The Euro Surges

The Euro Surges on “Less-Negative-than-Expected” Rates

by Louis Navellier

December 8, 2015

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

The S&P 500 rose over 2% on Friday due to a strong jobs report, but the biggest news last week was that that European Central Bank (ECB) announced on Thursday that it cut its deposit rate 0.1% to -0.3%, in a move designed to weaken the euro, encourage consumer and business spending, and ignite some inflation.

Euros ImageAt a press conference on Thursday, ECB President Mario Draghi said that the ECB is also extending its asset buying program (i.e., quantitative easing) through March of 2017.  Overall, Draghi chose to be very conservative with his comments, probably because the ECB is entering uncharted waters.  Speculation about what Draghi will do at the January ECB meeting is now brewing.  In the meantime, every retired person in the euro-zone remains very frustrated that interest rates are now devaluing their pension plans.

Since many observers predicted an even deeper cut (to -0.4%), the euro surged 3.3% relative to the U.S. dollar on Thursday, rising from $1.06 to $1.095 in one day, according to Bloomberg Business, its biggest daily gain in more than six years. But I would not pile into the euro right now.  Even though the euro rallied on Thursday because the ECB did not cut key interest rates as much as some central bank observers had hoped, I still expect the euro to reach parity with the U.S. dollar in the upcoming months, simply because central bankers are not acting in a coordinated manner – the U.S. dollar offers higher interest rates in a stronger currency, and that will continue to attract overseas capital.

Another big surprise last week was that the International Monetary Fund (IMF) added the Chinese yuan to its basket of reserve currencies.  (The IMF currency basket also includes the British pound, the euro, the Japanese yen, and the U.S. dollar.)  This is the first time in my memory that the IMF added a currency that recently had a devaluation.  Unlike the euro and the yen (which yield under 0.5% on the 10-year bonds, according to the December 5-11, 2015 Economist), the Chinese yuan pays a higher interest rate, so European and Japanese companies will likely welcome real positive returns in the Chinese yuan.

In This Issue

Ivan Martchev will dig deeper into the ECB decision, while Gary Alexander will take a longer-term view of the jobs report. Jason Bodner’s sector spotlight uncovers hidden trends among the sectors, and I will examine America’s surprisingly strong productivity levels, job growth, and service sector expansion.

Income Mail:
An ECB Surprise
by Ivan Martchev
Amazon is a “Prime” Conundrum

Growth Mail:
A Worker Shortage May be Our Next Challenge
by Gary Alexander
How to Read the Monthly Jobs Reports

This Week in Market History:
The “Day of Infamy” Barely Dented the Dow
by Gary Alexander
Modern Market Milestones on December 6-10

Sector Spotlight:
The Market Can Read Your Mind…
by Jason Bodner
The Search for Meaning in the Numbers

Stat of the Week:
211,000 Net New Jobs Lift the Stock Market
by Louis Navellier
Manufacturing Declines, while Services Carry the Economy

Income Mail:

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

An ECB Surprise

by Ivan Martchev

The much-awaited ECB monetary policy meeting last week disappointed those who were looking for more aggressive action by Mario Draghi. While the ECB deposit rate dove further into negative territory (at -0.3%), the refinancing rate remained at 0.05%. The rate of QE remained at $60 billion EUR per month although QE was extended for an extra six months into 2017. (see December 3 Bloomberg: “Draghi Braves QE Hype With Boost That Leaves ECB Room to Do More”)

Euro Fx versus United States Dollar - Daily OHLC Chart

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

This created quite the short squeeze in the EURUSD cross rate as the market was pricing in more aggressive ECB action with the expectation that there would be new EURUSD lows by year end. This is an example of what can happen when too many institutional traders lean on the wrong side of the market. Within hours the EURUSD cross rate went from a hair above $1.05 to a hair below $1.10.

While very little has changed with the fundamentals of the common currency, this simply means that EURUSD parity (an exchange rate of $1) has been pushed most likely into the first quarter of 2016. If the Fed hikes the fed funds rate at its December FOMC meeting (as the present fed funds and eurodollar futures indicate to be a high likelihood event), this should push the EURUSD cross rate back towards major support at $1.05. Parity is not impossible by the end of December, but with the less-aggressive-than-expected ECB action last week it is simply less likely.

Germany and European Union Inflation Rate Chart

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

The Germans – the ultimate hawks on the ECB board – seem to have overpowered the doves as the low inflation rate in the eurozone (dotted line) seems to have been ignored with this less aggressive monetary policy action. Germany has been in very low inflation territory before (blue line) and seems to have managed to do OK without unorthodox monetary policy actions. If this German history of coping with low inflation is driving the German resistance for less QE, the Germans are using the wrong historical parallels, since this time the problem is much, much bigger and extends towards the whole eurozone.

The U.S. inflation rate is also hovering around zero, but the Fed seems hell-bent on proving to global markets – and what's more important, to themselves – that their highly-experimental QE policies have worked and that they can now normalize monetary policy and proceed just like in the good old days.

United States Inflation and Unemployment Rate Chart

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

I do not believe that 5% unemployment is representative of the true nature of the labor market. Before the 2008 Great Recession, there were 80 million outside the labor force; now there are 94 million. If the labor force participation rate were at pre-recession levels, the unemployment rate would likely be much higher, most likely 7% to 8%. I don't think that if the unemployment rate dives below 5% in 2016 that will cause any inflation problem in the U.S. That would mean that the Fed is considering hiking interest rates with inflation near zero, which is, in and of itself, a monetary policy absurdity.

Bank of America Merrill Lynch United States High Yield Bonds Chart

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

Furthermore, credit for the riskiest corporate borrowers has already tightened with CCC credit spreads blowing out to five year-highs, closing last week at a 15.12% premium to the relevant Treasury bonds. This is crisis territory and suggestive of an economic problem. I know this weakness in junk bonds has not yet spilled over into the higher-end B-rated credits, but those two spreads seem to be pretty closely correlated and I am watching with great interest to see when the contagion that I envision materializes.

Crude Oil West Texas Intermediate - Monthly Nearest OHLC Chart

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

The price of oil, which closed last week at $39.97/bbl on the front-month January 2016 futures contract, is partly to blame for the CCC-spread blowout, as energy is the weakest sector in the junk bond market. Oil falling too far under $40 spells trouble for the most leveraged producers of shale oil as it is high cost in nature and that means increasing losses and less money to repay heavy borrowing in the junk bond market. If crude oil falls towards $20 due to seasonal weakness and cyclical issues in many emerging markets – the most important of which is China – junk bond spreads are likely headed much higher. I expect to see a wave of bankruptcies in the energy sector, spreading into higher-quality corporate bonds.

This certainly does not seem like the time to begin an interest rate hiking cycle by the Federal Reserve, but for the time being they seem to be willing to signal that an interest rate hike is firmly on their agenda.

Amazon is a “Prime” Conundrum

Disruptive technologies and disruptive companies should defy conventional logic. Such was the thinking behind the Internet bubble of 2000, which led to a spectacular U.S. stock market crash. Amazon.com (AMZN) survived that malaise bottoming at $5.51 in 2001. As of last Friday, it fetches over $670/share.

Amazon Growth versus Standard and Poor's 500 Chart

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

I like Amazon. I have a Prime membership and I think it is a great service that saves shoppers a lot of time. If you don't have time to run around stores, just point and click and the Amazon package is there in 24 to 48 hours (select items have same-day delivery).

Amazon is worth $315 billion in market cap while Wal-Mart is worth $191 billion. Amazon has estimated sales of $129.6 billion for 2016, while WMT has $494.5 billion. Of course AMZN sales are growing at a 20% clip while the WMT sales pace for next year is 2.3%.

The trouble is that for years Amazon has managed to convince Wall Street that it should grow its sales aggressively at the expense of earnings and that someday that will pay off. It seems that “someday” is here, as Amazon’s $1.88 earnings for 2015 are forecasted to grow three-fold to $5.64 in 2016.

I am mentioning this as I do not recall ever seeing an EPS “carrot” placed at the end of a longer stick. It is truly remarkable for Jeff Bezos, Amazon’s founder and CEO, to have built the company to the size it is today; but at 25 times book value and 970 times earnings, shares are priced for the coming of the “Age of Amazon,” a scenario in which profitability explodes in 2016.

If AMZN disappoints and profitability does not explode by 200% in 2016, the shares are ripe for a nasty fall, given their lack of valuation support. That is something to consider for AMZN fans.

(Please note: Ivan Martchev does not currently hold a position in AMZN or WMT. Navellier & Associates does not currently hold a position in AMZN in client portfolios. Navellier & Associates does currently own WMT in some client portfolios.)

Growth Mail:

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

A Worker Shortage May be Our Next Challenge

by Gary Alexander

“Next year, the world’s advanced economies will reach a critical milestone. For the first time since 1950, their combined working-age population will decline … By 2050, the world’s population will have grown 32%, but the working-age population (15 to 64 years old) will expand just 26%.”

– Wall Street Journal, November 22, 2015, “How Demographics Rule the Global Economy,” by Greg Ip

The Dow rose 370 points on Friday, primarily in response to a positive jobs report, as Louis describes in more detail below. Traditionally, 5% unemployment is close to “full employment,” since there are always some workers in transition between jobs or intending to start a new job within a few months.  The low (62.5%) labor force participation rate is the wild-card in this mix, but I bet this rate will rise as the long-term worker shortage develops and we begin to run short of qualified workers in many professions.

Last Wednesday, Ed Yardeni posted this clever opening to his Morning Briefing about the jobs situation:

“What does Friday’s employment report have to do with the 1998 American neo-noir crime comedy film written, produced, and directed by Joel and Ethan Coen? “The Big Lebowski” starred Jeff Bridges as Jeffrey “The Dude” Lebowski, a Los Angeles slacker and avid bowler. The U.S. labor market has been performing so well this year that even The Dude should be able to find more stable and safer employment than delivering ransom money in between bowling games.”

– Ed Yardeni, “Head Count,” December 2.

I certainly hope “the Dude” can get and hold a good job, but I’m afraid his permanent mind-set is being a slacker. He isn’t looking for work. He’s one of the 37.5% of working-age adults outside of the Labor Force. I’ve met a lot of Dudes in my life, and I bet you have, too, but the Dude is only a modern extension of the lovable slacker.  I remember Maynard G. Krebs in “The Many Loves of Dobie Gillis,” a TV series that ran during my high school years, 1959-63.  Whenever Work is mentioned, Maynard jumps in shock.

Disability Claims ImageOne reason for the low labor force participation rate is an explosion of disability claims. Social Security Disability Insurance (SSDI) was part of the original Social Security Act in 1935.  As Tad DeHaven, budget analyst at the Cato Institute, told Newsmax on December 17, 2013, “At the time this program began we were much more of a blue collar manual labor society, so there was some real need for it. Today, we have a lot more white collar [jobs], we have better medicine and devices to assist the disabled, but those receiving benefits have nonetheless exploded.” In 1960, when jobs were far more physically dangerous than they are today, disability claims were justified but rare.  Including workers and their non-disabled dependents, SSDI dependents rose from 788,543 in 1960 to 12,156,191 in 2013, according to the Social Security Disability Insurance 2013 report.

In the last 15 years, there has been a 77% rise in SSDI recipients.  Charles Murray in his 2012 book Coming Apart, said that the growth of SSDI claims rose from just 1% of the labor force in 1960 to 8% of the labor force in 2010 – in a half-century when dangerous jobs like coal mining are safer and scarcer.

Right now, we are nearing a point of worker shortage.  Yardeni cited this data in his “Head Count” report last Wednesday: Initial unemployment claims averaged only 271,000 in the most recent four weeks (through the week ending November 21); and “so far this year through October, payroll employment in the private sector is up 1.98 million, with private service-producing jobs up 1.91 million.” In 10 months!

A decade from now, we may worry less about unemployment than finding new, young, qualified workers.  (“Dudes” need not apply.)  According to Ed Yardeni’s report on demographic challenges last Thursday,  the United Nations’ World Population Prospects, 2015 Revision says that 12% of the world population is now over 60 (including 24% in Europe) and by 2050, a quarter of the world population will be over 60.

Falling birth rates mean fewer workers supporting each retiree, as the United Nation report explains:

“Population aging is projected to have a profound effect on the number of workers per retiree in various countries, as measured by the Potential Support Ratio (PSR), defined as the number of people aged 20 to 64 divided by the number of people aged 65 and over.… By 2050, seven Asian countries, 24 European countries, and four countries of Latin America and the Caribbean are expected to have PSRs below 2, underscoring the fiscal and political pressures that the health care systems as well as the old-age and social protection systems of many countries are likely to face in the not-too-distant future.”

This is where the problem of growing entitlements can strangle an economy.  If too many retire early or “game” the system with a phony disability claim or engineer a too-rich public pension plan (examples abound), we can bankrupt our cities, states, and nations via bloated entitlements (a dangerous word, in my view).  There are too many legitimate needs among older and ill Americans to waste our treasure on the Dudes of the world.  As Paul Harvey used to say, “self-government won’t work without self-discipline.”

Pay attention, Maynard G. Krebs and Jeff “Dude” Lebowski.  It’s time to go back to school or get a job.

How to Read the Monthly Jobs Reports

The market rose strongly on last Friday’s jobs report, but these reports are almost meaningless.  It’s far more important to look at 12-month running totals than one-month preliminary estimates, in my view.

Barron’s Economic Editor Gene Epstein wrote in his 2006 book, Econospinning, that “the monthly employment figures give off more false signals than true.”  Epstein’s book is dominated (about two-thirds) by dissecting the monthly employment numbers. Here are a few key points from Epstein’s book:

  • Don’t Mix Surveys: There are three major monthly job surveys – the ADP payroll survey and two BLS job surveys. (See http://www.bls.gov/web/empsit/ces_cps_trends.pdf for an excellent rundown of their statistical differences). As Epstein explains: “The Establishment Survey counts jobs, not people; the Household Survey counts employed people, not jobs.” Their job totals vary widely, historically.  As a result of this wide spread in job totals, pundits who want to spin the numbers positively often use the household report, which includes self-employed people, while those who want to spin the numbers negatively refer to the payroll data.  Bear this in mind when you hear politicians pontificate about jobs.
  • Revisions can be Huge.  Most monthly job totals are revised drastically up or down in future months.  Epstein cites one initially bullish report of 268,000 new jobs, later revised to a decline of 53,000 jobs for a 321,000 negative job swing.   Bear in mind that the jobs report is issued on the first Friday of the month, which can fall on the first or second day of a month.  How can job counters know about all new hires that fast? The initial report is just a wild estimate. This month, the two-month revisions totaled 35,000 jobs.
  • Small Changes are Usually Meaningless. The payroll survey covers over 140,000 establishments.  Its margin of error (or in BLS jargon, “size required for statistical significance”) is 90,000.  But you won’t hear reporters telling us “we gained 115,000 jobs last month, give or take 90,000.”  The household survey (or Current Population Survey, in BLS jargon) covers 60,000 households, with those totals extrapolated to about 150 million workers. Because of this small sample, the BLS warns, “For a monthly change in CPS employment to be significant, it must be about plus or minus 436,000.”  In other words, it’s a wild guess.
  • Job Creation is the Tip of the Iceberg: When you hear that America “created” a certain number of jobs last month, try adding a decimal point.  According to the BLS’ Quarterly Census of Employment and Wages (QCEW), the private sector normally creates about 15 million jobs per year, or about 1.25 million per month.  The flip side is that we lose 13 million jobs per year, for a net gain of two million.  Tens of thousands of Americans are hired each day, while a similar army of transitional workers quit, retire, or are otherwise sent packing. In a good year, we will gain two million NET jobs, despite 13 million layoffs, firings, or quits each year.  One “net new job” is quite literally eight new jobs and seven terminations.

A related creation myth is that Presidents or Congress can “create” jobs.  More often, they get in the way.

This Week in Market History:

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

The “Day of Infamy” Barely Dented the Dow

by Gary Alexander

Speaking of unemployment, the lowest jobless rates of the 20th century came during war.  The lowest full-year rates since 1920 were (1) 1.2% in 1944, during World War II; (2) 3.0% in 1952, in the Korean War; and (3) 3.6% in 1968, during the Vietnam War.  The stock market also rose in those years.  The lowest monthly rate was October, 1944, when the jobless rate was 0.91%!  Anyone breathing could have a job.  This is all the more amazing because the jobless rate was 15 points higher (15.82%) in April of 1940.

Pearl Harbor Flag ImageSunday, December 7, 1941 was “a date which will live in infamy.” Americans were in a state of shock. But what happened next? Even though Battleship Row in Hawaii was in shambles, the stock market damage was slight. You could almost say that investors had priced U.S. entry into World War II into the market. The Dow closed on Friday, December 5, 1941 at 115.9.  After Pearl Harbor, the Dow only fell 2.9% on Monday, December 8.  The Dow stayed above 105 for the next three months until a dip to 92.92 on April 28, 1942.  But after the psychological lift of Doolittle’s bombing raid over Tokyo (on April 18) and the surprise U.S. victory at Midway (June 4-7), the Dow quickly recovered to pre-Pearl Harbor levels.

On December 11, 1968, the monthly unemployment report hit a 17-year low of 3.3%, the lowest jobless rate of the last 60 years.  However, that was a false positive for the stock market. The Dow peaked at 985 on December 3, 1968, and then went down 36% in the next 18 months. The 1969-70 recession was an inflationary recession – with a Prime Rate of 8.5%, inflation at 7.2%, and unemployment reaching 6%.

Modern Market Milestones on December 6-10

On December 6, 1974, the U.S. stock market reached its nadir of the last 50 years, at 577.6 on the Dow Jones Industrial Average.  In the next 25 years, the DJIA gained 20-fold, to 11,723 on January 14, 2000.

On December 7-9, 1987, the market finally rallied strongly, following the October 19 crash.  The DJIA rose 136 points (+7.7%) in those three days.   On December 8, Soviet Premier Mikhail Gorbachev arrived in the U.S. for a summit meeting.  The next day, Reagan and Gorbachev agreed to reduce their nuclear arsenals.  Meanwhile on Friday, December 11, Oliver Stone’s film, Wall Street, was released nationwide, painting the investment world in rather unflattering terms.  (P.S. Oliver Stone’s father was a stockbroker.)

On December 8, 1993, the North American Free Trade Agreement (NAFTA) was signed into law by President Bill Clinton.  NAFTA ended almost all trade restrictions between Mexico, Canada, and the U.S. The Dow rose 15.65 points that day, but that was just part of the “NAFTA surge,” rising nine of 10 trading sessions in early December, and up over 200% in the six years after NAFTA’s passage.

On December 6, 1994, Orange County (California) declared Chapter 9 bankruptcy, the single biggest bankruptcy filing by a municipality to that date.  Their losses from derivative investments reached $2 billion before officials decided to surrender all hope.  The DJIA fell 60 points (-1.7%) in the next two days to 3685, but within five years the DJIA had tripled and Orange County went back in the black.

On December 5, 1996, Alan Greenspan, in a Washington speech, wondered if financial markets could be exhibiting “irrational exuberance.” The DJIA fell 55 points the next day but soon began rising again.

Sector Spotlight:

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

The Market Can Read Your Mind…

by Jason Bodner

I’d like to start today by trying to read your mind…in nine easy steps:

  • Think of any number greater than zero.
  • Next, multiply that number by 9.
  • If the result is a multi-digit number, sum its digits together to come up with a new result.
  • If that new number is still a multi-digit number, add its digits together to come up with yet another new number. Continue doing this until you end up with a 1-digit number.
  • Once you have that 1-digit number, subtract 5 from it.
  • Now, using the method of numbering the English alphabet (A= 1, B=2, etc.), find the letter corresponding to your number.
  • Next, think of a European country that begins with that letter.
  • Then take the last letter of that country and think of an animal that begins with that letter.
  • Finally, take the last letter of that animal and think of a fruit that begins with that letter.

Are you by any chance thinking of an orange Danish kangaroo?

If you are, I just read your mind! If you’re not, you are possibly thinking of an apple eating Danish Koala!

Kangaroo ImageEither way, the effect of being amazed may leave you searching for meaning in this exercise. Yet there is no mystery to be found. The number 9 is a magical number. When the number 9 is multiplied by any non-zero number, the sum of the individual digits of the product always eventually adds up to 9. For example: 9 x 89,651= 806,859, where 8+0+6+8+5+9 = 36, where 3+6 = 9.  Subtract “5” and you get a “4” which translates to a European nation starting with D, and Denmark is your only choice. Now the orange eating Danish kangaroo trick comes clear… pretty cool huh? But I doubt that it will change your life. Likely, there will be no meaning in this at all for you other than a fun trick. Naturally, there are astounding facts about anything from creatures to cosmic occurrences that may have no direct impact on our lives, and therefore seem meaningless. Sometimes though, the meaning is there, it just has to be illuminated a bit.

If you looked at the closing level of the S&P 500 for Friday November 27th versus the close this past Friday, December 4th, it would reveal a tiny difference of 1.58 points - only an 8 basis-point rise (+0.08%). Yet if we look at what took place each day, the stock market saw yet another wild week of price action – at a time when most (present company included) expect that volatility should be stabilizing a bit into year-end. The one-week performance of the sectors of the S&P500 looked a bit schizophrenic, too, but ultimately it told a similar story to what we have been witnessing for a long while.

Energy once again dragged the market down while TMT lifted it up, with the tug of war ultimately leading to the S&P 500 finishing the week flat. Here’s how the individual sectors performed last week:

Standard and Poor's 500 Sector Indices Tables

As the headlines whipped the market around this past week, it felt hard to keep up. Between disappointing levels of continued European stimulus, OPEC revising its production ceiling, and then nonfarm payrolls adding to the likelihood of the much-desired resolution of the pending rate hike, it may have felt like we were all wondering “what’s next?” The market’s bobbing and weaving this past week may have felt jarring after the recent strength we have seen. But it turns out that the volatility is just more of the same of what we should be used to by now. The biggest one-day drop last week belonged to energy on Wednesday, when the S&P 500 Energy Index plummeted 3.11%. The strongest one-day gain was in the S&P 500 Telecom Sector Index notching a 2.68% gain Friday, just narrowly beating out the S&P 500 Financials Sector Index, rising +2.66% on the same day.

After all was said and done, the broad market finished flat, leaving many investors searching for meaning.

The Search for Meaning in the Numbers

While we are on the subject of the number “9” this week, let’s take a look at how the sectors have been performing over the past nine months.  In looking at the returns in the table below, we can see clearly that the S&P 500 Information Technology Index has been in the pole position with a +7.31% return. Materials and energy are the clear losers with a weak -7.77% and a shocking -22.30% performance, respectively.

Standard and Poor's 500 Nine Month Sector Index Table

Much of the strength we have seen in the Info-tech arena over the last year has occurred in the Software and Semiconductor space.  Again this past week, we saw strong positive reactions to earnings reports and forward guidance of strong tech companies.  Retail has given momentum to the Consumer discretionary sector for the better part of a year until recent weakness in the face of fears of slowing growth.

Standard and Poor's 500 Information Technology and Consumer Discretionary Sectors Chart

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

Materials weakness has been fairly broad-based within its sector groups for the past year. But if we look beneath the hood of the energy sector, we see that for the past nine months Oil & Gas stocks have dragged the sector down markedly. Recently, (especially last week) we have seen heavy pressure on the Pipelines stocks. The S&P 500 Oil & Gas Exploration & Production Index is -38.73% off of its 52-week high of 8528.09 on 4/16/2015. Perhaps even more eye-opening, is the fact that the US Pipelines Index is -50.83% from its 52-week high of 1042.52 on 4/26/2015!

Standard and Poor's Oil, Gas Exploration, and Pipelines - Daily OHLC Chart

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

These weekly rotations in sectors and groups have seemed unpredictable and sudden, convincing some that there is little meaning or direction in the market, with this past week as no exception. But if we step back and take a breath, we see the clear story unfolding much in the same way it has been for a while.

TMT and Consumer Discretionary continue to be strong, while Energy and Materials continue to be weak. Looking over a longer horizon helps smooth out the recent choppiness we have been feeling and gives us more perspective. As we look over nine months we see the sector situation largely looks similar to what it has been, the number 9 may just have significance after all… so whenever you think of that meaningless orange kangaroo in Denmark, think of what the author Khalil Gibran said in his poem “Sand and Foam”: “Half of what I say is meaningless; but I say it so that the other half may reach you.”

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.*

211,000 Net New Jobs Lift the Stock Market

by Louis Navellier

Handshake ImageThe biggest news this last week was the November payroll report.  On Friday, the Labor Department announced that payroll jobs rose 211,000 in November, which was better than the economists’ consensus estimate of 200,000.  The best news was that the October and September payroll numbers were revised up to 298,000 (from 271,000) and 145,000 (from 137,000), for a cumulative upward revision of +35,000.  The unemployment rate remains at 5%, the average workweek slipped to 34.5 hours (from 34.6 hours), and the labor force participation rate rose to 62.5% (up from 62.4%).  Average hourly earnings rose four cents to $25.25 per hour and have risen 2.3% in the past 12 months.  Due to the upward revisions in the previous months, it appears that the previous problem of double accounting of part-time workers has dissipated.

I should add that on Wednesday, ADP announced that the U.S. economy added 217,000 private payroll jobs in November. ADP revised its October private payrolls up to 196,000 (from its initial estimate of 182,000).  This was the strongest private sector job growth in the past five months, according to ADP.

Also on Wednesday, the Labor Department revised third-quarter productivity to a 2.2% annual pace (up from 1.6% initially estimated) and unit labor costs to 2% and 1.8% increases in the second and third quarters, respectively.  Initially, the Labor Department reported that unit labor costs declined 1.8% in the second quarter, so this was a substantial (+3.8%) upward revision.  In the past four quarters, unit labor costs have risen at a 3% annual pace, so the Fed will undoubtedly argue that the time to raise key interest rates has finally arrived.  I expect that the financial markets will continue to celebrate the “certainty” of the Fed’s rate hike, which is better than the perpetual uncertainty that has haunted the Fed all year long.

Manufacturing Declines, while Services Carry the Economy

The other economic news last week was mixed.  By far the worst report was from the Institute of Supply Management (ISM), which announced that its November manufacturing index declined to 48.6, down from 50.1 in October, reaching the lowest level since 2009 and well below economists’ consensus estimate of 50.5.  Furthermore, since any reading below 50 signals a contraction, the U.S. manufacturing industry is now officially slowing down.  There is no doubt that the slowdown in activity in the U.S. energy industry due to low crude oil and natural gas prices is weighing on the ISM manufacturing index.  A strong U.S. dollar is also hurting U.S. manufacturers, so it appears that the manufacturing sector may be in a prolonged contraction – at least until the U.S. dollar weakens and energy prices rise.

I should also add that on Thursday, the ISM service index slipped to 55.9 for November, down from 59.1 in October.  This was below economists’ consensus estimate of 57.5, so the deceleration in the service sector was a bit of a surprise.  However, since any reading above 50 signals an expansion, the service sector is still humming along, but at a slower pace.  The primary problem is that the U.S. economy is now dependent on the service sector and consumer spending, so the economy is not as balanced as it could be.

In other news, the Commerce Department reported that factory orders rose 1.5% in October after declining 0.8% in September. The real strength in U.S. manufacturing has been in the automotive sector.  On Tuesday, Autodata announced that annual U.S. vehicle sales peaked at an 18.24 million pace in October and decelerated to a still healthy annual pace of 18.19 million in November.   Annual U.S. vehicle sales have averaged over 18 million for the past three months, the strongest prolonged pace ever.

Low gasoline prices are boosting the sales of larger vehicles, which is good news for the domestic auto industry, since the vast majority of trucks are made in the U.S.  In November, Nissan, Toyota, Fiat-Chrysler, GM, and Ford’s sales rose 3.8%, 3.4%, 3.0%, 1.5%, and 0.3%, respectively, while the big manufacturers without big trucks, like Honda and Volkswagen, saw their November sales decline 5.2% and 24.7%, respectively.  Volkswagen’s sales were also hindered by its diesel emission testing scandal.

Due to the sales of these new trucks and SUVs, Ford’s average price is up 11% compared to a year ago.  Ford’s average vehicle price in November was $36,000, which is nearly $4,000 above industry averages. Clearly, the many Black Friday special sales helped the U.S. auto industry finish November strongly.

Shopping Cart ImageSpeaking of special sales offers, Black Friday was totally overshadowed by Cyber Monday, since online sales rose 12% to $2.98 billion vs. a year ago.  Even better, between Thanksgiving and Cyber Monday, consumers spent over $11 billion online, up 15% compared to the same period a year ago.  Mobile devices are now accounting for 49% of online sales, implying that consumers may be price shopping at stores and then ordering online if the prices are cheaper.  Electronics sales, especially video games, were especially popular.  Clearly, the holiday shopping season is off to a strong start.

Despite strong electronic sales, Bloomberg reported last Tuesday that China’s manufacturing activity is now running at the lowest level in three years.  Specifically, China’s official purchasing managers index (PMI) slipped to 49.6 in November, down from 49.8 in October, below economists’ consensus estimate of 49.9.  China’s PMI is now at the lowest level since August 2012 and its manufacturing index has been below 50 for four straight months.


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.

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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.

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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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