The Fed’s Hands are Tied

The Fed’s Hands are Tied as They Meet This Week

by Louis Navellier

March 15, 2016

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

The recent short-covering rally in commodity and financial stocks appears to be almost over.  In addition, I believe that the recent spike in crude oil prices is largely based on speculation as well as short-covering.  According to the Energy Information Administration (EIA), crude oil inventories rose 3.9 million barrels in the past week.  Despite a massive crude oil glut, we are at the time of year when crude oil tends to rise as worldwide demand rises.  However, when crude oil demand ebbs in the fall, do not be surprised if crude oil futures break below $30 per barrel again.  I remain very concerned about ongoing dividend cuts from major energy companies.  I expect these energy dividend cuts to resume in April.

Euro Bond ImageIn the meantime, the big news last week was the European Central Bank’s (ECB) announcement on Thursday to lower its key deposit rate to -0.4% (down from -0.3%), boosting its monthly quantitative easing by increasing its monthly bond buying program to 80 billion euros (up from 60 billion euros).  The ECB also expanded the type of bonds it can buy, so its quantitative easing now encompasses even more securities.  Additionally, the ECB cut its benchmark lending rate to 0% (down from 0.05%).  Overall, the ECB essentially threw in the “kitchen sink” by easing a lot more than most economists anticipated.  This looks like a desperate attempt to offset an avalanche of bad loans at banks in France, Germany, and Italy. ECB President Mario Draghi also predicted that “rates will stay low, very low, for a long period of time.”

All this essentially means is that when the Fed meets today they should not raise interest rates, since worldwide market rates continue to decline steadily.  Furthermore, the U.S. yield curve has flattened dramatically, since the 2-year Treasury note and the 10-year Treasury bond are now at their narrowest spreads since 2009.  A flattening yield curve can be a bit scary since it often (but not always) signals that a recession may be approaching.  As a result, this week’s Federal Open Market Committee (FOMC) meeting is very crucial and financial markets will be closely scrutinizing the Fed’s official FOMC statement tomorrow.

In This Issue

In Income Mail, Brian Perry analyzes the implications of the ECB’s latest move, which “borrowed a page out of Star Trek and went where no central bank had gone before.”  In Growth Mail, Gary Alexander looks at the chances for more “bubbles” popping up in 2016, as they did in the 8th year of the Bush and Clinton administrations.  In Global Mail, Ivan Martchev examines whether or not this energy-fueled rally is sustainable, while Jason Bodner’s Sector Spotlight compares various commodity prices vs. their value. My closing look ahead examines the mediocrity of index funds and hidden dangers of indexed annuities.

Income Mail:
The “Big Squeeze” Propels Stocks and Yields Higher
by Bryan Perry
The Undertow of Deflationary Forces

Growth Mail:
Could 2016 Go Down as Another “Bubble” Year?
by Gary Alexander
Potential Crises Facing a President Clinton or Trump
Befriend the Ides of March

Global Mail:
Risk Assets’ Oil-Driven Rally
by Ivan Martchev
Changes in Fed Funds Futures & ECB Reactions

Sector Spotlight:
Price/Value Discrepancies in Commodities
by Jason Bodner
Sector Winners and Losers for the Last Week, Quarter, and Year

A Look Ahead:
Index Funds Deliver Guaranteed Mediocrity
by Louis Navellier
This Recovery Still Needs to Pass Some Important Hurdles

Income Mail:

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

The “Big Squeeze” Propels Stocks and Yields Higher

by Bryan Perry

As of last Friday, it was exactly one month since the S&P 500 traded at its two-year low of 1810 (intra-day). It has since rallied 11.7% as the narrative has dramatically shifted from an assumption that the U.S. economy was headed for a recession to that of a narrative which suggests there will be no recession.

Surging oil prices have sparked massive short covering in the commodity and junk bond sectors, while investor sentiment has gone from bleak to semi-blissful during this short (29-day) span.

Standard and Poor's 500 Index Chart

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

The American Association of Individual Investors reported that bullish sentiment stood at just 19.2% on February 12, well below the long-term average of 38.6%. Bearish sentiment stood at 48.7% then – well above its long-term average of 30.3%. With investor sentiment being a contrarian indicator, the stock market was primed for a big rebound effort, which has proven accurate. With the market rebound, bullish sentiment has pushed up to 37.4% in the latest report, while bearish sentiment has dropped to 24.4%.

In the chart above, we can see major technical resistance for the S&P between 2025 and 2050. Some backing-and-filling or consolidation at current levels is a very likely scenario for equities.

In the midst of the recent stock market rally, bond yields rose in conjunction with the shift in the narrative (from recession to no recession). The yield on the 30-yr Treasury Bond spiked from a low of 2.40% to 2.75% but it is still 33 basis points below where it stood at the first of the year. In my view, bonds were extremely overbought in early February, out of fear of a meltdown in the sub-prime debt space. We have simply seen yields move back to their long-term downtrends. Depending on forward-looking economic data, I would not be surprised to see the selling in bonds subside at current levels.

Thirty Year Treasury Bond Index Chart

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

Last week, the European Central Bank provided global markets with an extra big lift by announcing a slew of fiscal stimulus measures targeting weak growth in the broader European economy. Faced with a regional economy stubbornly resistant to revival, the ECB borrowed a page out of Star Trek and went where no central bank had gone before. It said it would effectively pay commercial banks money to borrow central bank funds. The offer, one of a half-dozen measures the central bank announced last Thursday, means banks that participate would pay back less at the end of the four-year loan than they borrowed. Banks will qualify for the money only if they lend it to consumers and businesses. There are other conditions. The money cannot be used for mortgages, for example. This represents a significant escalation of the ECB’s efforts to get banks to lend more money, heading off the threat of deflation.

Additional stimulus measures included an increase in the purchases of government bonds and other assets to 80 billion euros, up from 60 billion. In yet another unprecedented step, the central bank will begin buying corporate bonds as part of their monthly asset purchases. On the surface, this spending is meant to pump more money into the slumping European economy, but it’s my view they are simply absorbing bad debt from Italian, German, and French banks awash in emerging market debt that is either in default or in arrears. The ECB also cut its benchmark interest rate, the main refinancing rate, to zero, from 0.05% and lowered its deposit rate to -0.4%. By charging banks more to keep their deposits at the central bank and less to borrow from it, the ECB hopes to make it less attractive for commercial banks to hoard cash.

The Undertow of Deflationary Forces

Only time will tell if Europe’s bazooka-like fiscal policy will have a meaningful effect, but ECB President Mario Draghi would not have gone down this road if he and his fellow bankers didn’t recognize that the forces of deflation are weighing heavily on the recovery. Despite the bank’s stimulus measures to date, inflation within the euro-zone has been stuck near or below zero for more than a year.

A drop in demand for euro-zone exports from emerging countries like China and recent data showing a decline in confidence among consumers and business managers is prompting all this bank intervention. Goldman Sachs has stated in no uncertain terms that the commodity rally of late will stall out and prices for metals, oil, and gold will tumble by as much as 20% from current levels (see Bloomberg’s “Goldman Says Commodity Rally a False Start That’s Set to Fizzle,” March 7, 2016).  Bloomberg also reports that Xu Huimin, an analyst at Huatai Great Wall Futures Co. in Shanghai, believes “there may be some short-covering in the futures markets.” This comes as “the crazy surge in futures prices has surprised traders and steel mills, as they haven't seen a corresponding increase in physical orders.”

While almost $5 trillion was added to the value of global equities in the past few weeks (according to Briefing.com March 11, 2016), some new data is reinforcing the misgivings that marked trading at the start of the year. Bloomberg reported on March 1 that Japan said its economy contracted last quarter, while China reported the biggest tumble in offshore shipments in almost six years. Some things about this rally in stocks and the selling of bonds obviously don’t jibe, but investors seem to be betting that a trough in commodity prices and corporate earnings is in the making, which would also explain the bump in yields. That said, apparently there is little attention being paid to oil supply charts, which are anything but comforting in the face of a spike in crude prices.

Total Crude Oil and Petroleum Products Stocks Chart

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

A month ago, when global stock markets were in upheaval, credit spreads were widening, and economic data was disappointing, the fed funds futures market priced out any probability of another hike in the fed funds rate until 2017. Traders and fund managers have been forced to re-think that outlook now that global stock markets have come roaring back and economic data has been surprising more to the upside.

The latest data from the fed funds futures market shows a 49.6% probability of a rate hike at the July meeting (source: CME Group FedWatch). If the economic data continues to produce positive surprises, and oil prices keep rising, there is likely to be some growing angst that the Fed will raise rates multiple times this year on its path toward normalization. It’s truly a tale of two tapes: Seemingly better growth ahead on the domestic front while China, Japan, and Europe are battling a downward spiral in prices.

The reality check of the past week is that the announced basket of fiscal stimulus measures is seen as a sign that the ECB is more worried about the risk of deflation than they previously had voiced. Paying banks to lend has never been tried by one of the world’s major central banks, but there’s always a first time and Mario Draghi is making an “all in” bet that fueled a celebration akin to the running of the bulls.

Good, bad, or indifferent, the market is in love with fiscal stimulus and the latest round by the ECB is being received akin to what was labeled “the Bernanke put” (when the Federal Reserve kept upping their QE programs when negative economic data crossed the tape). Markets are taking the same cue from the ECB and running with it, as in Friday’s big rally, which was led by junk bonds and deep cyclical stocks.

Growth Mail:

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

Could 2016 Go Down as Another “Bubble” Year?

by Gary Alexander

“I’m Forever Blowing Bubbles” – a popular song in 1919

Looking back over the last three two-term Presidents, we saw market cataclysms in their final year: The Clinton years ended in the tech stock bubble of 2000.  The Bush years ended in a financial crisis in 2008, triggered by kinky real estate derivatives.  And now, the Obama years are ending with a credit bubble fueled by seven years of near-zero-interest rates, three rounds of quantitative easing, Operation Twist, bailout packages in 2009, massive corporate borrowing to fund stock buy-backs, negative interest rates in Japan and Europe, a commodity market crash, and currency manipulations to fight deflation or recession.

The most explicit example of a bursting “bubble” so far is the sharp decline in oil prices and negative GDP growth in resource-dependent nations like Brazil, Venezuela, and Russia.  There has been no major crash (yet) in U.S. stocks or the economy.  In fact, The Wall Street Journal reported last Thursday that the net worth of U.S. households and nonprofits “reached a record $86.8 trillion in the fourth quarter, according to a report Thursday from the Federal Reserve,” up by “more than $1.6 trillion from the third quarter.”

United States Aggregate Household Net Worth Chart

The Fed’s quarterly wealth report, known as the Flow of Funds report, also measures assets by category. Most of America’s net wealth is in financial assets, including $20.9 trillion in pension funds, over $13 trillion in stocks, and a record $10.7 trillion in bank deposits.  The net value of household real estate rose to $15.5 trillion last quarter.  According to CoreLogic, about 61 million U.S. homeowners now have at least 25% equity in their homes – an increase of 10 million over the same time last year.  Only 4.4 million homes have negative equity, according to CoreLogic, vs. over 12 million underwater homes in 2009.

I’m comparing assets in real estate vs. financials for a reason.  The bulk of the real estate bubble came during the George W. Bush administration, whereas the financial bubbles have grown during the two surrounding Democratic administrations – Clinton and Obama.  Financial assets tend to favor the richer investor vs. real estate as a more commonly-held core middle-class investment.  For this reason, the gap of income inequality has grown faster under Democratic administrations than during Republican years.

Income Gap Soars under Obama Bar Chart

This chart only covers Obama’s first term, but the trend has continued.  Writing in the March 5-6 weekend edition of the Wall Street Journal (“How Progressives Drive Income Inequality”), economist Lawrence B. Lindsey, a former Federal Reserve Governor, explained how income inequality is measured: “The Census Bureau releases annual updates on income distribution in the U.S., publishing three technical statistical measures – the Gini index, the mean logarithmic deviation of income and the Theil index…. By all three measures, inequality rose more under Bill Clinton than under Ronald Reagan. And it wasn’t even close.”

The same trend continued in the Bush and Obama years: “The mean log deviation increased 37% more under Mr. Obama than under President George W. Bush, although when this statistic was released, Mr. Obama had only six years as president compared with Mr. Bush’s eight. The Gini index rose more than three times as much under Mr. Obama than Mr. Bush. The Theil index increased sharply during the Obama administration, while it fell slightly under Bush 43.” Lindsey summarizes: “Both Democratic presidents presided over bubble economies fueled by easy monetary policy. There is no better way to make the rich richer than to run policies that push up the price of financial assets.”

On the flip side, stock markets have performed better under Democratic presidents than Republicans, but when stock market growth exceeds cash returns or appreciating real estate, income inequality rises.

Potential Crises Facing a President Clinton or Trump

As we narrow the presumed Presidential choices down to Donald Trump or Hillary Clinton, we can begin to dope out the likely consequences for the stock market and postulate where their signature crisis might arise.  Hillary Clinton has been especially vocal against pharmaceutical drug pricing, so you can expect some price caps or controls on Big Pharma – a populist move that will likely foment some unintended consequences, such as less R&D to produce new life-saving chemical compounds and a shortage of high-demand medicines, followed by drug rationing and a possible shortage of health-care professionals.

For Mr. Trump, his bellicose trade war rhetoric is more dangerous than a potential drug price cap.  Trump has endorsed 45% trade tariffs, which could lead to a trade war.  In the February 25 debate, Trump shot back “I don’t mind trade wars,” portraying a lack of free market economic principles or ignorance of history.

The end of the Cold War brought a wave of relatively unrestricted trade between nations.  The average growth rate of world trade from 1987 to 2007 was 7.1% per year, according to the OECD.  According to a recent Wall Street Journal editorial (“Making Depressions Great Again,” March 1, 2016), “Forecasters expect world GDP to grow only 2.2% to 2.4% this year, and one reason is that trade flows are historically weak.  The OECD estimates that the trade slowdown since 2012 has subtracted about half a percentage point a year from the overall growth rate of the developed world.”  As this chart shows, trade soared 12% in 2010, fell to +7% in 2011, and retreated to 3% a year in 2012 to 2014, before falling below 2% in 2015.

Annual Percentage Growth in World Trade and Gross Domestic Product Bar Chart

Barron’s concluded in their cover story last week (“Clinton vs. Trump,” March 7) that “Clinton is the more investor-friendly of the two.”  Trump has not only called for heavy tariffs but has “vowed to alter or undo the North American Free Trade Agreement.”  The positives on Trump’s side, according to Barron’s, are that Trump’s proposed tax cuts are far more growth- and business-friendly than Mrs. Clinton’s plan.

If our politicians could simply get out of the way, that would be a much better choice for most businesses. Trade, after all, is between companies, not nations.  Politicians only get involved after companies in their district demand protection of jobs, resulting in “free trade” bills with thousands of specific exceptions.

Befriend the Ides of March

Next Sunday marks the first day of Spring.  The dawn of spring has motivated poets and bards from time immemorial.  Spring inspires more poetry and music than any other season.  It marks a rebirth of life.

Spring is also a good time of year for stock markets.  March is a good month and April is the best.  The largest one-day gain in the Dow Jones Industrials took place on March 15, 1933, the day that our new President Franklin Delano Roosevelt re-opened America’s bank after a 10-day banking holiday.

More recently, since 2007, the S&P 500 has averaged 5% gains from mid-March to April 30:

Ides of March - Great Time to Invest Table

Have a great Spring, and forget Shakespeare and Julius Caesar – mid-March is a great time to invest.

Global Mail:

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

Risk Assets’ Oil-Driven Rally

by Ivan Martchev

“A picture is worth a thousand words” – Fred R. Barnard

While pondering the new-found correlation of oil and stock prices – and junk bonds to stock prices, for that matter – I came upon this chart from Bloomberg, which spoke volumes.

International Energy Agency Oil Price Bottom Predictions Chart

The inspiration for that chart came from IEA, which recently dared to pronounce that “oil prices may have bottomed out.” If one keeps calling a bottom habitually, one is bound to be right at some point. A broken clock is right twice a day. Granted, those are not the same bottom callers every time, but I think it is likely that some of the others (who were wrong in the past) now feel we’ve seen the bottom in oil.

As I elaborated here last week (“Was This the Seasonal Low in Oil?”), I think we have a seasonal rally that is typical for this time of the year. While oil inventories globally are at a record and drilling rigs in the U.S. fell to a multi-year low of 480 at last count, it is premature to call a bottom, in my opinion.

West Texas Intermediate Light Crude Oil Chart

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

This looks like an intermediate-term seasonal rebound, like the one we saw in early 2015, which forms an eerily similar chart pattern, above. I am not necessarily basing this analysis on charts, though. As readers of this column know, I think charts are fine but one needs to make an effort to know what is going on behind the chart. The reason why the low in drilling rigs is not resulting in a drop in production is the Damocles’ sword of high debt hanging over the heads of many producers. They are not spending more money on drilling – horizontal drilling is much more expensive than conventional drilling and the present oil price level certainly does not justify it – but they are maximizing output from existing wells, hence the still-elevated level of production with the plunge in the rig count (see chart below).

Field Production and Rig Count Chart

I have previously noted that the volume of sand shoved down fracking oil wells has risen dramatically, because that is the cheapest way to increase output. I do not pretend to know what is the physical limit of the amount of sand that won’t result in more production but a mere choking of the well. However, I see only a limited drop in production of crude at present. The current rebound in the oil price will only prolong the agony of overleveraged shale producers that are producing at breakeven, or even a loss, in order to keep making those bond coupon payments so they can stay in business. We must add any new production from Iran, which is looking to ramp up production as they need the forex revenues. There is also Saudi Arabia, in talks with Russia that have yet to result in any meaningful declines in production.

For the time being, this is working out to the investor’s advantage, as stocks prices now are positively correlated to a rallying oil price. Still, I often wonder should it not be the opposite for the S&P 500 since a falling oil price stimulates service-based economies like the U.S. When the oil price falls, producers lose and consumers win.

That said, I think it is a major mistake for the Federal Reserve to be doing more rate hikes in the present environment. Risk assets like junk bonds and stocks are taking the rebound of oil as a signal that the global economy is getting better. They are confusing a seasonal rebound in oil with a cyclical rise.

Thirty Day Fed Funds - Daily OHLC Chart

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

Changes in Fed Funds Futures & ECB Reactions

In the first six weeks of the year the probabilities of more Fed rate hikes completely disappeared. The December fed funds futures went from 99.10 (implying a year-end fed funds rate of 90 basis points, or 100 minus the ZQZ16 price) to 99.655 on February 11 (implying a year-end fed funds rate of 34.5 basis points). Since the fed funds rate at the time was 50 basis points (0.5%) after the December 2015 rate hike, fed funds futures traders, most of which are institutional investors, were anticipating a rate cut in 2016.

United States Ten Year Treasury Yield Index Chart

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

December 2016 fed funds futures have sold off in the past month, again giving the Fed more breathing room to act. I hope they don’t hike again as that would be compounding a mistake they already made. Since the first Fed rate hike, the 10-year Treasury note yield went from 2.32% to a low of 1.57%. I do not recall a time when 10-year Treasury yields dropped 75 basis points so fast after a rate hike. Granted, the 10-year Treasury note yield closed at 1.98% last Friday so the Treasury market has calmed down; but that February low in Treasury yields was 19 basis points away from the all-time low of 1.39% in 2012.

I think that in the present global deflationary environment more Fed rate hikes are hopelessly misguided. I think we have a better-than-even chance of hitting an all-time low in 10-year yields by the end of 2016 (see my December 29, 2015 Marketwatch article, “Will 2016 Bring New Treasury Yield Lows?”).

This sounded like a far-fetched prediction at the end of 2015. It’s not so far-fetched anymore.

Meanwhile, the European Central Bank (ECB) is genuinely aiming to surprise the markets these days. Even though their monetary policy actions were more aggressive than what they announced in December, they still managed to create a sizeable upswing in the euro, just like they did back then.

Euro versus United States Dollar Exchange Rate Chart

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

Still, in December we had a 5-cent intraday move where the euro went from $1.05 to about $1.10. Last week we had a 4-cent intraday move on the ECB announcement, as the euro went from $1.08 to $1.12. Although those are large intraday ranges, they have not had any follow-through and the euro price is still consolidating in the range that it established in 2015.

European Union Inflation Rate Chart

The reason why the ECB went further into negative territory to -0.4% with their short-term deposit interest rates is that euro-zone inflation has now turned negative at -0.2%, as can be seen in the chart above. This deflationary malaise can be seen in the price of euro-area banks, some of which have taken out the 2008 crisis lows, even though there is no equivalent crisis at the moment. Deflation is bad for banks as non-performing loans tend to rise; but in this case their net interest margin is collapsing too, with negative interest rates at the short end and extremely low government bond yields at the long end.

Europe already looks to be following the deflationary quagmire that has plagued Japan for 20 years. I hope it does not take the Europeans as long to find an answer, as this is not a hopeful comparison. Still, I am beginning to wonder if the euro is not acting like the yen, which counter-intuitively went up after the currency markets digested the negative rate move by the BOJ in January (see my March 9, 2015 Marketwatch article, “What’s Behind Yen’s Monster Rally?”). Maybe too many institutions used euros for too many carry trades that are now unwinding…?

For the time being I still think a euro-dollar parity (1:1) is in the cards, but the action in the currency markets last week strikes me as a rather peculiar first reaction.

Sector Spotlight:

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

Price/Value Discrepancies in Commodities

by Jason Bodner

“Price is what you pay, value is what you get.” -- Warren Buffet

If price is what you pay, then let’s look at some comparative prices for a minute.

  • Running water costs an average 1 cent per gallon in the United States. Bottled Poland Springs water retails for about $6 per gallon or 72 cents per pound (a gallon of fresh water is 8.36 lbs.)
  • Oil, the second most plentiful liquid on the planet, is 12.8 cents per pound, as the average full barrel of oil weighs around 300 lbs.
  • Smoked Salmon retails for approximately $24 per pound.
  • One pound of uranium-235 contains two to three million times the energy equivalent of oil or coal. Uranium prices settled on Friday at $28.50 per pound.  Interestingly, uranium is many times more naturally abundant than silver, which currently costs $225 per pound.
  • Wagyu Beef can be bought at Costco for around $136.63 per pound, which is substantially less than Kobe beef, which goes for roughly $300/lb.
  • Gold costs about $18,177 per pound, over 80 times the price of a pound of silver, at about $225.

Commodities Image

What does all this tell us? Well, it tells us that in perhaps one of the most successful marketing ploys of all time, the consumer has been conditioned into paying about a 600-fold markup for water. Bottled water also costs significantly more than oil. One could buy a pound of lox for about the cost of a pound of uranium. One pound of salmon will feed a family one meal. One pound of uranium will make a ball only 1.3 inches in diameter (make an “OK” sign with your forefinger and thumb to see how big that ball would be). That ball however, could generate 11 million kwh of power versus the same amount of oil generating 6-kwh. Worldwide, there are more than 441 nuclear power plants that supply about 16% of the world's electricity using uranium. What we also see is that even though oil is more abundant and significantly cheaper on an absolute basis, when we factor in the enormously higher energy potential of uranium, oil is actually obscenely expensive on a relative basis. If it takes roughly 2.5 million times as much oil to reach the energy potential of uranium, then the oil required to match a pound of uranium would cost $320,000!

What we have seen in the behavior of many markets recently is that price and value are two completely different things. And in some cases, they may have absolutely nothing to do with each other.

Speaking of oil, a few weeks ago it seemed as though the sinking price of oil was going to take out the world markets. According to Bloomberg, after a spectacular short-covering rally prices have recovered almost 45% from a closing low of $27.88 on January 20th to $40.39 on Friday March 11th.  The biggest downtrend since the U.S. housing and financial markets in 2008 has seemed to catch its footing for now.

While we are on the subject of downtrends, the VIX had a 1-year peak at 28.10 February 11th and is back down to 16.50, a level previously seen December 29th – just prior to the slide in equities in early 2016.

Sector Winners and Losers for the Last Week, Quarter, and Year

As this market chugs higher, let’s look in on the sectors to see how the performance has been. Friday’s huge gains were strongest in Energy and Financials – as the weakest sectors lead us out of the depths.

Standard and Poor's 500 Sector Indices Changes Tables

Looking at sector performance, it’s plain to see why I am still concerned about the quality of this rally or lack thereof. For 12 months now, Energy and Materials have been consistently the weakest groups to appear in the sector performance tables (recently joined by Financials). As with previous weeks, the market’s march higher finds Materials, Utilities, and Energy leading the pack. The fundamental story has not changed dramatically other than the higher prices sparked by short covering from the bottom put in on February 11. Oil output is still shockingly high. Global growth is still visibly slowing. It seems that each new week brings more and more negative rates from central banks. Why does the market then rally?

But rally it does…

Looking at the 1-year charts (below) next to the charts for the past two months helps illustrate just how powerful the updraft has been with the S&P 500 Energy and S&P 500 Materials Indices.

Standard and Poor's 500 Yearly Sector Indices Charts

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

While it is easy to feel relief and possibly even some cheer about the market’s recent rebound, it is important to note that it is not strength leading the way; it is weakness. We live in a world where water is nearly free – or 600 times more costly. We live in a world where a pound of fish costs almost as much as an equal-weighted rock which could power a computer continuously for about 1250 years! We live in a world where an inert metal like gold, which doesn’t power anything, costs 650 times as much as uranium.

Prices on the stock board are objective red and green numbers, but value is often based on subjectivity, especially in volatile markets like these. Sometimes it’s hard to make sense of what the market is doing or where it is going. It is logical to quantify what is leading and lagging, but at this particular point in time, the weak sectors of the past year continue to lead. It may make about as much sense as paying $300 for a pound of steak, but then again there are plenty of people who gladly pay $300 for a pound of Kobe steak.

A Look Ahead:

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

Index Funds Deliver Guaranteed Mediocrity

by Louis Navellier

At one of my recent advisor meetings, I noticed that my book was placed next to Tony Robbins’ book, Money: Master the Game.  I mentioned to the advisors that Tony lives up the street from me in Florida and that we waved at each other recently, since we both drive the same limited-edition Porsche model.

At these advisor meetings, I have been getting lectured a lot lately by those who believe Tony Robbins when he says that you should have all your money in index funds, especially indexed annuities.  I like to fight back by saying that if you index all your investments, you can replace advisors with robots.  Frankly, I am sick of hearing about this famous (but non-SEC registered) motivational speaker giving investment advice, but clearly the annuity business is using Tony Robbins’ book to sell their indexed annuities.  Many advisors endlessly tout Robbins, perhaps because they like the high annuity product commissions.

In Robbins’ laboriously long (688-page) book, he promises “Upside without the downside” (page 428).  That’s the magic formula investors want to hear – a way to win, but never lose.  That’s not realistic, and it doesn’t account for net returns after fees.  Some of these products have high management fees.  The New York Times reported (“Slippery Tips on Annuities from a Life Coach,” January 16, 2015) that FINRA, the independent securities regulator, said these products are “anything but easy to understand.”  In his book, Robbins says fixed indexed annuities are an “elevator that can only go up,” but the Times reported that the SEC says the opposite, in blunt language: “You can lose money buying an indexed annuity.”

I don’t mean to pick on Robbins alone.  In addition, I’ve seen all kinds of other glossy brochures from a number of companies about “stop-loss” systems and other special ways to protect investors from any downside.  Besides being non-compliant, such promises are unrealistic.  You can’t avoid downside swings in index funds and you can’t create superior returns by seeking “flat” returns through indexed annuities.

The moral of this story is that in the tactical investing annuity world, a fantasy usually sells better than reality.  I see a lot of very professional-looking but non-compliant charts showing returns (before net fees) as advisors try to capitalize on the kinds of fears generated by the recent market reversal.  The market may be manic-depressive but if you settle for indexed annuities, you miss the market highs as well as the lows.

This Recovery Still Needs to Pass Some Important Hurdles

Jury Box ImageAs I’ve been saying over the last month, this is a short-covering rally (so far), with the weakest stocks and sectors (prior to the bottom of February 11) being the strongest stocks in the latest recovery.  Last Tuesday, when the S&P 500 fell by 1.1%, Bespoke reported (in “As Mean as Mean Reversion Gets!” on March 8), that “The stocks and sectors that led the rally off the lows, pulled back the most, while the stocks and sectors that gained the least during the rally held up the best.”  Bespoke analyzed the S&P 1500, dividing stocks into 10 deciles of 150 stocks each.  They showed that “the best 10% of stocks in the S&P 1500 gained an average of 56.2% during the rally!  But the higher they go, the harder they fall.” That group of high-flyers fell 5.8% last Tuesday, giving a double meaning to the term “mean reversion.”

On the same day, Bespoke reported (in “Wait for Downtrends to Break”) that the chart channels for the major stock indexes are still in a downtrend that began last May.  Bespoke said that the S&P 500 “still has a ways to go just to test the top of its channel, which is at 2075. Until that level breaks, market bears remain in control no matter how much we’ve bounced off the lows.”

In summary, the jury is still out on this one-month recovery.  We need to see higher-quality leadership, with strong companies beating the “junk” on both the up and down days.  We also need to see the S&P 500 break out of its 10-month declining channel before we can say with any confidence that this 7-year-old bull market is still intact.  I wish I could give you the absolute answer to this dilemma, but I prefer to let the market disclose its own direction rather than to rely on the promises of famous self-help gurus.


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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

Marketmail Archives Trade Summary

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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

Marketmail Archives