The Market is Overbought

The Market is Overbought and Likely to Deliver Slower, More Selective Gains

by Louis Navellier

February 26, 2019

I hate to be a party pooper, but I have to tell you that the stock market is grossly overbought.  According to our friends at Bespoke Investment Group, 70.8% of the stocks in the S&P 500 are now overbought, which is the highest level in nearly three years (since March 2016).  This 70% overbought threshold has only happened eight times in the past decade, according to Bespoke, and the S&P 500 has usually kept rising – by a median 2.1% and 5.6% in the next month and three months, respectively. So, the good news is that, based on historical parallels, the S&P 500 may continue to move higher, but at a slower pace.

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Essentially, the stock market is entering a “funnel,” which I expect to become progressively narrower, with fewer stocks showing leadership. First-quarter 2019 S&P 500 earnings are expected to “hit a wall” due to more difficult year-over-year comparisons. Furthermore, due to a strong U.S. dollar, multinational stocks that account for about 50% of the S&P 500’s sales are fighting a strong currency headwind.

As a result, companies that post strong sales and earnings momentum in a slower earnings environment – like my A-rated dividend growth and conservative growth stocks – should continue to exhibit relative strength and emerge as market leaders. Here are links to my Dividend Grader & Portfolio Grader services.

In This Issue

This week, President Trump may negotiate a denuclearization deal with North Korea and a trade deal with China in the same week – after former Presidents have failed to make progress on either front. Bryan Perry covers the China deal and Ivan Martchev writes about North Korean investment options. In between those columns, Gary Alexander writes about media bias when covering stock markets, with media silence greeting this historically rapid recovery. Jason Bodner covers the phenomenal 8-week recovery in growth stocks, while I close with a look at Brexit, Europe, and what looks like Maduro’s final days in Venezuela.

Income Mail:
The March 1 Trade Truce Extension is Looking Like a Done Deal
by Bryan Perry
Dealing with China’s Hyper-Growth Cyber Crime Network

Growth Mail:
The Market is Getting Boring – and That’s Great News
by Gary Alexander
No News is Good News

Global Mail:
How to Invest in North Korean Denuclearization
by Ivan Martchev
Investment Surrogates Are Not Created Equal

Sector Spotlight:
Growth Has Been Leading Us Out of the Ashes
by Jason Bodner
Don’t Fight a Rising Market!

A Look Ahead:
Brexit Problems Overshadow a Brewing European Recession
by Louis Navellier
U.S. Energy Production Aids in Policing Venezuela and Other Dictators

Income Mail:

*All content of "Income Mail" represents the opinion of Bryan Perry*

The March 1 Trade Truce Extension is Looking Like a Done Deal

by Bryan Perry

Global equity markets ended their ninth straight week of gains, fueled by rising optimism that a formal deal with China will be struck in the coming days – a deal that satisfies President Trump enough to lift the March 1 deadline and avert another round of stiff tariffs on Chinese imports. Although the market is loving the new narrative of “settling for a whole lot less” (to avoid a further tightening of the screws on China’s evil ways), it clearly sends a signal that President Trump blinked first. At least that’s my take.

After seven rounds of negotiations over the last two years, President Trump is taking a more conciliatory tone that is not in synch with the more emboldened position of lead U.S. Trade Representative (and lead negotiator) Robert Lighthizer, who has demanded that China be accountable and transparent in a number of areas that are bona-fide long-term high-level risks to the U.S.

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This all came to a head in last Friday’s news conference in the Oval Office as Lighthzer described making progress on a memorandum of understanding (MOU) that by definition can involve a wide-ranging set of issues that precedes a formal contract. Instead, and out of left field, President Trump emphatically stated to the press that he preferred making progress on a “trade agreement” instead, and that’s how the situation would be described going forward. It was a surprising display of a public dressing down of Mr. Lighthizer and carries with it an implied softening of Trump’s resolve on China.

As the Friday (March 1) deadline approaches for raising tariffs to 25% on $200 billion of Chinese imports, President Trump is looking like he may be taking a page out of the elder George Bush’s “read my lips” playbook. Last week, a state-run Chinese tabloid ran an op-ed stating that the “global stock market faces a ‘catastrophic strike’ if trade war escalates” (source: Global Times – February 19, 2019).

We all know how President Trump is sensitive to stock market gains and losses, and how he takes special pride in touting the market’s gains since taking office. Heading into a second-term election season with a nasty fourth-quarter 2018 market correction still very fresh in the minds of investors (voters), fueled by fears of a trade war, I think the ground is shifting under the hardball terms and conditions outlined by Lighthizer and White House Trade Advisor Peter Navarro, who hasn’t been heard from in weeks.

President Trump stated no fewer than three times last week that he is willing to extend the March 1 deadline if talks are going well. The question that most concerned parties are asking is, “What’s the definition of ‘going well’?” Mr. Lighthizer has a very high standard for what China needs to bring to the table to earn that extension. Since President Trump is scheduled to be meeting North Korea President Kim Jung Un on February 27-28, the market sees a China tariff extension as a foregone conclusion.

As of Friday’s closing bell, it was reported that China will refrain from currency manipulation as a point of structural progress. And while that is a first step within a long laundry list of malfeasance by China’s government, what seems to be shaping up in the “memorandum of understanding” is a deal long on soy beans and short of any substance on forced technology transfer, IP piracy, cyber intrusion, recognition of international waters, and dumping of subsidized goods on U.S. markets that are in violation of the WTO.

Dealing with China’s Hyper-Growth Cyber Crime Network

One area where there will be little if any progress is cyber warfare on the U.S. China sees cyber espionage as a necessary component of its national strategy to grow economically and become more powerful, and that the pace of cyber incursion on U.S. assets is not going to stop, barring pressure by U.S. officials.

According to some Key Report Stats published by cyber security company Carbon Black:

  • Customers, in aggregate, are seeing approximately 1 million attempted cyberattacks per day.
  • The top five industries targeted by cyberattacks in 2018 were: Computers/Electronics, Healthcare, Business Services, Internet/Software, and Manufacturing.
  • Global governments saw increased cyberattacks in 2018 stemming from China.
  • Approximately $1.8 billion of cryptocurrency-related thefts occurred in 2018.
  • The top ransomware variant seen in 2018 was Kryptik.
  • The top industries targeted by ransomware in 2018 were: Manufacturing, Business Services, Retail, Government, and Computers/Electronics
  • The top commodity malware family seen in 2018 was Emotet, a banking trojan targeting financial information.
  • The average corporate endpoint protected was targeted by two cyberattacks per month in 2018.

Cyber-related theft, intrusion, espionage, and extortion have been reported to be ramping up further in the midst of the trade negotiations. I was informed by a cyber anti-terrorist specialist this past week that the number of uniformed Chinese-government-sponsored hackers working 24/7 that target just U.S. assets exceeds that of the entire U.S. Marine Corps – over 186,000, he estimates.

China and Russia now have the ability to disrupt critical infrastructure, such as transportation, power, water, natural gas transmission, and communications, according to the just-released copy of The Worldwide Threat Assessment of the U.S. Intelligence Community – January 29, 2019, which is published on an annual basis. This is the first year the report has changed its language from China is “developing the ability…” to “China has the ability…,” which changes the calculus on any and all dealings with China.

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Authored by President Trump’s current Director of National Intelligence, Dan Coats, this 42-page document is a serious eye-opening read. It’s free and can be downloaded over the Internet.

Besides this fresh off-the-press information, there is surely a lot more going on behind closed doors than we are aware of. So, applying this recent revelation to the situation, who really does have the upper hand?

I would venture to say that, given the soft underbelly of U.S. infrastructure – which has now been penetrated by both China and Russia – the March 1 extension will likely come and go as just another Friday at the office for all of America and China. If all this were occurring towards the end of Trump’s second term, however, I believe the game board would look considerably different. But true to form, re-election politics in the modern era comes before God and country and this time around is no different.

The stock market will continue to celebrate a trade war averted, Robert Lighthizer will join his brother-in-arms Peter Navarro as a muzzled defender of what is right and good, and the U.S/Sino geo-political tin can will be drop-kicked another 50 yards down field, where another scrum will form at a later date. 

Growth Mail:

*All content of "Growth Mail" represents the opinion of Gary Alexander*

The Market is Getting Boring – and That’s Great News

by Gary Alexander

“The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.”

– H.L. Mencken

The Dow Jones Industrials finally surpassed 26,000 again, after rising for nine straight weeks – the longest weekly winning streak since 1995. On an intra-day basis, that venerable index is up a tantalizing 19.99% in 58 days – from 21,712.53 last December 26 to 26,052.90 on Friday, February 22.  Along the way, we enjoyed the best January in 32 years, and February has defied its historic tendency of being a “letdown” month by rising 4.13% through Friday. NASDAQ is up 21.6% since Christmas, and the small-cap Russell 2000 is up a phenomenal 25.5%. But you wouldn’t know any of this by watching the nightly news.

MRC Business searched Nexis for all ABC, CBS, and NBC transcripts mentioning stocks, stock market, or the Dow between December 1, 2018 and February 15, 2019. They monitored broadcasts of ABC World News Tonight with David Muir, CBS Evening News, and NBC Nightly News with Lester Holt to determine the nature of all their stock coverage. Each news report was categorized as positive if it was about a rising market or negative if it was about the market falling. Result? Negative coverage won by a ratio of 4-to-1.

Some examples: On December 4, the market decline led the Nightly News and Evening News broadcasts. One of the on-screen headlines screamed: BREAKING NEWS: MARKET PLUNGE, with a prominent photo of President Trump next to a declining stock chart. Three days later, on Friday, December 7, all three networks covered another decline, in what CBS called the “worst start to December since 2008.”

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Good news didn’t merit much coverage. After the Dow enjoyed its best January since 1987, there was not one second of network coverage. Two weeks later, on February 15, when the Dow rallied over 400 points and completed eight straight rising weeks, not one of the evening news shows mentioned either fact.

Why? Good news is boring and bad news is energizing. Fear generates an adrenalin rush that keeps those eyeballs glued to the TV. MRC noted that negative headlines about a “nosedive,” “meltdown,” or “worst Christmas Eve ever” dominated the December shows, while January’s rapid recovery was almost totally ignored. There is no great interest in “spectacular rebounds,” as dramatic as those words may seem.

There is also the political angle. Presidents get undue credit or blame for the stock market under their watch. A strong market in President Trump’s first year surprised and upset some journalists who consciously or unconsciously wanted to undermine his presidency. When the market finally declined in late 2018, they reported the cataclysm with great zeal and energy, but January’s return to the market’s long-term upward bias has found the three main TV news network suddenly mute on the markets.

No News is Good News

'Nulla nuova, buona nuova' (no news, good news) – an old Italian proverb

Lately the market rise has slowed, creating a sense of boredom, or unease. The CBOE Volatility Index (VIX) fell to its lowest average in four months. Bespoke Investment Group – which researches the significance of every day’s market – pointed out how flat the market was in the middle of last week:

“We realize that it has been a holiday-shortened week and everything, but you can't get much more boring than the last three days of trading.  Heading into the final trading day of the week, the S&P 500 is within one point of where it closed out last week.”

– Bespoke Investment Group, February 22, 2019

This torpor is positive in the sense that it indicates we’re not close to entering a bubble situation. Markets usually die of excesses, not boredom.  The market in late 2017 was more like a bubble. The Dow crossed 23,000 on October 18, then hit 24,000 on November 30, and 25,000 on January 4, 2018. There were no significant corrections along the way. Then, the Dow crossed 26,000 just two weeks later, January 16, 2018. Similarly, it took the S&P only nine trading days to set new all-time highs at 2700, and then 2800.

THAT looked more like a “bubble” to me at the time. My Growth Mail column of January 23, 2018 was titled, “Market Milestones are Falling – Maybe Too Fast.” In that column, I expressed unusual caution:

      “Whoa, Nellie! Maybe it’s time for a breather! Big new barriers usually take some time to digest.”

--From Growth Mail, January 23, 2018

Nothing like that is happening now. January’s recovery was more like a “relief rally” from the extreme negative sentiment in December.  The February slowdown looks like what I foresaw in Growth Mail three weeks ago (February 4, 2019) – it’s neither a correction nor a great new rally, but a “pause that refreshes.”

Today, there aren’t any market bubbles or economic excesses like those that preceded previous crashes – like the commercial real estate bubble (S&L crisis) in 1990, the tech stock dot-com bubble in 1999, then those kinky real estate derivatives in 2007. No single sector is running away in bubble territory now. There’s no bubble in oil, no bubble in global or U.S. GDP growth rates, and no bubble in stock prices.

Technicians predicted an end to this bull market in late October 2018, when the S&P dipped below its support channel (see chart below). The bull seemed truly ended after the market collapse in December, but here we are on the cusp of March with no bear market, and a bull market about to turn 10 years old.

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

Next week marks this bull market’s 10th birthday. It began on March 6, 2009 on an intraday basis, and on Monday, March 9, 2009 on a closing basis. Along the way, the S&P 500 twice narrowly avoided a 20% correction, first in 2011 (-19.4%) and then last fall (-19.8%). It has not been a smooth ride, but don’t look now: The Dow only needs to rise 800 points (+3%) to reach a new all-time high, a great birthday present.

After the best January since 1987 and the worst December since 1931, we’ve still got some “catching up” to do, since S&P 500 earnings rose 24% in 2018 while the S&P index fell 6.2%. That’s a 30% differential between S&P earnings and price, pushing that index down to a historically normal 16 P/E earnings ratio.

This bull market has also coincided with what will soon be the longest economic expansion in American history. The previous record of 10 years (1991-2001) will be eclipsed if we’re still growing in July 2019, and every indicator points to positive growth in 2019, making 2019 a double 10-year market celebration.

Global Mail:

*All content of "Global Mail" represents the opinion of Ivan Martchev*

How to Invest in North Korean Denuclearization

by Ivan Martchev

By the time you read this, Kim Jong Un’s armored train would have arrived in Hanoi, Vietnam for the second summit between the United States and North Korea. This is important as the seeds have been sewn for the opening of North Korea and the commencement of a new investment cycle in the hermit state that promises to bring long overdue peace to the Korean peninsula.

Credit needs to be given to President Trump for negotiating directly with Kim Jong Un, as previous Democratic and Republican presidents have been unwilling to engage the North Koreans in such a direct way before. It is true that the North Koreans have reneged on numerous deals before – stimulating such unwillingness – and that they may renege yet again, but only an unconventional leader like Donald Trump could pull off a trade deal with China and sign a peace treaty ending the Korean War in the same week!

I believe that Kim Jong Un is very different than his father, Kim Jong-Il, or his grandfather, Kim Il-Sung, who set up the communist state. “Little Kim” was educated in Switzerland and has seen the ways of the Western world in his formative years. I believe he understands that he needs to make substantial changes in order to survive and cling to power for as long as his father and grandfather did before him.

His half-brother, who was assassinated in Kuala Lumpur in 2017 did not think that little Kim was up to the task. Yoji Gomi, the Japanese journalist and author of “My Father, Kim Jong Il, and Me,” said of the assassinated Kim Jong Nam at the time of the launch of the book: “He (Kim Jong Nam) sees his brother failing. He thinks he (Kim Jong Un) has a lack of experience, he's too young, and he didn't have enough time to be groomed. Those three reasons are why he thinks he'll fail.” (see CNN.com 1-17-2012)

Little Kim has not failed yet and based on what he has done with the North Korean economy so far, he is hell-bent on succeeding. In addition to the gruesome consolidating power, including the execution of his own uncle with anti-aircraft machine guns (see New York Times,March 12, 2016 “In Hail of Bullets and Fire, North Korea Killed Official Who Wanted Reform”), little Kim has begun a number of economic reforms that resulted in rising economic growth in North Korea (before recent sanctions began to bite).

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

Economic growth in 2016 was the highest since 1999, due to liberalization of the economy – with small merchants allowed to go into business for themselves and factory managers given more autonomy to run their enterprises. Still, the fact remains that North Korea does not have a stock market and investing in denuclearization, which I think is coming, can only be done via surrogates – like China or South Korea.

Investment Surrogates Are Not Created Equal

China is problematic as an investment surrogate for North Korea, as its too big for one to be able to find a leveraged investment on North Korea. I think the Chinese will be very active if North Korea opens up, as China is their #1 trading partner at the moment, with three quarters of all North Korean trade being done with China. China needs to maintain their influence there and will remain a major investor in the country.

Since I believe that China has very serious economic problems of its own – namely, an epic credit bubble that is likely to sooner or later put them in a bad recession, even with a trade deal – they are not likely to be a good proxy to be used as a North Korean investment surrogate, in my view.

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

South Korea is a better investment surrogate. Still, 24.8% of South Korean exports go to China and 20.5% of South Korean imports come from China, making China the largest South Korean trading partner. This is part of the clever Chinese scheme that the Trump trade deal is trying to attack, wherein the Chinese purposefully buy more from countries around them in order for them to increase their political influence.  That way, even with a large U.S. military presence, China still gets more leverage. This is the primary reason why the Chinese cannot close the trade gap with the U.S. very quickly, as they will have to redirect their state buyers to buy more from the U.S., but if they do such a maneuver too quickly, it will create unintended political consequences with many regional countries, which they had previously favored.

The easiest proxy for North Korean liberalization is to buy the South Korean iShare (EWY) as North Korea is big enough to create economic leverage for South Korea. Population in the North is 25.5 million while South Korea’s population is 51.4 million, inviting easy parallels with the reunification of East and West Germany, which were of similar size, and similar prosperity gaps. The trouble is, I do not believe that anyone in North Korea wishes to be absorbed by the South – and neither do the Chinese.

For more leveraged plays, investors could research South Korean financial ADRs like KB Financial (KB), Woori Bank (WF), and Shinhan Financial Group (SHG), which should be major beneficiaries of an investment cycle in North Korea. If I were not bearish on China’s near-term economic prospects, I would say that advanced steel producer Posco (PKX) would also be a good candidate, but Posco’s leverage to China is too big at a time when the Chinese economy is slowing, so any leverage to North Korea would be a secondary concern for a few years.

(Please note: Ivan Martchev does not currently hold a position in KB, WF, SHG or PKX. Navellier & Associates does not currently own a position in KB, WF, SHG or PKX for any client portfolios).

Sector Spotlight:

*All content of "Sector Spotlight" represents the opinion of Jason Bodner*

Growth Has Been Leading Us Out of the Ashes

by Jason Bodner

If you want to read yet another wacky story of a world turned upside down, Somali pirates actually have set up a stock exchange to finance their operations.  That’s right, you can actually invest in your favorite pirate clan and participate in the success of their ventures. As he took a Reuters reporter on a tour of this new bourse, Mohammed (a wealthy former pirate) said, “The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons, or useful materials ... we've made piracy a community activity.” What a happy thought! Organized exchange-traded pirates!

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Crazy as that may seem, this helps highlight this one key point: Opportunity exists all over the place.  Just because the news media beat the bearish drum doesn’t mean there’s no opportunity. Look at last fall and winter as an example.  The rally from lows has been astonishing, to say the least.  Let’s take a look:

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

My key takeaway is this: Growth has been leading us out of the ashes.  That’s a great thing, regardless of the reason.  By that I mean, whether growth was unfairly punished heading into the fall of last year, or if investors fled for fear, or if the consensus was that growth would grind to a halt – whatever the reason – it seems those reasons were either wrong or have been largely discounted to zero. The small caps are kings!

The U.S. dollar is strong, thereby hurting other currencies, and Europe is facing its fair share of problems.  Brexit looms over an already-worsening situation in Europe.  The flight from that landscape to U.S. small caps is clearly evident.  The Russell 2000 Index has rallied more than 25% from its December 24th lows. The Russell 2000 Growth index is up nearly 28% over the same time. The S&P Small Cap 600 Index is up +24.37% since Christmas. The value indexes are lagging while growth indexes are charging ahead.

As far as sectors go, we see a similar story: The four strongest sectors have been Industrials, Information Technology, Consumer Discretionary, and Energy. There is a lot of growth imbedded in these sectors.  Traditionally “safe” sectors, such as Utilities, Communications, Staples, and Real Estate, have lagged their better-performing peers.  With that said, their performance has nonetheless been excellent.

When we think back to the headlines swirling around at the end of the year – with all the big scary bears roaring – we must now ask, “How could they all have gotten it so wrong?”  Well, they’re not all admitting they are wrong! One interview I heard recently pointed out that bear markets fall in stages and the worst may be yet to come.  But I beg to differ.  There are countless examples of companies bucking the trend.

Could it be just a technical rally sparking us into overbought territory? I concede that is a possibility, yet while we are overbought, we have rallied for an excellent reason: Sales and earnings are largely working.

Don’t Fight Rising Earnings!

According to FactSet Earnings Insight as of February 22, 2019:

  • Earnings Scorecard: For Q4 2018 (with 89% of the companies in the S&P 500 reporting actual results for the quarter), 69% of S&P 500 companies have reported a positive EPS surprise and 61% have reported a positive revenue surprise.
  • Earnings Growth: For Q4 2018, the blended earnings growth rate for the S&P 500 is 13.1%. If 13.1% is the actual growth rate for the quarter, it will mark the fifth straight quarter of double-digit earnings growth for the index.
  • Earnings Revisions: On December 31, the estimated earnings growth rate for Q4 2018 was 12.1%. Seven sectors have higher growth rates today (compared to December 31) due to upward revisions to EPS estimates and positive EPS surprises.
  • Earnings Guidance: For Q1 2019, 68 S&P 500 companies have issued negative EPS guidance and 25 S&P 500 companies have issued positive EPS guidance.
  • Valuation: The forward 12-month P/E ratio for the S&P 500 is 16.2. This P/E ratio is below the 5-year average (16.4) but above the 10-year average (14.7).

What happened in late 2018 is that Wall Street generally revised their expectations downward to prepare for the pending end of earnings growth and slower global GDP growth.  They didn’t want to be caught flat-footed when the world slowed down, despite all the talk of rosy sales and earnings outlooks.

Well guess what – they were wrong and were caught flat-footed when the market went the other way!

Here’s a great example: The Trade Desk (TTD) is a company that’s been on our radar for a long time. A couple of days ago, John Egbert, an analyst at Stifel Nicolaus, downgraded the stock to a Hold citing amongst other things “a rapid rise in the share price.”  He issued a revised price target of $144, just before earnings were released. He was optimistic about earnings but said, “Consensus expectations are elevated.”

TTD then came out and absolutely smashed earnings estimates. Here are some highlights of their report:

  • Earnings per share (eps) of $1.09, double the $0.54 a year ago and well above consensus of $0.79.
  • Revenues of $160.5 million, up from $102.6 million last year vs. consensus of $148 million.
  • Full Year 2019 revenue projections of at least $637 million vs. consensus of $617 million.

This is what the chart looked like on Friday: +31.5% by day’s end!!!

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

Well, John, all I can say is, “Ouch! – that’ll leave a mark in the morning.”

Naturally, our whole focus here is to identify names like TTD beforehand, by trying to find unusual institutional buying, like we can see in the green bars in the chart below:

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

For those who hate self-back-patting, or calling attention to the other guy’s premature downgrade, what’s important here is that growth is alive and well and attracting capital.  The story here is that the market is fighting back with a vengeance and equities are looking strong.  We believe we are entering a more selectively narrow bull market in terms of opportunities – but many other good names are still out there.

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As far as getting the market right, remember what Elbert Hubbard said: “Don’t take life too seriously; you’ll never get out alive.” (Hubbard went down with The Lusitania in May, 1915, at age 58)

A Look Ahead

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

Brexit Problems Overshadow a Brewing European Recession

by Louis Navellier

There are formidable storm clouds on the horizon concerning Brexit.  The deadline for Britain leaving the European Union (EU) is just over 30 days away, on March 29th.  This date is shaping up to be a disaster!

Already, Britain appears to be slipping into a recession over the Brexit mess. For example, Land Rover Jaguar announced 4,500 layoffs and is short of capital. Honda announced that it will close its plant in Swindon, England, employing 3,500 workers, in 2021. Some EU automotive companies, like Porsche, have warned its British customers that a 10% surcharge may be added after March 29th since there is no agreement between Britain and the EU on vehicle tariffs. Economies hate uncertainty, since businesses and consumers tend to postpone purchases, which causes the “velocity of money” to grind to a halt.

Britain is supposed to pay the EU a multi-billion-pound exit fee to leave, but Prime Minister Theresa May has not been able to get the House of Commons or Parliament to approve any exit fee.  As a result, chaos reigns and both the British pound and euro are expected to remain weak due to all this Brexit chaos.

Meanwhile, continental Europe may be slipping into a recession.  Italy is already in an official recession after two consecutive negative GDP quarters and rising unemployment.  France is still dealing with the aftermath of its yellow vest protests, but these EU problems have been overlooked due to the Brexit news.

Ironically, neither the Bank of England nor the European Central Bank (ECB) can cut interest rates enough to fix their ailing economies, so more quantitative easing (QE) may be their only option.  The only problem with QE is that it further weakens currencies and sparks inflation, as prices on imports rise.

Essentially, the chaos surrounding Brexit has caused money to flow into the U.S. and suppress our Treasury yields.  This international capital flight is expected to persist through March and possibly beyond, depending on the ongoing infighting within Europe.  The insults from the EU bureaucrats regarding Britain’s decision to leave the EU without a transition plan exposed just how bitter the EU is about Brexit.  Specifically, European Council President Donald Tusk made some provocative comments that there is “a special place in hell” for the British officials pushing for Brexit. That was his parting jab at the failure of EU officials in Brussels to extract any significant exit payment from Britain.

Interestingly, The Wall Street Journal on Tuesday reported that, based on their two-year government bonds, Finland, France, Germany, and Austria all have negative yields due to ebbing confidence.  Although money is gravitating to what is perceived to be stable EU countries, as the amount of negative government yield grows, that money is looking elsewhere, and the U.S. is unquestionably the oasis.

U.S. Energy Production Aids in Policing Venezuela and Other Dictators

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Thanks to all-time record crude oil production, the U.S. is now driving world economic growth.  U.S. control over worldwide energy prices should eventually lead to political changes in Venezuela and possibly Iran as their respective economies collapse.  Like China has successfully done, the U.S. is now using its economic might to influence the world, with a special focus in our home hemisphere.

Speaking of U.S. economic might, President Trump last week in Miami delivered a scathing speech that warned Venezuela’s military authorities that they would “lose everything” if they remain loyal to President Nicolas Maduro and refuse to allow emergency humanitarian aid piling up on the Colombian border.  The U.S. military continues to fly C-17 cargo planes to Colombia with nutritional supplements and hygiene kits.  Venezuelan opposition leader, Juan Guaido, is demanding Venezuela’s military allow the humanitarian aid in. He has offered amnesty to military officers who violate Maduro’s blockade.

President Trump called Maduro a “Cuban puppet” and warned officials who keep Maduro in power that “the eyes of the entire world are upon you.”  In his speech, President Trump said Cuba is reported to have sent 1,000 military and intelligence advisors to protect President Maduro. Complicating matters further are the approximately 400 Russian security personnel in Venezuela, ostensibly defending Maduro.

Finally, President Trump said, “The twilight hour of socialism has arrived in our hemisphere.” He concluded by saying, “The days of socialism and communism are numbered, not only in Venezuela, but in Nicaragua and in Cuba as well.”  Obviously, by continuing to fly C-17 cargo planes to Colombia, the U.S. is planning to help with massive humanitarian aid to Venezuela.  The best possible solution is for the Venezuelan military to end the humanitarian aid blockade and back opposition leader Juan Guaido.

This chaos in our hemisphere is actually helping financial markets, since international confidence in the U.S. is boosting the U.S. dollar and suppressing Treasury yields.  Naturally, a stronger U.S. dollar lowers commodity prices and squelches inflation. Lower U.S. energy prices should boost consumer spending, while lower interest rates should eventually help the automotive and housing industries to recover.

The bottom line is the foundation under the U.S. economy remains strong, although we have seen an interruption in the normal flow of economic statistics. For instance, the Conference Board on Thursday announced that its leading economic index (LEI) declined 0.1% in January, but three of the 10 LEI components – building permits, new orders for capital goods, and new orders for consumer items – were not available due to the federal government shutdown, so there’s little value in these preliminary data.

Finally, the Fed released their Federal Open Market Committee (FOMC) minutes on Wednesday, revealing that they plan to stop shrinking their $4 trillion portfolio via asset sales later this year.  Details will come later. The FOMC minutes said, “Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve’s balance sheet.” 

This is big news, since the Fed has been systematically selling government securities and artificially keeping Treasury bond yields a bit higher than they might otherwise be.  When the official announcement comes out that the Fed will stop selling $50 billion per month in government securities, I expect that Treasury bond yields will decline.  The FOMC minutes also revealed that several Fed officials lowered their economic outlook due to (1) softer consumer and business sentiment, (2) downgrades in foreign economies’ growth outlooks, and (3) tighter financial conditions stemming from the year-end market swoon.  Overall, the FOMC minutes were very revealing and very positive for both bonds and stocks.


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