S&P 500 Reached “Triple Bottom”

The S&P 500 Reached a “Triple Bottom” Last Friday

by Louis Navellier

January 19, 2016

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

Last Friday, the S&P 500 essentially tested its August 24th low on high trading volume; so we finally got the panic “capitulation” day that typically marks decisive stock market bottoms. I for one can tell you that I was putting new money into the stock market by funding my 2016 SEP and adding money to a family partnership Friday, because the stock market appears to be grossly oversold, as signaled by a “triple bottom,” which was created by market lows set in mid-October 2014, August 24, 2015, and January 15, 2016.

The way High Frequency Trading (HFT) systems work, what is down today is likely to be up tomorrow; so the herky-jerky market action we’ve been seeing on a daily basis will likely persist. The fact that Friday was a capitulation day on high trading volume, aided by an option expiration day, gives me hope that we’ll see a big bounce early in this holiday-shortened week; so be prepared for more daily gyrations, thanks to HFT. In addition, the S&P 500 dividend yield of 2.3% is now well above the 10-year Treasury bond (below 2%, intraday).

Deep Sea Oil Drilling Platform ImageHowever, before we get too excited, the average energy stock now trades at 28.7 times trailing earnings, and their forecasted earnings are truly horrific. A while ago, my company published a white paper, warning investors to stay away from these stocks. The ETF industry is basically causing this excess valuation for energy companies with negative sales and earnings. Specifically, I’ve seen a wave of ETF “pop up” buttons lately, advertising ETFs with yields over 4%. The only problem is that to get that 4% dividend yield, the ETF industry has to buy a lot of multinational and commodity-related stocks that are characterized by negative sales and earnings. As a result, the tail (i.e., dividend yield) is wagging the dog.

Not surprisingly, energy stocks now dominate the “F”-rated stocks in our Navellier DividendGrader and PortfolioGrader services. In my opinion, it is futile to chase high-dividend stocks via ETFs since you are setting yourself up for persistent principal erosion, regardless of the dividend yield. In other words, while the S&P 500’s generous dividend yield is putting a good foundation under the overall stock market, some of the highest dividend offerings are becoming dangerous, due to the ongoing woes in the energy sector.

In This Issue

Income Mail:
A “Fork in the Road” Confronts Yield Investors
by Bryan Perry
“Gimme Shelter” in Stormy Market Conditions

Growth Mail:
Unwarranted Pessimism is Infecting America
by Gary Alexander
Doomsday Rhetoric has a Long Pedigree

Market History:
Doomsday Rhetoric 110 Years Ago
by Gary Alexander

Global Mail:
The China-Driven Panic Continues
by Ivan Martchev
India: The Last Emerging Market Standing

Sector Spotlight:
Beware Unrealistically High Yields
by Jason Bodner
Materials & Financials Lag

Stat of the Week:
Producer Prices Declined 1% for All of 2015
by Louis Navellier
The Fed’s Beige Book Portrays a “Jekyll & Hyde” Economy

Income Mail:

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

A “Fork in the Road” Confronts Yield Investors

by Bryan Perry

Further downside selling pressure swept global markets last week, led by the breakdown in the Shanghai Index, violating the 3000 level and closing down another 3.5% to 2900 heading into the long weekend. The other shoe to drop was WTI crude falling below $30 per barrel and testing the $29 support level.

China got the global markets into this mess last summer, and that country has also been fueling the recent weakness in global equities; so market participants are waiting to see if China can deliver some uplifting economic news to get the global markets out of this mess. China’s GDP data offers a telling snapshot, albeit somewhat dated, of where the Chinese economy stands now. China’s GDP growth has been in a steady state of deceleration since the first quarter of 2010, when it hit 12.1%

China Real Gross Domestic Product Chart

Given the growing importance of China's economy as an engine for global growth, the latest GDP report has far-reaching trading implications for capital markets. China’s third-quarter GDP growth was 6.9% year-over-year, just behind the 7.0% second-quarter rate. Economists are expecting 6.8% growth year-over-year during the fourth quarter. That would be the slowest pace since the first quarter of 2009.

And here’s the rub. There is legitimate investor concern that credit markets tied to oil, materials, metals, and emerging markets will begin to see defaults accelerating in the weeks ahead, without a serious rebound in sight. Without a clear catalyst to latch onto, the latest “dash for cash” heading into a three-day weekend took its toll. This is especially true for dollar-denominated bonds issued by emerging markets whose currencies are losing value against the dollar, thereby increasing the cost of debt repayment. Not surprisingly shares of two closely-watched junk bond ETFs, iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and SPDR Barclays High Yield Bond ETF (JNK), took out their recent lows last week and are now trading at levels not seen since 2009.

Last week’s RBS Capital Markets call to “sell everything except investment grade bonds” sounds too draconian in my view. There are still many blue chip companies that are devoid of the risks associated with the strong dollar, the drop in oil prices, China’s slowing rate of growth, and emerging market debt.

“Gimme Shelter” in Stormy Market Conditions

Until this market correction clearly ends, I’ve been identifying select income bunkers where safety of principal is present, along with juicy yields that far outstrip those of intermediate-term Treasuries and investment grade bonds. In addition to certain REITs (like self-storage, data centers, skilled nursing, and neighborhood retail), which I covered here in last week’s update, the U.S. electric utilities sector has emerged as another safe zone. Even the consumer staples sector – which encompasses all the kitchen and bathroom stocks – has succumbed to the latest sell-off, although they are typically on the receiving end of market rotation.

The dividend yields for these five stalwarts are at or below 3%. For investors seeking yields above 3% that also exhibit bond-like behavior, consider the best-of-breed power utilities, the majority of which are holding the line against torrential waves of equity liquidations. A comparison of the Utilities Select Sector SPDR EFT (XLU) and the S&P 500 (SPX) over the past two months shows a striking divergence of relative strength. While the S&P is down almost 9%, shares of XLU are trading almost 1% higher.

Utilities Select Sector Chart

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

Sometimes a picture says a thousand words. The contrast (above) between the recent washout in the S&P vs. the small gain in the utility sector is meaningful, especially when the dividend yield on shares of XLU is 3.75%. I would be hard pressed to find another ETF with any sort of yield that has bucked the market’s slide like XLU. (Please note: Bryan Perry does not currently own a position in XLU; Navellier & Associates does currently own a position in XLU for some client portfolios.)

When we dissect the holdings of what makes up the SPDR Utilities ETF (XLU), a few stocks stand out. Shares of Southern Company (SO) sport a dividend yield of 4.6%, one of the highest in the industry.

Southern Company - Annual Dividend per Share Chart

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

Southern operates in nine states with a widely-diversified portfolio of power generation that includes natural gas, coal, nuclear, hydro, wind, solar, and biomass. Southern Company has large, regulated business operations, and it is working to strengthen these. The company has been reporting healthy financial numbers, due to the strong backing of its large regulated asset base which should provide stability to their revenues and cash flows, as well as supporting future dividend growth. The stock is currently trading near a 10-month high. (Please note: Bryan Perry does not currently own a position in SO; Navellier & Associates does currently own a position in SO for some client portfolios.)

Southern Company Stock Index Chart

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

In the words of Mark Cuban, “sometimes the best advice in an enormously volatile market such as the present is to do nothing at all.” If only Janet Yellen & Co. had heeded that advice. The current investing landscape could last for months to come, which doesn’t help income investors sitting in a 100% cash position. The fact that stocks like Southern Company and others in the space have weathered the worst start to any January in stock market history is a testament to the soundness of the sector and those companies that are so well positioned from a geographic and demographic standpoint.

Growth Mail:

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

Unwarranted Pessimism is Infecting America
(But Pessimism often Accompanies Market Bottoms)

by Gary Alexander

“On what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?” – Thomas Babington Macaulay, 1830

A year from tomorrow, America will inaugurate a new President. So much of our hopes and dreams seem to revolve around who holds that mighty office. Think of the major market recoveries after a smiling and jovial Franklin D. Roosevelt or Ronald Reagan entered the highest office in hard times (1933 and 1981), replacing the dour-faced Herbert Hoover and Jimmy “economic malaise” Carter. Last month, I profiled the Scrooge-like negativism of Donald Trump and Bernie Sanders, but few of the other major candidates in either major party has much good to say about the current state of affairs in America.

On January 5, I reported that 2015 was the first postwar pre-election year that failed to deliver significant market gains. January has started out even worse, with major market indexes down 8% to 12% in the first two weeks of 2016, capped by a market meltdown the day after the latest Republican candidate debate.

The market’s current malaise goes far beyond earnings contraction, a strong U.S. dollar, and weak commodity prices. There is a prevailing sense of pessimism across America. For example, the market research firm YouGov polled 1,000 adults in each of seven nations last September, asking if those respondents agreed with this statement: “The next generation will probably be richer, safer and healthier than the last.”

Here are the totals of those believing that the next generation will be better off than the last generation:

Percentage of Optimists Table

Apparently, only one in seven Americans believes that the future will replicate the past two centuries of growing prosperity for a greater number of people. The “Great American Dream” is alive and well, but only in parts of Asia. You must go to Mumbai to find some real optimists! Brazil has some of the worst economic problems facing any free nation, but there are twice as many optimists in Brazil as in America.

We are also getting more cynical. YouGov reported that 65% of Americans believe that “most big businesses have dodged taxes, bought favors or polluted” and over half (55%) of Americans believe in the statement “the poor get poorer under capitalism,” despite overwhelming evidence to the contrary. (Over 100,000 people are being lifted out of poverty every day around the world according to World Bank data released last October in “Policy Research Note No. 3: Ending Extreme Poverty and Sharing Prosperity.”)

It gets worse. A huge minority of Americans believe that all human life will end in the coming century.  According to Ronald Bailey in Reason Magazine (“Everybody Loves a Good Apocalypse,” November 2015), a majority (54%) of those surveyed in the U.S., Canada, Australia, and the UK think there’s a 50% or greater chance that our way of life will end within the next 100 years and 25% think we’ll go extinct as a species within a century. Among those four nations, Americans were the most pessimistic, coming in at 57% who believe that our way of life will soon end and 30% who believe all human life will end by 2115.

Younger respondents were more pessimistic than older folks, according to the survey, conducted by Melanie Randle and Richard Eckersley (“Public perceptions of future threats to humanity and different societal responses: A cross-national study,” Futures, June, 2015). When did our kids become so cynical?

Doomsday Rhetoric has a Long Pedigree

I’m being facetious when I ask, “When did our kids become so cynical?” I fell for the same sad siren song when I was young, especially after reading Rachel Carson’s “Silent Spring” (1962), a gorgeously written book that was badly wrong on the economic and biological trade-offs from using chemicals like DDT.

For a while, I also believed Paul Ehrlich’s “Population Bomb” (1968), which sold three million copies. He was one of the most popular guests on the Johnny Carson show, where he was invited back 20 times to give Carson’s audience a verbal horror show. He predicted mass starvation in the 1970s. According to Earth Island Journal (Summer 2009), when Ehrlich gave out the address to his group, Zero Population Growth, on Carson’s show, the postal center where ZPG was located had more mail arriving two days later than on any other day in its history. When I attended my 10th high school reunion and won the award for having “the most children” (three); that accomplishment earned scowls from some ZPG zealots there.

Nearly a half-century after Ehrlich’s book, thanks to Dr. Norman Borlaug’s “Green Revolution,” obesity is our problem, not starvation. In 1960, an average acre of corn delivered 51 bushels.  Today, the average yield is 166 bushels per acre, supporting over three times as many people. But Ehrlich is still preaching gloom and doom (see “The End of Doom,” by Ronald Bailey, Reason Magazine, October, 2015).

Today, there is similar pessimism about the stock market. The percentage of bulls in the weekly American Association of Individual Investors (AAII) poll for the week ending January 14 was the lowest (17.9%) in a decade. Even on March 4, 2009, the week before the bull market began, the AAII Sentiment poll was 19% bullish (and 70% bearish), the widest bearish plurality since the market low of October, 1990, when just 13% were bullish and 67% were bearish. (P.S. Both readings preceded long, massive bull markets.)

The percentage of bulls has fallen by a third in the three weeks since Christmas, from 26.4% to 17.9%.

Percentage of Stock Market Bulls Table

Turning to earnings and revenues – the mother’s milk of market growth – Ed Yardeni wrote last Tuesday, January 12, 2016, (in “The Litany of Pessimism”) that “industry analysts didn’t get the memo with the litany of worries for 2016 and 2017.” The consensus estimates for S&P 500 revenue growth is +4.8% for 2016 and +5.0% for 2017. Expected earnings increases are even better: +8.1% for 2016 and +12.6% for 2017: “The world certainly looks better from a bottom-up perspective than a top-down one. Admittedly, industry analysts have a tendency to be too optimistic. But quite a few of the top-down wise guys may be too pessimistic.”

I predict that the 14% who believe in progress and the 17.9% market bulls will likely be among our most successful investors. Bears make money selling their negativism. Bulls make money buying good stocks.

Market History:

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

Doomsday Rhetoric 110 Years Ago

by Gary Alexander

Pessimism reigned a century ago, too: On January 19, 1906, the DJIA reached a high of 103, which it would not surpass until 1916. The DJIA fell nearly 50% by the end of 1907. President Teddy Roosevelt exacerbated the crash by labeling big business “malefactors of great wealth.” It was a time of muckraking books like Upton Sinclair’s The Jungle (published in February of 1906), Lincoln Steffens’ The Shame of the Cities (1904), Jack London’s War of the Classes (1905) and his socialist novel, Iron Heel (1908).

In this week during 1974 and 1980, America was in recession while gold and silver soared. On Thursday, January 17, 1974, the Commerce Department reported that the final quarter of 1973 saw the worst inflation rate since 1951. (Late 1973 was the quarter in which OPEC launched its first oil embargo.)  On January 18, the first New Orleans investment conference began, under the sponsorship of the late Jim Blanchard. Then, on Monday, January 21, London gold hit a record $161.31 and silver hit a record $3.97.

There was an instant replay over the same weekend six years later. The Soviet Union had invaded Afghanistan between Christmas and New Year’s Day, 1979, and 54 Americans were held hostage in Iran. On Friday January 18, 1980, silver hit $50 an ounce for one day, resulting partly from inflation fears, but also from a cornering of the silver market by the Hunt brothers. On Monday, January 21, 1980, gold hit $850, a level it would not exceed for the next 28 years, reflecting high inflation and global tensions.

On January 17, 1991, 25 years ago this week, “Desert Storm” broke out in the Persian Gulf. The DJIA rose 114.6 points (+4.6%), its second largest daily point gain to that date (second only to October 21, 1987).  For five previous months, during the “Desert Shield” build-up, the market had been sagging, reaching a low of 2365 in October and hovering around 2400 thereafter.  Few expected stocks to soar when war erupted, but aircraft from the U.S.-led coalition hit targets in and around Baghdad all night long. The world watched on CNN, building into a buying frenzy by dawn. The week ending January 18 delivered the biggest weekly percentage gain of the DJIA in the 1990s but that was just the beginning. In six weeks, the DJIA rose 20%. Another market surprise on January 17 was that the key commodities fell badly. Gold and crude oil went into a spectacular free fall. Oil set a record for the single largest one-day drop, falling quickly to just $10.56 a barrel, down 74% from its peak of over $40 the previous August.

Global Mail:

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

The China-Driven Panic Continues

by Ivan Martchev

It is difficult to believe that the selling that has marked the first two weeks of January will continue at the same pace. At the January selling rate, the Chinese stock market will disappear by June while the U.S. stock market will disappear by year end, neither of which is likely to happen. The U.S. market is entering earnings season, which is unlikely to be all that bad, and is likely to create a rebound for the S&P 500.

For the Shanghai Composite the situation remains dire. My base-case scenario is that the China is facing a generational economic unravelling which is hitting the Chinese yuan with record capital flight, declining economic numbers (as much as one can believe mainland statistics), and a falling Chinese stock market.

I have serious doubts that China can create a recession in the U.S. For the time being I am treating the bad news hitting the U.S. stock market as an external shock, similar to the one we saw in the Asian Crisis in 1997-98. As I have explained previously, the U.S. stock market can get hit by external shocks but it also has a much easier time rebounding from those than if the problem was generated by the U.S. economy.

The Shanghai Composite last week closed at 2900, which puts it 900 points away from the upper end of my target range of 1000-2000 in 12-24 months. There are no earnings to support most mainland Chinese equities and as I have previously shown, they are more than three times more expensive (65 P/E) than the median valuation for U.S. stocks (19 P/E) at a time when the economy is rapidly deteriorating, as reflected by commodity prices, where China has been the #1 or #2 consumer of most major commodities.

Shanghai Composite - Daily Nearest OHLC Chart

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

Chinese stocks have created a rather peculiar technical pattern called a head-and-shoulders top (marked by my blue lines, above), which puts a rough target for the Shanghai Composite below 1000. This is possible in the sense that a nasty recession could dramatically suppress earnings for Chinese stocks on top of them being quite overvalued based on their current median P/E multiples.

Commodities Research Bureau Index Chart

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

We have not only taken out the major support in the CRB commodity index in the 180-200 range, but we have now penetrated 160, closing at 159.93, a level not seen since early 1973. It is true that the CRB commodity index has been reformulated more than once since the 1970s, but it is also true that it still serves as a valid gauge of commodity demand, which is collapsing at the moment. Many of the components of the S&P 500 Index have also changed over the past 20 years but it too serves as a good gauge of the health of corporate America. Reformulated or not, the CRB Index signals no bottom in sight.

Crude Oil WTI - Daily OHLC Chart

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

Based on February 2016 WTI crude oil futures, we have now cracked the $30 barrier and closed at $29.42/bbl. last week. Soon the March 2016 WTI futures will become the front-month and they still hold that important psychological level. I don’t think $30 will hold and $20 may not hold, given that Iran’s sanctions have now been lifted, which will unleash plenty of crude oil to push crude oil prices lower.

One unintended consequence of this China-driven panic has been the rally in Treasury prices and the marginal breach of the 2% barrier by the 10-year Treasury note yield, closing the week at 2.03%.

I raised a lot of eyebrows in my conversations with investors at the end of 2015 when some were telling me that Treasury yields were headed higher due to the coming Fed funds rate hikes. My point of view is different, in that I am looking for Treasury yields to make all-time lows in 2016.

Ten Year Treasury Yield Chart

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

Pictured above is the weekly chart of the 10-year Treasury Yield Index, which is basically the 10-year note yield times 10. The all-time low in the 10-year note yield is 1.39%, set in 2012. That is about 60 basis points away from here. Those 60 basis points would be quite the move in the bond market, provided that the Fed has not yet officially given up on its future rate hike plans. I would expect the 10-year note yield to make all-time lows in the second half of 2016 as the Fed gives up on its rate-hike strategy.

I don’t think that the Fed should be hiking interest rates in this environment, but those giant egos that sit on the FOMC are likely to have trouble admitting that the December rate hike was a policy mistake. They will have to “discuss” and “debate” their mistake before admitting it and perhaps make another mistake before backtracking. This monetary flip-flopping should be quite entertaining to watch as it develops.

India: The Last Emerging Market Standing

While the MSCI Emerging Markets Index is now under serious pressure as most countries in the index have China leverage via commodity prices or close trade relationships in Asia, one index member stands out, India. On a relative basis, the Indian Sensex flagship benchmark looks like a rocket ship about to enter outer space when plotted against the MSCI EM Index (see below).

India Bombay Stock Exchange Sensex Index Chart

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

In reality, the Sensex has sold off marginally, even though the MSCI EM Index has sold off quite a bit more. Since the MSCI EM Index is the benchmark for investors interested in emerging markets, or the equivalent of the S&P 500 in this country, it is rather peculiar to see India in this situation.

The issue is that the BRIC quartet – Brazil, Russia, India, and China – has more or less disintegrated. Brazil and Russia have been pushed lower by China’s unravelling because of the collapse in commodity prices, but in a strange way whatever is pressuring most emerging markets now is actually helping India. The global deflationary backdrop is lowering the persistently higher Indian inflation rate, which has allowed for four interest rate cuts in a little over a year. Low inflation and lower interest rates are supporting this relatively closed economy.

Emerging Markets Free Index Chart

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

This may be a tradeable market trend. I don’t think that China is done suppressing commodity prices. There are numerous Indian ETFs and more than one that follow the MSCI EM Index. Being long India and short the MSCI EM Index may have more time to work out. The MSCI EM Index is likely to take out the 2008 low simply because the economic unravelling in China is a bigger deal to many emerging markets, be they dependent on commodity prices or on China trade with manufactured goods, than the 2008 Great Financial Crisis. In this environment I fully expect India to remain the best-performing emerging market.

Sector Spotlight:

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

Beware Unrealistically High Yields

by Jason Bodner

In 1821, a British military officer named Gregor MacGregor returned to England from years of service in Central and South America. He informed anyone he could that King George Frederic Augustus of the Mosquito Coast in the Gulf of Honduras had made him Cazique (or Prince) of Poyais, a developed colony with an existing community of British settlers. He described it as rich in natural resources and perfectly ripe for development. He was looking to raise funds for development and settlers for Poyais. He set about recruiting settlers to emigrate to Poyais from Britain. This was easy because, according to MacGregor, Poyais had natives who loved the British, had land twice as fertile as anywhere else, and clear, clean streams of water that held chunks of gold. He managed to fill seven ships of soon-to-be Poyaisian settlers.

His timing was perfect. Napoleon was defeated and the British economy was expanding. Manufacturing was the engine of growth and wages were growing. Interest rates kept heading lower. Investors became dissatisfied with low rates of return from government debt, yielding around 3% at the time. In October of 1822 MacGregor floated a £200,000 Poyais bond at 6%, which was competitive to the rates offered by the governments of Peru, Chile, and Colombia. Poyais had no record of tax collection. MacGregor countered this seemingly large detraction by stating that Poyais was so ripe in natural resources that export tariffs would easily cover the interest payments on the debt. Skeptics only had to look at the Poyais settlement scheme as evidence that Poyais’ development was on track. MacGregor’s bond sales offering worked well as investors were thrilled with their higher-than-domestic yields. All seemed right with the world.

Poyais Dollar Bill Image

There was only one minor detail that was problematic: Poyais did not exist. It was a fabrication germinated entirely from the mind of Gregor MacGregor. When news of this sad event broke and eventually the bonds collapsed, MacGregor just picked up and moved shop to Paris where he launched a similar bond sale. All told he was able to walk off with the equivalent of $5 billion in today’s dollars.

This mega-heist put him up there as one of the greatest swindlers of all time. The man fabricated a new country, convinced people to invest their life savings and emigrate there to settle it, all while making off with their money. One has to marvel at how this could be, but humans are often slaves to their emotions – in this case, greed. We are currently in a market driven by fear. In the last few weeks, the world has become afraid of a China slowdown, lower commodity demand, negative sales and earnings, North Korean H-Bomb tests, potential Puerto Rico debt defaults, and let’s not forget, a frazzled stock market with averages down between 8% and 12% year-to-date. And we’ve only seen two weeks of trading.

Materials & Financials Lag

Markets seem to vacillate between fear and greed. As discussed last week, for a long time greed based on theories of diminishing supply of physical oil propelled energy and energy stock prices higher. Now it seems that fear of oversupply, waning demand, and global growth slowdown has been punishing energy and energy stock prices. Each day it feels as though we reach new lows. Fear contagion is spreading as we look at the weakest performing sectors: Financials and Materials continue to bear the brunt of the selling pressure. The logical thought here is that if banks and financial institutions issued debt to energy companies reliant on $100 (or even $50+) oil, they may soon be on the hook. And if global demand is really waning, then materials-driven companies will continue to feel the pain of deflation this year.

Standard and Poor's 500 Financials and Materials Sectors Table

Now to be clear, I am not comparing the equity market to Poyais, nor am I telling this story as an object lesson for greedy investors. Yet beware, as energy prices continue to fall, the likelihood of energy-oriented companies sustaining current levels of cash flows goes lower. Earnings and sales are likely to suffer along with their ability to maintain a high dividend. As dividends face cuts, stocks may fall out of dedicated dividend yield portfolios, putting even more pressure on these stocks. And as debt levels are tied to production, even though we are drowning in oil, more oil is likely coming on line. This does not bode well for energy stocks, financial stocks, or the rest of the market, quite frankly.

The silver lining here is that consumer stocks will likely benefit from all this tension, as will higher-yield stocks. REITs perform quite well showing relative strength in the recent months. The stocks offer high yields as a mandate of being a REIT is to pay a minimum of 90% of its taxable income to investors. The dividend yields of companies with real sales and revenue growth will also benefit from the current environment. But to be clear, the differentiation is that these companies may not have increasing yields because of lower share prices and waning sales and earnings – ala energy stocks.

The market is jittery and nervous and fear is growing. But looking for strength and light in the market can certainly help to calm our nerves. Just as greed can propel mythical lands like Poyais to become the stuff of legend, rational behavior can help steer investors through choppy waters with calm and poise.

Stat of the Week:

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

Producer Prices Declined 1% for All of 2015

by Louis Navellier

Welcome to deflation! Last Friday, the Labor Department reported that the Producer Price Index (PPI) declined 0.2% in December.  Wholesale energy prices declined 3.5%, while wholesale food prices fell 1.3% for the largest drop in food prices in 10 months. In the past 12 months, the PPI has declined 1%.

The Fed announced on Friday that industrial production declined 0.4% in December, and November’s industrial production was revised down to -0.9% (down from -0.6% previous reported). There is no doubt that deflation is here and it is spreading due to plunging energy prices. It will be interesting to see if the Fed will modify its forecast of 2% inflation, which is clearly dead wrong.

New York Fed President William Dudley said in a speech last Friday that energy prices would likely fall further, that auto sales may have peaked near-term, and that global events may impact the U.S.  Translated from Fedspeak, he is hinting that the Fed will not raise key interest rates any time soon and may even have to reconsider quantitative easing to weaken the U.S. dollar to break the growing threat of deflation.

Speaking of energy, on Tuesday, crude oil futures fell below $30 intraday after Nigeria’s oil minister called for an emergency OPEC meeting. Heavy grades of crude oil from Canada, Iraq, and Venezuela are now trading as low as $16 per barrel (in Canada) to $20 per barrel (in Iraq). The glut of refined petroleum products continues to grow after the American Petroleum Institute reported on Tuesday that in the latest week U.S. gasoline inventories rose by seven million barrels, while distillate inventories rose by 3.7 million barrels.

Normally, crude oil demand rises in the spring, but the current supply glut and ongoing concerns about China’s GDP growth continue to weigh on energy markets. Additionally, major oil companies have new projects completed in the Gulf of Mexico that are coming online, which will exacerbate the crude oil glut in North America. Complicating matters further, Bloomberg reported last week that an official at the National Iranian Oil Company said that Iran would begin selling a new grade of crude in March or April.

Chess Game ImageClearly, between the ongoing Iran vs. Saudi Arabia diplomatic crisis, plus the fact that both countries are trying to out-produce each other and lock up lucrative Asian contracts by discounting crude oil, OPEC is no longer an effective cartel; so market forces continue to prevail and suppress crude oil prices.  In fact, many crude oil experts are not forecasting a substantial recovery in the price of crude oil until 2017.

The Fed’s Beige Book Portrays a “Jekyll & Hyde” Economy

Last Wednesday, the Fed’s Beige Book survey essentially described a “Jekyll & Hyde” economy.  Specifically, nine of the 12 Fed districts are characterized by “modest” growth, while the Boston district was the lone “upbeat” region and the Kansas City and New York Fed districts were “essentially flat.”

Nine of the 12 Fed districts reported growth in consumer spending, while the Dallas, New York, and Richmond Fed districts reported retail sales as “sluggish” or “softened.” Farming was cited as “flat to down” due to low crop prices, while the energy sector would “struggle further” in Beige Book language. To me, this means the Fed will not likely raise rates at its next Federal Open Market Committee meeting.

On Friday, the Commerce Department announced that December retail sales declined 0.1%, which was disappointing; but the good news is that November retail sales were revised up to a 0.4% gain, up from 0.2% previously reported.  For all of 2015, retail sales rose 2.1%, which was the slowest annual pace in the past six years (retail sales rose 3.9% in 2014), so concerns that consumers are becoming overly cautious are spreading, since some of the categories that were strong in November stalled in December.

Right now, Wall Street is worried that we may be entering a recession, since retail sales are down and consumer spending represents almost 70% of GDP calculations. So far, the National Association of Business Economists is forecasting 2.6% annual GDP growth for 2016, which seems a bit too optimistic to me. Ironically, the perpetually optimistic Fed only expects 2.0% to 2.3% annual GDP growth in 2016.

I am also a bit concerned that the Presidential campaign is currently negative and uncertain; so many investors are becoming more nervous about the future. There is hope, however, that the two major party nominations could be locked up by March, after which the most positive candidate is likely to win.


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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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