seen several occasions in the recent past where the yen has appreciated at the same time the Dollar Index appreciated. One such notable occasion was in 2008 when both the yen and the dollar rallied dramatically. Another such occasion was right around Brexit when the yen tested 100 on several occasions and held that psychologically important level at a time of a strong DXY index.

United States Dollar versus Japanese Yen Chart

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

What causes the yen to act like a fish swimming against the dollar current sometimes and at other times to go with the dollar flow? The yen is the ultimate risk indicator, so that any strengthening of the yen and the DXY at the same time typically indicates times of rising stress in global financial markets. The yen is a popular funding currency for “carry trades,” due to its cheap interest rates. Large yen borrowings create a big synthetic short position against the yen, which results in a short squeeze when those carry trades are unwound, especially when financial markets are under stress. This is why we saw the yen and the dollar both rising until a couple of months ago, when the yen began to act more “normal” and weaken all the way from 100 to 113 at last count. (The USDJPY rate is inverse, so more yen per dollar is weaker yen).

Nikkei 225 Stock Index versus Japanese Yen Chart

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

While the correlation of weaker yen and stronger Japanese stock prices, as measured by the Nikkei 225 stock index, is very close (see chart above) and well known, what is not so well known is that the dollar-yen cross rate has also been tracking Japanese government bond (JGB) yields. In the past two years, lower JGB yields have meant a stronger yen and rising yields reflected a weaker yen (see chart below).

Japanese Ten Year Government Bond versus Japanese Yen Chart

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

It is rather strange to see the yen appreciate from 125 to 100 when 10-year JGBs went from +0.50% in the summer of 2015 all the way to -0.29% in the summer of 2016. Typically, higher interest rates mean a stronger currency, not the other way around. In this case the yen strengthened as the market was betting the Bank of Japan was losing its fight against deflation, which is why 10-year JGB yields went negative.

Japanese Yen versus Japanese Inflation Rate Chart

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

Due to many years of protracted deflation – most simply described as negative inflation or falling prices – nominal Japanese interest rates are not the driver of the yen, but rather “real” (adjusted-for-deflation) interest rates. As the inflation rate in Japan collapsed back into negative territory in the past couple of years, real Japanese interest rates rose, which in part explains why the yen appreciated from 125 to 100.

When the BOJ announced negative rates last January, the yen rallied and Japanese financial stocks came under serious pressure. Negative short-term policy rates at the time were collapsing the Japanese yield curve, which looked like a serious central bank miscalculation. How did they fix this unintended yield curve side effect? In September, the BOJ began a maneuver called “QQE with yield curve control,” (QQE stands for Quantitative and Qualitative Easing to target a positive yield curve through JGB purchases.)

Here is a table of the annualized rates of targeted purchases by the Bank of Japan under QQE:

Bank of Japan Asset Purchases and Negative Interest Rate Chart

Does the sell-off in the yen after the announcement of QQE – and by inference, the rally in the Nikkei 225 index – mean that the BOJ policy is finally succeeding? QQE is dangerously close to unlimited QE or what we call “helicopter money,” which is as close to real printing press money as central banks can get.

In contrast, the U.S. version of QE (now discontinued) cannot be considered printing money. The QE operations were sterilized by the payment of interest on excess reserves, always by design higher than the Fed funds rate. That, in effect, stopped the excess cash from multiplying in the U.S. financial system and creating undesirable inflation. U.S. QE was targeting restarting credit growth and limiting undesirable inflation.

The Japanese QE – and now QQE – are very different from the U.S. version as they target both higher credit growth and inflation. What is most intriguing is that the Japanese QE was originally designed to be three times more aggressive than U.S. QE, adjusted to the size of the Japanese economy. Despite this, Japan’s inflation rate fell into negative territory, which is why the BOJ resorted to QQE in September.

Gold is Doing Better in Non-Dollar Currencies

While the gold price has weakened dramatically, closing below $1,180 last week, this is only bad news to holders of gold bullion denominated in U.S. dollars. If one were a holder of gold bullion in India, where the government is phasing out large denomination currency notes to reign in cash hoarding, or in Great Britain, where the pound in under serious pressure because of Brexit, gold is still a good store of value.

Gold Price - Monthly OHLC Chart

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

The gold price is up more in euro and British pound terms in 2016 than in dollar terms, and it may go up further in terms of those currencies in 2017 as they are likely not done depreciating against the dollar. It is my expectation that the dollar is headed a lot higher – for numerous reasons often mentioned in this column and by our other analysts – so, by that definition, both of those currencies are headed lower.

I suspect that if QQE in Japan is open-ended monetization (otherwise known as helicopter money), the Japanese holders of gold bullion should consider increasing their holdings. If the Japanese central bank is hell bent on creating positive inflation and keeps upping the ante on more aggressive open-ended QE operations, who is to say that they won't damage the Japanese financial system to a point beyond repair?

Gold versus Japanese Yen - Weekly Line Chart

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

While gold bullion in yen is flat in the past five years as the yen exchange rate has gone down against the dollar, the gold price has also gone down in U.S. dollar terms since 2011. Still, the Japanese are famous savers of money so they should feel a lot safer holding more gold bullion than Japanese yen at this point.

Sector Spotlight:

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

Short Words about a Short Man

by Jason Bodner

It was a short week, so I’ll talk about a short man, and I’ll keep it short. When I say a short man, I mean extremely short. Matthew Buchlinger (1674-1740) was known as “The Little Man of Nuremberg.” He was born with no hands, legs, or thighs and was less than 29 inches tall. Despite these disabilities, he was an extremely accomplished musician, playing half a dozen instruments. He was a gifted calligrapher, a very famous stage magician, and he also fathered 14 children! His writing was done by using his small, finlike appendages (for hands). He was exact and meticulous, as his self-portrait below shows. When inspecting the curls of his hair, one can find practically microscopic text which includes seven Psalms from the Bible.

Matthew Buchlinger -

The point here is that small things can be powerful. The message we are seeing from the markets is now: “bullish.” During Thanksgiving week, we’ve seen record highs and several outsized moves. For instance, Telecommunications Services vaulted nearly 5%. Materials, Industrials, Consumer Discretionary, and Energy all logged more than 2% moves. In fact, all sectors but one posted healthy gains. That one lagging sector was Healthcare with a -0.32% performance for the week.

Standard and Poor's 500 Daily Sector Indices Changes Table

Month-to-date, we see Financials as the clear winner. The move of nearly 14% was impressive, to say the least, as was the move from Industrials, which is up just north of 9% for the last month.

Standard and Poor's 500 Monthly Sector Indices Changes Table

Real Estate and Utilities have taken a drubbing this past three months with Real Estate down almost -15%. Utilities fared slightly better with a 3-month performance of just under -11%.

Standard and Poor's 500 Quarterly Sector Indices Changes Table

Looking back over six months, the performance of Real Estate and Utilities seems far less threatening than it has over the past three months. Financials still reign supreme at nearly +21%.

Standard and Poor's 500 Semi Annual Sector Indices Changes Table

Is the Short-Covering Rally Finally Over?

Regardless of our feelings on the outcome of the election, the market is making its opinion loudly known. We should continue to watch Financials and Industrials to see if their short-covering rally has run its course, or if in fact it has become a catalyst for further strength. Based on the level of institutional buying and recent seismic shifts in the performances of these two sectors, the data suggests (to me) more power behind this move, so I would say it has room to continue into the near future.

Let’s look a little closer at Financials and Industrials. The S&P Financials Sector Index has rallied nearly 13% since the election. This means that the bulk of the powerhouse performance from Financials for the past month, three months, six months, and nine months has taken place in the past three weeks! Industrials reflect the same pattern: Most of the gains for Industrials have taken place in just a few weeks.  As epic as these moves are, the fall from grace for Real Estate and Utilities is equally impressive. In the last three months, Real Estate is off nearly 15%. The move has been more steady and prolonged than the sudden bursts of Financials and Industrials. S&P Utilities have also cratered more than 11% since its July peak.

With Financials, Industrials, and Technology emerging as strong sectors, this bodes well for a sustained bull market, at least for the near future. These sectors, along with Energy which has steadied and even strengthened despite the continued volatility of crude oil, are great engines to fuel a higher stock market.

The one final thing I’d like to add about the Financials and Real Estate sectors is to recall a time prior to August, when these two sectors were combined as just Financials. We pointed out frequently back then how there was often a push-and-pull effect between the two to keep the sector as a whole fairly stagnant. Now that they have decoupled, these two discrete sectors are behaving in opposite fashion, and violently so. Real Estate, composed of yield-intensive stocks, stands to be harmed by higher rates, while Financials stand to benefit from both higher rates and possible reform when it comes to Dodd-Frank.

Financials, Industrials, Real Estate, Utilities Sectors Charts

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

All of these weekly sector moves seem small and inconsequential compared to the market as a whole, especially over a long time horizon. But small things have been known to have great impact for years to come. Look at the Litte Man of Nuremburg. Once, when I was frustrated with slow, humble beginnings at the start of my career, a more seasoned colleague told me: “From small acorns grow large oak trees.” Paraphrased from Thomas Fuller in Gnomologia in 1732, this quote has stayed with me ever since.

Large Oak Tree 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.*

Share Buy-backs Could Return Soon

by Louis Navellier

According to FactSet’s latest Buy-back Quarterly (dated September 20, 2016), S&P 500 share buy-backs declined 6.8% (year-over-year) in the three months ending July 31.  This marked the smallest quarterly buy-back quarter since the third quarter of 2013.  Due to rising interest rates, some market observers believe that stock buy-backs will keep slowing down – since long-term Treasury bond rates bottomed out last July.

On the other hand, in expectation of major corporate tax reform in 2017, Goldman Sachs issued a note to investors on November 18th saying that they expect corporate stock buy-backs to surge 30% in 2017 to $780 billion.  In that report, Goldman’s David Kostin wrote that “we expect tax reform legislation under the Trump administration will encourage firms to repatriate $200 billion of overseas cash next year.” (Please note: Louis Navellier does not currently own a position in GS. Navellier & Associates, Inc. does not currently own a position in GS for any client portfolios. Please see important disclosures at the end of this letter.)

Both President-elect Trump and House leaders have proposed a one-time tax holiday to encourage multinational companies to repatriate their overseas cash.  Interestingly, back in 2004, a tax holiday that imposed only a 5% tax on overseas cash caused 813 companies to repatriate $312 billion.  Overall, both major corporate tax reform and/or a special tax holiday are anticipated to cause billions to be repatriated and much of that money will naturally be used to boost stock buy-back activity.

With rising rates, corporations won’t want to borrow as much, but they could use their regained cash for several shareholder-friendly moves.  Still, I see other problems developing if interest rates rise too rapidly.

In just the last three weeks since the Presidential election, the 10-year Treasury bond yield has risen 48 basis points (from 1.88% to 2.36%) and needs to settle down a bit, otherwise dividend-paying and other interest-rate sensitive stocks will continue to become more volatile and spook many conservative income-oriented investors.  Second, the fact that the U.S. dollar is now at a 14-year high means that commodity-oriented and multinational stocks will be facing massive headwinds because their overseas sales are fighting eroding commodity prices and weak currencies, respectively.  Finally, many of the stocks that surged immediately after the Presidential election, namely financials, industrials, and materials, are now in the midst of profit taking on the realization that their earnings announcements are several months away.

A Fed Rate Increase in December is Now Very Likely

This brings us to the Fed’s decision in mid-December.  Last week, the Fed released the minutes of its last (November 1-2, 2016) Federal Open Market Committee (FOMC) meeting, in which senior members argued that the next key interest rate increase “should occur at the next (FOMC) meeting” in mid-December.  Furthermore, the FOMC minutes said, “Most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon.”

Leaning Tower of Pisa Image

The FOMC will most likely cite renewed economic growth as well as the fact that the Fed has met its unemployment targets.  Furthermore, the FOMC will likely cite recent inflation trends as a preemptive reason for wanting to raise key interest rates.  The Fed does not like to cite market interest rates, but that is also another reason the FOMC will want to raise key interest rates.  Overall, unless Italy’s December 4th Constitutional Referendum becomes super-disruptive to market interest rates, the Fed will likely raise key interest rates in mid-December – just to get more in line with existing market rates.

The Fed can also cite recent economic statistics.  Last week, the biggest economic surprise was that the Commerce Department reported that orders for durable goods surged 4.8% in October, the largest monthly increase in two years, due largely to a 94.1% surge in commercial plane orders.Excluding transportation, however, durable orders still rose by an impressive 1%, substantially higher than economists’ consensus estimate of a 0.2% rise (ex-transportation orders).

In addition, business spending rose 0.4%, which is very important, since business spending contracted for seven straight previous quarters.  With business spending recovering and government spending ramping up, the only factor yet to improve dramatically is consumer spending.  In that regard, Post-Thanksgiving sales are premature but encouraging.  Online retailers are reporting record on-line sales, so Cyber Monday should set a record.  Clearly, the holiday shopping season is off to an incredibly positive start!

On Tuesday, we learned that existing home sales surged 5.6% in October to an annual pace of 5.6 million, the strongest pace since February 2007, when existing home sales were running at a 5.42 million annual pace.  Existing home sales in September were also revised higher to a 5.49 million annual rate. Gains were widespread throughout all major regions for both single-family units and multi-family homes.

Put all this together with this week’s Beige Book, GDP revision, and jobs report, and the Fed should feel comfortable enough to raise key short-term interest in their upcoming mid-December FOMC meeting.


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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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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