Week of Record Highs

A Strange Week of Record Market Highs but Good Stocks Falling

by Louis Navellier

September 25, 2018

Growth stocks have led the market for a long time, but last week we saw many interest-rate-sensitive value stocks (like insurance companies and utilities) firm up. This temporary rotation into value stocks is a bit odd, since the 10-year Treasury bond yield rose decisively above the 3% level, despite low inflation.

Semiconductor Chip Image

For example, on Thursday, a flagship semi-conductor stock, Micron Technology (MU), announced that its latest quarterly sales rose 37.5% to $8.44 billion vs. expectations of $8.25 billion, and $6.14 billion in the same quarter a year ago. During the same period, the company’s earnings-per-share rose 79% to $3.56 ($4.33 billion) vs. $1.99 per share last year. Excluding extraordinary items, Micron Technology’s operating earnings were $3.53 per share vs. analyst expectations of $3.33 per share, so the company posted a 6% earnings surprise. Since Micron Technology trades at barely four times earnings and has “fat” monopolistic operating margins, I would not be surprised if the company announces another big stock buy-back program, like its recent $10 billion buy-back program announced just three months ago.

Micron’s stock rose on the good news Thursday, but then it declined on Friday. If you are wondering why technology stocks with stunning sales, earnings, and better-than-expected results no longer lead the overall stock market, the answer is simple: There was a big “reversion to the mean” among some laggards. I think investors should be patient and wait for the fundamentals to work. I prefer superior stocks with great valuations, like Micron Technology, while avoiding frothy “fad” stocks, like Canadian marijuana stocks!

(Please note: Louie Navellier does currently hold a position in Micron in Mutual Funds and Navellier & Associates does currently own a position in Micron for client portfolios).

In This Issue

In my closing column, I’ll talk in more detail about the Canadian marijuana stocks, but first Bryan Perry has something to say about the “buzz kill” of most pot stocks while finding some “smart money” plays in pot partnerships. In Growth Mail, Gary Alexander highlights the seasonal bump we’re likely to see in both stocks and gold during the fourth quarter. In Global Mail, Ivan Martchev compares the small-cap and large-cap stock market indexes in China and the U.S. in 2018 and finds some surprising contrasts. Jason Bodner’s Sector Spotlight covers a familiar recurring theme of the “tech rest” (as opposed to the “tech wreck” promulgated by CNBC). In addition to pot stocks, I also cover the latest tariff and trade war news.

Income Mail:
Marijuana Investing – Gold Rush or Buzz Kill?
by Bryan Perry
Catching A High-Quality Profit Buzz in the Pot Sector

Growth Mail:
All Hail the Fourth Quarter, the Market’s Best Quarter (By Far)
by Gary Alexander
Gold Also Glitters Late in the Calendar Year

Global Mail:
The Surprising All-Time Highs for U.S. Stocks
by Ivan Martchev
China Trade Talks Deteriorate

Sector Spotlight:
Time Travelling for Fun and Profit
by Jason Bodner
Which Door Holds the Prize – Door #1, 2, or 3?

A Look Ahead:
The “Long Game” of Trump’s Trade & Tariff Talks
by Louis Navellier
Stay Away from Speculative Canadian “Pot” Stocks

Income Mail:

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

Marijuana Investing – Gold Rush or Buzz Kill?

by Bryan Perry

Last week, there was a laser-like focus on pot stocks that took investors for one of the biggest roller-coaster rides in recent memory. The trend toward the legalization of weed has created “reefer madness” in the price action of several pot stocks, where volatility became about as extreme as anyone can remember.

Canada has taken the lead on making pot legal throughout the entire country. Marijuana use in Canada will likely be legal as of mid-October after legislation cleared regulatory hurdles in June.

There are several ways to invest in the potential marijuana boom. Many are plays for recreational use of marijuana, which will boom if legalization goes forward as expected. Many other investments are medical plays, which have the potential to be quite successful, even though the upside is smaller.

In the U.S., all marijuana-related products are grouped into the Schedule I classification by default. Drugs in this Schedule are illegal at the federal level, with the U.S. government declaring them to have “no currently-accepted medical use, and a high potential for abuse.” But Shares of GW Pharmaceuticals[GA1]  (NASDAQ: GWPH) rose sharply last week, spurred by Morgan Stanley analyst David Lebowitz’s report that the U.S. Drug Enforcement Administration (DEA) plans to reclassify GW's cannabidiol (CBD) drug Epidiolex as a Schedule IV controlled substance to treat rare forms of epilepsy.

(Please note: Bryan Perry does not currently hold a position in GWPH and Navellier & Associates does not currently own a position in GWPH for client portfolios).

The last category of marijuana-related investments is made up of those that happen to have a lot to gain from the pot industry but aren’t necessarily reliant upon it for success. This is where the smart money is finding a way into the sector – in a highly cautious, almost indirect manner. These would involve joint-ventures (pardon the pun) by large blue-chip companies partnering with highly speculative small-cap cannabis companies to develop an array of medicinal and recreational products. As ancillary businesses, a failed joint-venture only has a negligible impact, whereas a successful venture will be highly celebrated.

Worldwide Legal Cannabis Spending Bar Chart

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

The headlines have caused several of these small pot stocks to soar. While there are many micro-cap pot stocks that trade only in Canada, a handful now trade as American Depositary Receipts (ADRs) on Nasdaq or Over-the-Counter (OTC) and are cleared to be owned by most major brokerage firms.

American investors eager to get in on the weed rush have pounced on these recently-listed securities in what resembles a bubble-like buying panic that has sent their stock valuations sky high. There is even an exchange traded fund, the ETFMG Alternative Harvest ETF (MJ) that has become wildly popular of late, trading at a sky-high premium to its NAV.

As a result, the hottest names in the sector have soared and crashed in recent weeks. As with any stock mania, the shorts got crushed and the panic buyers that paid top dollar are seeing their investment capital go up in smoke. The current pullback is going to define which pot stocks offer legitimate opportunity. Of the names most coveted, Canopy Growth (CGC) shares have doubled this year, while Tilray Inc. (TLRY), which made its debut in July, rallied 500% since Labor Day, hitting $300 before getting knifed back down to $123 as of last Friday. But it still trades at 400 times forward sales!

(Please note: Bryan Perry does not currently hold a position in CGC or TLRY and Navellier & Associates does not currently own a position in CGC or TLRY for client portfolios).

American Cannabis Companies Trading on Canadian Securities Exchange Bar Chart

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

Catching A High-Quality Profit Buzz in the Pot Sector

A major catalyst fueling the pot stock rally and bringing credibility to the whole investment theme is the interest and entry by Fortune 500 companies into the space. This is what I deem the “smart money” trade in what is a highly speculative sector, where there will be a few big winners and many more, and bigger, losers.

For instance, marijuana stocks spiked higher after a report that Coca-Cola (KO) is looking to get into the industry. Aurora Cannabis (ACBFF), a Canada-based cannabis producer, rallied more than 20% in trading after Bloomberg reported that Coke is in talks with Aurora to develop weed-infused beverages. Additionally, Aurora Cannabis sent an email to CNBC that they would be planning a U.S. stock listing in October. Any partnership between the two would likely develop health-focused beverages aimed at easing inflammation, pain, and cramping, the report said. Coca-Cola, in turn, offered this statement:

"Along with many others in the beverage industry, we are closely watching the growth of non-psychoactive CBD as an ingredient in functional wellness beverages around the world. The space is evolving quickly. No decisions have been made at this time."

Other big-name companies that have strategic plans and partnerships in place include Scotts Miracle-Gro (SMG), a leader in the hydroponics industry. The company is a dominant player in the horticultural supplies that growers depend on for producing high-quality cannabis. Though the move in marijuana stocks is mostly headline-driven thus far, Coke wouldn’t be the first beverage titan to test these waters.

AbbVie Inc. (ABBV) is a pharmaceutical giant with a syntheticcannabis-based drug on the market. The FDA has approved Marinol, which helps alleviate nausea or vomiting for chemotherapy patients. The drug also helps AIDS patients who have lost their desire to eat. Marinol is not AbbVie's flagship drug. That makes investing in the company a way to play the pot card without 100% exposure to the plant itself.

Several beer makers are getting involved. Corona beer maker Constellation Brands (STZ) upped its bet on the industry last month, announcing an additional $4 billion stake in Canopy Growth (CGC). Molson Coors (TAP) also announced in August that its Canadian unit is entering into a deal that will develop cannabis-infused beverages in Canada. Molson Coors Canada is partnering with Canadian cannabis producer Hydropothecary Corp. (HEXO) to create a joint partnership “to pursue opportunities to develop non-alcoholic, cannabis-infused beverages for the Canadian market following legalization.”

The latest offering by Heineken N.V. ADR (HEINY) in the pot market is the Lagunitas' IPA-inspired and THC- and CBD-infused sparkling water called Hi-Fi Hops. Heineken completed the Lagunitas acquisition in 2017, after initially taking a 50% stake in the company. Lagunitas has tied up with the medicinal marijuana company CannaCraft to add THC/CBD ingredients to the product that will be distributed initially through dispensaries in California.

(Please note: Bryan Perry does not currently hold a position in KO, ACBFF, SMG, ABBV, STZ, CGC, HEXO, or HEINY and Navellier & Associates does not currently own a position in KO, ACBFF, SMG, ABBV, STZ, CGC, HEXO, or HEINY for client portfolios).

Not to be left out, it’s probably just a matter of time before global pharmaceutical companies must think about partnering with cannabis producers as a “hedge” against the entire space. And one has to openly wonder when the global cigarette companies, with their well-established distribution channels will enter the fray with their own trendy versions of “wacky tobacky.”

From my vantage point, professional money is targeting the blue-chip companies noted above that pay juicy dividend yields averaging 3.0% and then see how the market for their marijuana-based products develops. Blue-chip companies that are partnering up with the pure-play pot producers or marijuana-business-related services companies have already done a lot of due diligence into what might be investible companies once the “smoke” clears after the initial bubble bursts.

Big Green Bubble Image

For an industry with essentially no barriers to entry and seeing new stock listings growing like “weeds,” there is a lot of dot-com-like risk. States legalizing recreational pot – like Colorado, Washington, and Oregon – bear major red flags. In all three states, oversupply ran rampant within just a few quarters, pushing the per-gram price for retail and wholesale dried marijuana down as much as 80%.

Commoditization of dried cannabis is likely to negatively impact margins and make it very difficult for Canadian marijuana stocks to hit investor expectations of overnight fortunes. It’s my view that the bursting sound of the big green bubble (above) will soon be heard across the investing landscape!

Growth Mail:

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

All Hail the Fourth Quarter, the Market’s Best Quarter (By Far)

by Gary Alexander

As the third quarter is about to end in five days, I think we can all take a deep breath, let it out, and then realize that we have dodged the most dangerous quarter of the year – Quarter #3 – and we are about to enter the strongest quarter of the year. But first, let’s review the fundamentals keeping this market aloft.

In terms of economic growth, the Atlanta Fed’s latest GDPNow model is back up to 4.4% for the third-quarter, so we’re likely to see the second straight quarter of 4%+ growth announced right before Election Day. We’re also likely to see the third straight quarter of double-digit corporate earnings growth.

As amazing as S&P earnings are, the 10% growth in per-share sales may be even more encouraging. According to Ed Yardeni (in “Remarkable Revenues,” September 19), “The escalating trade war hasn’t depressed US exports,” which were up 9.6% y/y in July, and S&P 500 revenues per share are up 10.3%.

Yardeni summarized the revenue situation like this: “The bottom line is that the top line is all good: Revenues are strong across the board. This suggests that US corporate managements are doing a remarkably good job of bolstering their worldwide sales despite the challenging global environment. It may also be, dare we say, that Trump’s policies of deregulation and tax cuts are working to stimulate the US economy, just as supply-siders predicted. Deregulation may be opening up more business opportunities. The 20% corporate tax rate makes America a great place to do business.”

When it comes to historical quarterly stock market gains, there is no contest. Over the last 20 years, according to Bespoke Investment Group, the fourth quarter has delivered seven times more gains than the other three quarters combined. From mid-1998 through mid-2018, according to data from the August 31, 2018 Bespoke Report, the first nine months of the year averaged 0.85% gains, while the fourth quarter averaged a whopping 5.99%. In addition, three of the five best months of the year are in the final quarter.

 Quarter   Average Gains*   Best Months   Average Gain* 
 First  +0.90%   October  +2.49% 
 Second  +1.20%   April  +2.39% 
 Third  +1.24%   November  +2.39% 
 Fourth  +5.99%   March  +1.80% 
 Full Year  +6.90%   December  +1.52% 

Going back 50 years, the fourth quarter outdistances the third by a long shot, gaining +3.78% vs. +0.13%, on average. Going back even further, according to LPL Financial, from 1950 through late September of 2017, the S&P has been positive in almost 80% of fourth quarters, and it has gained an average of 3.9%.

Fourth Quarter is Historically the Strongest Quarter Bar Chart

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

Considering past October horror stories, October is amazingly not only the #1 month over the last 20 years, it also averages +0.84% (5th best month) over the last 50 years and averages +0.40% over the last 100 years – a span which obviously includes 1929, 1987, 2008, and a few other scary October collapses.

I’m not predicting the Dow will rise 6% (or the S&P 4%) in the final quarter of 2018, but if either index gains 5% from last Friday, the Dow would close the year over 28,000 and the S&P would be at 3,075.

Gold Also Glitters Late in the Calendar Year

Gold is down about 8% so far in 2018, but – like stocks – the yellow metal tends to shine late in the year. Ironically, it also tends to rally after the Fed raises rates – which is scheduled to happen tomorrow.

The second half of each year is the time when gold jewelry fabricators stockpile gold bullion to prepare for the late-year festival season in various cultures – including the wedding season and holy days in India, Christmas, and the Chinese New Year. Gold is usually flat from March through July, but August through January is stronger for gold demand over the last 40 years, as the following chart demonstrates:

Gold Performance by Month Bar Chart

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

The Fed is scheduled to raise rates this week. Pundits still argue that raising rates is bad for gold, since “gold doesn’t earn interest,” and it must compete with interest-bearing investments. That may sound elegant in theory, but that isn’t historically accurate. During the Fed’s previous rate-raising cycle (2004-06), gold rose from under $400 to over $600, and gold’s strongest surge was from $103 per ounce in 1976 to $850 in 1980, at a time when U.S. interest rates soared to their all-time high, peaking at rates over 20%.

More recently, gold peaked in September 2011 at over $1,900 and fell to $1,050 in late 2015. During that entire time, the Fed Funds rate was near zero. At the time, most pundits said that gold would fall further as soon as the Fed started raising rates. During those years, I argued that this was historically inaccurate.

Sure enough, gold reached its bear market bottom on the precise day the Fed began to raise short-term interest rates in this cycle, December 17, 2015. Gold’s price that day was under $1,050. Three months later, gold traded at $1,266.50, up over 20%. After each of the next four Fed rate increases, gold rose during the three-month period after the Fed’s rate increase, contrary to the pundits’ favorite theory.

 Fed Rate Increases   Gold Price That Day   3 Months Later   Change 
 December 17, 2015  $1,049.40  $1,266.50   +20.7% 
 December 14, 2016  $1,162.25  $1,204.60  +3.6% 
 March 15, 2017  $1,198.80  $1,254.55  +4.7% 
 June 14, 2017  $1,275.50  $1,322.85  +3.7% 
 December 13, 2017  $1,242.65  $1,322.75  +6.4% 
 Gold price data: Kitco.com 

Gold is currently out of favor – which is a positive factor from a contrarian viewpoint. It is so out of favor that the largest gold-oriented mutual fund, Vanguard’s Precious Metals & Mining Fund, will change its name to Vanguard Global Capital Cycles at the end of this month. In doing so, it will drastically reduce its exposure to precious metals. The last time Vanguard changed the name of this flagship gold fund (by taking “Gold” out its name in 2001), gold traded at $255, at the very bottom of a long gold bear market.

Vanguard's Precious Metals and Mining Mutual Fund Chart

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

Will history repeat itself? Could Vanguard’s fund name change mark the end of gold’s current dry spell?

Global Mail:

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

The Surprising All-Time Highs for U.S. Stocks

by Ivan Martchev

If I had to guess earlier this summer, I would have not guessed that most major U.S. stock indexes would have made fresh all-time highs before any concrete results in the trade negotiations with China were evident. In fact, we have seen fresh all-time highs in both the Dow Jones Industrial Average (the retail investor’s favorite index) and the S&P 500 (the fund managers’ favorite index). Small-caps and the Nasdaq Composite did not make fresh new highs last week, but they were outperforming all year and making fresh all-time highs into late August, so the advance in the market is much broader than one would have anticipated in a late-stage expansion.

What is driving this push in share prices to all-time highs? Simply put: earnings.

At the beginning of the year, 2018 EPS growth was estimated to be in the 10%-12% range, depending on if analysts used top-down or bottom-up estimates. Right now, after Q1 and Q2 EPS growth came in at 20% and 25%, respectively, 2018 EPS growth is estimated to be 20%.

Naturally, if EPS growth is accelerating by 20%, so should share price growth.

Clearly, quantitative tightening by the Fed, global trade frictions and a rout that started in emerging markets’ currencies (soon spilling into local bond markets and later into emerging markets’ stocks) had the potential to create another crisis, but the crisis is contained at the moment. As we witnessed in 1997 through mid-1998, the U.S. stock market could ignore the Asian Crisis – until it didn’t – so the current contrast between a strong U.S. stock market and weak Chinese (and other emerging) stock markets can continue for a while, but ultimately either the EM space will rally or the U.S. market will sell off.

Brazilian Real versus Brazil Foreign Exchange Reserves Chart

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

While there was a small recovery off of an all-time low in the JP Morgan Emerging Markets Currency index last week, the situation in the emerging markets space is very precarious. Both the Turkish lira and Argentine peso have been cut in half in 2018 and we are still very much in the contagion phase of this emerging markets crisis. Since the JP Morgan EM Currency Index is not widely available other than on a Bloomberg or FactSet database terminal, a good rule of thumb is to keep an eye on the Brazilian real, where forex reserves are ample and interest rates are high. The real made an all-time low two weeks ago. The rout in weaker EM currencies is spilling over into stronger ones and the real shows that in real time.

China Trade Talks Deteriorate

Because trade talks with the Chinese delegation slated for this week were cancelled over the weekend, just as $200 billion in new tariffs were about to go into effect, one could imagine that the U.S. stock market would have a more difficult time – as the war of words escalates and more and more tariffs go into effect.

Dow Jones Industrial Average versus Shanghai Composite and CSI 300 Index Chart

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

Since this trade friction with China started, U.S. and Chinese stock markets have performed differently. Even though the Dow Industrials and S&P 500 lagged the small-cap and technology indexes most of the year, they did much better than the mainland Shanghai Composite and CSI 300 index (above). While in the U.S. small-caps have been outperforming large cap indexes in 2018, the small-cap indexes in China have been massively underperforming the large-cap indexes. The 1-year trailing returns as of last week for the large-cap Shanghai Composite and CSI 300 were -16.6% and -11.1%, while the 1-year trailing returns for the small-cap Shenzhen Composite and ChiNEXT Price Index were -27.3% and -24.4%.

At one point earlier in 2018, we had a situation where the large-cap indexes in China were rising, while the small-cap indexes were going down. I never trust a stock market where small-caps are notably weak. Sure enough, the wheels started to come off the wagon for large-cap Chinese stocks in earnest in March.

China Fixed Asset Investment versus China Outstanding Yuan Loa Chart

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

The Chinese are in a precarious situation, as they managed to prolong their economic expansion for 25 years via the policy of forced lending quotas as the central government controls the major banks in the country. While such policies prolonged the economic cycle and the Chinese economy grew over 10-fold, total credit aggregates in the economy grew over 40-fold. We have a credit bubble in China, which will have nasty consequences similar to what happened in Asia 20 years ago, with the caveat that the Chinese economy is several times bigger than all of the countries involved in the Asian Crisis at that time.

Loan growth, despite a small uptick of late, and fixed asset investment growth have both been declining for a while and it very well may be a real trade war with the U.S. that pushes China over the brink. They have every incentive to make a trade deal, yet the abrasive approach of the Trump administration that produced results in the case of Mexico and the EU may be counterproductive in the case of China, since Trump’s aggressive approach runs counter to the “saving face” modus operandi of Chinese diplomacy.

Sector Spotlight:

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

Time Travelling for Fun and Profit

by Jason Bodner

I often write about human beings not being wired well for change. We crave stability and predictability. But when change comes, it often comes from “out of nowhere.” It can sometimes be remarkably hard to adjust to change. I thought of this when reading about Sergei Krikalev. In 1991, as a cosmonaut, he went into space as a citizen of the USSR, but he came home as a Russian. While he was hanging out in space, the USSR collapsed, Russia was created, the government changed, the president was replaced, and the name of the city he came home to was changed. Imagine coming home from a trip to changes like that!

Cosmonaut Sergei Krikalev Image

In addition to facing a national revolution, Krikalev also set a record for being the world’s longest time traveler. Due to the effects of gravitational time dilation, he literally travelled into his own future. Having spent 803 days in orbit around the earth, he spent the most time in orbit of any human. According to Einstein’s Theory of Relativity, his time and velocity pushed him into his own future by 0.02 seconds.

Back to the Future Movie Image

Sometimes change is sudden, jolting, and jarring. Other times it takes place without much notice. The markets right now are in a tumble-dry cycle. We are seeing changes in sector leadership each week. We may not notice it because markets are at highs, but money seems to be sloshing around. This makes sense as we are in between earnings cycles and are in the midst of a historically volatile time of year for stocks.

Last week was a great example of the sloshing effect. The markets set all-time highs, yet some leading sectors were not moving higher. Last week we saw leadership in Telecom, Energy, and Industrials – not your typical leaders. Financials were the only negative performing sector for the week.

Standard and Poor's 500 Weekly Sector Indices Changes Table

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

I have been noticing in some of my own portfolios that some growth-heavy stocks have paused to take a breath. Growth has been powering higher for a while now, and many of these stocks seemed to collectively stop to catch their breath. This can be seen by looking at the sector performance table for the month-to-date. We see Telecom, Industrials, and Staples as our top three performers. Growth-heavy sectors like Consumer Discretionary and Information Technology are in negative territory for the month.

Standard and Poor's 500 Monthly Sector Indices Changes Table

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

Again, this is in keeping with the theme of a breath-catching pause. But if we look at the past three months, we also see a pattern of defensive sectors leading the pack. We see Health Care with a stunning +9% gain. The next three sectors are what interest me most. Utilities, Telecom, and Real Estate come in 2nd to 4th place. These are commonly defensive in a low-rate environment. These sectors have stocks with higher yields than other sectors. Growth sectors typically plow profits and excess cash back into research and development. Higher-yielding stocks choose to pay out excess cash as dividends to shareholders. These investments are perceived as safer with more predictable rates of return. This is interesting because these have been the three-month leaders during a time when the market is reaching all-time highs.

Standard and Poor's 500 Quarterly Sector Indices Changes Table

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

Before you get concerned, let’s look out over the past nine months of sector performance. When we go that far back, we notice our growth stalwarts are there in full force. Discretionary and Tech are the clear winners. Following close in third is Health Care. These are the sectors I like to see leading the market.

Standard and Poor's 500 Nine Month Sector Indices Changes Tables

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

Which Door Holds the Prize – Door #1, 2, or 3?

Seeing the engines of growth falling behind in the sector leader board may cause concern. The question arises: Should we be worried?  I am not worried, and here’s why you shouldn’t be either. For one, life’s too short to waste it worrying. But the real reason is that I believe that the growth sectors are just taking a coffee break. Their level of price appreciation has been awe-inspiring for quite a while now. It’s only natural to have periods when stocks take a pause. This could generate a few possible outcomes thereafter:

  1. This signals the end of a wonderful run, and these stocks will soon crater
  2. The ramp-up has fizzled out and the stocks will just stay rangebound for the foreseeable future
  3. The stocks are recharging and about to resume their journey upward

I think the first scenario is highly unlikely. These are not stock “weeds,” with no sales and earnings. These are high-quality stocks with growing sales and earnings. For these stocks to crater, valuations would need to be unreasonably high – which they are not.

The second scenario is also unlikely. With the economic backdrop being what it is, I believe stocks are poised to move higher. We have so many strong fundamentals as wind at our backs: Record sales and earnings, record low taxes, record buy-backs, record market highs, and a business-friendly administration.

I think door number three is our winner. The market is a reflection of moods, hopes, and fears, but it’s also a reflection of data. I believe U.S. domestic smaller-cap companies still stand to benefit the most from the current environment. Many of these companies are what populate the growth-heavy sectors.

So, before you settle in to adjust to the market’s changing sector dynamics, remind yourself that it’s entirely possible (and likely, in my opinion) that we are just in a lull before growth resumes its march higher. This landscape is ideal for U.S. stocks. While we may see minor corrections here or there, the environment has rarely looked this good, if ever. Sometimes it pays to just sit back and celebrate that fact.

Guillaume Apollinaire Quote Image

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

 

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 “Long Game” of Trump’s Trade & Tariff Talks

by Louis Navellier

I believe the catalyst driving the 10-year Treasury bond yield back above 3% was the fact that China threatened to continue to sell Treasury securities as their trade spat with the U.S. escalates. Last week the U.S. announced a new round of 10% tariffs that will be imposed this week on $200 billion in Chinese imports and, if China does not negotiate in good faith, the rate will reportedly be raised to a whopping 25% later this year. Clearly the Trump administration is striving to get China to negotiate in good faith.

Interestingly, popular consumer electronic items, like smart watches and Bluetooth devices, were exempted from these tariffs, so Apple and FitBit’s operating margins are not expected to be adversely impacted. Since both Apple and FitBit are open to moving some of their manufacturing to the U.S., it appears that the Trump administration is not intending to punish U.S. companies that manufacture in China, provided that they plan to divert some of their manufacturing facilities back to the U.S.

Free Trade Balance Image

President Trump also made it crystal clear that he does not want to impose the 25% tariffs on China later this year, but he will keep ratcheting up the tariffs until China negotiates in good faith. Wall Street liked President Trump’s comments and now seems to fully comprehend that his ultimate objective is free trade with no tariffs. We are well on the way down that road with Europe and some other trading partners, but China is the only one that has purposely devalued its currency to maintain a competitive trade advantage.

The trading math is in America’s favor. For every $1 of products the U.S. exports to China, the U.S. imports $4 of products from China, so the U.S. leverage over China is essentially 4-to-1. China can’t raise tariff’s “tit for tat” beyond a certain point, since there are comparatively much smaller total U.S. exports to China.

In my opinion, Trump’s economic advisor, Larry Kudlow, is still the best spokesman for the President’s domestic objective of sustainable 4% GDP growth. Since there is no way of boosting 4% long-term growth rates without boosting U.S. exports, Trump’s push to narrow the trade deficit will soon shift to more domestic manufacturing like the recent NAFTA agreement with Mexico to raise U.S. content in vehicles.

Speaking of GDP growth, the Conference Board on Thursday said that its Leading Economic Indicators (LEI) rose 0.4% in August, following a 0.7% increase in July and a 0.5% increase in June. As an example of just how strong some of the leading economic components are now, the Labor Department announced on Thursday that new claims for unemployment benefits declined to a 49-year low for the third consecutive week, despite a major disruption from Hurricane Florence. Overall, an acute labor shortage persists and after the mid-term elections, the U.S. may boost its VISA program to attract more qualified foreign workers, which many companies currently need to fill the many job openings going begging.

Stay Away from Speculative Canadian “Pot” Stocks

The big financial gossip last week was the wild ride of Tilray Inc. (TLRY), a Canadian cannabis stock that went public in July. Initially, Tilray was up more than 400% in a month before falling over 50% in the last half of last week. Tilray briefly hit an intraday market capitalization in excess of $20 billion (with a “b”), even though its annual estimated sales are expected at less than $40 million (with an “m”)!

I must add that I haven’t seen any stock trade at 500 times annual sales since the old “dot-bomb” days.

There are a couple of major details that you need to know about cannabis stocks, namely that Canada is really the primary investment option, since U.S. tax rules prohibit expensing normal business costs (like wages, electricity, rent, etc.), which is why many of the U.S. cannabis businesses are non-profit enterprises. The other thing you need to know is that Pot ETFs, like ETFMG Alternative Harvest (MJ), are pouring money into thinly-traded Canadian cannabis-related stocks in an essentially “pump and dump” manner.

Furthermore, after it leaked out that MJ was trading at approximately a 30% premium to its Intraday Indicative Value (essentially, its net asset value), Morningstar stopped publishing an Intraday Indicative Value for MJ, which showed that investors were getting fleeced 30% per trade, which may also be related to the fact that it is very difficult to price thinly-traded Canadian cannabis-related companies. (I highly recommend you read the following article I wrote about getting fleeced in Pot ETFs like MJ. Click here.)

Every weekend when we run our weekly quantitative research, I typically find about 15 Canadian cannabis-related stocks, but I have yet to find any Canadian cannabis-related stock that regularly files quarterly reports, so I can’t analyze sales, earnings, operating margins, etc. For example, just go to Yahoo! Finance and look up a stock like Canopy Growth (CGC), and then click on “Analysis” to access all its financial and analyst data. You’ll probably find, as I did: “Analysts data is not available.”  Oops!

I have to tell you that I have never come across an industry where virtually all companies within a sector largely refuse to file quarterly financial statements! In conclusion, I expect the current bubble in pot stocks to end badly, since some unscrupulous ETFs are fleecing naïve investors by 30% per trade and are in the midst of a massive “pump and dump” campaign of thinly-traded Canadian cannabis-related stocks.

(Please note: Louie Navellier does not currently hold a position in APPL, FitBit, CGC or TLRY in Mutual Funds and Navellier & Associates does not currently own a position in APPL, FitBit, CGC or TLRY for client portfolios).


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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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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