Surprise! Earnings Aren’t Down

Surprise! Earnings Aren’t Down as Badly as Feared

by Louis Navellier

May 17, 2016

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

Last Tuesday, the stock market seemed to be “melting up,” but then the market began a slow decline over the rest of the week, finishing down 0.5% for the week and up just 0.1% year-to-date. As the first quarter earnings announcement season winds down, I am pleased with the overall results so far, since we’ve seen so many positive earnings surprises. With over 90% of the companies in the S&P 500 having reported their first quarter results, the average earnings decline was -6.4% versus analysts’ expectations of -7.7%. Sales declined an average of 1.7% for the same reporting companies. For the current (second) quarter, analysts are expecting a 3.9% earnings decline. To me, this essentially means that stocks posting positive sales and earnings should break out and emerge as the market leaders in the upcoming months.

Bridge Image

We are seeing several new distractions overseas, including Britain’s June 23 vote to leave the European Union (EU). Last Thursday, the Bank of England said “The most significant risks to the (bank’s) forecast concern the referendum. A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy.”  Translated from central banker jargon, the Bank of England stands ready to defend the value of the British pound in the event of a June 23 “Brexit.”

The other big international distraction is the impending impeachment of Brazil’s President Dilma Rousseff. On Thursday, the Brazilian Senate deliberated for 20 hours and then voted 55 to 22 to put Rousseff on trial over charges that she disguised the size of the country’s budget to make the Brazilian economy look healthier in the run up to her 2014 election. The new interim President, Michel Temer, is a centrist who is expected to move Brazil more towards market-friendly policies. President Temer said “It is urgent we calm the nation and unite Brazil,” adding that “Political parties, leaders, organizations and the Brazilian people will cooperate to pull the country from this grave crisis.” (Source: Reuters.com, “Brazil’s Temer calls for unity, confidence for Brazil recovery,” May 13, 2016). This gives us some hope for South America’s largest economy and Brazil’s stock market in the run-up to the Olympics in Rio this summer.

In This Issue

In Income Mail, Bryan Perry makes the case for well-chosen utilities and other quality dividend stocks. In Growth Mail, Gary Alexander looks back to a painful chapter in China’s history for clues about how its leaders will navigate this current challenge. In Global Mail, Ivan Martchev will caution against buying into the recent rally in emerging markets and commodities. In Sector Spotlight, Jason Bodner notices a subtle shift of momentum in market forces last week, and in my Look Ahead, I’ll focus on stocks with high and reliable dividends, while warning against energy stocks, despite their recent seasonal rally.

Income Mail:
Reliable Dividends Command Higher Premiums
by Bryan Perry
Money is Flowing into Reliable Utilities

Growth Mail:
Why China Will Likely Keep Growing
by Gary Alexander
China Learned Capitalism from its Closest Neighbors

Global Mail:
The Flattest Yield Curve Since 2008
by Ivan Martchev
Emerging Markets’ May Take out Recent Lows

Sector Spotlight:
Finding the “Edge” in Market Forces
by Jason Bodner
Markets Need Catalysts to Create Reversals

A Look Ahead:
Seek High (and Reliable) Dividend Yield
by Louis Navellier
Could the Alberta Fires Boost Oil Prices?

Income Mail:

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

Reliable Dividends Command Higher Premiums

by Bryan Perry

With roughly 90% of the S&P 500 reporting, stocks in the energy, financials, industrials and technology sectors are reporting lower earnings and revenues. (Source: Investor’s Business Daily, May 9, 2016). Though oil prices have rebounded to the mid-$40s, inventories continue to push U.S. storage capacity close to its limit. Demand is seasonal and with large shale producers actually raising their 2016 production targets due to a reduction in costs, it’s a stretch to think that WTI crude is going to trade consistently above $50 – a level at which most domestic producers need prices to remain in order to generate any semblance of profitable margins.

U.S. Treasuries failed to trade lower despite U.S. retail sales growth hitting a one-year high in April. (Source: Reuters.com, “Strong U.S. retail sales, consumer sentiment data buoy economic outlook,” May 13, 2016). A sagging market eventually helped to push Treasuries higher. The yield curve flattened sharply late last week in one of the most dramatic curve flattenings in recent months. Overnight, China reported that bank lending there contracted sharply in April. That also weighed heavily on investor sentiment. (Source: Wall Street Journal, “Chinese Lending Drops Sharply as Banks Take Stock of Credit Binge,” May 13, 2016).

Here’s how the major Treasury yields moved last week – the 2-year is up a bit but longer rates are down.

 Weekly Yield Changes 
 (For the week ending May 13) 
 Source: www.treasury.gov 
2-yr: +2 bps to 0.75%
5-yr: -2 bps to 1.21%
10-yr: -7 bps to 1.71%
30-yr: -7 bps to 2.55%

 

So with bond yields cranking still lower, beset by renewed fear of global deflationary pressures, blue chip dividends paid from the sterling balance sheets of domestic non-cyclical companies have the luster of gold for investors seeking investment-grade bond-equivalent instruments delivering decent income.

Dividend growth for the S&P 500 during the five-year period 2010-2015 averaged 13.5% per year, which is pretty decent. Going forward, the current growth rate for dividends is 7.5%. Dividend growth was at its worst in December 2009, down 21.1% and at its best in December 2012, up 18.25%. (source: mutpl.com).

Dividend Growth Rates for the S&P 500

Dividend Growth Rates for the Standard and Poor's 500 Chart

Source: www.mutpl.com

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

A declining dividend growth rate trend tends to place a premium on quality dividend growth. This is why professional and retail investors alike are aiming for non-cyclical growth where the dividends generated are from stocks with stable earnings growth that can thrive without the tailwind of a robust economy. The good news is that although forward dividend growth for the S&P is tenuous, there are plenty of great stocks that are continuing to reward shareholders with year-over-year dividend increases. Market leadership has narrowed for sure, but today’s torch-bearing role squarely belongs to blue chip dividend growth stocks.

This market leadership is part and parcel with (albeit reluctantly) a more dovish Fed policy. Recent Fed statements in March and April told investors that economic growth is slower than previously believed. Putting it in no uncertain terms, the Fed did not want to jolt the fragile U.S. economy by raising the price of money. Fed Governor Lael Brainard (an FOMC voter and self-described dove) said in a Bloomberg interview on May 10 that global risks could re-emerge for a variety of reasons. Against this backdrop, I expect to see mediocre returns for most sectors that are leveraged to future growth and continued strength for the defensive sectors – including utilities, telecom, consumer staples and specialty REITs. This might explain why the S&P 500 is mired in a well-defined range of 2,050-2,100, while utilities are breaking out.

Money is Flowing into Reliable Utilities

As a tempting alternative to growth investing and bond investing, no fewer than five utility ETFs are now making or approaching new highs. The profit outlook for utilities is relatively favorable. The sector’s combined profit is expected to fall 2% for the first quarter, as a result of an unseasonably warm winter, but profits are set to rise about 4% for the full year, according to S&P Global Market Intelligence.

The Utilities Select Sector SPDR ETF (XLU), the most widely traded of all the utility ETFs, sports a current yield of 2.98%. Historically, when XLU’s yield drops below 3%, it signals a top, but with the 10-yr T-Note about to challenge the low yield of 2009 (1.57%), one has to wonder if getting nearly twice the payout of the 10-yr T-Note (via XLU) warrants a caution flag or the green light for further gains. Market veterans would likely instruct investors to stay the course, while using tight trailing stops underneath. A move below $47 for XLU would invite a possible change in sector sentiment and might only occur if the economic data started heating up to where the flow of weekly data consistently beats economic forecasts. (Please note: Bryan Perry does not currently hold a position in XLU. Navellier & Associates, Inc. does currently own a position in XLU for some client portfolios.)

Utilities Select Sector SPDR Exchange Traded Fund Chart

Source: www.bigcharts.com

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

The relentless money flow into the utilities sector is a function of a world awash in liquidity seeking yield, plus the notion of the U.S. dollar resuming its intermediate-term uptrend after a six-week period of consolidation. Additionally, inflation expectations retraced their entire move from the previous week as the “five-year, five-year forward breakeven” rate (the market’s expectation of the average five-year inflation rate five years from now) dropped 11 basis points to 1.70%. The rate marked a fresh 2016 high last week, but it has been pressured back to a level that has been re-visited several times in recent weeks. As this chart shows, the 5y5y rate remains below last June’s peak. (source: Briefing.com).

Five Year Forward Inflation Breakeven Chart

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

It is sage advice to consider riding out the hot summer months with a portion of assets invested in specific utilities with a strong history of raising dividends until the earnings story improves and we’re through with the cutting and slashing of the dividends of commodity-related stocks.

At the Money Show in Las Vegas last week, it was 95 degrees outside. It’s nice to know that when the air conditioning is running full blast, the casino is paying our utility companies for our comfort. In a highly uncertain stock market, tapping into those steady utility income streams makes perfectly good sense.

Growth Mail:

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

Why China Will Likely Keep Growing

by Gary Alexander

Today marks the 50th anniversary of the start of China’s Cultural Revolution. It was like our Great Depression on steroids. In America, the crucibles of 1930s poverty and World War II forged what Tom Brokaw called our “Greatest Generation.” Depression-era veterans (like my parents) rebuilt our nation after 1945. All seven Presidents from PT-109 Lt. John F. Kennedy to Navy pilot George H.W. Bush were of that Generation. Our latest Fed Chairs either grew up in the 1930s (Volcker and Greenspan) or studied that era (Bernanke and Yellen), so they have bent over backward to prevent another Great Depression.

Likewise, those who suffered in China’s Cultural Revolution vow it must never happen again. China’s Depression was far worse – and 35 years more recent – than our Depression. The top nine members of today’s Politburo were born 1945 to 1955, so they were in their teens and 20s from 1966 to 1976.

On May 16, 1966, Mao and his wife Jiang Qing issued a proclamation against “scholar tyrants” to be enforced immediately. By the end of May, China’s educational system came to a stop and juvenile mobs took over. It was a revolution of semi-literates against “spectacle wearers.” Bad students took revenge on good teachers. Libraries and art museums were ransacked, closed or burnt. Western goods were burned.

I saw the impact of China’s Depression first-hand 20 years ago, when I joined a 30-person three-week tour of China with a group of investors. The tour was led by Keren Su, who was born in Hangzhou in 1951. I interviewed Keren Su often during those weeks. His parents were teachers, making his family part of the intelligentsia, which Mao vowed to humble. Keren’s father, a professor of Chinese literature, was imprisoned seven years and his mother was sent to a re-education camp. Keren Su was sent to a labor camp for being a child of the intellectual class. He was shipped off to Harbin in Northeast China, and then put on an overnight train to a small work camp 200 miles northeast, where he spent nearly a decade in a frigid labor cap instead of in a warm school room.

Cultural Revolution Image

Red Guards shame Provincial Party Secretary Wang Yilun in Harbin, China, August 23, 1966
(Photo by Li Zhensheng; Source: New York Review of Books, “China: Surviving the Camps,” January 26, 2016)

Our China tour ended on May 17, 1996, the 30th anniversary of the Cultural Revolution. As we met for breakfast before heading for the airport, CNN was carrying news clips from that terrible time. I asked Keren Su if it all started on a single day, or was it more gradual?  He said, “Oh, no! One day we studied our lessons and went home to dinner and the next day we came in and a new Red Guard demanded ‘Are you a loyal comrade or a bourgeois devil?’ Then, I had no home to go to. My parents were both in jail.”

Chinese youth, like an oriental Lord of the Flies novel, held political meetings to “struggle” classmates with questionable family backgrounds, like Keren Su. Teenagers scoured homes for Western clothes, books or other signs of intelligence. Such folks were sent to prisons or to the “uncorrupted countryside.”

Keren Su suffered 12 years until he was set free in 1978, age 27. Soon he gained fame by riding his one-speed bike across China. That earned him enough respect to travel more widely. When he led our tour to the Real China in 1996, he didn’t choose tourist spots. Our first week was in China’s poorest province, Guizhou. We visited farms and schools and local spring festivals, some of which no other Westerner had seen. Everywhere we heard adult survivors of the Cultural Revolution say “it can never happen again.”  I didn’t detect any anger or blame, just a shame over their collective madness – “we did this to ourselves.”

Since 1978, China has had a peaceful transfer of power between four survivors of that hard time: Deng Xiaoping (ruling 1978 to 1992), Jiang Zemin (1993 to 2003), Hu Jintao (2002 to 2012), and Xi Jinping.

Deng Xiaoping barely survived the Cultural Revolution, being branded a “capitalist roader.” His eldest son, Deng Pufang, was tortured and thrown out a third-story window, rendering him a paraplegic. Now 72, Deng says, “The generation of the Cultural Revolution is in no sense a lost generation, as is often said. Quite to the contrary. All those who passed through that testing have been toughened.” For instance, Deng Pufang now fights for the rights for the handicapped in China. “To my way of thinking,” he says, “this generation represents a trump card for China and for the reforms which they have set in motion.”

The man who ran China from 1993 to 2003, Jiang Zemin, also suffered greatly. He was sent to a Cadre School in 1968, even though he was a skilled engineer in his 40s. He endured over a year of political “re-education” (farm labor) in Henan province. His sister, a University counselor, was packed off to a farm for five years. His uncle was crushed in a mob. His children were separated from him and sent to farms. (For more on Jiang Zemin, see “The Man Who Changed China” by Robert Lawrence Kuhn and his more recent book, “How China’s Leaders Think,” which profiles the backgrounds of these and other leaders.)

China’s current leader, Xi Jinping, suffered even more. In 1962, at the end of the Great Leap Forward (when 30 million died from starvation), Xi’s father was purged, spending 16 years in one kind of jail or another, subject to withering criticism and severe physical abuse. At age 15, in January 1969, young Xi was sent to a remote mountain village in the Loess Plateau in Shaanxi, spending six years performing hard manual labor in a harsh, poor, rural climate. He and his cadres lived in a cave house, but by night Xi read books in the dim light of kerosene lamps, sometimes sharing lessons with his cadre mates. By day, he gained favor by carrying a shoulder pole with twin 110-pound buckets of wheat for several miles across mountain paths without showing fatigue. Xi says that time has “influenced me every minute” in ruling China today.

While I was in China, an amazing trend began. Business leaders in their 40s started holding reunions on the labor farms where they had worked in 1966-76. That struck me as a cross between a 20thhigh-school class reunion and survivors tentatively returning to Auschwitz. About 8,000 attended a reunion in Ruili on the Burma border. One survivor, Hu Guohui, said “If you haven’t had a bitter period and survived it, you can’t feel true satisfaction. You end up simply accepting the world about you, instead of relishing it.”

China Learned Capitalism from its Closest Neighbors

China’s recovery is the most amazing in world history. There was no blueprint for recovery from such a massive reversal. Deng Xiaoping once said “we cross the river by feeling the stones.” Translated from Confucius-speak, that means “we’re trying what works.” His success is based on closely watching failures of the past at home (and in the USSR) while also emulating the success of their neighbors, notably Japan, Taiwan, South Korea, Singapore, Malaysia, and their own tiny capitalist enclave of Hong Kong.

First, China learned decentralization and localized capitalist experimentation. For example, in 1979, the USSR controlled the allocation of 60,000 products and millions of prices. In the same year, China only controlled distribution of about 600 products and the prices of a few thousand items. All of the Soviet Union’s 40,000 factories were run from Moscow, while 90% of China’s factories were controlled locally. (Source for this section: “China’s Economy: What Everyone Needs to Know,” by Arthur R. Kroeber)

Deng then decentralized even further, creating “special economic zones,” with pro-business incentives. The IMF studied all global economies in the period 1972-2000 and found that democracies averaged 25% of total government spending coming from the local (non-national) level vs. 18% for non-democracies. The figure for China was 54%, but by 2014 government spending at the local level reached 85% in China.

China learned positive lessons from its East Asian neighbors, first Japan, then South Korea and Taiwan. All three experienced phenomenal booms by freeing up their economies, even though the politics in South Korea and Taiwan remained centralized and undemocratic. (It must have bugged Beijing that Taiwan, a poor agricultural province in 1949 when the defeated Nationalists retreated there, had a thriving middle-class making exportable electronic goods.)  Taiwan and South Korea are the only two countries to jump from poor (10% or less of U.S. GDP per capita in 1970) to “rich” (50% or more of U.S. GDP in 2010)

 Economies that Rose from Poverty to Middle Class or Rich, 1970-2010 
(In terms of percentage of U.S. Per Capita GDP)
 Source: “China’s Economy: What Everyone Needs to Know,” by Arthur R. Kroeber 
Country Pre-1970 Low 2008-2010 Average Relative Gain
China 2% 18% 9.0-fold
Taiwan 9% 68% 7.6-fold
South Korea 10% 58% 5.8-fold
Thailand 5% 19% 3.8-fold
Malaysia 9% 29% 3.2-fold

 

In 1981, only 16% of Chinese were above the poverty line – most of them barely so. Within 30 years, more than 1.3 billion Chinese lived above the poverty line, with hundreds of millions in the middle class.

 Poverty Reduction in China: The Most Dramatic Rags-to-Riches Story in History 
 *Poverty is defined as per capita income of $1.25 a day or less (using 2005 dollars at PPP) 
  Source: “China’s Economy: What Everyone Needs to Know,” by Arthur R. Kroeber 
Year Population Millions in Poverty* % of Total
1981 1.00 billion 840 84%
1990 1.13 billion 689 61%
2002 1.26 billion 359 28%
2011 1.35 billion 84 6%

 

China has faced far worse challenges than today, when their economy was much smaller and poorer than it is now. They could have faltered in June 1989 after Tiananmen Square, or after the fall of the Berlin Wall in late 1989, or after the 1991 failure of the Soviet Union military coup, or after the high-inflation and currency devaluation of the early 1990s. They could have come down hard on Hong Kong when they inherited that Crown Colony in 1997, or they could have failed during the 1997-98 Asian currency crisis.

Today’s slowing growth is to be expected, and healthy. China’s challenges are huge but China’s resources are far greater than they were in the 1990s. One of their greatest resources is battle-tested leadership. We may not approve of China’s lack of open elections, but I can see why they won’t risk mob rule … again.

Global Mail:

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

The Flattest Yield Curve Since 2008

by Ivan Martchev

Something happened Friday that did not get very wide attention, but I believe it is highly relevant for the present global economic environment. Two-year Treasury yields traded down to 0.7419% while 10-year Treasury note yields traded down to 1.6984%. The 10-year note stopped trading for the week at 1.7001%, while the 2-year note ended the week at 0.7459%. Based on those closing values, one of the most popular measures of the slope of the Treasury yield curve – the difference between 10- and 2-year yields – ended the week slightly above 95 basis points (0.9542%).

Ten Year Treasury Constant Maturity Rates Chart

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

This 95 basis point level may be a fresh multi-year low, or it may be just a tick above the previous multi-year low on March 8, 2016, but that would be splitting hairs. The main point is that the U.S. yield curve is massively flattening during a supposed Fed rate hiking cycle which has been put on hold after a 25 basis point rate hike in December, 2015. A flattening yield curve typically means a slower economy, or the expectation of a slower economy, so if there is no inflation out there, one has to wonder if the Fed will raise rates this year at all.

It is true that we have had boom times at flatter levels of the Treasury yield curve, like in the mid-1990s when the yield curve stayed at more depressed levels before it inverted during the onset of the 2000-2001 recession. In fact, an inverted yield curve preceded each of the past five recessions. Typically, these inverted yield curves – when the 2-year Treasuries yield more than 10-year Treasuries – don’t happen all that often and they signify that the Federal Reserve is running a restrictive monetary policy.

Because of the tendency of yield curves to invert before recessions and because that tends to coincide with Fed tightening cycles, some investors have claimed that the Fed has caused every recession since it was created as an institution in 1913. I am not sure I agree with that view as there were recessions in the U.S. before there was a Federal Reserve and there will be many more in the future as economic growth tends to be cyclical. The Federal Reserve, though, has always tried to play a countercyclical role, slowing the economy from overheating (by hiking rates) or keeping the economy from sinking further (by cutting rates or using QE). The question investors need to ask themselves in this brave new world of quantitative easing and negative interest rates (in Europe and Japan) is: Does monetary policy have its limits?

It sure feels like we are bumping against the limits of modern-day monetary policy. Global government debt with negative yields has now topped $9 trillion, while an aggregate index of the main global government bond markets comprised by Bank of America just hit an all-time low in yield last week. (See May 11, 2016 Bloomberg article: “Investors Fleeing $9 Trillion of Negative Yields Fuel Bond Binge.”)

Global Broad Market Index Yield Chart

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

The present global deflationary environment is not a time for more Fed rate tightenings. Still, for the time being, those giant egos that sit on the FOMC have yet to admit their mistake and conduct what they surely view to be an embarrassing monetary policy U-turn and give up on their well-telegraphed but hopelessly-misguided rate hiking “cycle.” I described this situation in the Treasury market at the end of last year in my December 29, 2015 MarketWatch article, “Will 2016 bring new Treasury-yield lows?” Keep in mind that the consensus estimates at the time were calling for four Fed rate hikes in 2016. So far there have been none, and the Fed should give up on this hiking cycle so it won’t compound its December mistake.

At a 10-year Treasury note yield of 1.70%, we are not all that far from the 2016 low in yields at 1.57% or the all-time low of 1.39% from 2012. I believe that the odds of making an all-time low in Treasury yields in 2016 remain very high and they become overwhelming for 2017. In fact, before this bull market in Treasury bonds is over, I think the 10-year note yield will fall below 1%, but this is most likely a target for 2017 and most likely after the Chinese currency devaluation – which is coming, in my opinion.

Saudi Arabia Riyal - Chinese Yuan Exchange Rate Chart

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

The coming Chinese currency devaluation will serve as a major global deflationary force, not to mention a likely Saudi riyal devaluation coming as well, since I expect the seasonal oil price rebound to unwind later this year, pushing crude oil prices down to $20 per barrel.

Global Bond Market Index Duration Chart

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

In the present environment, I think Treasury bonds will continue to appreciate, but are they safe? Duration risk is at an all-time high due to the all-time low in yield for the Bank of America Global Bond Market Index. That means that in order to get a positive yield investors have to go further and further out and buy longer-dated bonds. This causes small swings in interest rates to result in much larger price swings for those government bonds that have reached record duration risk.

In this environment, why would advisors tell retired investors they should have more bond investments as they get older? This suggests to me that the old way of allocating assets between stocks and bonds is out the window. It seems to me that conservative dividend strategies and global dividend growth strategies will continue to do very well in the present global interest-rate environment. Investors should be focusing more on dividend strategies and less on bonds, since there is simply very little yield left in fixed income.

Emerging Markets’ May Take out Recent Lows

The big rebound in emerging markets in Q1 is raising questions about whether investors will “miss the bottom.” After all, if one bought in the spring of 2009, the MSCI Emerging Markets Index (in black) was very rewarding to those that had the guts to take a position.

Commodities Research Bureau Index Chart

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

I think the rebound of the MSCI Emerging Markets Index was due to the rebound of the CRB Commodity Index as those two indexes have always been heavily correlated. Rapid economic growth in emerging markets tends to coincide with strong demand for commodity prices. This is fine from a cyclical standpoint, but I happen to think that the rebound in commodities is seasonal in nature, primarily due to oil, and that it will completely unwind come this fall. If my view on commodities is correct, the MSCI Emerging Markets index is likely to take out its 2016 low.

iShares MSCI Emerging Markets Exchange Traded Funds Image

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

I have always thought that the term “emerging markets” is a bit of a misnomer. If one looks at the weights of the MSCI Emerging Markets Index , one can see that it is dominated by manufacturing export-driven markets in Asia, along with other markets driven by commodity prices. I believe a potential hard landing in China is driving this decline in commodity prices, and since this hard landing has not officially arrived, commodity prices have not bottomed. Neither has the MSCI Emerging Markets Index.

Sector Spotlight:

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

Finding the “Edge” in Market Forces

by Jason Bodner

There are four basic forces in the laws of physics: strong, weak, electromagnetic, and gravity.

The strong force is so strong it binds the particles in atomic nuclei together. It is an extremely short-range force however. One can’t detect its force beyond a fentometer (that’s 10-15 of a meter – it’s really small).

The weak force is responsible for things like nuclear beta decay – that’s when a proton, for instance, decays into a neutron. Like the strong force, above, its range is also smaller than a fentometer.

The electromagnetic force is the force that exists between charged particles(think protons and electrons.) It has theoretically infinite range but diminishes as the distance between the particles expands.

Gravity is the weakest of all forces, but it is the only force that most of us are familiar with. It is 10-38 the strength of the strong force. The really interesting thing about gravity is that despite its weakness it is cumulative and extends into infinity. What this means is that it is self-feeding. Gravity is so weak that in a vacuum, two particles of relatively small size are attracted to each other not by gravity but by electro-static forces. There was a really fascinating experiment done in space illustrating this. NASA scientist Don Pettit took a Ziploc bag with salt crystals and shook it up in space. What he found was that almost immediately the crystals agglomerated (came together) to form clumps, like this:

Agglomerated Crystals Image

A theory goes that this electrostatic force – i.e., charges attracting – started the process of accretion, the same process that forms planets, stars, solar systems and ultimately black holes (which are now widely regarded as the force at the center of galaxies which slings everything around it). The forces of charges get the process going and then gravity takes over. Clumps attract more matter, as well as other clumps. Gravity gets stronger with more and more mass, becoming a runaway train. Clumps turn into huge balls of matter. Balls of matter become planets. A ball of matter can get big enough that its gravity can crush the nuclei of atoms fusing them into new molecules. This is the fusion in the core of stars. Gravity keeps getting stronger, eventually collapsing some stars and crushing them into black holes. The weakest forces, when cumulatively growing, seem to overcome all forces. This is why the laws of physics break down in the infinite gravity of black holes. Even photons of light with no mass can't escape gravity in a black hole.

Black Hole Image

There's a tipping point at which gravity takes over and won't stop. Up to that point it may be very delicate, weak and even undetectable. But when it passes the point of no return, there's no stopping it.

Markets Need Catalysts to Create Reversals

Equity markets seem to behave similar to the physical forces described above. Markets need a catalyst to get moving along a trend channel; then it can keep going for a long while until a catalyst creates a reverse direction. The market began its race higher after the February 11th bottom. For a while, the rise seemingly did not stop, but the week before last, I highlighted some cracks surfacing. This was potentially the electrostatic clumping starting the process of a reversal which seemed to have intensified this past week. The number of new 52-week highs has outnumbered new 52-week lows since late February. But if you look in the chart below, you can see that the froth is perhaps coming out of the market as the pace of new highs slows down.

Standard and Poor's 500 Large Cap Index Chart

This chart overlays the % of highs to lows over the price of the S&P 500. While still elevated, the number of new highs is slowing. As earnings season is pretty much over by now, we are at a potential pivot point.

Last week was volatile, with sharp ups and downs, but as we finished on a low note, it is interesting to see what force is pulling the market in possibly a different direction. Industrials, Financials and Consumer Discretionary (led by retail - specifically apparel and footwear), were a drag on the market. Each of those sectors was down more than 1% last week. The week’s sole winner was utilities, followed by consumer staples, which had the dubious distinction of not going negative.

Standard and Poor's 500 Weekly Sector Indices Chart

I find a comparison of last week and the month-to-date readings particularly interesting. As noted above, I believe an inflection point may be just around the corner or upon us already. Positive catalysts are not so abundant with earnings season behind us. Global pressures continue, as does the volatility of crude oil and the U.S. dollar. If we compare what is leading and lagging this past week and month to date, it is almost a mirror image of the past 12 months. The same culprits are clumping at the top and bottom. Defensive sectors are in the lead while financials, energy, and materials are weighing on the market.

Standard and Poor's 500 Yearly Sector Indices Chart

This past week’s rocky performance feels as though something may have changed from the tone of the past few months. Is the accelerated selling in retail, financials, and industrials akin to the clumping of small particles in the process of agglomeration? Is this the beginning of a bigger, longer downward movement for the market? Maybe so. If so, we may be near the edge. Hunter S. Thompson elegantly defines “the edge” by saying “the only people who really know where it is are the ones who have gone over.” Unfortunately, there is no real way of knowing where the edge is until we go over it…

Hunter S. Thompson 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.*

Seek High (and Reliable) Dividend Yield

by Louis Navellier

So far this year, we have been favoring stocks with high and reliable dividends. I can’t overstress that word “reliable” enough, since corporate dividend cuts have risen to a post-recession high in early 2016. According to Bespoke Investment Group (“Dividend Cuts Reach Seven Year High,” May 10), there were 213 dividend cuts through April 30 – the highest rate since the 298 cuts in the first four months of 2009.

At the same time, Bespoke pointed to the data (from the Standard and Poor’s monthly dividend report) showing 921 dividend increases through April 30, down from 1017 last year, but still better than any year between 2004 and 2012. If you combine dividend cuts and dividend increases, you get “net” dividend increases, which paints a clear picture of rising dividend increases from 2010 to 2014, then a slowdown:

 *Dividend increases, less dividend cuts, through April 30 each year 
  Source: Bespoke Investment Group, May 10, 2016 (Using S&P data) 
  Year    Net Dividend Increases to April 30*   Change over previous year 
2009 -46 -624
2010 349 +395
2011 519 +170
2012 679 +160
2013 776 +97
2014 911 +135
2015 848 -63
2016 708 -140

 

This trend tells me that we’re not likely entering an overall recession, as in 2008-09, but certain sectors, notably energy, remain in a steep earnings recession that may get worse. Bryan Perry’s Income Mail column refers to the benefit of utility stocks in an era of dividend cuts in other sectors.)

Could the Alberta Fires Boost Oil Prices?

The recovery of many energy companies depends on a return to $50-per-barrel crude oil. I feel $50 at year-end 2016 is unrealistic. The devastating fires in Alberta have largely spared the tar sands, although some infrastructure has to be repaired. Canada is expected to fully resume its crude oil production in the upcoming weeks. The more devastating supply situation is developing in Kuwait, which on Tuesday pledged an almost 45% production increase over the next four years. Specifically, Abdulaziz Al Attar, head of research at the state-owned Kuwait Petroleum Corporation, said Kuwait is aiming to produce four million a barrels of crude oil per day by 2020, sustaining that level through 2030. (Source: MarketWatch.com, “Kuwait confirms plans for record oil production at 4 million barrels a day,” May 10, 2016). This effectively means that Kuwait wants to increase production by 44.4% from its March 2016 output of 2.77 million barrels a day.  As a result, despite peak seasonal summer demand now fast approaching, I expect that crude oil prices will not rise significantly in the upcoming months due primarily to the ongoing inventory glut.

Speaking of crude oil inventories, the International Energy Agency (IEA) said on Thursday that crude inventories will experience a “dramatic reduction” in the second half of this year. Interestingly, in its best double-speak, the Paris-based IEA also said that global crude oil inventories will continue to increase in the first half of 2016 as Iran ramps up its production. Specifically, the IEA said that the rise in Iran’s oil production and exports after the lifting of international sanctions has been “faster than expected.”  Recent disruptions in Canada and Nigeria have exceeded 1.5 million barrels per day, but high inventories and robust production from some OPEC members have helped to keep inventories abnormally high. Frankly, I think that anyone expecting crude oil inventories to fall “dramatically” in the second half of 2016 is delusional, simply because too many OPEC members are boosting production to lock up Asian contracts.

P.S. I will appear on CNBC’s Squawk Box live this coming Thursday, May 19, at approximately 8:15 am EST. Please check it out if you can.


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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