Two Major Elections

Two Major Elections are Taking Place Tomorrow

by Louis Navellier

March 14, 2017

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

Tomorrow brings us an election in The Netherlands, as well as the vote among Fed governors about raising U.S. interest rates.  Most pundits expect the Fed to raise rates, especially after last Friday’s jobs report.  I agree, but we still need to see the Consumer Price Index and retail sales reports tomorrow to be sure.  If we see two negative numbers (deflation and negative retail sales), the Fed might hold off yet again. We’ll know soon enough.

The Netherlands’ vote will be interesting, but the vote in France poses a far more important challenge to Europe. Last week, French President Francois Hollande warned that nationalist candidate Marine Le Pen could win the elections held on April 23rd (with a scheduled runoff on May 7th). This vote could have a big impact on the survival of the European Union (EU).  Le Pen is not a big fan of the EU and has vowed to ditch the euro as France’s currency as well as hold a referendum on whether France should remain in the EU.  The fact that Le Pen is doing so well in the polls means that the euro may weaken further if she wins.

Vote Check Mark Image

The S&P 500 is up a scant 0.4% so far in March after a positive January and February, but the bad news is that the profit taking in some previous market leaders is continuing. Last Thursday, Bespoke Investment Group (“Chart of the Day,’ March 9, 2017) showed how stocks are closing at new highs less frequently.However, I must stress that we are now in what appears to be a rotational correction – the best kind of correction, since it gives long-term investors a new buying opportunity to accumulate shares in fundamentally strong stocks. 

In This Issue

In Income Mail, Bryan Perry says the hourly wage component (up 2.8% y/y) could likely tip the scales toward a rate increase, but there’s a downside to higher wages and interest rates.  In Growth Mail, Gary Alexander predicts tomorrow will be something of a non-event, as most historical scare stories turn out to be.  In Global Mail, Ivan Martchev says the oil price decline is partly due to declining Chinese demand.  Jason Bodner sees another culprit – the way oil traders sometimes try to manipulate short-term prices in the oil futures market. Then, I will review the Fed’s upcoming decision and its potential near-term implications. 

Income Mail:
Stronger Wages – A Double-Edged Sword
by Bryan Perry
The U.S. Dollar Could Vault Even Higher

Growth Mail:
Befriend the Ides of March
by Gary Alexander
The World is Coming to an End Tomorrow (or Soon)
Hold the Presses! Global Growth is Rising and “Synchronized”

Global Mail:
The China Factor in Crude Oil
by Ivan Martchev
Reappearing Rate Hikes

Sector Spotlight:
Can We Reprogram our “Animal” Brain?
by Jason Bodner
What’s Driving Oil Prices Down?

A Look Ahead:
The Fed Will Likely Raise Rates Tomorrow
by Louis Navellier
The Downside of a Rate Increase – A Stronger U.S. Dollar, Hurting Exports

Income Mail:

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

Stronger Wages – A Double-Edged Sword

by Bryan Perry

Last Friday’s February employment data was all the rage for market participants. The news release all but guaranteed that the Fed will raise interest rates tomorrow. The payroll increase and the unemployment rate stole the headlines, but I think it was the increase in average hourly earnings that provided the “stop the music” moment. Average hourly earnings increased by 0.2%, leaving them up 2.8% year-over-year.

This slice of the jobs data tells us that the labor market is strengthening, which improves the prospects for stronger economic growth later this year. Employment is generally regarded as a lagging indicator, yet last Friday’s report is the coincident indicator the stock market was seeking to corroborate its recent rise based on the view that the Federal Reserve will raise the fed funds rate for the right economic reasons.

This good news for the U.S. job market comes at an interesting time – when President Trump is weighing the virtues of a ‘border adjustment tax’ (BAT), sponsored by House Republicans. While high-profile companies are being asked to keep their new capital investments at home, other factors are trickier to score – like the repatriation of jobs and foreign cash reserves under threat of new import taxes; or stopping the flow of outsourcing work to foreign-owned services like call centers, medical back office operations, IT help desks, insurance claims, legal services and an array of other services that are not associated with cars, tractors, smart phones and other finished goods. This turns “America First” into a slippery slope.

The chart below shows which industries face the most (or least) risk from taxes that could penalize companies for offshoring production, based on the share of domestic supply that’s imported. In its first draft, the BAT applies to imported products made by U.S. companies. Outsourcing companies have largely gone unnoticed and unmentioned up to now and – if left alone by any new taxes – would represent a good investment thesis for playing emerging markets that have natural advantages, including cheaper wages, English language skills, affinity with customer service, and familiarity with American culture.

Industries at Risk from Potential Destination-Basis Tax Bar Chart

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

The average cost of a full-time outsourced employee in the Philippines is about $19,300 a year, vs. $72,300 in the U.K. and $91,100 in the U.S., according to consulting firm Everest Group. This cost calculation includes salaries and expenses related to benefits, administration, facilities, technology, and other costs. With U.S. wage inflation heating up, the cost for a U.S. employee could top $100,000 soon.

For now, taking that $91,100-a-year cost for a U.S. outsourcing employee, and assuming half that number is salary, it would seem that even if the outsourcing industry were also a target of a BAT, the math still works heavily in the favor of outsourcing to countries like the Philippines and India because the cost per employee is so much lower there.  You can’t repeal the laws of economics by fiat so, by and large, foreign outsourcing service firms look to not only survive but continue to thrive in a post-BAT world.

Cheapest Destinations for Outsourcing Bar Chart

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

The IRS will still collect its 20% or so off the top if domestic companies maintain their overseas business relationships and, provided the U.S. economy picks up speed, the tax can be somewhat absorbed in higher prices for goods and services as expected. What is harder to forecast and is truly the wild card in all of this is the future value of the U.S. dollar and the possible threat of currency wars and forex headwinds.

The U.S. Dollar Could Vault Even Higher

Supporters of BAT point to economic studies suggesting the dollar would increase in value under this tax plan, so the cost of imports would remain the same. But economists also point out that many factors affect the value of the U.S. dollar, so the adjustment would be imperfect. They also warn that a stronger dollar would hurt the competitiveness of U.S. exports. And to that point, there is no way to know how China, the EU, Mexico, Canada, and other large trading partners would react to a BAT via currency manipulation.

In a perfect world, lower corporate and individual income taxes would be offset by higher GDP and BAT that produces a net revenue-neutral budget structure for Trump’s economic team. The stock market seems to reflect this assumption. The Congressional Budget Office (CBO) is the official arbiter of tax proposals considered by Congress. The CBO will almost certainly produce a forecast far below the Trump team’s prediction. There's a long history of administrations, both Republican and Democrat, producing rosier growth estimates than the CBO, but usually the differences amount to a few tenths-of-a-percent, or less.

The White House would have to convince doubters, even in its own party, that its economic plan can boost growth rates by 50% from current levels to achieve the numbers needed to not just finance what will certainly be a record federal spending budget, but also quite possibly a record federal budget deficit over the next couple of years. The question is whether a Republican Congress, where conservative deficit hawks have railed against growing budget deficits for decades, will buy into the President's aggressive forecast. If the stock market is any indicator, some kind of a deal will eventually get done.

Growth Mail:

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

Befriend the Ides of March

by Gary Alexander

“A soothsayer bids you ‘beware the ides of March’.”

-- Brutus to Julius Caesar in Act I (scene 2) of Shakespeare’s tragedy, “Julius Caesar”

This year, the “Ides of March” (March 15th) will likely be more dramatic than usual.  First, voters in the Netherlands will select their next leader.  The People’s Party for Freedom and Democracy (VVD in Dutch) is currently leading the polls by a narrow margin. If we have learned anything in the last year, we have learned that the public polls tend to under-estimate the level of unrest among voters. Those who intended to vote for Brexit last June 23rd (or Trump last November 8th) tended to be generally mute about their intentions in various polls, so Brexit and Trump emerged as surprise victors. If the VVD is leading narrowly in the polls, they might come out a winner by a larger-than-expected margin.  However, the economy is improving in Europe, so there may be less unrest at the polls tomorrow. Either way, good TV!

More importantly, the French vote for President is coming April 23rd (with a runoff on May 7th).  The Dutch may provide clues about the French outcome, where anti-European Union sentiment could spell the end of the EU.

In another important vote, members of the U.S. Federal Reserve’s Open Market Committee (FOMC) will vote tomorrow on whether or not to raise key short-term interest rates. They will almost certainly wait until late tomorrow morning to cast their vote, since two of the most important statistical indicators on the U.S. economy will be released at 8:30 am Wednesday morning – February’s retail sales and CPI inflation.

Some say investors should sell into uncertainly like this.  But recent history contradicts that assumption.

In the last year, assumptions were rampant that a “Brexit” vote would fuel a global stock market panic and perhaps a recession in Europe. Neither happened.  In fact, stocks rallied and the European economy started to recover.  Within two weeks of the Brexit vote, the S&P 500 hit its first new all-time high in over a year.  Then, in the fall, predictions of a Trump victory warned of the same dangers – fears over an untested neophyte taking control of the richest nation in the world.  But the stock market and the major sentiment indicators have gone the other way – north – since the surprise Trump victory last November.

The same is true of the Fed’s decision.  The last time the Fed went into a rate-rising cycle – 17 straight quarter-point rate hikes from mid-2004 to mid-2006 – both the stock market and gold rose strongly, despite concerns at the time that rising rates would be bad for both gold and the U.S. stock market.

The U.S. dollar staged a mini-rally in 2004-06 when the Fed raised rates, but that was in the middle of a long dollar skid from 2001 to 2008 (see chart, below).  In general, when the U.S. dollar declines, commodities tend to rise in U.S. dollar terms.  (That is one reason why gold rose so rapidly from 2001 to 2011.)

United States Dollar Index Chart

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

The dollar index (now around 101) bottomed out at 70.7 on Monday, March 17, 2008. That was also the date that gold first topped $1,000 per ounce.  The proximate cause of both events was the collapse and bailout of Bear Stearns – the opening shot of the crisis of 2008, which reached its nadir six months later.

Can it happen again – tomorrow, maybe?

The World is Coming to an End Tomorrow (or Soon)

How do I know the bull market is coming to an end soon?  The press told me – on three consecutive days.

On the eighth anniversary of the bull market last Thursday, the Wall Street Journal printed a very serious warning: “This Crazy, Expensive Stock Market is for Speculators, Not Investors.”  This review, timed to spark fears about the death of this bull market, said that investors now face a dilemma: “Chase the returns a final blowout would bring, or switch to cash now to survive the bear market that might follow?”

The next day, I got the March 11, 2017 edition of The Economist, with their editorial “Bubble-spotting: Markets are booming. Their underpinnings are fragile.” In that editorial, they asked – ala Alan Greenspan 20 years ago – “Have investors become irrationally exuberant?  That is the biggest question hanging over global stock markets.”  The Economist explained: “After breaking the 20,000 barrier in January, the Dow Jones Industrial Average swiftly passed 21,000 earlier this month.  In Britain, the FTSE 100 bas been notching up fresh records, too. The MSCI World Index has hit an all-time high…the warning signals are flashing.”

If you recall, Louis Navellier predicted 20,000 would be a “launching pad, not a ceiling,” so this news did not come as a surprise to us, but new highs in global markets seem to portend a crash for gloomy analysts.  (To their credit, The Economist also printed an evenly-balanced array of pretty good economic news, but editors know that they need to put the “bad news” in the headline, even when their analysis is balanced.)

Then, I read the weekend (March 13, 2017) Barron’s, with a lead article on how “Oil’s Slide Portends Trouble.”

Also, Barron’s weekly poll showed analysts equally divided on this question: “The bull blew out candles on his eighth birthday. So we ask: How many more birthdays will the bull enjoy?” Two fully-credentialed bears said: “We’re almost through it,” and “The bull looks like it’s coming to an end,” while two equally-qualified bulls said: “The bull will run for at least two more years,” and “over the next 12 years, returns could easily average more than 9% annually, the 100-year average.” Pick your pony. The odds are 50-50.

I keep hearing the skeptics say how this market is “priced to perfection” or is a “bubble about to pop” or is “overcome with euphoria.”  The very fact that so many pessimists warn us so frequently about this supposed end of the bull market is a pretty clear indication to me that euphoria is not widespread, the market is not priced to perfection and this is not a bubble about to pop.  (When the market melted up in 2000, I remember a few maverick newsletter editors warning of a crash but not the mainstream press.)

Hold the Presses! Global Growth is Rising and “Synchronized”

“This year is shaping up as the first synchronous acceleration in both developed and emerging markets since 2010.”

--Chetan Ahya, global co-head of economics and chief Asia economist at Morgan Stanley in Hong Kong

What many market-centric analysts are ignoring is that the global economy has quietly revived in the last nine months. Markets rise more on economic fundamentals than on politics or a tiny change in short-term interest rates.  Starting in the middle of 2016 – between Brexit and the Trump election – global growth rates started turning around. According to Bloomberg (March 2, 2017), “This year is shaping up to be the most synchronized for global growth since the immediate aftermath of the last recession, in a development that could ease the burden on the U.S. as the world’s economic engine. From robust Chinese factory data to faster inflation in Germany, just about all major economies are running at a decent clip, if not accelerating.”

In previous years, we saw the rapid rise and fall of emerging market economies, sometimes running rings around the developed world, or vice versa. Now, the two are synchronized better. According to this Bloomberg review, corporate profits in Japan set another record. Economic growth in Australia is exceeding expectations. South Korean exports rose for a fourth month in February. Data from India also shows better growth than expected and on March 1, 2017 there was a report that factory activity in the euro region rose to its highest reading in six years, driven by Germany and strong readings in Italy and Spain. (Spain’s GDP grew 0.7% last quarter – a 2.8% annual rate – a great rate for that long-troubled economy.)

Synchronous Growth - Global Purchasing Managers' Indexes are Rising Together Chart

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

Overall, the dangers that pundits see facing the world this year – and specifically, tomorrow – could turn out to be another great time to accumulate good stocks.  To paraphrase Disraeli, don’t buy when blood is running in the streets but when every town crier is warning you that something terrible is about to happen.

Global Mail:

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

The China Factor in Crude Oil

by Ivan Martchev

The volatility squeeze in major commodity indexes that I have been referring to resolved itself to the downside last week, with crude oil leading the way in what should be a seasonally strong period for the high-octane commodity. Volatility squeezes typically tend to resolve themselves in the direction of the major trend. We had a similar volatility squeeze in the S&P 500 which resolved itself to the upside (in the direction of the major trend (see my January 20, 2017 Marketwatch column, “I’m expecting a stock market rally this year, but 2018 is another matter.”) Now we have a similar resolution from commodity indexes in the direction of the major trend. This is why traders like to say: “The trend is your friend”.

Another surprise here is that crude oil did not decline in the seasonally weak September-to-February period and now it is weakening right around the time when it bottomed out and was beginning to rebound in early 2015 and early 2016. This is peculiar as we have a recent OPEC deal to cut production that may have helped oil stay up in a seasonally weak period, but clearly is not helping it at the moment.

GSCI and CRB Commodities Indices Chart

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

The oil market is flipping back deeper into “contango,” where the near-term futures contracts are cheaper and the longer-dated contracts are more expensive. Oil producers would prefer to see “backwardation” in the futures curve – which is the reverse of contango, a situation where the near-term futures contracts are more expensive and they get cheaper progressively into the future as backwardation maximizes revenues.

Deepening contango in the oil market simply means increasing oversupply. Deepening contango as we enter the supposedly strong season for oil prices (March to September) is not a good sign as the market is doing the opposite of what seasonality suggests. As I like to say in such situations, if the market does not do what you think it should do, there is a message in that, too.

Crude Oil Index Chart

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

Another surprise here is that oil was down on news of the February employment report, which was rather strong. This caused a sell-off in the U.S. dollar which typically helps energy and metals, but not this time. There was clear selling into strength in crude oil futures as April WTI futures rose briefly above $50/bbl when February non-farm payrolls were announced but ended dripping down all day to close the day and the week at $48.48. In Shakespearean terms, I’d say “something is rotten in the state of the oil markets.”

It was not only oil. Most economically sensitive commodities sold-off, if one runs through all the components of the CRB index. What could be doing this to crude oil and other major commodities?

The two major risks to commodities and the global economy are the Chinese credit bubble and the difficult-to-quantify political risk in Europe with their heavy election cycle in 2017. While European elections are front-page news, China isn’t like it was in early 2016 when malfunctioning circuit breakers on mainland stock exchanges caused a rather large sell-off in global markets in credit, equities, and commodities. The Chinese market has not yet been able to recover what it lost in January in 2016.

If one wanted to find a perfect illustration for the rather nebulous trading term “dead-cat bounce,” this chart action in the Shanghai composite since it found a bottom in late January 2016 fits the bill to a T.

China Shanghai Composite Stock Market Index Chart

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

I am sure that there is a problem with the Chinese economy that has not fully surfaced yet. The crash in the Chinese stock market in 2015 is only part of that problem. The rapid (11-fold) growth of the Chinese economy since the year 2000 was fueled by excessive borrowing, which raised the total leverage ratio in the Chinese economy from 100% of GDP to about 400%, if one includes the infamous unregulated shadow banking system. It is this shadow banking system which is to blame for the excessive margin leverage that resulted in the 2015 crash in the Shanghai composite. This hyper-growth based on hyper-credit and the resulting economic slowdown crashed the commodity markets in 2014, than it crashed the mainland stock exchanges in 2015 and it may very well crash the entire Chinese economy next. (See my February 20, 2017 Marketwatch column “China’s economy is dangerously close to unraveling.”)

Whether China’s economic crash will come in 2017 or not I do not know, but I am taking official Chinese economic releases with more than a grain of salt knowing the situation in their credit markets and the fact that they are famous for doctoring statistics. Considering the fact that China is the number one consumer of oil, it is not that far-fetched to look East for an explanation for the recent peculiar oil price weakness. While economic releases can be fudged, it is much more difficult to mess with the direction of the Shanghai Composite or the level of crude oil prices, none of which are acting too perky at the moment.

Over the past week, I saw quite a few explanations for the recent oil price weakness – being due to the surge in U.S. rig count and shale production – which is to be expected as there was massive borrowing in U.S. oil sector in the past 10 years and those high debts need to be serviced. I also saw quite a few stories about how the Chinese economy is slowly improving that, frankly, I do not believe. Something is rotten in the state of the oil market and my gut feeling tells me that one of the rather significant factors is China.

Reappearing Rate Hikes

Writing about Fed rate hike probabilities a year ago, my title captured the trend then: “Disappearing Rate Hikes.”  This was evident by the December 2016 (black line, below) and the December 2018 (green line) fed funds futures converging as fewer and fewer rate hikes were priced into the market at the time.

Thirty Day Fed Funds - Daily OHLC Chart

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

As a reminder, fed funds futures price rate hikes at 100 minus the price of the futures contract. As of last Friday, those forecasted fed funds rates are 1.2650% for December 2017 and 1.8% for December 2018.

Clearly, a lot has changed since the U.S. Presidential election, since the two lines are now getting a wider distance between them, meaning more fed rate hikes are being priced in. That is all fine and dandy, but I have to point out that this is what the market thinks right now. A lot can change by the time those fed funds futures contracts expire – like a Frexit, a Chinese economic implosion or, God forbid, a possible North Korean nuclear strike from a regime that is getting major headlines of late due to its recent missile tests.

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.

None of these possible domino effects are facts at the moment, but their probabilities range from somewhat unlikely to uncomfortably likely, in the case of China. As long as the two lines (the 2017 and 2018 fed funds rate futures) are seeing a widening differential, I would expect the U.S. Treasury market to remain under pressure. Still, 2.5% to 3% is a major area of resistance. I would be mightily surprised if we rise above 3% in any meaningful fashion. As far as I am concerned, the long-term decline in Treasury yields is not over, despite the present intermediate-term stress that is giving indigestion to bond investors.

Sector Spotlight:

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

Can We Reprogram our “Animal” Brain?

by Jason Bodner

How many times have you heard “that’s just how we’re wired” or “humans are hard-wired to do so-and-so”? In fact, I have written something like that many times. It comes from the supposition that humans have to do what humans naturally do, that is, years of evolution and experience cause predispositions to approach situations in predictable ways. For instance, most of us would approach a dark alley with fear.

For those of us who think, “you can’t teach an old brain new tricks,” the science in this area strikingly says otherwise. The brain has 100 billion neurons, and learning increases the branches amongst them – the neural pathways. There are many fascinating examples of neuroplasticity – the ability of the brain to form and reorganize synaptic connections, especially in response to learning or experience or following injury. What neuroplasticity tells us is that we can reprogram our own brains through just thought.

A great example can be seen in a television series called “Redesign My Brain.”  In it, host Todd Sampson, who is right-handed, tries a series of shots with a bow and arrow using his left arm. He misses terribly. He is then instructed to train for a month by closing his eyes and visualizing the arrow shot process with his left arm for 15 minutes a day. When he returns, he fires the arrow with substantially increased accuracy.

Rewiring the Brain Image

Imagine being able to train our brain to have total clarity, where “unknown” becomes a foreign word. We could live our lives with purpose, without the burden of anxiety from the obscure future.  For some, this clarity already exists. As I mentioned last week, we can have clarity about long-term investing, or at least a reasonable approximation thereof, through identifying growth companies and then compounding their dividends. This is a clarity that Warren Buffett has demonstrated. He knew that he would be rich and he knew it would happen during his lifetime. That clarity has served him well. But what about the near term?

The chaos and uncertainty of the near term is what drives entire industries, especially the media. If we knew that everything was going to turn out OK, why would we need the fear and anxiety caused by the news? When was the last time you saw good news dominate the headlines? The truth is, fear and anxiety sell papers – or clicks, or whatever metrics drive media revenues. As we scan our daily news, one thing is certain: The environment seems downright confusing. Recent sector shifts offer the same lack of clarity.

Let’s take the obvious example from last week’s news – the sinking price of oil.

What’s Driving Oil Prices Down?

We have been discussing the large and growing glut in crude oil supplies for many months here, but last week the world finally noticed. The Energy sector was not quite the worst sector last week, but the worse drubbing for Real Estate can be attributed to a higher likelihood of the Fed raising rates in its FOMC meeting this week. But for Energy, a key question may be “why is the move so sudden and drastic?” This is a good question as the market slide of 2014 began with crude oil falling from over $100 to under $30.

Standard and Poor's 500 Daily, Weekly, and Quarterly Sector Indices Changes Tables

One way for markets to become volatile is due to the professional or “local” trader. In a June 2013 WSJ article (“Traders Try to Game Platts Oil-Price Benchmarks”), an energy trader details how he plays games in order to affect price movement in his favor. Simply put, he sells a little oil at a small loss to push prices down which enables his larger pre-scheduled buy to take place at lower levels. Oil traders are not required to report their oil trades. It’s a voluntary process. This introduces obvious potential for people to “game” the information. This has taken place for a long time, so this “legal” manipulation is known! But what about the stuff that traders want hidden?

Near-term price fluctuations are riddled with “noise.” The more noise there is in the short term, the more investors should focus on the longer term. This brings us back to Warren Buffett.  Last week, he inflamed some active managers by essentially saying “save your money, don’t pay hedge funds, and invest in passive index funds; you’ll do better over time.” The irony, of course, is that Warren himself proved that active managers can trounce indices over the long term!  The man who found $50 billion worth of clarity in the long term is in essence discounting his own resounding success – further confusing the situation.

Current events thrive on confusion and doubt and drive the markets’ daily fluctuations. Traders create volatility for near-term gain but what can an investor make from all of this?  We have three choices:

  • Invest passively and let the market run – up or down – que sera sera.
  • Do the work yourself and identify companies that may reward you handsomely over time.
  • Hire an active manager with an exemplary track record to do it for you.

In trying to train our brains for the investing world, Isaac Newton’s comment rings true: “Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things.” Never mind that Newton was taken to the cleaners when it came to investing. Sometimes, you shouldn’t care about what the experts do.  Just listen to what they say. Both Isaac and Warren are essentially saying, “do as I say, not as I do.”

A Young Isaac Newton Image

A Look Ahead:

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

The Fed Will Likely Raise Rates Tomorrow

by Louis Navellier

I’ve been going back on forth on this question for the last two months, but I’ve always said that the “data dependent” Fed would postpone their decision until all the facts are in.  Well, last week brought us mostly positive news so – barring announcements of negative inflation rates or sagging retail sales tomorrow – a rate rise is likely.

Let’s start with Friday’s February payroll report.  The Labor Department reported that 235,000 payroll jobs were created in February – significantly higher than the economists’ consensus estimate of 221,000.  During the past two months, the payroll reports were revised up by a combined 9,000: January was revised up to 238,000 (from 227,000 previously estimated) and December was revised down to 155,000 (down from 157,000).  Also, the unemployment rate declined to 4.7% in February, down from 4.8% in January.  Average hourly wages rose by 6 cents or 0.2% to $26.09 per hour, up 2.8% in the last 12 months.

Even better, on Wednesday, ADP reported that 298,000 new private payroll jobs were created in February, well above economists’ consensus estimate of 190,000 and a massive surprise.  This was the biggest surge in private payrolls in almost three years. What was must impressive was that “goods-producing” jobs surged 106,000, an all-time monthly record, so President Trump can take some credit for a new surge in manufacturing jobs. Furthermore, ADP also revised January’s private payroll up to 261,000 (from 246,000 previously reported), so private job creation in 2017 is now running at the strongest pace in a decade.

In addition, the Commerce Department reported last week that factory orders rose 1.2% in January, led by a 6.6% surge in industrial machinery orders.  Excluding the strong transportation sector (in commercial aircraft orders and related fields), factory orders still rose 0.3% in January.  Factory orders have risen in six of the last seven months, so it appears that there is no slowdown underway, despite a strong U.S. dollar.

The Downside of a Rate Increase – A Stronger U.S. Dollar, Hurting Exports

The strong U.S. dollar appears to be impacting trade, since the Commerce Department announced last Tuesday that the trade deficit in January surged to $65.3 billion, the highest level in almost five years (since March 2012) as imports surged 2.3% in January to $235.3 billion while exports rose only 0.6% to $192.1 billion.  This was the biggest surge in imports in almost two years (since March 2015). It was due largely to imported vehicles and higher petroleum prices.  Since the trade deficit reduced annual U.S. GDP growth by 1.7% in the fourth quarter, there is a growing concern that an even bigger trade deficit in the first quarter could potentially take up to a 2% bite out of overall GDP growth.  In fact, the Atlanta Fed reduced its first quarter GDP estimate to a 1.3% annual pace after the January trade deficit report.

Interestingly, there may be some relief in sight on the trade deficit and inflation front, since crude oil prices cracked the $50/bbl level on Thursday.  On Wednesday, the Energy Information Administration reported that crude oil inventories surged by 8.2 million barrels in the latest week, the ninth straight weekly increase to an all-time record of 528.4 million barrels.  Furthermore, the America Petroleum Institute on Tuesday reported an even bigger increase to 11.6 million barrels of crude oil in the latest week.

Oil Derrick Image

The glut of crude oil in the U.S. may help reduce petroleum imports, which might in turn lower the trade deficit in upcoming months.  Also, since most of the inflation in recent months is attributable to higher energy prices, the recent decline in crude oil prices may help cool off recent inflationary pressure.

There is one other important indicator for the Fed to consider tomorrow: Market interest rates.  Treasury bond yields have steadily risen for the past several days and these higher bond yields are also pulling short-term Treasury bill years higher.  This rise in market rates will most likely encourage the FOMC to raise key interest rates tomorrow, since the Fed does not historically like to fight market rates, so I expect that the FOMC will raise rates this week and most likely hint at another key interest rate increase in June.


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

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

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

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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

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