“VIX” Needs a Fix

The “VIX” Needs a Fix

by Louis Navellier

February 21, 2018

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Last week, the stock market made back more than half the losses it suffered in the previous two weeks. The Dow industrials rose 4.25%, the S&P 500 rose 4.30%, and NASDAQ shot up 5.31%. But in my opinion, the biggest news last week was that FINRA (the Financial Industry Regulatory Authority), which regulates broker dealers, is now looking into whether prices linked to the CBOE Volatility Index (VIX) have been manipulated.  The VIX is derived from S&P 500 options prices and FINRA is specifically looking at whether or not traders placed bets on S&P 500 options to influence the prices for VIX futures.

I’ll have more to say on that development later on.  In the meantime, new Fed Chairman Jerome Powell said that the Fed will “remain alert” to any risks to financial stability.  This was his first attempt to calm the financial markets.  Powell added that “We are in the process of gradually normalizing both interest rate policy and our balance sheet with a view to extending the recovery and sustaining the pursuit of our objectives.”  Translated from Fedspeak, Powell intends to shrink the Fed’s balance sheet by selling $10 billion to $50 billion per month in Treasury and mortgage-backed securities that it had accumulated after the 2008 financial crisis.  Since the Fed has to maintain orderly interest rates to “normalize” and unwind its balance sheet, I think you can assume that the Fed will not let interest rates rise too high, too fast.

In This Issue

Bryan Perry shares the fundamentals by which he thinks the S&P can recover to 3,000 and even 3,200 by Memorial Day.  Then, Gary Alexander uses the President’s Day break to handicap the political parties when it comes to market influence.  Ivan Martchev turns his attention to the Japanese yen and its carry trade, plus the U.S. dollar vs. the euro, while Jason Bodner shows us which sectors bounced back best from the recent market stress test.  Then I’ll return with a closer look at the VIX controversy and the outlook for rising inflation after last week’s lofty readings on the various price indexes for January.

Income Mail:
Disorderly Market Correction Fuels Feeding Frenzy for Stocks
by Bryan Perry
No Valentine’s Day Correction as Expected (with High Inflation Numbers)

Growth Mail:
George Washington Didn’t Like Political Parties, But…
by Gary Alexander
Which Party is Better for the Stock Market?

Global Mail:
Mind the Japanese Yen
by Ivan Martchev
The U.S. Dollar Has a Big Synthetic Short, Too

Sector Spotlight:
Success is How High You Bounce Back from the Bottom
by Jason Bodner
Tech Stocks Lead the Rebound – Again

A Look Ahead:
Another Derivate – The Venerable “VIX” – Devastates the Market
by Louis Navellier
Inflation Rises Rapidly in January: Is Inflation a New Danger?

Income Mail:

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

Disorderly Market Correction Fuels Feeding Frenzy for Stocks

by Bryan Perry

If you blinked or weren’t watching the market for the first half of February, there was a fierce correction that has left few traces of the shock and of the incredible trap-door sell-off that occurred in the span of just a few days. Then, almost as swiftly as stocks fell, U.S. equities advanced for a sixth consecutive session, overcoming a hotter-than-expected January CPI reading. Investors also took great comfort in the new Fed Chairman Jerome Powell’s Tuesday comments that the Fed “will remain alert” to any risks to financial stability and added that “We are in the process of normalizing both interest rate policy and our balance sheet with a view to extending the recovery and sustaining the pursuit of our objectives.”

Markets roared higher after being convinced that the Fed wasn’t “out to lunch” regarding the market’s extreme volatility, while addressing the very thing that rattled everyone in the first place, namely rising bond yields. The Nasdaq Composite led the recovery rally, followed by the S&P 500, the Dow Jones Industrial Average, and Russell 2000, all of which returned to positive territory for the year.

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The most notable aspect of the last week has been how the market showed an impressive performance following the release of the Consumer Price Index for January, which prompted fears that inflation is picking up: Total CPI increased 0.5% month over month versus consensus +0.4%, while core CPI, which excludes food and energy, rose 0.3% versus consensus +0.2%. Most professionals, including myself, were of the view that high inflation could cause a retest of the 2,533 low for the S&P set on February 9.

There isn’t a market technician or charting guru that won’t tell you that following such a dramatic sell-off followed by an equally intense oversold rally isn’t all but a foregone conclusion. Investor sentiment typically takes a massive emotional hit and thus requires some time for repair. But just maybe the events of February 2-9 that saw the S&P shed a full 10% of total market value in just six trading days has had much to do with the snap-back rally; the sell-off came and went so quickly that by the time investors started contemplating what to do about their portfolios, it was all over, with the major averages soaring off the bottom mid-day February 9, catching most professionals flatfooted, stunned, and very confused.

No Valentine’s Day Correction as Expected (with High Inflation Numbers)

So naturally, investment pros waited with baited breath for the Consumer Price Index (CPI) to be released on none other than Saint Valentine Day, where surely a high inflation number would all but assure the textbook pullback that would provide the quintessential ‘buy the dip’ opportunity, which the mountain of sideline cash holders has sorely longed for. As it turned out, the headline on CPI initially pushed the Dow down over 250 points, and a retest looked like a done deal; but the market bounced back after investors had time to further digest the report, which on a year-over-year basis wasn't all that alarming: Total CPI and core CPI are up 2.1% and 1.8% year-over-year, respectively, which is where they've been for months.

At that point, it was off to the races for the rest of the week. Cyclical sectors – like financials, technology, consumer discretionary, industrials, and materials – led the charge, indicating that investors grew more comfortable with the inflation data, which is ultimately consistent with a growing economy and rising corporate earnings. Among the other S&P sectors, the countercyclical health care space also outperformed, but consumer staples, utilities, telecom services, and real estate groups lagged.

In the bond market, U.S. Treasuries were weak ahead of the release of last week’s economic data, which included a disappointing Retail Sales report for January (-0.3% actual vs. +0.2% consensus). The benchmark 10-year yield climbed eight basis points to 2.91%, which marks its highest level in more than four years, before backing off by Friday to yield 2.88%.

Market pundits call this transition away from bonds into economically sensitive equites the “regime change.” It has occurred with great speed because of how influential computer-driven trading platforms have become on rebalancing portfolios. What used to take days and weeks now happens in a matter of hours.

Meanwhile, the U.S. Dollar Index declined 0.8% to 88.25, a four-year low, as the greenback gave ground to the euro ($1.2459), the British pound ($1.4007), and the Japanese yen (106.97 per $1). Dollar weakness helped commodities, including crude oil: West Texas Intermediate crude futures climbed 2.3% to $60.57 per barrel. On a related note, the Department of Energy reported that U.S. crude inventories rose by 1.8 million barrels last week, which was roughly in line with estimates.

Looking ahead, investors will be watching the 10-year Treasury for a move up toward 3.0% yields, which will likely provide a stiff headwind to equities. As of last Thursday, the S&P 500 ran into its first test of resistance at 2,720 (its 50-day moving average) where it was met with some initial profit-taking and then it sliced up through that like a hot knife through butter. The S&P has recovered 62% of its correction-related losses in what can only be described as a very impressive rally off the reaction low of 2,533.

It’s my view that once the market consolidates this mighty bounce off the lows, the forward picture for the S&P looks bright. While the media may spin fear of a deep correction just around the corner – so as to keep investors glued to cable business TV channels – there is quite a different story developing, one where the market will likely take a brief rest and then trade firmly higher heading into May, fueled by what should be a banner first-quarter reporting period evidenced by accelerating earnings and further upward forward guidance by large corporations benefiting from tax reform, a weak dollar, record business investment, and a confident consumer: The University of Michigan preliminary consumer sentiment index rose in February to 99.9, up from 95.7 in January, reaching the second highest reading ever recorded.

So, with both business and consumers powering up, it’s a classic case of how the market can outsmart even the savviest of investors. That said, a rising level of volatility can still be expected to accompany the next rally phase, with the trusted blue-chip stocks in higher demand going forward as a direct result. Some well-deserved consolidation after the recent run up would be constructive, but I can’t remember in my 35 years of stock market experience where the desire to own stocks in leading sectors has been so intense during the first six weeks of a year that includes a 10% correction along the way!

The passing of major tax reform is a generational happening that changed the calculus of corporations’ balance sheets overnight. The result is being borne out in the current investing landscape at a fierce pace. Because of what I call a higher level of ‘animal spirits’ at work, don’t be surprised if the S&P 500 cruises through 3,000 on its way to 3,200 by Memorial Day. No one is calling for that number that fast. That would put the S&P up 20% for the year. Why can that happen? Because things are different this time.

Growth Mail:

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

George Washington Didn’t Like Political Parties, But…

by Gary Alexander

Whenever we have a holiday break, it gives us extra time to look back into history and see what this day means. Washington’s Birthday used to mean something, before it was homogenized into President’s Day in 1971. Americans over 60 remember celebrating Washington’s Birthday, not President’s Day.

From 1856 to 1887, five political parties were launched on Washington’s Birthday, because that was considered the patriotic thing to do, even though Washington himself warned against political factions.

  • Five Political Parties Born on Washington’s Birthday (February 22)
  • 1856: The Republican Party first met in Pittsburgh, Pennsylvania.
  • 1872: The Prohibition Party and Labor Reform Party first met in Columbus, Ohio.
  • 1878: The Greenback Labor Party was formed in Toledo, Ohio.
  • 1887: The Union Labor Party was organized in Cincinnati, Ohio.

In his Farewell Address in 1796, George Washington said some unkind things about political parties:

“The alternate domination of one faction over another, sharpened by the spirit of revenge, natural to party dissension, which in different ages and countries has perpetrated the most horrid enormities, is itself a frightful despotism. But this leads at length to a more formal and permanent despotism. The disorders and miseries, which result, gradually incline the minds of men to seek security and repose in the absolute power of an individual; and sooner or later the chief of some prevailing faction, more able or more fortunate than his competitors, turns this disposition to the purposes of his own elevation, on the ruins of Public Liberty. … It agitates the Community with ill-founded jealousies and false alarms; kindles the animosity of one part against another, foments occasionally riot and insurrection. It opens the door to foreign influence and corruption, which find a facilitated access to the government itself through the channels of party passions.”

--From President George Washington’s Farewell Address, September 19, 1796

Our second President, John Adams, said the same thing in fewer words.

“There is nothing which I dread so much as a division of the republic into two great parties, each arranged under its leader, and concerting measures in opposition to each other. This, in my humble apprehension, is to be dreaded as the greatest political evil under our Constitution.”

There were a lot of minor Parties in the 19th Century, but it has been mostly Red vs. Blue since 1925. Going back to 1926, Democrats like to crow that the market has fared far better under the Donkeys than the Elephants, but they ignore half of the history of the Republican Party, which was born in 1856 and dominated the White House for 48 of the 64 years from 1868 to 1932, including the Industrial Revolution.  In those years, there were 11 Republican Presidents and only two Democrats (Cleveland and Wilson).

Which Party is Better for the Stock Market?

In a new compilation (“Socionomic Causality in Politics,” 2017, edited by Robert Prechter), chapter 1 answers this question directly. Matt Lampert studied market data from the 1857 to 2015, revealing a 7.08% average annual rate of return in the stock market under Democratic presidents vs. 5.90% under Republicans, a difference that he deems “not statistically significant.” However, in the middle of that 159-year period, there was one major (-89%) crash, 1929-32, which fell entirely during the administration of Republican Herbert Hoover, followed by a rapid 370% recovery, which mostly came in FDR’s first term.

Lampert concluded: “When we omit the term encompassing 1929-32 from the analysis, the average annual rate of return under Republicans jumps to 7.68%, slightly higher than the 7.08% under Democrats,” and then, “If we also omit the next term, covering 1933-1936, when the stock market rebounded under a Democrat president, the data favor the Republicans even further, by 7.68% vs. 5.52%.”  Clearly, there is no significant difference between the two Parties, although partisans can choose the dates to fit their bias.

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

In modern times, the winning formula for stock market profits seems to be a division of powers – or “gridlock” – in which one Party occupies the White House and the other Party dominates Congress.

I’ve just taken a look at the 16 years since 1950 in which the S&P 500 gained 20% or more.  In 14 of those 16 years, one Party was in the White House and the other controlled the House of Representatives (in three cases, all under Reagan, 1983-86, Congress was split, with the House solidly Democratic and the Senate narrowly Republican).  In 10 of the 16 best market years, there was a Republican President and a Democratic Congress; four cases involved a Democratic President and Republican Congress.  The outliers were 1954 (with a Republican President and Congress) and 2009 (a Democratic President and Congress).

I’ve also looked at the mid-term elections in the last 50 years in which one Party in Congress gained a huge (40+) number of seats in the House, and then I looked at what happened next in the stock market:

  • In the mid-term 1974 elections, when Republican Gerald Ford was President, the Democrats gained 49 seats. The Dow gained 75.7% from December 6, 1874 to September 21, 1976.
  • In the mid-term 1994 elections, when Democrat Bill Clinton was President, the Republicans took control of Congress for the first time in 40 years, gaining 54 seats.  The stock market took off almost immediately. After gaining 2% in 1994, the Dow rose 300% from 1995 to 2000.
  • In the mid-term 2010 elections, when Democrat Barack Obama was President, the House went from 236-199 Democrat to 242-193 Republican.  The Dow rose 14% in the next seven months.

This historical narrative is important in 2018, since mid-term elections are coming up.  If the stock market performs best under a divided government, the market may surge if the Democrats take back Congress.

Global Mail:

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

Mind the Japanese Yen

by Ivan Martchev

Last week’s recovery in stock prices was to be expected. Trading a couple of standard deviations away from key short-term moving averages typically is a sign that the rubber band has been stretched in an unsustainable fashion. What we are seeing in the stock market is a reversion-to-the-mean type of trade, which is pretty normal after the rally we experienced in January. Still, there is a fly in the ointment here that needs to be carefully monitored as it indicates that large institutional investors are pulling in their horns. That fly in the ointment is the Japanese yen.

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

The last time we experienced a sharp yen appreciation was in 2016, when there was pronounced volatility in world stock and commodity markets. The yen rallied from over 120 to under 100 that year only to weaken dramatically all the way to 118 by the end of 2016 after the U.S. presidential election. (A rallying yen means the USDJPY chart is going lower, since fewer yen per dollar means an appreciating yen.)

Why worry about a rallying yen?

In my experience, sharp rallies in the yen are in many cases correlated rather strongly with institutional investor cautiousness. Two decades of extremely low short- and long-term interest rates caused the yen to become the world's favorite carry trade funding currency as the cost of financing carry trades was negligible due to the unfortunate deflationary environment in Japan. A sharply rallying yen in the past two decades has often meant that institutional investors are unwinding carry trades.

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

Why would the yen rally if carry trades are being unwound?

Carry trades are only available to institutional investors with access to the short-term Japanese funding markets whose interest rates are heavily influenced by the Bank of Japan policy rate, which is -0.10%. While many forms of short-term wholesale funding in Japan are not negative, they are very close to zero.

In a carry trade, an institutional investor receives short-term financing from the yen-funding markets and buys assets with the yen-denominated loan. If the institutional investor buys assets in Japan, the loan remains in yen. However, large multinational institutional investors in many cases obtain low-interest-rate yen financing and buy assets outside of Japan. This involves selling the yen and buying the foreign currency those assets are denominated in. This yen-funding of foreign-currency-denominated carry trades creates a large synthetic short position against the yen, which causes the yen to rally sharply as those carry trades are liquidated and the borrowed yen is bought back to repay the yen-funded loans.

I think we may be experiencing this very dynamic at the moment. If many institutional investors try to reverse yen-funded carry trades in a short period of time, the yen tends to rally sharply. This is why when the stock market rallies and key commodities experience a rebound whilethe yen is sharply appreciating, as it is now, I tend to view those asset price recoveries with suspicion as institutional investors – the so-called “smart money” – may very well be unwinding carry trades and selling into the rally.

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

Another dichotomy that needs to be discussed along with the sharply appreciating yen is that of the Nikkei 225 Index itself. Naturally, the correlation between the Nikkei 225 and the USDJPY exchange rate is much stronger, since a weaker yen has meant a stronger Nikkei and vice versa. This is due to the large percentage of exporters in the Nikkei 225 Index, where a sharply weaker yen means higher EPS for the exporters, whose earnings are in many cases 80% or more derived from outside of Japan.

It is natural that the Nikkei 225 has sold off in this latest move higher in the yen (indicated by a move lower in the USDJPY cross-rate chart), but the correlation between the two has not been as strong in 2017 as in prior years. This is precisely why I viewed the breakout in the Nikkei 225 after the Japanese parliamentary elections in late 2017 with suspicion. While it was natural for investors to be excited after another mandate for reform-oriented PM Shinzo Abe, such a big deviation from the Nikkei-yen correlation has not been able to hold for long historically.

The U.S. Dollar Has a Big Synthetic Short, Too

Much has been said about the weak dollar in 2017 also having a weak start to 2018. As I have opined previously, I think this is more political in nature as the largest component of the U.S. Dollar Index – the euro at 57.6% – had the pricing of the eurozone disintegration trade wrung out of the currency market due to a wave of pro-EU victories in Europe. No such pro-EU political developments are expected in 2018.

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

Also, there was a sharp increase in dollar borrowings in the past 10 years – to the tune of over $9 trillion as reported by the Bank of International Settlements (see April 12, 2015 Bloomberg article, “The $9 Trillion Short That May Send the Dollar Even Higher”). At a time of rising short- and long-term U.S. interest rates, this could create a massive short squeeze in the dollar, too.

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

In fact, I would not be surprised to see the dollar and the yen rallying at the same time at some point in 2018, even though the yen is a 13.6% component of the U.S. Dollar Index. The yen has been known to act as “a fish swimming against the current” in dollar appreciation environments because of the carry-trade unwinding. As to the synthetic short against the dollar due to too much dollar borrowing, it’s too large to ignore in an accelerating Fed tightening cycle.

Sector Spotlight:

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

Success is How High You Bounce Back from the Bottom

by Jason Bodner

Did you know: Steel and glass balls bounce higher than rubber balls? It may surprise you that balls made of these hard materials can bounce higher than ones made of rubber. The fact is that bouncing is an elastic collision between two objects. The ball can bounce if it gets back more of the energy it imparted onto the surface. The rubber ball compresses and changes shape, so it loses energy. Rigid strong material sees most of the energy of impact returning to the object. So, steel balls bounce higher than rubber balls.

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We can observe the same behavior in stocks. The parallel here is that a weak market based on shaky fundamentals won’t bounce as high as a strong market after a sell-off. We have seen many recent sell-offs met with violent buying out of the depths. Last week is yet another example. When markets sell off, good stocks get snapped up at discounts, while bad stocks tend to hit the ground with a thud.

What a difference a week makes. My theory was that the correction was technically induced, exaggerated by algorithmic traders (algos), and wholly overblown. As if on cue, a week later we watched the market stage its swiftest four-day rally since Brexit. Those who had cash to deploy and the wherewithal to do so will likely be rewarded for buying discounted stocks mid-day February 9, when they were cheapest.

The overall economic environment is still very favorable for stocks. Sales and earnings continue to wow, and good stocks are finding plenty of support. They are bouncing high and fast along with the broader market. The point here is that this market is strong and leading stocks are stronger. Looking at a 10-day chart, we can see how quickly the market was bought up. Looking at a 5-year chart, the sell-off seems like hardly a bump in the road. We can now expect this bounce to vault us to higher prices in the near future.

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

As FINRA is starting to sniff around about whether the CBOE’s VIX prices were manipulated in the downdraft, that investigation just lends credence to the theory that this was just a technical sell-off followed by what looks like a V-shaped recovery. I believe the worst is behind us, and we can get back to watching the market rise. Corrections, however, will still come, but we can probably expect them to be faster and more volatile than what we have seen. As more and more automated market participants trade on algorithms, we can expect choppy waters when selling begins – choppier than what was normal before.

Tech Stocks Lead the Rebound – Again

It’s always interesting to see what leads the charge out of a sell-off. The broad markets were stunning in their recoveries. NASDAQ Comp led the charge with a more than 6% rally while the S&P 500, Dow Jones Industrials, and Russell 2000 indexes, all were up nearly 5%. In the wake of a 10% sell-off, this may not seem as significant, but the lows were clearly put in, and the stage is set for higher prices, in my view.

This week’s sector performance saw impressive numbers across the board, but Tech led all others out of the tunnel with a +5.83 performance. Industrials and Financials posted 4.6% or better gains, while Health Care, Materials, Consumer Discretionary, and Staples were all up more than +3.4%. Real Estate was the laggard, but it was still positive. Rising rates are still a concern impacting rate-sensitive securities.

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Market strength can sometimes be measured by its bounce-back from weakness. As we move to a new phase of the bull market, potentially to a time when this volatility passes (we seem to be at the tail end currently), I will be attentive to see which sectors lead us higher. Right now, Tech is powering forward, but it has been a firm leader for a long time. If new leadership should emerge, it will reveal new leading stocks with it. It may be counterintuitive but if the current market is any indication, the momentum of fundamentals and technicals means investors just don’t want the market to go down! George S. Patton’s quote seems perfect for the current situation: “Success is how high you bounce when you hit bottom.”

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A Look Ahead:

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

Another Derivate – The Venerable “VIX” – Devastates the Market

by Louis Navellier

Last Tuesday, The Wall Street Journal reported (in “Regulator Looks into Alleged Manipulation of VIX, Wall Street’s ‘Fear Index’”) that the VIX might be manipulated: “Traders trying to move prices for VIX futures and options could achieve this by making the options bets at a special auction that takes place each month to calculate settlement values.”  A whistleblower has urged regulators to investigate this possibility of VIX manipulation, even though the CBOE is fighting back in a public spat that is not very flattering.

The bottom line is that since VIX-derived portfolio insurance failed earlier this month in a spectacular manner via (1) Exchange Traded Notes, (2) an option mutual fund designed for portfolio protection, and (3) in multiple risk-parity products promoted by the hedge fund industry, these portfolio insurance products are likely doomed.  The VIX soared in popularity in the past decade as a popular hedging tool, but when everybody is engaged in the same or similar trade, a “Black Swan” event all too often happens.

That is apparently what happened in early February when the options tail (i.e., VIX) wagged the dog (i.e., the S&P 500).  This won’t end soon, and it probably won’t end without some pain to some big names. These regulatory investigations can take several years to uncover, so VIX portfolio insurance and risk-parity products will likely be doomed until Wall Street designs another type of portfolio insurance.

Interestingly, former SEC Chairman Harvey Pitt said on CNBC on Friday, “It’s quite clear that these index’s options can be manipulated.  And when there were complaints about possible manipulation, the CBOE, as the marketplace, should have sprung into action.”  If a former SEC official is blaming the CBOE, nothing is going to likely get fixed, since the regulators are starting to blame each other.

Inflation Rises Rapidly in January: Is Inflation a New Danger?

Last Wednesday, the Labor Department reported that the Consumer Price Index (CPI) rose 0.5% (a 6% annual rate) in January, the largest monthly increase in five months.  In the past 12 months, the CPI is now running at a 2.1% annual pace, a bit above the Fed’s 2% inflation target.  The next day, the Labor Department reported that the Producer Price Index (PPI) rose 0.4% in January (a 4.8% annual rate), which was not a surprise, due to higher energy prices.  However, the big surprise was that the core PPI, excluding food, energy, and trade, rose 0.4%, so there is now strong evidence of wholesale inflation.  In the past 12 months, the PPI has risen 2.7% and the core PPI rose 2.5%, so wholesale inflation is now clearly brewing.

The only hope to squelch wholesale inflation will be (1) a stronger U.S. dollar to push down commodity prices and (2) moderating energy prices.  These two variables are likely to occur in the upcoming months, but for the near-term there is no doubt that the Fed will raise key interest rates at its March meeting.

I believe that the inflation reflected by higher prices at the pump may be fleeting, since crude oil prices continue to moderate as the U.S. ramps up its shale oil production. The Energy Information Administration (EIA) last week reported that U.S. shale crude oil production is expected to rise by 110,000 barrels per day in March.  Further putting pressure on crude oil prices is the proposed U.S. budget deal that includes the sale of 100 million barrels of crude oil from the Strategic Petroleum Reserve.

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The EIA is forecasting that U.S. crude oil production will average 10.3 million barrels per day in 2018 and 10.8 million barrels a day in 2019, meaning the U.S. will rival both Russia and Saudi Arabia as the top producer of crude oil.  As a result of all the new crude oil coming on line, crude oil prices will likely moderate at a level that should insure steadily profits for the energy sector while not causing inflation.

A possible reason that the Fed may hesitate raising key interest rates in May, after its March FOMC meeting, is that the Commerce Department announced on Wednesday that retail sales declined 0.3% in January, the largest monthly drop in 11 months and substantially below economists’ consensus of a 0.2% rise.  Slumping auto sales and home improvement store sales were largely responsible for the drop.

Also worrying is that December retail sales were revised down to “unchanged” from a previous estimate of a 0.4% increase and core retail sales (excluding gas stations, autos, and home improvement) declined 0.2%.  As a result, economists are now trimming both their fourth-quarter and first-quarter GDP forecasts.

Finally, on Friday, the University of Michigan announced that its preliminary consumer sentiment index rose in February to 99.9, up from 95.7 in January.  Sentiment is now at the second highest reading ever recorded and the highest reading in 14 years.  Overall, it appears that the tax cuts have cheered up the American consumer.  Interestingly, there were big gains in both the current economic conditions and expectations components, so that should bode well for continued strong first-quarter GDP growth.

Speaking of the new tax bill, the U.S. Treasury just announced a budget surplus of $49 billion in January, the first month under the new tax law.  Tax receipts were $361 billion and expenditures were $312 billion. That won’t happen every month because Congress just passed a new spending bill to keep the government running, but with corporations repatriating taxable cash from overseas, the Treasury will soon be bursting with large checks written by U.S. corporations that are bringing billions in cash back home from overseas.


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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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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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