Small Stocks Soar

Small Stocks Soar on a Stronger U.S. Dollar

by Louis Navellier

July 19, 2016

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

The S&P 500 gained 1.5% last week and is now up 5.76% for the year.  As of the market’s close last Tuesday, the Russell 2000 index of small-capitalization stocks had surged 10.8% in just 10 trading days.  According to Bespoke Investment Group (July 12: “Russell 2,000 Up 10% in 10 Trading Days,”) this has happened 27 times since 1979 (the latest being in December, 2011).  In those 27 instances, the index was up a median 4.47% in the next month and +10.97% over the next three months.  During the current bull market (since 2009), this has happened six times, with subsequent three-month gains averaging 8.5%.

I Voted Image

Wow!  It is very obvious that domestic stocks and small-cap stocks are surging post-Brexit in the wake of a strong U.S. dollar on the fear that the earnings of multinational companies will be hindered further by a strong dollar.  The surprisingly strong June payroll report, ISM service sector, and other recent economic reports also bolstered confidence in overall GDP growth.  It appears that the stock market has finally fallen into a typical Presidential election cycle, which historically rallies heading into the elections.  With the political conventions now underway, both Presidential candidates will likely promise anything to get elected; so a surge in consumer confidence is likely, which tends to rub off on investor confidence.

In the meantime, I have noticed that the bid-to-cover ratios on Treasury security auctions have tightened up; so despite negative yields in Japan and Europe, it appears that the dramatic decline in Treasury yields has drawn to a close as the yield curve tilts back up for Treasury bonds.  Overall, it looks like a rotation out of defensive investments into more aggressive investments is underway.  Going forward, I expect that dividend growth stocks will remain very resilient, while those stocks with the biggest earnings surprises and best guidance should perform the best during the current earnings announcement season,

In This Issue

In Income Mail, Bryan Perry covers last week’s bond correction, while pointing out danger in the upsurge of low-cost mortgage refinancing.  In Growth Mail, Gary Alexander reports on the latest bull vs. bear debate and the danger of selling stocks based on misplaced fears.  In Global Mail, Ivan Martchev analyzes “Helicopter Ben” Bernanke’s visit to Tokyo along with the folly of central banks pursuing endless QE.  In Sector Spotlight, Jason Bodner warns about high valuations in today’s market, with the caveat that what goes up doesn’t always come down.  Then, I’ll cover the long Brexit divorce process and the latest economic statistics, which profiled a June in which economic growth seemed to be “busting out all over.”

Income Mail:
The Latest Economic Data Helps Stocks, Hurts Bonds
by Bryan Perry
“Moral Hazard” in the Race to Refinance Mortgages

Growth Mail:
The Bulls and Bears Butt Heads in Las Vegas
by Gary Alexander
How Bears Undermine the Average Investor’s Performance

Global Mail:
Helicopter Ben Lands in Tokyo
by Ivan Martchev
Is There a Limit to Quantitative Easing?

Sector Spotlight:
What Goes Up…Doesn’t Always Come Down
by Jason Bodner
Utilities Fall from #1 (Last 12 months) to Worst (Last Week)

A Look Ahead:
The Long, Slow Brexit Divorce Process Begins
by Louis Navellier
June Economic Statistics Rise Sharply over May

Income Mail:

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

The Latest Economic Data Helps Stocks, Hurts Bonds

by Bryan Perry

This past week’s slate of economic data was of a more encouraging tone. This kept the market’s bullish sentiment fully intact while triggering some much-awaited profit taking in the bond market. In what has been a relentless stream of fund flows into Treasuries from all corners of the globe, stronger reads on producer prices, manufacturing, and retail sales triggered a fierce round of selling pressure that took the bond prices gapping lower while the yield on the 10-year Treasury Note jumped from 1.33% to 1.60%.

For bond yields both here and abroad, we might have just seen the lows for the cycle – but don’t hold me to that. Stranger things could happen. Last Wednesday, Germany became the second G-7 nation to issue 10-year bonds with a negative yield (Japan being the other). It would stand to reason that rates in Japan and Europe will stay persistently low until there is a sequential uptick in hard economic data; but the U.S. economy is seeing GDP growth pick up, so the recent rotation into cyclical sectors is gaining support.

One boost for market sentiment came from several big banks  all reporting second-quarter financial results within the target range of estimates, so they didn’t disappoint, as many had predicted. The fact that the financial sector got through the week without derailing the recent stock rally bodes well for the bulls going forward. However, I see the major averages as technically overbought, so I expect the market to consolidate its gains in a sideways fashion, giving little ground before resuming its upside bias. This is a classic upside market breakout that should widen out and include most if not all of the 10 S&P sectors of the broad market over the next few weeks.

“Moral Hazard” in the Race to Refinance Mortgages

It seems that the Fed is finally getting what it wants – a hint of inflation and a more confident consumer, which correlates with the recent decline in gasoline prices and the spike in home mortgage refinancing data, thanks to record low rates for mortgages. The Brexit-induced boom in mortgage refinancing hit new highs last week. Lower interest rates pushed total mortgage application volume up 7.2% last week from the previous week, according to the Mortgage Bankers Association. Refinance applications were entirely behind the jump, increasing 11% from the previous week to reach their highest level in three years.

Refinances had surged 21% in the previous week and are up nearly 65% from the same week a year ago, when interest rates were higher. Mike Fratantoni, chief economist for the MBA, highlighted this trend by saying: “Mortgage rates dropped again last week to their lowest level in more than three years, as investors continued to seek safety in U.S. assets given the global turbulence following the Brexit vote.”

Thirty Year Fixed Mortgage Rates - Monthly Line Chart

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

Despite the surge in refinancing, home buying traffic fell off significantly in June, according to a monthly survey of real estate agents by Credit Suisse. Mortgage applications to purchase a home, which are less rate-sensitive, didn't move at all last week. In fact, the volume was 5% lower than the same week a year ago. Interestingly, lower rates have not served as much enticement to homebuyers because they cannot offset the impediment of higher home prices. Although some local markets remain solid, more agents are citing buyers’ concerns with the broader economy and volatile financial markets as holding activity back.

The main issue for most buyers is a lack of sufficient down payment. First-time buyers and low- to moderate-income buyers have largely been sidelined by today's housing recovery. The common cry is “too-tight credit.” Lenders have kept the credit box restrictive because they are gun-shy from the billions of dollars in buy-backs and judicial settlements stemming from the mortgage crisis of a decade ago. Now, one of the nation's largest lenders,  is taking aim at this situation with a new “low down payment” loan – a loan it claims is low-risk to the bank – that is, if Fannie Mae is going to buy them, package them, and sell those loans to Wall Street. Sound familiar? If not, watch “The Big Short.”

Scene From the Movie

New products launched this year have a minimum down payment of just 3% for a fixed-rate conventional mortgage of up to $417,000. If 3% remains too formidable, help can come from gifts and community-assistance programs. Customers are not required to complete a homebuyer education course. The minimum FICO score for these loans is 620.

I don’t care how banks try to spin these new programs, it just sounds like they are pushing the envelope all the way around to boost volume when low interest rates are squeezing bet interest margins in a big way. The fact that after only seven years from the mortgage meltdown that the banking industry is introducing these kinds of products raises a red flag in my view.  One has to question whether any borrower with a 620 FICO score should qualify for this program. Unless the borrower has a resounding income-to-debt ratio, a 620 credit score usually denotes someone who is in a subprime credit range. Other programs have that minimum, but the average score on loans actually made is closer to 750. This trend could begin to sow the seeds of another subprime mortgage crisis if others compete for the low-credit market. The low down payment, low income, low credit genie is once again out of the bottle.

Instead of letting free market forces cause overheated home prices to come down to more normalized levels, the banks would rather make it possible for unqualified buyers to chase record home prices – like buying dot-com stocks on margin back in 1999 – possibly creating another housing bubble.

Last I heard, home ownership is not a right or an entitlement, as some industry officials or politicians like to claim. In my view, this kind of earnings-at-all-costs thinking could cause history to repeat itself again.

Growth Mail:

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

The Bulls and Bears Butt Heads in Las Vegas

by Gary Alexander

I’ve just returned from my 10th consecutive Freedom Fest in Las Vegas, a four-day “gathering of free minds” that holds concurrent sessions on the global economy, stock markets, politics, the arts (including a film festival), history, and science – a smorgasbord of highly educational and entertaining sessions, sparked by a series of classic debates on subjects including global warming, capitalism vs. socialism (guess who won?), the cause of the 2008 banking crisis, and “FDR: Champion or Opponent of Liberty?”

With over 2,100 attendees, Freedom Fest has become bigger than any investment seminar I have attended in recent years. Last year, I moderated the bull vs. bear stock market panel – which I wrote about here.  This year, conference producer Mark Skousen moderated the two-on-two bull vs. bear debate, which included three of last year’s four panelists. He began by asking: “Despite the panic after the Brexit vote in late June, the Dow Jones Industrials and S&P 500 both just set new record highs. Does that shock you?”

The first bear said that Mark was cherry-picking his indexes. He said that the New York Composite is down and many overseas indexes are down, including emerging markets and several sectors, like financials and energy. The other bear added that the U.S. market has been flat over the last two years, adjusted for inflation, while the average stock is down. The market is only up, he said, because the Fed stopped raising rates. He said that the debt bubble is still huge and politicians are avoiding addressing it, while the Fed is lowering the interest-rate cost of debt and thereby keeping the market afloat. He also said that the stock market peaked in “real” terms (in terms of the gold price) over 16 years ago, in early 2000.

In response, the bulls reminded us of the positives that headline writers and most bears ignore: Very low inflation, rock-bottom interest rates, ultra-cheap energy for family home heating and travel, a rebounding housing market, a declining jobless rate, and household wealth at an all-time high. The second bull added that the bears typically use scare tactics to trigger fears, resulting in panic sales, but over the longer term America is still the most innovative nation in terms of new patents and new technologies. Stocks are like any market, he said. If the supply declines and demand rises, prices tend to go up. With corporate stock buy-backs, the volume of stocks available for purchase has declined, which fuels a bidding war in shares.

When recommending investments for the next year, one bull and one bear agreed on liking emerging markets. The bull reasoned, “Buy what’s cheap. What is cheap now? Look at emerging markets, which include 75% of the world’s land mass and 85% of its people. The great engine of future growth will be in emerging markets. Everything we take for granted in America is still new in these markets.”

It was a great debate, with a lot of overlap between the bulls and bears, since no panelist was 100% in or out of the market, but I want to highlight the comment that “the bears use scare tactics to trigger fear….”

How Bears Undermine the Average Investor’s Performance

This bull market is now seven years and four months old. Ed Yardeni reminds us that “an actual bull can live from five to 15 years, depending on how well-behaved he is and how his libido and fertility rate hold up over time.” Naturally, there have been quips about this bull market’s libido failing to perform after it took over a year (May 21, 2015 to July 11, 2016) to reach a new high, but this is still a pretty virile bull.

Outrageous doomsday warnings from the past underline the folly of market timing based on scary statistics. In the bull/bear debate, one of the bulls asked the audience to name one consistently successful market timer. There were no nominations. He said there are only two kinds of market timers, “Those who don’t know what they’re doing, and those who don’t yet know that they don’t know what they’re doing.”

The problem with perma-bears is that they tend to scare investors out of the market at the worst possible time. Richard Bernstein examined how the average investor fared during a recent 20-year period, 1993 to 2013, using actual client accounts surveyed by DALBAR vs. major market indexes. He found that the average investor tended to sell low and buy high, underperforming most asset classes, including T-bills:

Asset Class Returns versus The

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

Regarding the emerging markets – which were favored by a bull and a bear in this year’s panel – I make no predictions regarding emerging markets funds; but I will say that Americans can profit from overseas markets by buying selected stocks in companies that make products in demand around the world. Barring a trade war or a world war or other disruptive externality, the emerging markets should continue growing.

The world is getting dramatically richer, even though the widespread perception is the opposite. In an article in the January/February 2016 issue of Foreign Affairs (“Prosperity Rising”), Steve Radelet wrote:

“In 2013, the Swedish survey organization Novus Group International asked Americans how they thought the share of the world’s population living in extreme poverty had changed over the last two decades: 66% of respondents said that they thought it had doubled and another 29% said that it hadn’t changed.  Only 5% knew (or guessed) the truth: that the share of people living in extreme poverty had fallen in half.”

Here is the clear reality, which flies against what 95% of respondents assumed was the exact opposite:

Global Poverty by Percentage Chart

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

The fact that only 5% knew (or guessed) the direction of this long-term trend tells me that the bears have overloaded the debate stage. They have poisoned the minds of many investors. Don’t let them poison you.

Global Mail:

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

Helicopter Ben Lands in Tokyo

by Ivan Martchev

On November 21, 2002, Federal Reserve Board Governor Ben Bernanke gave his infamous “helicopter” speech titled, “Deflation: Making Sure “It” Doesn’t Happen Here,” before the National Economics Club in Washington DC. The speech raised eyebrows. The most notable part has been quoted often:

“What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

In that speech, Bernanke referred in passing to economist Milton Friedman’s phrase, “helicopter drop,” referring to excessive money creation. Now, as a former Fed Chairman, Bernanke surely regrets the parts of this speech that gave him the nickname “Helicopter Ben,” but its contents again re-surfaced as he met with Bank of Japan Chairman Haruhiko Kuroda last week in Tokyo. This informal meeting helped the yen weaken all the way to 106 during the week from 100 the week before and was seen as a sign that Japanese authorities were mulling even more extreme monetarist measures.

Japanese Yen versus Nikkei 225 Stock Market Index Chart

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

The weekly decline in the yen was also met with a surge in the Nikkei 225 benchmark index, which in the week prior had been flirting with 52-week lows in the area of 15,000. The past year has not been a pleasant experience for Japanese stock market investors as the yen strengthened from 125 all the way to 100 as many of the famous Japanese exporters derive the majority of their earnings from abroad. In that regard, the correlation of the Nikkei 225 Index and the USDJPY exchange rate is very high (see chart).

Bernanke's visit to Tokyo makes this comment on Japan from his 2002 “helicopter” speech even more prescient today: “I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems.”

Given the fact that the Japanese have run a QE program since 2013 that is three times more aggressive than the Fed’s QE program relative to the size of Japanese GDP, and Japan has still not gotten the results that they were looking for is rather telling. Sure, the yen originally weakened from 80 all the way to 125 (last year) and the Nikkei 225 surged, but why has it been strengthening so much of late? (See my May 31, 2013 Marketwatch article, “Repercussions from the yen surge.”)

At an earlier meeting in April, Etsuro Honda, one of the most trusted advisors to Japan’s prime minister, noted that Bernanke had mentioned to him the option of “perpetual bonds.”  Under this scenario the government would issue non-marketable perpetual bonds with no maturity date and the Bank of Japan would directly buy them. This is practically helicopter money, as is direct monetization of government debt by the central bank. (Source: July 13, 2016 Bloomberg article, “Bernanke Floated Japan Perpetual Debt Idea to Abe Aide Honda.”) While the details of last week’s meeting are still not well-known, the currency markets surely acted like they heard the sound of helicopters landing in Tokyo.

Japan Government Debt to Gross Domestic Product Chart

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

Monetizing Japanese government debt, as the government simply cannot manage to repay it, is where this all seems to be moving. It may be simply too late for Japan. I have no doubt that the strengthening cycle of the yen over the past year is temporary from a longer-term perspective as it is primarily driven by a short squeeze due to the yen’s popularity in institutional carry trades. But from a longer-term perspective, such as five years, the yen’s prospects are not good if the plan is to run the printing presses until Japan runs out of trees and then drop those freshly-printed banknotes from helicopters. Under such a “helicopter” scenario, who knows how much the yen will fall?

Japanese Yen Chart

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

For the time being, until it becomes clear what new and innovative ways the Japanese authorities will choose to monetize their way out of the present economic mess, the yen will probably coast near present levels. The talk of more monetarist measures in Japan, particularly given what is going on in Europe and China, only means one thing: that the U.S. Dollar Index is headed to fresh multi-year highs above 100.

United States Dollar Index - Monthly OHLC Chart

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

The U.S. Dollar Index is still down marginally in 2016 since the four rate hikes originally expected in 2016 are no longer expected; but given the relative performance of other currencies in the index and their monetary policy developments, I expect the U.S. Dollar Index will be higher by year’s end.

Is There a Limit to Quantitative Easing?

The short answer is “yes,” but the trouble is we don't know where that line in the sand is situated. Total assets of central bank balance sheets at the moment are $17.2 trillion. It is rather scary when one starts to round trillions, as every decimal point is $100 billion. Before the Great Financial Crisis started in 2007, total central bank assets were $6.4 trillion, according to Yardeni Research.Japan Central Bank Balance versus United States Central Bank Balance Sheet Chart

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

Most market observers think the Fed came up with the idea of impregnating their balance sheet, but that is incorrect. In 1998 the Bank of Japan embarked on the first real QE operation in the modern era, which can be seen in the first upward zigzags in the blue line above. The Federal Reserve unofficially started QE in late 2008 by taking in all kinds of illiquid debt instruments – the markets for which had vanished at the time. Officially, QE operations in the U.S. Treasury and mortgage markets began in early 2009.

What I am worried about is that central bankers may get cocky as so far their monetarist maneuvers have not broken the financial system. While quantitative easing is not necessarily real debt monetization and outright printing in the U.S. as the Fed swaps one interest-bearing asset (Treasuries) for another (excess reserves), it is that interest on excess reserves has purposefully always been above the fed fund rate that stops them from producing hyperinflation. This higher rate stops excess reserves from entering the fed funds market and in effect stops the credit multiplier of the fractional reserve banking system.

In essence, the U.S. version of QE was the most profitable carry trade in the world where the Fed paid 0.25% (the interest rate on excess reserves for most of QE’s tenure, rising to 0.50% on December 17, 2015) to buy assets that had yields of 2% or higher, in effect remitting the difference to the Treasury.

Monetary economists at the Fed seem to think that they know how to unwind its balance sheet (see “The Federal Reserve’s Balance Sheet and Earnings: A primer and projections”). What I am worried about is that what was discussed in Tokyo last week is very different than the controlled QE in the U.S. and is more along the lines of what Ben Bernanke told Etsuro Honda in April.

It feels to me that the line in the sand – the QE “point of no return” – is getting nearer and nearer.

Sector Spotlight:

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

What Goes Up…Doesn’t Always Come Down

by Jason Bodner

Have you ever seen a pile of junk or a landfill and felt a little sad about how much waste we produce? When that happens, it’s therapeutic to look towards the clear skies in an attempt to feel better. Sadly, though, according to NASA, in Earth’s orbit there are more than 21,000 objects above 10 centimeters, over half a million objects larger than 1 centimeter, and over 100 million bits of space debris under 1 cm. As if that weren’t concerning enough, these objects travel through the heavens at 17,500 mph or faster.

After well over 8,000 rocket launches since Sputnik in 1957, roughly 3,500 satellites remain in orbit, many of them doing essential work, improving our daily lives. Yet that number is tiny compared with the space debris floating around it. Some of it falls to earth, but most of what goes up … stays up there.

Space Junk in Orbit Image

The S&P 500 Index has rallied more than 18% since the low on February 11, but there has been a rise in junk as well as a rise in quality stocks. While the stock market’s recent rally has been exciting to watch and surely helped to calm some rattled nerves, the latest rally is still a bit concerning for a few reasons.

Standard and Poor's 500 Index Chart

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

The S&P 500 is currently trading at a 25 P/E ratio. The mean for the last 100 years is 15.6 (using data from Multpl.com). While there’s nothing inherently wrong with a high P/E ratio, it typically indicates a heated market where growth is in demand. This is obviously not what we have been seeing recently.

We have been pointing to the fact that the strongest sectors have been defensive and cater to yield-hungry investors: Utilities, Telecom, and Staples. The weakest have been Financials, Industrials, and Materials. Energy, while having recovered from the depths of despair, is not a particularly strong sector, and a traditional engine of growth – Infotech – hasn’t been the shining leader that would more readily justify a higher overall market P/E. Furthermore, Birinyi Associates (in WSJ.com July 17, 2016) puts the 12-month forward P/E for the S&P 500 at 18.37. In their Earnings Insight dated February, 20 2016, FactSet pointed out that the forward 12-month P/E was the highest since 2004 – and it was just 17.10 then.

Standard and Poor's 500 Trailing Price to Earnings Ratio Chart

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

Another reason for concern is that a report last week from Bespoke Investment Group highlighted the fact that all 10 S&P sectors are overbought. They define “overbought” by measuring prices higher than one standard deviation above the 50-day moving average.

Utilities Fall from #1 (Last 12 months) to Worst (Last Week)

Let’s look at those 10 sectors more in detail:

Standard and Poor's 500 Daily Sector Indices Changes Table

Materials, Industrials, Financials, and Infotech were last week’s top performers. These sectors have been weaker of late with Financials being the weakest for some time. The only loser last week was Utilities:

Standard and Poor's 500 Weekly Sector Indices Changes Table

Meanwhile, Utilities was among the top three performers for the last three months:

Standard and Poor's 500 Quarterly Sector Indices Changes Table

Notice how powerful the last six months have been in all sectors (the S&P was 1880.83 on January 16):

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

Over the past 12 months, Financials trail the pack significantly, with Utilities on top:

Standard and Poor's 500 Yearly Sector Indices Changes Table

So we have an overbought market with a high P/E. Let’s add one more concern to ponder. According to FactSet, it's a fact that we are in the fifth consecutive quarter of negative earnings growth and sixth consecutive quarter of negative sales growth. This “will mark the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009.”

The one saving grace for this rally is the seemingly ubiquitous question, “Where else is money going to go?” With many global yields negative, volatile commodities facing pressure from a strong dollar, wild-west swings in currency markets, shaky ground for European equities, and uncertain monetary policy, the question seems to answer itself. Ideally, a process of elimination is not the strongest fundamental reason to chase a rally, but we are in an election year and the uncertainty over the Brexit vote is behind us, while the real implications of Brexit likely won't be felt until the divorce is finalized more than two years out.

As I write this, I'm inclined towards expecting some short-term consolidation of the U.S. equity market.  Top ends of price ranges are technically extended, all sectors are overbought, the P/E ratio is high, and sales and earnings growth is decelerating. I would expect more volatility and, when a turn does come, I also expect high frequency traders and algorithmic trading to kick in and exacerbate the move.

We all find security when the market has a series of good days. The last year has been highly volatile, and I suspect our recent rally is a high point in the market mood swings amidst continued volatility. While fundamentals are improving in some places, they are not that strong or confidence-inspiring to me. The rally has been all-encompassing with both quality and dreck going up. As with space-junk, what goes up doesn’t always come down. Although a rally can be sustained for quite some time based on “where else will you put your money?” that doesn't breed the best of conditions for mental security in markets.

As the 34th President of the United States, Dwight D. Eisenhower, said, “If you want total security, go to prison. There you’re fed, clothed, given medical care and so on. The only thing lacking... is freedom.”

Dwight D. Eisenhower 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.*

The Long, Slow Brexit Divorce Process Begins

by Louis Navellier

On Thursday, the Bank of England surprised everybody by not cutting its key interest rate of 0.5% after previously hinting that it would.  Literally 80% of traders surveyed expected that the Bank of England would cut its key interest rate by 0.25%.  However, the Bank of England implied that a cut in key interest rates would happen instead at its August meeting.  Specifically, the Bank of England said, “In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the Committee expect monetary policy to be loosened in August.”

The British pound rallied in the wake of this announcement as it now appears that Governor Mark Carney wanted to help shore up the British pound, which had plunged to a 31-year low to the dollar after Brexit.

The Bank of England, euro-zone finance ministers, and the IMF are all predicting that Brexit will curtail economic growth throughout Europe.  The continent is so pessimistic that Germany actually auctioned new 10-year government bonds with a negative yield last Wednesday.  This trend should continue, since Britain cannot exit the euro-zone for at least two years and negotiations may not even begin until October.

My favorite economist, Ed Yardeni, pointed out last Wednesday that the Bank of Japan, the European Central Bank, the Fed, and the People’s Bank of China have cumulatively increased their assets by $1.3 trillion over the past 12 months, up a whopping $10.5 trillion since 2008.  This 166% increase in assets since 2008 grossly exceeds the 15% increase in global industrial production and 17% increase in global exports.  Furthermore, the International Monetary Fund (IMF) said that nominal global GDP rose by 44% between 2007 and 2015.  So, no matter how you slice it, central banks through their relentless quantitative easing and money pumping have inflated financial assets, as money flowed into both stocks and bonds.

Now that interest rates are increasingly negative around the world, money is expected to continue to flow to where the yields are still positive; so the U.S. has clearly been a major beneficiary of the global money flows and will likely continue to benefit as long as U.S. rates remain much higher than Europe or Japan.

June Economic Statistics Rise Sharply over May

In addition to June’s healthy jobs picture, reported earlier this month, many other June statistics are also coming in positive.  On Thursday, the Labor Department announced that the Producer Price Index (PPI) rose a whopping 0.5% in June, the biggest surge in a year.  Economists were expecting just 0.2%.  Wholesale energy prices rose 4.1% and prices for wholesale goods rose 0.8%.  The other surprise was that wholesale service prices rose 0.4%.  Excluding food and energy, the core PPI rose 0.4% in June.

Another positive number came on Friday when the Commerce Department announced that retail sales rose 0.6% in June, substantially higher than economists’ consensus estimate of 0.1%.  Sales at home improvement stores surged 3.9%, posting their biggest monthly gain in more than six years.  Auto sales only rose 0.1% in June, while restaurant sales declined 0.3% and clothing sales declined 1%.  Despite these soft spots, most other retail categories posted strong sales growth.  Excluding autos and gasoline, retail sales rose 0.7%.  In the past 12 months, retail sales are up at a 2.7% annual pace through June.

Industrial Production Image

Also on Friday, the Fed announced that June industrial production rose 0.6%, slightly higher than economists’ consensus estimate of 0.5%.  Industrial production is now running at the fastest pace since last July, but it is a bit distorted by the fact that utility output rose 2.4% in June due to abnormally hot weather.  Manufacturing output rose 0.4% in June and was led by a 5.9% surge in automotive production.

Last Wednesday, the Federal Reserve released its latest Beige Book survey, which revealed that most of the 12 Fed districts reported growth continuing at a “modest pace.”  The Beige Book survey reiterated that the U.S. economy remained on track for 2% GDP growth in 2016, despite a weak start.  Essentially, the Beige Book survey painted a picture of a Goldilocks economy that was neither “too hot nor too cold,” but just right for steady growth with no need of interest rate increases (or cuts) by the Fed, while these economic statistics comprise one more reason why financial assets keep pouring into the U.S.


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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

Marketmail Archives Trade Summary

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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

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