The SEC Strikes Back

The SEC Strikes Back at Some Shady Trading Practices

by Louis Navellier

October 4, 2016

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

On the surface, September seemed like another boring month – with the S&P 500 down a scant 0.1% – but we saw the usual seesaw in sector strength, plus quite a few surges and collapses in some key stocks.  As it turns out, many of these single-stock “mini-crashes” were caused by some rather shady trading practices.

In recent weeks, we have been writing about shady practices by High-Frequency Traders (HFT), so I’m delighted to see that the Securities & Exchange Commission (SEC) fined a big Wall Street firm $12.5 million last week for its “erroneous orders,” which caused a “flash crash” in stocks.  Placing and then suddenly “pulling back” orders is a big no-no in the securities business, since it essentially “baits” HFT traders as well as the algorithmic traders that monitor HFT order flow and all too often exaggerate any major market moves.  This big firm was fined by the SEC for market manipulation in three stocks that each dropped over 3% within seconds.  Another SEC investigation found more than 15 market disruptions (“mini-crashes”) caused by the same firm between late 2012 and mid-2014.  This big Wall Street firm did not admit or deny the SEC findings, but they nonetheless agreed to pay the $12.5 million fine.

Canadian Snowbirds Image

In Fed Chairman Janet Yellen’s testimony in front of Congress last Wednesday, she made it clear that the Fed would not seriously consider raising key interest rates until the December meeting of the Federal Open Market Committee (FOMC).  The other FOMC meeting – in early November, just before the Presidential election – was not cited as a likely time for the Fed to raise rates.  Perhaps smarting after Donald Trump lambasted her during the first Presidential debate, Ms. Yellen (and some other Fed members) may want to crawl into a hole and hide until after the November Presidential election.

In This Issue

Bryan Perry and Ivan Martchev will dissect the chances of some major market fallout from the Deutsche Bank crisis, while Ivan and I will take a closer look at oil price volatility last week.  In addition, Gary Alexander will preview earnings season and the likelihood of an October correction, while Jason Bodner will review the brewing storms in nature and in certain S&P sectors.  Welcome to another stormy October!

Income Mail:
The October Madness Has Only Just Begun
by Bryan Perry
Never a Dull Moment in Deutschland

Growth Mail:
October – The Birth Month of Bull Markets
by Gary Alexander
Will Third-Quarter Earnings Fill (or Empty) the Glass?

Global Mail:
Summarizing Deutsche Bank’s Systemic Risk
by Ivan Martchev
Oil Rebounds as Middle East Tensions Escalate

Sector Spotlight:
Is a Market Hurricane Brewing?
by Jason Bodner
Storms Brewing in Financials and Energy

A Look Ahead:
Don’t Be Fooled by “OPEC Unity”
by Louis Navellier
Slow Global Growth is Also Hurting Oil Prices

Income Mail:

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

The October Madness Has Only Just Begun

by Bryan Perry

Following a string of high-profile events that included an FOMC policy meeting, a BOJ policy meeting, an OPEC meeting, end-of-quarter window dressing, and a no-holds-barred Presidential debate, one would have thought that the skies for the stock and bond markets might clear up somewhat heading into October.

Investors aren’t going to be that lucky, since we now face a few new uncertainties in the next few weeks.

As the quarter ended, it was clear that the appetite for risk-on equity exposure was on the rise. Though the markets saw a spike in volatility, the week was fairly uneventful, as the S&P 500 added 0.17% last week.  Over the year-to-date, however, four of the most widely-watched market indexes are up at least 5%.

Four of the Most Widely-Watched Market Indexes Table

Rate-hike expectations rose somewhat after we learned that August Core PCE Prices declined 0.1%, even though most other inflation measures trended up during August. As a result, the implied probability of a rate hike at the December meeting climbed to 55.7% last Friday, up from 48.1% the previous day, according to the fed funds futures market (source: CMEGroup FedWatch Tool 9/30/2016; details below).

Futures Expiry: December 2016

Futures Price: 99.515

Rate Hike Probability Table

Meanwhile, the yield on the 10-year Treasury Note closed out the week where it began, right at 1.61%, after plunging to 1.55% on the Deutsche Bank stream of headlines earlier in the week.

Never a Dull Moment in Deutschland

The wild and wooly trading week began with a decline in shares of German banking giant Deutsche Bank, driven by renewed concerns about the bank’s capital standing. German Chancellor Angela Merkel said that the bank would not be eligible for state aid if it were to experience a capital shortfall. This drove up concerns that something may indeed be wrong at Deutsche Bank. (source: “Week in Review: Bank Shares Wobble, But Market Holds.” Briefing.com. 30 September 2016.)

The stock remained in focus throughout the week, leading another market-wide swoon on Thursday amid reports that some funds that clear trades with Deutsche Bank have reduced their positions and withdrawn some excess cash. The stock ended Thursday down 6.7%, weighing on sentiment in the broader market.

A turnaround in Deutsche Bank and the overall market developed on Friday when DB’s CEO John Cryan sent a letter to employees, assuring them of the bank’s health. The stock rallied out of the gate on Friday, receiving another boost after Agence France-Presse (AFP), the French press agency, reported that the bank is nearing a $5.4 billion settlement with the U.S. Justice Department, down over 60% from the $14 billion originally sought by the Department of Justice.

Deutsche Bank Headquarters Image

Naturally, Deutsche Bank has refused to comment on speculation around the level of the DOJ fine, which means that should the DOJ make no announcement in the ensuing days after this published report, any buying spree in DB may promptly turn into another sell-off. As a reminder, there were “fixes” galore in 2008 as rumors sent Lehman stock soaring during many weeks before its final share price meltdown.

There is real potential of a Lehman Brothers 2.0 sequel shaping up and, if so, there is systemic risk to the European banking system that will require a government-sponsored (or ECB-sponsored) bailout. Negative interest rates are only adding to DB’s woes, due to its high-risk loan portfolio and extreme leverage in the derivatives markets.

The German national weekly newspaper Die Zeit reports that the German government and financial authorities are preparing a rescue plan for Deutsche Bank. They suggest that this rescue plan would come into force if Deutsche Bank needed extra capital and was not able to raise it on the open market. It also added that the government would take a stake in Deutsche Bank in the worst case scenario. (Source: ZeitOnliine – “Federal Government Prepares Emergency Plan for German Bank,” 9/28/2016.)

Lehman Collapse Compared to Deutsche Bank Failure Chart

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

The German flagship bank’s value has more than halved this year after it posted its first full-year loss since 2008 in January. The IMF also warned in June that Deutsche’s links to the world's largest lenders make it a bigger potential risk to the wider financial system than any other global bank. Any further such headlines of elevated counterparty risk could punish the stock and rattle markets around the globe.

We’re at a point where a bailout of some form is probably more a question of when than if. Such a move will open wider the gate of moral hazard to the ECB and other banking bodies. If DB is bailed out, every bank that has mismanaged its affairs will be in line for a similar deal, led by the Italians. It’s one big hot mess over there. But rest assured that if DB reaches the point of no return, it will be saved because it is ‘way too big to fail.’ And when that bailout is finally announced, markets will likely rally and rally big.

With two more debates between Hillary and The Donald all teed up, to say that we live in crazy times is becoming an understatement. Thank goodness for earnings season, starting next week. Despite all of the unknown factors surrounding DB and the election, few things clarify our portfolios like reporting season. Earnings season is where the rubber meets the road for great dividend-paying blue chip stocks. (Please note: Bryan Perry does not currently own a position in DB. Navellier & Associates, Inc. does not currently own a position in DB for any client portfolios. Please see additional important disclosures at the end of this letter.)

Growth Mail:

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

October – The Birth Month of Bull Markets

by Gary Alexander

“OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.

-- Mark Twain, in Pudd'nhead Wilson's Calendar

Pessimists say this bull market is too old (and/or overvalued) to continue, especially considering this year’s distasteful Presidential candidates and negative earnings growth.  But the optimists expect business in America to continue to prosper and profit no matter what our newly-elected officials try to do to us.

If this market were a glass of water, is it half full or half empty right now?  That depends…

Instead of looking at any glass as either half-full or half-empty, we could see it as always 100% full of life-giving air and water.  In that sense, air (the empty half) is more important than water.  We can live over a week without water, but not an hour (or even 10 minutes) without air.  Market corrections merely provide the air – call it a “buying vacuum” – which the subsequent and inevitable rally will fill up again.

Half Full or Half Empty Glass Image

October has a terrible reputation in market history.  Some of the worst market crashes came in October of 1907, 1929, 1987, or 2008, along with a lot of other October mini-crashes I’ll cite below.  But the flip side of that scary tendency is that October is also the birth month of big bull markets.  Here are some examples from the first week in October.  (I’ll bring you an equal number of examples from late October later on.)

      (Note: These samples are based on historical market data available in “The Almanac Investor.”)

During the week of October 3-7, 1932, the Dow Jones index fell 12.4%, the third worst weekly decline to that date and the sixth worst percentage decline of the 20th century.  Like now, America was on the cusp of an historic election in a time of great political division.  (Unlike today, however, unemployment was 25%.)  A rich populist Democratic challenger, Franklin Roosevelt (unlike today, a man with political experience) was favored over Republican incumbent Herbert Hoover, but FDR’s policies were still controversial and vague.  His ideas remained such a mystery that the stock market remained low until his Inaugural address on March 4, 1933.  But the Dow gained 372% from its 1932 low through the start of FDR’s second term.

Fifty years ago, on October 7, 1966, the Dow reached a bear market bottom of 744.32, down 25% since early 1966, in what was called the “credit crunch of 1966,” but the market then rose 32.4% in two years.

On Thursday, October 3, 1974, the S&P 500 reached its lowest close of the last 50 years, at 62.28.  It stayed low (62.34) the next day, but for the lucky week of October 7-11 (“7 come 11”), 1974, the S&P 500 rose 14.1%.  Two years later, the index surpassed 105, up 70% in less than two years.

The week of October 4-8, 1982 marked another bull market birth.  The DJIA rose 8.7% that week and 15% in the first three weeks of October, rising from 896.25 on September 30 to 1037 on October 21.

October 8, 1998 was a day of deep pessimism following the crisis at the Long-Term Capital Management hedge fund.  From July 17 to October 1, 1998, the Dow fell 18.3% but the index began to rise strongly on Friday, October 9, rising 167 points in one day.  Within six weeks, the Dow hit a new all-time high of 9734 on November 23, rising a phenomenal 21% in 32 trading days.  The mini-bear market was over.

Bringing this hopeful history up to the present, the current bull market suffered a major correction in the summer of 2011 and bottomed out near this date five years ago – October 3, 2011.  The S&P 500 closed that day at 1,099.23, after setting an intraday low under 1,075 the day before.  As of last Friday’s close, the S&P 500 has more than doubled its intraday low five years ago, so the 2011 glass was just half full.

With the S&P 500 near its all-time high of 2,190 (set on August 15), we’re hardly in a position to expect a big rally, but I’d say the near-term future depends on whether third-quarter corporate earnings rise or fall.

Will Third-Quarter Earnings Fill (or Empty) the Glass?

As of Friday, September 30th, FactSet’s Earnings Insight update predicted a 2.1% decline in third-quarter S&P 500 earnings.  If that indeed happens, it will mark the first time the index recorded six consecutive quarters of year-over-year declines in earnings since FactSet began tracking the data back in Q3 of 2008.

According to FactSet, all 10 sectors (omitting the new Real Estate sector) “have lower growth rates today (compared to June 30), due to downward revisions to earnings estimates, led by the Energy sector.”  As FactSet’s chart (below) shows, S&P earnings have been flat (around $125 per year annual rate) since late 2014, so the S&P 500 index has gotten ahead of its earnings.  Of course, we shouldn’t ignore the other obvious message from this chart – that S&P 500 earnings had previously doubled from 2009 to 2014.

Standard and Poor's 500 Change in Forward Twelve Month EPS Versus Change in Price Chart

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

Using FactSet data through September 23rd, The Wall Street Journal (on September 25th: “Profit Slump for S&P 500 Heads for Sixth Straight Quarter”) warned that we should abandon all hope for an end to the earnings recession in the third quarter, since analysts have been cutting estimates ever since the quarter began.  As the Journal put it, “The third quarter was supposed to be when earnings growth returned to U.S. companies. Not anymore. Companies in the S&P 500 are now expected to report an earnings decline for the sixth consecutive quarter in the coming weeks, according to analysts polled by FactSet.”

Here’s the Wall Street Journal’s graphic summary of the FactSet data:Analyst's Forecasts for United States Corporate Earnings Chart

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

Despite these downbeat Journal and FactSet estimates, economist Ed Yardeni still sees a potential rise in 3Q earnings, but he’s not as enthusiastic as he once was.  In his briefing last Wednesday (“Fairy Tales”), Yardeni noted that “going into every earnings season since the start of the bull market, actual results often tend to exceed downwardly revised estimates just before the earnings season begins…. There wasn’t one quarter over this period with a negative surprise. The positive surprise for Q2’16 was 3.6%.”

More importantly, Yardeni says that the market tends to trade on forward earnings expectations more than historical data.  He says S&P 500 forward earnings are “back at $129.20 per share, near the record highs of 2014. That’s because it is converging to the current estimate of $133.57 for 2017.”  Yardeni sees $147.49 S&P earnings for 2018.  “While those numbers are bound to be revised downward over time, as typically occurs, there’s certainly no profits recession in the analysts’ earnings outlook for the next couple of years.”

We won’t be closer to the answer until this quarterly earnings season – and the election – is over, but by Thanksgiving, we’ll know the name of our next President and whether (or not) the earnings recession is over.  It’s bound to be a close call on both fronts, but we’ll be able to enjoy greater clarity fairly soon.

There’s one more statistical anomaly about October.  The Stock Trader’s Almanac (by Jeffrey Hirsch and Yale Hirsch) says that October is the worst month of election years.  Using data going back to 1950, “The S&P 500 averages a 0.7% decline and the Dow industrials average a 0.8% decline. But the more-volatile Nasdaq and Russell 2000 small-cap index do appreciably worse, with average setbacks of 2.1% and 2.6%, respectively” (source: Barron’s, October 3).  Also, history tells us that markets do best if political power is divided (one Party in the White House, the other controlling Congress), so if Hillary wins, Republicans retain the House, AND 3Q earnings turn unexpectedly positive, I believe the stock market could rally in November.

But if things go wrong in the elections or earnings, my bottle of single-malt scotch is only half empty….

Global Mail:

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

Summarizing Deutsche Bank’s Systemic Risk

by Ivan Martchev

As the accelerating negative news from Germany’s largest lender – Deutsche Bank – began to pile up last Friday, someone asked me: “How big and how important is DB to the U.S. and global financial system?

“Twice as big as Lehman Brothers,” was my blunt answer.

That was my initial guess, but after I sat down to write this column, I realized I had underestimated the importance of Deutsche Bank. Lehman Brothers on May 31, 2008 (the last 10-Q it had filed before it went bust) showed assets on its balance sheet of $639.4[1]  billion and stockholders’ equity of $26.3 billion. By comparison, Deutsche Bank, as of June 30, 2016, has assets of €1.8 trillion and stockholders’ equity of €66.5 billion. Given the size of Deutsche’s balance sheet, it is three times as large as Lehman Brothers was.

The next question on everyone’s mind should be: Does this mean that the global financial crisis will get three times as bad if DB fails? While no one actually knows, here is my answer. The Great Financial Crisis of 2008 was not caused by Lehman Brothers. It was caused by failure of regulatory oversight, irresponsible lending practices, and financial engineering that took over a decade to accumulate before it became the crisis of 2008. If we go back even further, the 2008 crisis started with the practice of shoving debt down the throat of the financial system every time the economy stumbled via negative real (adjusted-for inflation) policy rates, and later on by global QE campaigns and negative nominal interest rates.

Lehman Brothers was simply a spectacular catalyst for the unravelling of a mortgage debt bubble that was going to take probably a couple of years of accelerating losses and failures of smaller banks to unwind – that is, if the U.S. government had bailed Lehman out in September of 2008. The Lehman catalyst basically compressed two years’ worth of declines in the debt and equity markets into a six-month period that is only comparable to the 1929 stock market crash when it comes to historical U.S. financial crises.

Needless to say, nobody will let Deutsche Bank fail, given its size, even if it means nationalization and wiping out the shareholders. If Lehman were too big to fail, Deutsche is much bigger. That, of course, raises an interesting question: Could Deutsche’s depressed stock be a good value? After all, it registered all-time lows last week and the shares trade somewhere in the vicinity of 20 cents per book value dollar.

My short answer is “No” (this is my opinion, of course).

Commerzbank Ag Ads - Monthly Line Chart

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

German regulators – and U.S. regulators, for that matter – have the tendency to dilute shareholders on massive bailouts. This can be seen in the share price history of 1-for-10 reverse splits in Commerzbank (CRZBY) and Citigroup (C), represented by the black and green lines, respectively, in the chart above.

While a history of diluting shareholders is not a guarantee that the same would happen to Deutsche Bank, it is not a reassuring historical pattern, either. Plus, given that Commerzbank kept on sliding after the bailout, given the more precarious deflationary situation in Germany, even though it is more domestically oriented than Deutsche Bank, this historical record is definitely a warning sign to stay away.

Other than a possible dilution and governmental bailout, I think the global deflationary situation will get worse. If that happens, DB is likely to be dead money for a long time, the same way Japanese financials have been dead money for 25 years.

Ten Year Treasury Note - Weekly Line Chart

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

In previous postings, I flagged the close correlation between Deutsche Bank’s stock and 10-year U.S. Treasury yields (see June 24 Marketwatch article, “A look at the global economic malaise through Deutsche Bank”). If we take the chart back further (above), we can see the correlation has been there for a long time, although over the past year it has been travelling in parallel patterns. I wondered how I had not noticed this previously. My conclusion is that it is a little odd to think about government bond rates in the U.S. in the same paragraph as stock in the largest bank in Germany. It would have been more appropriate to look at the German bund market to make a connection between the two, but U.S. Treasury bonds?

The conclusion I reached last June is that the Treasury yield/DB-stock correlation is basically a reflection of how global deflation is a negative for Deutsche Bank, since lower 10-year Treasury yields signify deteriorating deflationary conditions that affect Deutsche bank negatively and vice versa. If you compare the 10-year Treasury yield and DB shares over a year (below), the correlation becomes surreally close.

Ten Year Treasury Note - Daily Line Chart

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

I don’t know if there will be a rate hike in December 2016, but if there is one I expect it to be reversed as soon as early 2017, given the accelerating global deflation we are experiencing at present. That will only get worse in the case of a Chinese recession and devaluation that I expect to come as soon as 2017.

There weren't too many people looking for all-time lows in Treasury yields in 2016 at the time of the December 2015 rate hike by the Fed (see December 29, 2015 Marketwatch article, Will 2016 bring new Treasury-yield lows?”). I am not sure if there are that many people who are now looking for the 10-year Treasury yield to fall to 1%, possibly in 2017, given the same accelerating deflationary trends.

A 1% 10-year treasury yield certainly suggests a DB share price in the single digits, making the present dead-cat bounce into the low teens a bad deal for value investors. Furthermore, there are numerous reports of clients pulling money from DB. Such a run happened on Bear Sterns before it was devoured by J.P. Morgan, as well as to Lehman before it failed. These asset runs can be very rapid and tend to feed on themselves. Those assets are not coming back soon, if ever, so a dilutive bailout may not be avoidable.

Finally, there is a political problem. The Germans have been so outspoken about bailouts of irresponsible financial institutions under ECB supervision that now, when they have their largest bank in a precarious situation, they seem to have boxed themselves into a corner. I still think that a bailout will come, if need be, but probably at the 11th hour and at a cost that shareholders won’t like, similar to Commerzbank. (Please note: Ivan Martchev does not currently own a position in DB, CRZBY, or C. Navellier & Associates, Inc. does not currently own a position in DB, CRZBY, or C for any client portfolios. Please see additional important disclosures at the end of this letter.)

Oil Rebounds as Middle East Tensions Escalate

Based on recent troop movements and accelerated aerial bombardment, an attack on Aleppo’s rebel-held area seems to be imminent, marking a major escalation in the Syrian conflict. I am trying to figure out the impact on the price of oil, which has now entered its seasonally weak September-March period.

It appears to me that the Aleppo attack will happen before the U.S. Presidential election, so it is unlikely that the U.S. will intervene, which clearly has been taken into consideration by the warring parties. The potential for a much broader escalation is here, but it is too early to judge if it will happen in 2016.

West Texas Intermediate Crude Oil - Daily OHLC Chart

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

One thing is certain: If it were not for the Russian intervention, the Syrian government may not have survived to fight the Aleppo battle. The surge in the oil price over the past week is a combination of this geopolitical activity and the OPEC deal to freeze output at some future date.

I recall that when Turkey downed a Russian bomber jet last year for the comical 17-second violation of its airspace, oil failed to rebound and kept on going lower. Since the balance in the oil markets is more bearish now than it was this time last year, and the number of U.S. oil rigs has been rising, I think the oil price will unwind this rebound even if Aleppo flares up, provided the conflict does not escalate past Syria.

Sector Spotlight:

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

Is a Market Hurricane Brewing?

by Jason Bodner

As I write this, Hurricane Matthew is bearing down on the Caribbean. Having already earned the category 5 designation, Matthew has since downgraded to cat-4, but there is a lot of uncertainty over the storm’s trajectory and what to expect in the near future. Welcome to the 2016 version of Hurricane Season.

The word “hurricane” comes from Hurican, the name for the god of evil on some Caribbean islands. A big storm can reach 40,000 to 50,000 feet high and easily pack the energy of one or more atomic bombs in the surface winds alone. A typical hurricane can dump 2.4 trillion gallons of water in a single day! That’s something like two cubic miles of water. To put that into perspective, if you built a wall around Manhattan and poured 2 cubic miles of water in it, only buildings over 45 stories would break the surface.

Water in a Hurricane Image

Incidentally, if you want to find out if your name is on the hurricane naming list for the next five years, check their website for the National Hurricane Center (NHC) name list.

While no one is exactly certain what causes a hurricane, we are well aware of its destructive power. The term “perfect storm” comes to mind. The markets, although looking relatively strong as we sit near all-time highs, have the potential to see the undercurrent of problems align to form such a perfect storm. There is much uncertainty in the market, including a looming election of candidates that are uninspiring, energy and financial woes, and international financial shakiness due to QE-driven central bank policies.

Storms Brewing in Financials and Energy

Let’s start this week’s sector review by looking at a couple of stormy sectors, Financials and Energy.

The financial sector has rallied fiercely for months, notching second place for highest return in the last three months. All the while, the fundamentals for the sector have not been improving greatly, nor has the backdrop of scandals and fears. In the latest chapter, we see Wells Fargo on the hot seat for their account opening practices that are questionable (to be very generous). Add in the fears surrounding very large international banks having exposure to potentially bad loans, and possibly needing capital boosts and potentially government intervention, the headwinds to the financial sector seem to have returned.

The headlines continue to jerk bank prices around as we saw the shares of Deutsche Bank AG plummet on Thursday only to rally monstrously on Friday, due to news of a potential settlement with the DOJ for barely a third of the originally proposed $14 billion fine. Let’s be honest here: Lower fine levels likely won’t be the “big fix” required to inspire confidence in the shares of the bank, but something else might. (Please note: Jason Bodner does not currently own a position in DB. Navellier & Associates, Inc. does not currently own a position in DB for any client portfolios. Please see additional important disclosures at the end of this letter.)

Despite being up 4.7% in the last 12 months, the financial sector is still the worst 12-month performer. With its current set of trials and tribulations, we could see more negative price action in weeks to come.

Energy is mirroring financials a bit. The energy sector is up significantly in the past 12 months and modestly in the last three months. However, the oil glut continues and uncertainty looms. Once again headlines are a major factor for volatility as we saw last Wednesday, when OPEC discussions sparked a wicked short-cover rally in crude oil prices. The fundamentals are not materially better than they were on Tuesday. All they agreed on was the potential for some sort of curtailing of production after November.Standard and Poor's 500 Daily and Weekly Sector Indices Changes Tables

My featured sector of the last few weeks, Information Technology, has been the star sector for the past three months, despite having a ho-hum week. Over the last 12 months, it is solidly second, behind only Telecommunications. Telecom, although related to tech, contains a much smaller universe of stocks. It is also more yield-intensive. (Both points are noteworthy.) Despite being the 12-month leader, Telecom is the three-month loser, down more than -7.7% in that time frame. For the past three months, dividend and yield-focused stocks have been beaten down. Looking at Utilities, Telecom, and Real Estate, we find them all at the bottom of the three-month barrel. Incidentally, the Utilities sector was down almost -4% for the week! Real Estate was down -1.85% as yield-focused stocks continue to face pressure.

Standard and Poor's 500 Quarterly and Yearly Sector Indices Changes Tables

In these interesting times, we face an unpopular election, a financial sector beleaguered with major issues, an energy sector with a huge glut that no one seems to want to talk about, and a central bank-driven thirst for yield. The equity market is strong in spite of all of this but seems to be on shaky ground.

All of this breeds volatility, which is then amplified by algorithm-driven participants in the market. The question remains, “What will tomorrow bring?” Banks are seeing pressure from scandals and capital pressures. If a storm develops within both energy and banks, it could set up the perfect storm for the overall markets. It seems as if the near future poses some looming question marks that need resolution.

What Do You See Here Image

What do you see here? Do you see calm seas or the next category-5 hurricane on the horizon? As novelist Morris West said: “If you spend your whole life waiting for the storm, you’ll never enjoy the sunshine.”

A Look Ahead:

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

Don’t Be Fooled by “OPEC Unity”

by Louis Navellier

Crude oil prices rose last week – based on a combination of tensions in the Middle East (see Ivan’s column, above), plus supply disruptions from Hurricane Hermine and endless rumors about production cap deals involving Russia, Iran, and Saudi Arabia and the various warring factions of OPEC.

Early last week, Iran confirmed that there would be no crude oil production caps, so crude oil prices came under pressure.  Heading into last week’s OPEC meetings in Algeria, Iranian Oil Minister Bijan Zanganeh renewed his country’s vow to boost crude oil production, to “catch up” after years of trade embargoes.

On Wednesday, news of a planned OPEC production cap triggered a big short squeeze in crude oil prices, but OPEC postponed any action, saying they would work out the details at their next (November 30) meeting in Vienna.  So essentially, OPEC agreed to talk two months from now about a possible crude oil production cap of between 32.5 million to 33 million barrels per day.  Since OPEC members love to cheat on any such production quotas, the OPEC announcement was really just a way to save face and artificially inflate crude oil prices temporarily by causing needless speculation.  Most traders see through this charade, as crude oil prices resumed sliding on Thursday after Wednesday’s short covering; so apparently crude oil traders have no confidence that OPEC will agree or stick to a cap in crude oil production after November. (Please note: Louis Navellier does not currently own a position in GS. Navellier & Associates, Inc. does not currently own a position in GS for any client portfolios. Please see additional important disclosures at the end of this letter.)

I should add that on Tuesday Goldman Sachs slashed its crude oil price forecast for the rest of 2016 and warned that crude oil supplies will continue to outstrip demand.  Specifically, Goldman Sachs is now forecasting $43 per barrel crude oil in the fourth quarter, down from its previous forecast of $50 per barrel.  Goldman Sachs expects a ramp up in crude oil production from countries such as Kazakhstan, Russia, and Canada to further destabilize crude oil prices in the upcoming months. (Source: “Beyond Algiers, Weakening Oil Fundamentals.” By analyst Damien Courvalin.) The bottom line is seasonal demand will be weak for the next few months, so until worldwide demand picks up next Spring, I expect crude oil prices to remain soft, which may contribute to growing deflation fears.

Slow Global Growth is Also Hurting Oil Prices

China continues to slow down, the U.S. GDP rate is still under 1.5%, and Europe is in a long-term slow-growth rut.  Europe’s latest challenge comes from troubled German and Italian banks.  I am not sure that Germany is too happy with the Obama Administration’s Justice Department, since America keeps attacking major German corporations.  The Justice Department is still negotiating with Volkswagen to settle its criminal investigation of VW’s violation of U.S. clean air laws.  And now, the DOJ is demanding that Deutsche Bank pay $14 billion to settle an investigation of its mortgage business.  Speculation that Deutsche Bank may have to pay a $14 billion fine caused the bank’s stock to plummet last week and raised speculation that Deutsche Bank may have to raise capital or be bailed out by their government. (Please note: Louis Navellier does not currently own a position in DB. Navellier & Associates, Inc. does not currently own a position in DB for any client portfolios. Please see additional important disclosures at the end of this letter.)

Last Thursday, Commerzbank AG announced that it would lay off 9,600 employees, about 20% of its workforce.  Despite a healthy German economy, the negative interest rate environment in Europe is taking its toll on German banks.  The German banking industry is a mess, but the Italian banking industry is probably in worse shape, since it is characterized by too many delinquent loans.  With the German and Italian banking industry in trouble, speculation is growing that the current European banking crisis will make the European Central Bank (ECB) become even more accommodative.  As a result, the endless quantitative easing, as well as negative interest rates from the ECB, seemingly has no end in sight. (Please note: Louis Navellier does not currently own a position in CRZBY. Navellier & Associates, Inc. does not currently own a position in CRZBY for any client portfolios. Please see additional important disclosures at the end of this letter.)

On Thursday, the Commerce Department revised second-quarter GDP from its previous 1.1% reading to a 1.4% annual pace.  It turns out that weakness in business spending was not as bad as previously estimated.  Additionally, exports rose 1.8% in the second quarter, up from 1.2% previously estimated, so a smaller trade deficit helped lift the second-quarter GDP revision.  The consensus estimate for third-quarter GDP growth is 2.4% (the September 30 reading at the Atlanta Fed’s GDPNow), but it looks like the September retail sales report will be pivotal in influencing economists’ 3Q GDP estimates in the upcoming weeks.

I’ll close with a piece of good news.  The Conference Board announced last Tuesday that consumer confidence rose to 104.1 in September, the highest level in over nine years, and up sharply from 101.8 in August.  This was substantially higher than economists’ consensus estimate, which called for a decline to 99.3.  Especially encouraging is that the present situation component rose to 128.5 in September, up from 125.3 in August.  Future expectations also rose to 87.8 in September from 86.1 in August.  This surge in consumer confidence is very common in Presidential election years and the same pattern seems to be unfolding this year, despite the fact that the leading candidates have what pollsters call “high negatives.” 

Now, if we can only translate the September surge in consumer confidence into rising September retail sales – to be released next week – and in the coming holiday season, U.S. GDP could close 2016 strongly.


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