The U.S. Market Quickly Recoups

The U.S. Market Quickly Recoups 90% of its Brexit Panic Loss

by Louis Navellier

July 6, 2016

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

In the four pre-holiday trading days last week, the S&P 500 gained over 102 points (+5.12%), recouping over 90% of its 113-point decline on Friday, June 24th and the following Monday. On Tuesday morning, our friends at Bespoke Investment Group (in “How Friday and Monday Stack up to Other Two-Day Declines,” June 28) pointed out that there have been nine previous times in this bull market, starting on March 9, 2009, in which there was a two-day decline in the S&P 500 of over 5%. In 100% of those nine previous times, the market rose by an average 4.68% in the following week and 6.19% in the following month. Once again, the S&P followed that historical pattern, rising over 5% in the following four days.

European Union Map Image

This impressive rebound was helped by the fact that we were also heading into a big holiday weekend, when the stock market has traditionally rallied. The market also came to the slow realization that Britain cannot leave the European Union for at least two years, plus it cannot even discuss negotiating its exit until October, when a new Prime Minister and a coalition government are installed. So essentially, the currency and algorithmic HFT traders may have done a lot of unnecessary damage by “reacting” instead of thinking.

Due to negative interest rates and mounting concerns about potential currency losses, many major banks, especially those in Europe, are haunted by speculation that they may have major losses. The silence from many banks in Europe regarding potential currency losses is just adding to those fears. In the meantime, a surging U.S. dollar is also crushing commodity prices, so energy and other commodity-related companies remain under pressure. Gold is the only commodity that keeps prospering, due to a lack of confidence in major central banks plus the negative interest rate environment that has enveloped much of the world.

I should also add that Treasury bond yields continue to decline. At Friday’s close, the 10-year and 30-year Treasury bonds yielded 1.46% and 2.24%, respectively, after they had fallen earlier to intraday lows of 1.3784% and 2.1873%, respectively. On February 11th, the 30-year Treasury bond fell below the S&P 500’s dividend yield and the market took off strongly. If you ever need a screaming buy signal, it is when the 30-year Treasury bond yields less than the S&P 500. Currently, the S&P 500 has an annual dividend yield of 2.08% so we are extremely close to the strongest buy signal that I know of for the overall market.

In This Issue

In Income Mail, Bryan Perry profiles the value of safe-haven income stocks during the upcoming earnings announcement season. Then, Gary Alexander wishes our dollar and our nation Happy Birthday, while putting a microscope on some widely-touted economic statistics painting America in a sour light. Ivan Martchev has been predicting lower Treasury rates all year. After Friday’s new lows, can they go even lower? Jason Bodner’s Sector Spotlight covers solar flares and how they apply to market explosions like Brexit, and then I cover the way we humans can still profit from the myopia of HFTs or robo-traders.

Income Mail:
Winning Income Strategies When Uncertainty Rules
by Bryan Perry
A Safe Haven During Earnings Season

Growth Mail:
Rhetorical Overkill Knows No Holiday
by Gary Alexander
Statistical Fallacies that Malign America
Happy 231st Birthday to the U.S. Dollar

Global Mail:
2016 Treasury Market Target Reached, What Next?
by Ivan Martchev
The Chinese Yuan is the Ultimate Panic Button

Sector Spotlight:
The Brexit Market “Flare” Was Short-Lived
by Jason Bodner
Winners and Losers in the Post-Brexit Week

A Look Ahead:
Smart Humans Can Still Beat Robots
by Louis Navellier
Yield Curves Are Flattening All Over the World

Income Mail:

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

Winning Income Strategies When Uncertainty Rules

by Bryan Perry

We live in a world of maddeningly frequent terrorist attacks, constant political upheaval, sectarian warfare, natural disasters, and a constant news stream that has wide-ranging and immediate impact on the direction of equity markets. Many such events occur when the markets are closed. When markets are collared in a well-defined trading range, one way to manage steady returns is to implement a strategy that incorporates stocks that one might not mind owning for the intermediate term even if, due to upsets like Brexit, sudden powerful selling pressure hits the market in a manner that few investors are prepared for.

As has been the case in almost all major moments of crisis that the U.S. stock market has had to contend with, the major averages recovered within a relatively short period of time after each blow brought about by panic selling. We hear ad nauseam, time and time again, about the coming total collapse of global equity markets from writers that make their living casting doubt on the human capacity for recovery. And while some of the dire warnings are grounded in long-term structural issues, like the growing amounts of debt central banks and developed governments are generating, to conclude that there is no solution to these concerns is in my view myopic and fanatically negative, almost fatalistic.

Sadly, this dark and negative bias in the financial publishing business fails to consider that men and woman of character have overcome crisis conditions that seemed insurmountable at the time. The 56 men that signed the Declaration of Independence in 1776 were essentially signing their death warrants, while placing their weak young colonies at the mercy of the almighty and powerful British forces that could seemingly devour them in every encounter. But instead, as we celebrate our 240th birthday as a free nation this weekend, that small band of American men and women of that time overcame the impossible.

When that same kind of fortitude is applied to financial matters, like balancing budgets, implementing a simplified tax code, controlling entitlement spending, and balancing self-reliance with benevolence, good things can and will happen. I say this with an air of optimism, but this kind of re-engineering of the political process from the current messed-up state of affairs will take time and is, in my opinion, why this remains a relatively “unloved” stock market, according to most investment surveys. There is a general feeling that when (not if) the chickens (our deepest concerns) come home to roost, the market will collapse. This fear has kept a lid on this secular bull market and kept it from breaking its all-time peak of 2,130, set on May 21, 2015.

A Safe Haven During Earnings Season

After the market regained nearly all of the losses it incurred from the Brexit-related sell off, the S&P is once again knocking on the door of an upside breakout. With interest rates continuing to move lower, capital flows into equities are likely to fuel enough momentum that a new high could be in store this month, setting in motion a summer rally that could bring a tremendous amount of money out of the bond market and off the sidelines. Then again, if we see negative reactions to earnings – like what has already occurred for those early-bird earnings reports from certain market leaders in the past two weeks, where the headwinds from a strong U.S. dollar persist and some mention of lower demand creeping in to third-quarter guidance – the market may find itself mired in the same ongoing trading range for some time to come.

Against this fluid set of market forces, income investors starving for yield can afford to stay out of the junk bond market or long-term fixed income by purchasing blue chip growth stocks in companies with AAA-rated balance sheets that have phenomenal records of growing dividends by 10% to 20% per year. While the S&P is up by less than 3% year-to-date, leading stocks within the utility, telecom, consumer staples, and REIT sectors are advancing better than 20% in many cases. I don’t see any major shift in this leadership as long as interest rates keep grinding lower.

Growth Mail:

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

Rhetorical Overkill Knows No Holiday

by Gary Alexander

This is the worst period I recall since I've been in public service. There's nothing like it.

– Former Fed Chairman Alan Greenspan on CNBC, June 25, 2016, talking about the Brexit vote

Former Fed Chairman Alan Greenspan, now age 90, grew up in the Great Depression and World War II. He then worked in industry, entering public service as Chair of President Ford’s Council of Economic Advisors in 1974. He has seen the Great Stagflation (double-digit inflation, unemployment, and interest rates – all at once), the S&L crisis of the 1990s, the tech stock bubble, the real estate collapse, and the Great Recession of 2008, not to mention the 1987 crash, which happened right after he became Fed chair.

To say that 2016 is “the worst period” since 1974, with “nothing like it” may reflect a problem plaguing most of us over age 70 – selective or defective memory. Surely, a popular vote to leave a bureaucratic club in Brussels is not the worst crisis since 1974. Brexit will likely be a gradual nearly-endless process.

Three weeks ago, I wrote a Growth Mail column entitled, “Don’t Overly Fret the Fed’s next Move…or Brexit.” Historically, these widely-feared target dates rarely provide any surprise outcome, and even if they do, the resulting corrections are usually short-lived. Sure enough, fears of a Fed rate increase have slunk back into the shadows, while the surprising Brexit vote shook the U.S. market for a day or two, but that reversal was quickly unwound over the next week. The S&P 500 rose over 5% in the last four days.

The DJIA also recovered 90% of its 610-point “Brexit” loss in the following week. Despite that quick recovery, the June 30 Wall Street Journal chose to print this big Page-1 headline, “Stocks Rebound, but Jitters Linger.” Their chart showed the market’s V-shaped recovery last week, but they labeled it as “Whiplash,” making a quick market rebound from an overblown crisis sound like a painful injury from a car crash. Words like “jitters linger” or “worries remain” seem like a broken record for headline writers.

Statistical Fallacies that Malign America

“There are Three Kind of Lies: Lies, Damned Lies and Statistics.”

--A quote attributed to Benjamin Disraeli by Mark Twain

Over the holiday weekend, I noticed various commentaries that imply America has become a nation of “haves and have nots,” with a wide and presumably widening gap between the 1% and a struggling 99%.

In this segment, I want to honor America by dissecting two statistics used by the Blame America crowd. One vastly overrates the amount of hunger in America and the other says our middle class is disappearing.

Americans are generous. In 2015, according to the annual report “Giving USA” (cited in “Americans donated a record $373 billion to charity in 2015,” CNN/Money, June 15, 2016), we gave 4% more than the previous record $358 billion in 2014. Through our tax dollars, we also paid $74 billion in food stamps to 45,677,000 Americans in 2015. Taxpayers also provide regular free school lunches for 31 million kids.

Taking advantage of our natural generosity, a TV ad over the weekend said that 48 million Americans are hungry, so please send money to us! I chased that statistic to its source. The flimsy basis for 48 million is a U.S. Department of Agriculture survey of families, in which the USDA asks if a family ever felt (once) “insecure” about the source of their next meal at any time in the last year. One in seven said yes, so they are “food insecure,” which extrapolates (falsely) to hunger and (more falsely) to kids going to bed hungry.

According to the U.S. Department of Agriculture’s summary document, the actual data reveals only 1.1% of households with children have “very low food security.” (See http://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/key-statistics-graphics.aspx.) Obesity is a greater problem.

The other fallacy is endlessly repeated by Bernie Sanders and others – “The middle class is disappearing.” My simple, common-sense answer to that canard is to ask you to drive near any major city or go to an airport and see if the middle class has disappeared. The very rich have private planes and the poor don’t fly much. It’s a safe bet that nearly everyone in that airport is middle class. The same goes for highways or malls. The poor may not have cars, but nearly all those late model cars grinding along the highways are driven by middle class people, the vast majority of them on their way to work, leisure, or shopping.

This is reflected in the latest consumer spending data. According to economist Ed Yardeni (in “Happy-Go-Lucky,” June 30), in the three months through May, average real personal consumption expenditures rose 2.9%, the best growth rate since last September. In addition, the Consumer Confidence Index (CCI) climbed to 98 in June, with the CCI for people under 35 reaching 132.1, the highest since October, 2000.

The middle class is shrinking in a very positive way. More of them are moving up to be semi-rich (upper middle class) than falling into the ranks of the poor. According to a study by Stephen Rose, an economist at the nonpartisan Urban Institute, the upper middle class has recently expanded to a record 29.4% of the U.S. population as of 2014, up from 12.9% in 1979. (In this study, “upper middle class” is defined as a household earning $100,000 to $350,000 for a family of three, with households of one or two having a lower threshold and households of four or more having a higher threshold.) The upper-middle-class threshold is further defined as “double the U.S. median household income and five times the poverty level, adjusted for inflation.” (Source: Wall Street Journal, June 22, “Upper Middle Class Sees Big Gains” by Josh Zumbrum). By the way, that study also shows that “the rich have remained relatively flat.”

According to the Pew Research Center, between 1971 and 2015, the middle class dropped from 61% to 50%, but the percent of rich more than doubled (from 4% to 9%), while the lowest class rose four points. In short, for every 11 people moving out of the middle class, seven moved up and four moved down.

Share of Adults Living in Middle-Income Households Bar Chart

So, when somebody tells you that the middle class has disappeared, tell them that “You’re right, but 2/3 of them ‘disappeared’ because they became rich.”  Don’t let the pessimists ruin your holiday weekend.

Happy 231st Birthday to the U.S. Dollar

In addition to America 240th birthday party on Monday, today is the 231st birthday of the almighty dollar.

On July 6, 1785, the provisional Congress authorized a new U.S. currency to be named the “dollar,” a corruption of a German word for “valley person” (thal = valley), referring to Joaquimsthal, a valley town in Bohemia from where the thaler’s silver was first mined. In 1782, Thomas Jefferson suggested we avoid adopting the British pound, preferring the thaler, which was already circulating throughout the colonies. The U.S. Mint was established in 1792, but it wasn’t until 1794 that the first U.S. dollars were minted.

Happy birthday, Yankee dollar.

Global Mail:

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

2016 Treasury Market Target Reached, What Next?

by Ivan Martchev

“If you don't know where you are going, you might wind up someplace else.”

-- Yogi Berra

Even though it happened around 6:15 a.m., when most of the bond trading world in the U.S. was just getting ready to go to work, last Friday the 10-year Treasury note registered an all-time low in yield at 1.3784%. During the regular session, such levels weren’t reached, but that would be splitting hairs. An all-time low is an all-time low. The same is true for the 30-year Treasury yield, falling to 2.1873%.

United States Ten Year Government Bond Chart

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

I expect to hear the familiar argument that there are only 138 basis points to zero, so this bull market for bond prices (and the equivalent decline for long-term interest rates) could be over; but as we have learned from recent experience, that would be factually incorrect. There is over $10 trillion of negative-yielding government debt globally, so technically-speaking “zero” is not a firm floor for U.S. Treasury yields.

When I published my 2016 forecast (see December 29, 2015 Marketwatch article “Will 2016 Bring New Treasury Yield Lows?”), the fed funds futures market expected four rate increases in 2016 and the Brexit referendum date had not yet been set. I would agree that the Brexit referendum outcome on June 23 had something to do with German 10-year bunds getting a negative yield and 10-year British gilts and 10-year Treasuries registering all-time lows, but in the case of Treasuries Brexit is more a catalyst than a cause.

Federal Funds Futures Table

Source: TradingEconomics.com

I believe we were headed to all-time lows in Treasury yields with or without the Brexit vote. The deflationary trends described six months ago have only gotten worse. While the worst case is Switzerland at -0.58%, I am sorry to say that it is not inconceivable that all the governmental bond markets listed above could turn negative someday. If I were pressed to give a timeframe for this dire possibility, I would say 2-3 years.

Mind you, I am not rooting for such a negative rate outcome as that would mean that the unorthodox monetary policy practice of quantitative easing has failed and with it the modern practice of central banking. That would be a worst-case scenario that could lead to dangerous consequences down the road.

For decades, central banks in the developed world have worked hard to stimulate borrowing every time the economies they oversaw showed signs of weakness. In the U.S., the Fed would lower the fed funds rate which would stimulate borrowing which in turn would stimulate the economy and help it out of its slump. That was particularly the case under the Greenspan and Bernanke Feds. (Under Paul Volcker the need to rein in inflation led to a different tactic in which he would target money supply aggregates and let the fed funds rate fluctuate, allowing it to rise above 20% and in the process causing a recession.)

United States Fed Funds Rate Chart

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

Quantitative easing is a different type of monetarist stimulation, where the Fed suppresses long-term interest rates in order to stimulate borrowing, or prevent deleveraging, or both. It too has limits. Central banks and their monetarist maneuvers had assumed – incorrectly – that there is no limit as to how much money consumers, corporations, and governments are willing to borrow. Negative 10-year government bond rates in more than one major government bond market are a sign that there is such a limit.

We appear to be in a deleveraging process globally, resulting in accelerating deflation. History will end up studying the December 2015 fed funds rate hike as an obvious monetary policy mistake at the onset of the worst deflationary shock since the Great Depression. I would not be surprised if the fed funds rate hike is reversed in 2017, with chatter about QE4 beginning to accelerate. If that were to happen, I do not believe that QE4 will work as well as its previous incarnations.

The obvious target for the 10-year Treasury note yield, since we still have a reasonably strong economy and relatively low unemployment, is 1%. This is because of the deflationary mess in Japan, Europe, and the slow motion economic train wreck in China demand for safe haven buying of Treasuries will remain high. Also, if you are an insurance company, a bank, or any other institutional investor in a country with negative 10-year government bond yields, would you rather buy negative-yielding bonds, or Treasuries?

German Ten Year Government Bond Versus DAX Stock Market Index Chart

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

Here is a recent example of how falling long-term interest rates stimulate stocks. When the German 10-year bunds first fell below 1%, the German stock market was on fire, since that bund yield decline was caused by European problems that had not yet reached Germany and stocks had higher yields. As European economic problems spread to Germany as deflation got worse and German 10-year bunds moved into negative yield territory, low rates are no longer stimulating German stocks. Germany now has the opposite dynamic, where falling interest rates correlate with falling stock prices.

To paraphrase Yogi Berra (above), I think the 10-year Treasury is headed to 1% or lower, but I hope it is not headed there fast. I hope that the 10-year Treasury yield goes to 1% in 2017 and not this year, as this delay would be highly supportive for dividend strategies and stocks that show good earnings growth in this problematic global economy while the U.S. economy is showing signs of resilience.

The Chinese Yuan is the Ultimate Panic Button

The slow-motion Chinese devaluation continues with the USDCNY rate reaching a new multi-year low at 6.6995 on June 27th. The yuan has two exchange rates. One is the quoted official central bank reference rate, quoted above, while the other is called offshore yuan, or USDCNH. The two rates can deviate somewhat as the Chinese central bank with its deep pockets does not participate in offshore yuan trading. (Just like with the Japanese yen, more yuan per dollar, or a rising USDCNY chart means weaker yuan.)

United States Dollar versus Chinese Yuan - Weekly OHLC Chart

Source: Barchart.com

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

The Chinese authorities are devaluing slowly as the epic Chinese credit bubble is still deflating in an orderly fashion. It is the nature of deflating credit bubbles to pick up speed and start unravelling more quickly, so I think it is only a matter of time before Chinese financial markets are front page news. (For more on China see my February 6, 2016 MarketWatch article, “Something Broke in China in 2016.”)

I view the Chinese yuan as the ultimate monetary policy “panic button” as it fights the economic problems that a deflating credit bubble produces in a way that conventional monetary policy – like lowering policy rates or reserve requirements – cannot address. Normal monetary policy is less effective at a time when non-performing loans (NPLs) are rising. At a time when NPLs are surging, normal monetary policy is nearly impotent. The Chinese hit that panic button in late 1994 and devalued the yuan by 34% in order to fight the effects of a recession (that was never officially acknowledged but the effects of which showed up in secondary data). When they hit that same panic button again and devalue dramatically overnight, that would mean the credit bubble unraveling has reached crisis proportions.

China's Bad Debt Bar Chart

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

In May, CLSA put the estimate of bad loans in the banking system reaching 20% to 25% of total loans from the present estimate of 15% to 19%. This has the potential to result in over $1 trillion of losses. (See May 6, 2016 Bloomberg article, “CLSA Sees China Bad-Loan Epidemic With $1 Trillion of Losses.”)

In my opinion such losses may be underestimated due to the 40-fold surge of total credit (including shadow banking credit) in the Chinese economy when the economy grew “only” 10-fold in the last 15 years, thereby raising the debt-to-GDP ratio from 100% to 400%. A hard landing in such a situation is practically unavoidable as the Chinese seem to be accelerating borrowing as the economy is decelerating, as there is a diminishing GDP growth impact on every new yuan borrowed.

Sector Spotlight:

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

The Brexit Market “Flare” Was Short-Lived

by Jason Bodner

A solar flare is a sudden burst of bright material and light emanating from the sun. It occurs when a buildup of magnetic energy is suddenly released. Our sun produces flares pretty regularly but predicting when they will occur is not an easy matter. Occasionally a flare can interfere with our GPS satellites or communications. On March 9, 1989, a flare knocked out the power in Quebec for nine hours. In August of the same year, an electromagnetic storm from a flare halted all trading on the Toronto stock exchange.

Those were not the largest flares observed, by a long shot. For reference purposes, the atomic bomb that detonated on Hiroshima exploded with a force of 15 kilotons or 33 million pounds of TNT. Our sun's normal solar flares can release energy equivalent to 100 million megaton bombs, or 6.67 billion Hiroshima's. They can travel the 93 million miles to Earth in as little as two days – at a rate of almost two million miles an hour. To put the size of a solar flare into perspective, a flare on February 4, 2011, had a coronal ejection that was as long as 30 earths stacked together, and this flare didn't even make the top 15 list!

Solar Flare Image

While these events seem pretty intimidating, some scientists believe the sun may be due for a super flare, which is thousands of times more powerful than the solar flares our Sun usually puts out. Observed elsewhere in the galaxy, super flares can release the equivalent of 1 billion megaton bombs. That's 67 billion Hiroshima bombs, or 2,200,000,000,000,000,000 (roughly 2.2 quintillion) pounds of TNT.

Comparative Energy of a Solar Flare Image

For a few days, it seemed as though the Brexit event was a super flare to the financial markets, consuming and burning everything in its wake. Yet, sitting atop our luxury-of-hindsight seat 10 days later, things played out more like a scene from Ghostbusters (the original). Louis Tully, played by Rick Moranis, runs into Central Park to escape that evil red-eyed dog Zuul – the minion of Gozer. He is trapped against the glass at Tavern on the Green just before being consumed and turned into Vinz Clortho – the Keymaster. The music stops as does the chatter of all the patrons inside when he shrieks in terror, for about two seconds. Then everything goes right back to normal as if nothing happened: a real New York moment.

Zuul - Minion of Gozer Image

“Party on,” as they say! Last week’s rally was almost as shocking as the plummet that preceded it.

But the question remains: “Is everything really back to normal?”

Winners and Losers in the Post-Brexit Week

Looking at the sector action last week, it seems that something else lurks just beneath the surface.

Standard and Poor's 500 Sector Indices Changes Tables

It’s difficult to highlight individual sector performance when they all move in tandem in heightened volatility trading. However, Financials and Materials bore the brunt of most of the selling last Monday. Energy, Industrials, and Infotech also saw significant pressure. Yet as we can see in the results for the full week, above, nearly all sectors reversed nicely to post hefty gains for the week – all but one. Materials, although it recovered some, is the clear laggard for the week. The dollar’s recent surge means commodity-related stocks face pressure. This could mean continued woes for Materials and possibly Energy stocks.

The source of focus, for me at least, continues to be Financials. As we have highlighted repeatedly here, Financials have been at the back of the pack for at least a year now. Financials face all sorts of headwinds, certainly not the least of which is an environment where global interest rates are engaged in a crazy game of “limbo,” making analysts wonder “how low can they go?” Lenders certainly don’t benefit from low or even zero nominal rates that translate to negative real return after accounting for inflation, not to mention the 15 countries that have actual negative rates. The recent shock of multi-sigma events in the currency markets will surely have an impact on major international banks. Currency losses are becoming profound.

As we can see in the 1- and 3-year charts, weakness in the Financials closely tracks weakness in Banks:

Standard and Poor's 500 Sectors - Daily Area Charts

Source: Barchart.com

Friday June 24th seemed as though a Brexit solar flare ripped apart our global markets. The jitters continued over the weekend and well into Monday, but then Tuesday’s relief rally gave way to gathering momentum. By Thursday, we recovered lost ground, and Friday capped it all off with modest gains.

As I sit and write this over the weekend, the most recent shock to the market looks as though it may just turn out to be a blip. Naturally it’s too early to tell, but real buying occurred in the wake of real selling. Rarely have we witnessed such stunning reversals of sentiment and price action in the span of a few days.

A colleague and I were discussing the market’s recent Jekyll and Hyde action. His reply put it best in personifying the market’s dual personality: “Buy the dip; buy the rip!” George S. Patton didn’t have stock markets in mind when he said, “Success is how high you bounce when you hit bottom,” but it appears as though we have bounced high again – and the bottom seems far away. That is, for now…

A Look Ahead:

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

Smart Humans Can Still Beat Robots

by Louis Navellier

In the aftermath of Brexit, I need to talk a bit about the algorithmic traders that try to “front run” the order flows of the High Frequency Traders (HFTs). This kind of “robo” trading has been shaking around the S&P financial, energy, and materials sectors all year long; but when the Brexit vote turned against the widespread expectation of a “Remain” vote, these algorithmic traders had nowhere to hide, since they owned so many fundamentally weak stocks, like money center banks, energy, and commodity-related stocks characterized by largely negative forecasted sales and earnings. As a result, many algorithmic traders suffered their own “Black Swan event” for two days, when they were all caught flat-footed.

These algorithmic HFT traders tend to move in a big pack and can reverse their trades on a dime. The result looks like the behavior of a school of fish, zigging and zagging in unison. However, now that a strong dollar has resumed pushing down commodity prices again, energy and commodity-related stocks should remain volatile, since they are unlikely to report positive second-quarter sales and earnings.

One of the biggest robo-advisors had to suspend trading after Brexit due to many ETFs trading at substantial premiums and discounts, a clear sign that the robo-advisor programs are not suitable for tactical management, simply because they cannot execute ETF trades at prices near their net asset value (NAV) during fast-changing market conditions. At times like this, human traders (as opposed to robots) know that it is not wise to sell ETFs at a discount to NAV or to buy ETFs at a premium to NAV.

Yield Curves Are Flattening All Over the World

In the meantime, the other outcome from Brexit is that the British 10-year bond fell below 1% last week and yield curves all around the world are flattening, which has crushed big banking and financial stocks.

Bank of England Image

Last Thursday, Bank of England Governor Mark Carney said that the Bank of England would likely need to further ease its monetary policy and cut its key interest rate of 0.5% this summer due to concerns that both business and consumer spending may slow due to the uncertainty surrounding Brexit. Carney’s statement further undermined the British pound. After Carney’s statement, two-year British government bonds fell into negative territory. As market rates decline, the Bank of England will be under even more pressure to cut key interest rates to 0.25% or even 0%, matching the Eurozone’s flat rates.

Finally, I should mention that the stock market usually rallies around holiday weekends like this. This is because consumers feel good heading into holiday weekends and this optimism seems to rub off on investor sentiment. There are several other reasons for investors to be optimistic going forward, such as the fact that (1) the S&P 500 yields substantially more than the 10-year Treasury bond, (2) stock buy-backs should continue to rise due to ultra-low interest rates, (3) the S&P 500 typically rallies in Presidential election years, and (4) dividend growth and fundamentally strong stocks remain an oasis.


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