What to Expect

What to Expect in the Upcoming Earnings Reporting Season

by Louis Navellier

July 12, 2016

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

The S&P 500 reached a new record high but it is still weighed down by depressed money center banks and energy stocks as they continue to struggle with a flattening yield curve and falling crude oil prices, respectively. 

The aftermath of Brexit continues to impact bonds, too, as yields continue to plunge around the world in a seemingly worldwide limbo contest.  Some long-term bonds are now in negative territory.  The 50-year Swiss and 20-year Japanese government bonds each had negative yields last week.  U.S. Treasury bonds also set record lows: The 30-year Treasury bond yield fell as low as 2.0943% intraday on Friday, which was extremely close to the S&P 500’s annual dividend yield of 2.06% – an extremely bullish buy signal!

Oasis Image

Amidst all this chaos, dividend growth stocks remain an obvious oasis for investors.  As we enter second-quarter sales and earnings reporting season this week, they should remain strong.  Since the overall S&P 500 is forecasted to post a 4.6% earnings decline for the second quarter, I will repeat my mantra that an investor’s best defense is a strong offense of fundamentally solid stocks with dividend growth.

In This Issue

Quietly, the “junk” bond sector has been rallying of late, with the whole range of U.S. bonds beating the world, according to Bryan Perry.  In Growth Mail, Gary Alexander handicaps the political conventions this month for their likely impact on the market.  Ivan Martchev examines the reason for the collapsing Treasury yields, along with the latest outlook for oil prices.  Jason Bodner’s Sector Spotlight examines the impact of volatility in the safety vs. growth tug-of-war, while I examine the same trends with an eye on yield, along with a cautionary look at our manic-depressive monthly jobs report whipsawing the market.

Income Mail:
A Fresh and Firm Bid Under the High-Yield Sector
by Bryan Perry
U.S. Treasury Market: “Let Them Eat Cake”

Growth Mail:
Which Candidate(s) Can Help the Market the Most?
by Gary Alexander
The Stock Market Loves “Gridlock” (Separation of Powers)

Global Mail:
Why U.S. Treasury Yields are at All-Time Lows
by Ivan Martchev
Watch Out for Oil – and the Ruble

Sector Spotlight:
Playing the Volatility Game
by Jason Bodner
“Get Used to Higher Volatility”

A Look Ahead:
The Tail (Yield) is Wagging the Dog (Price)
by Louis Navellier
Don’t Put Too Much Credence in Monthly Jobs Reports

Income Mail:

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

A Fresh and Firm Bid Under the High-Yield Sector

by Bryan Perry

“That’s just what the doctor ordered!”

This old saying comes to mind when the prevailing uncertainties of Brexit, the elections, negative interest rates, deflationary pressures, and wild currency price swings are confronted with a key data point that comes in at a much better-than-expected number. Friday’s non-farm payroll report said that the economy added 265,000 jobs in June versus consensus estimates of 170K, putting to rest the notion of a U.S. economy at risk of falling into a recession. The U.S. equity and bond markets have been the de facto safe haven for global fund flows and Friday’s job report generated more capital flows into dollar-based assets.

One solid endorsement of this newfound conviction of investor sentiment is the fresh 2016 high for the junk bond market. Shares of the widely-traded iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond ETF (JNK) give fixed-income investors that warm and fuzzy feeling that there is a major catch-up rally in riskier assets to that of Treasuries and investment grade debt in the making. The five-year chart below compares the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) to shares of JNK (black line). The spread from the depths of the February lows has narrowed slightly, which was to be expected. They are now tracking LQD in parallel fashion, but clearly there is ample room for improvement to regain their historical pricing correlation. (Please note: Bryan Perry does not currently hold a position in HYG, JNK, or LQD. Navellier & Associates, Inc.does not currently hold positions in HYG, JNK, or LQD for any client portfolios.)

Junk Bond Market (iShares and Barclays) Chart

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

The main ‘tell’ in this picture is that if the economy were headed into a recession, we would see a further widening of the spread, as was the case at the end of 2015 and into early 2016. Confidence in the creditworthiness of corporate balance sheets is on the rise and it’s already evident in many closed-end funds, Business Development Companies (BDCs), and hybrid REITs that have sorely lagged sectors with BBB+ to AAA-credit ratings. A chart of the VanEck Vectors BDC Income ETF (BIZD) shows a “golden cross” in the making where the 20-day (orange line) and 50-day (yellow line) moving averages move up through the 200-day (top line) moving average that typically precedes a new uptrend. (Please note: Bryan Perry does not currently hold a position in BIZD. Navellier & Associates, Inc.does not currently hold a position in BIZD for any client portfolios.)

BIZD Business Development Companies Chart

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

BDCs are the gray market of corporate debt. They are similar to REITs in that they have to pay out 90% of disposable income in the form of dividends, but they have some key differences. Like REITs, BDCs are Regulated Investment Companies (RICs) that are eligible to pass taxes on capital gains, dividends, or interest earned on their fund investments to investors. How they differ is that BDCs can use leverage, charge performance fees, and use esoteric derivatives. They make loans to small- to medium-sized private companies in amounts ranging from $1 million to $50 million, charging an average 9% to 15% interest. All loans originated would be considered below investment grade with limited transparency to portfolio loan companies. To call it the wild west of the corporate lending world wouldn’t be too much of a stretch.

U.S. Treasury Market: “Let Them Eat Cake”

The benchmark 10-year T-Note yield closed Friday at a record low 1.37% and the 30-year T-Bond yield is at a new multi-decade low of 2.10%. With much of the rest of the developed world and investment grade global sovereign bond markets registering negative interest rates on maturities going out 50 years, getting 2.10% for U.S. Treasury Bonds is nothing short of a lip-smacking delicious yield if you are a fund manager sitting on $50 billion in cash and looking for ultra-safe sector allocation. In a world of dry bread crusts for income investors, these 2.1% U.S. bond rates must appear like a delicious slice of fresh cake.

In light of the improved outlook for lower-rated credits, professional fund managers are not abandoning their huge gains in the Treasury markets. Yields on the 10-year and 30-year Treasuries actually traded lower in Friday’s session in which the Dow vaulted higher by 250 points by the closing bell. Chalk it up to a weak hourly earnings number within the jobs data sidelining the Fed for the rest of 2016, evidently.

The chart of the 30-year T-Bond (below) goes back only 25 years, but the trend is decidedly down for 35 years and can only make one wonder: What’s it going to take to reverse the downward yield slope?

Thirty Year Treasury Bond Chart

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

My take is that a series of data points that surpass economists’ forecasts is the path by which bond yields will reverse course. That and a reduction in geopolitical tension and domestic terror, marked by random acts of violence that are becoming all-too-common of late. The market hates uncertainty, and we saw some of that apprehension removed on Friday regarding the largest and most powerful economy in the world. However, the market also hates social instability and the potential upheaval in the EU saddled with fresh fissures in the social fabric of the U.S. will likely keep the “safety trade” on for the foreseeable future.

From a purely financial point of view, global monetary policy hasn’t changed one iota, which keeps tremendous amounts of freshly-minted euros, yen, yuan, and other currencies resulting from hopped-up central bank stimulus programs clamoring for long-dated sovereign securities – like bees on honey.

Yes, the S&P is back up over 2100 and challenging the old intraday high of 2137 but don’t count it as a done deal until earnings season gives the bullish camp something more tangible to sink their teeth into.

This week, the big banks are on deck to lead off earnings season and a great deal of attention will be focused on their forward profit guidance against historically low rates. We’ll know by Friday if the market can withstand what will likely be a set of very uninspiring numbers from the banking sector.

With that said, the junk bond market historically precedes the direction of the stock market and if the past is prologue then we could be headed for a summer of stock market love.. If the 2137 level for the S&P 500 is penetrated to the upside, that could set off a powerful rally fueled by algorithmic buy programs, revised higher equity weightings by investment houses, and a swath of broad short-covering by professionals and hedge fund managers. Bottom line, market leadership will remain in the  blue chip stocks with strong dividend growth.

Growth Mail:

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

Which Candidate(s) Can Help the Market the Most?

by Gary Alexander

“Happy Days Are Here Again. The Skies Above Are Clear Again
Let us Sing a Song of Cheer Again. Happy Days Are Here Again.”

-- A 1929 song given new meaning in 1932

During this week in 1932, stocks soared following the nomination of Franklin Delano Roosevelt and the playing of “Happy Days Are Here Again,” raising the spirits of a depressed nation. Ironically, that song was first recorded on Black Tuesday (October 29, 1929) by the Casa Loma orchestra in the Okeh studios in Union Square (NYC), about two miles north of where the stock market was crashing on Wall Street.

During the week of July 11-15, 1932, the Dow rose 10.3%, from its absolute low of 41.22. What’s even more amazing is that the Dow rose over 80% in less than seven weeks, from July 11 to August 26, 1932.  That was the beginning of the strongest surge in market history, up 372% in four years and eight months.

Can it happen again? Below, I’ve listed the four Presidents under whom the Dow Jones Industrial Average (DJIA) at least tripled during their terms in office. The first in time was Calvin Coolidge, who was in office only five years and seven months following the death of Warren Harding. Under Coolidge (and the first six-month stretch under Herbert Hoover), the Dow escalated 344%. But the biggest gain in history came from the absolute bottom on July 8, 1932, the week after FDR was nominated in Chicago.

Who Was the President When the Dow Tripled Table

*Franklin D. Roosevelt was nominated July 1, 1932, causing the market to start rising in anticipation of his victory.
**Coolidge was President from August 2, 1923 to March 4, 1929; the last six-months’ gain came under Hoover.
Data source: Stock Traders’ Almanac, using the Dow Jones Industrial Average (DJIA) for consistency.
The Obama bull market is missing from this list because the DJIA’s greatest gain since 2009 was 180% and it took over six years to develop. The DJIA rose from a low of 6,547 on March 9, 2009 to a 18,312 peak on May 19, 2015.
 

The Coolidge and Roosevelt gains contain asterisks because they included overlapping months under Hoover, who presided over the greatest stock market crash in history, down 89% from 1929 to 1932.

Dow Jones Industrial Average Chart

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

Coolidge and FDR are ancient history, so we must turn to the Reagan and Clinton administrations to learn why stocks rose so strongly and consistently during the bulk of their administrations, from 1982 to 2000.

The Stock Market Loves “Gridlock” (Separation of Powers)

The biggest common denominator between the Reagan and Clinton eras had to do with an adversarial Congress of the opposing Party for most (Clinton) or all (Reagan) of their eight-year terms. Also, both men were positive and personally genial, masters of debate and compromise. Our current and any future presidents would do well to study how Reagan worked with the opposing Speaker of the House, Tip O’Neill, and Clinton worked with the opposing Speaker, Newt Gingrich, to hammer out compromises.

Ronald Reagan constantly faced a hostile Democratic Congress which controlled the House of Representatives for 40 straight years (1954 to 1994). In the more recent case of William Jefferson Clinton – a centrist Democrat – the market languished during his first two years, when he had a compliant Democratic Congress, but the market began its strongest rise in 1994 after the Republican Revolution.

Specifically, the Dow rose from 3,242 when Clinton took office in 1993 to 11,723 at its peak, with no sustained crash until his final year in office (2000). However, the Dow remained under 4,000 during Clinton’s first two full years in office. It was trading at 3,830 on November 8, 1994, when a Republican majority was swept into Congress. So 93% of the Clinton gains came after 1994. Who gets the credit? A Democrat President or a Republican Congress or both? That may depend on your party bias, but since all of Reagan’s gains and 93% of Clinton’s gains came under “gridlock,” a division of powers is bullish!

Lower tax rates also helped, especially during the Coolidge and Reagan administrations, but there were similar tax cuts under Kennedy/Johnson in 1963-64 and George W. Bush in 2003, each followed by stock market booms. Here are the four tax-cut decades and the maximum stock market gains in those decades:

Major Bull Markets Table

Maybe we can live with today’s high personal income tax rates, but one tax that remains too high is the corporate tax. America currently has the highest corporate tax rate in the world at 39.1%, causing many corporations to report their taxes overseas and store their cash abroad. Politicians malign them for this, but high taxes are counter-productive. We could raise more revenues by lowering corporate tax rates.

Corporate Tax Rates in 2020 Chart

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

Our choice appears to be pretty dismal for the two major Parties, but the Libertarian Party has nominated their most mainstream ticket since its founding – two governors elected and re-elected as Republicans in traditionally Democratic states, Gary Johnson (New Mexico) and William Weld (Massachusetts). But Johnson and Weld have no chance of winning if they are barred from the presidential debates. Therefore, the best realistic hope is to elect the least frightening candidate – either Donald Trump or Hillary Clinton.

This year’s conventions run back to back in the next two weeks (July 18-21 for Republicans in Cleveland and July 25-28 for Democrats in Philadelphia). As usual, we already know who the nominees will be, so the coronation is a tiring four-day ceremony of revolving podium time before we “Let the Games Begin!”

From the weight of historical evidence, it seems to me that the most market-friendly outcome of the 2016 election would be a Hillary Clinton presidency and a Republican Congress led by a Speaker like Paul Ryan, who is willing to work with the President on essential moves, like lowering the corporate tax rate.

The market doesn’t like one-Party domination. The market loves our Constitutional separation of powers!

Global Mail:

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

Why U.S. Treasury Yields are at All-Time Lows

by Ivan Martchev

With the U.S. stock market at all-time highs, did anyone stop and ask why the 10-year Treasury note yield would make an all-time low on a day when the employment report surprised strongly to the upside? Typically, a strong jobs report has been taken as an excuse for the Federal Reserve to ratchet up rate hike talk; but by now most market participants have assumed, correctly, that no rate hikes are coming in 2016.

It is peculiar to note that the December 2016 fed fund futures (ZQZ16) traded to a fresh contract high on June 24th (the day after the Brexit vote) for a short time calling for a rate cut. Since that date, they have settled down but still indicate no probability of a fed funds rate hike by December 2016. As a reminder, fed fund futures predict the fed fund rate at the time of settlement of the contract, so a price of 99.59 as of Friday’s close translates to a fed fund rate forecast of 0.41% (100 less 99.59). The present fed funds target is 0.5%.

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.

Clearly, external factors are to blame for the dramatic decline in Treasury yields. Deflationary dynamics in Europe and Asia are causing high demand for Treasury notes at a time when nearly $12 trillion in government debt globally carries negative yields. Collapsing European interest rates are also causing quite a headache for European financials as their net interest margins are disappearing. This has caused an interesting dynamic where the falling U.S. 10-year Treasury yield now strongly correlates with the share price of a large European financial firm, Deutsche Bank (see my June 24, 2016 Marketwatch article, “A look at the global economic malaise through Deutsche Bank). (Please note: Ivan Martchev does not currently own a position in DB. Navellier & Associates, Inc. does not currently own a position in DB for any client portfolios.)

Deutsche Bank Index Chart

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

With Brexit and its expected effects on European deflationary dynamics, Deutsche Bank shares trade for $0.23 per dollar of book value, a valuation below the 2008 Great Fiscal Crisis low and indicative of a serious problem not only with Deutsche Bank, but with the European financial system in general. Other large European financials are in the same dire situation, not to mention the Italian banking system, which is nearly insolvent.

We seem to be nearing some sort of European banking crisis, catalyzed by the now infamous Brexit vote. There are reports of multiple property funds in the UK halting redemptions and taking large NAV haircuts in order to discourage withdrawals. The logic of marking down net asset values by 15% to 20% as a tool to discourage investors from pulling out money is a bit difficult to understand, but it comes from investors fearing losses. Now that they have the NAV haircut imposed, this is somehow going to make them stay?!

The U.S. banking system is in relatively good shape to weather any European financial storm. While large-cap banks have generally underperformed the S&P 500 and are performing as one would expect in a flattening yield curve environment, on a relative basis they are trading at lows last seen in the Eurozone crisis. That is evident in a chart comparing the large-cap KBW Bank Index (BKX) and the S&P 500 (SPX).

KBW Bank Index Chart

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

Omitting the banks’ sharp decline in 2007-2008, what is happening at present is actually “normal” in an environment where the 2-year note yield has gone up while the 10-year note yield has fallen dramatically. This causes a popular measure of the U.S. yield curve – the 2/10 spread – to shrink notably (see below).

Ten Year Treasury Constant Maturity Minus Two Year Chart

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

I think that as long we have yield curve flattening in the U.S., the U.S. banking sector should continue to trade at a discount to the rest of the market and lag overall, simply because banking profitability in a flattening yield curve environment tends to be under pressure. If the 10-year Treasury note yield is indeed headed to 1% or lower, the 2/10 spread is only going to shrink from its present depressed levels.

Watch Out for Oil – and the Ruble

My suspicion that the seasonal high in the oil market may arrive earlier than usual, simply because the seasonal bottom in February was also rather early, seems to be playing out. (See June 21, 2016 Navellier Marketmail: “Was $52 the Seasonal Top in Oil?”) In the three weeks since I wrote that column, there has been a rather peculiar selling into strength in the front-month August 2016 crude oil futures (CLQ16).

West Texas Intermediate Crude Oil - Daily OHLC Chart

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

This CLQ16 contract has only been as low as $32 in January of this year, but the front-month futures at the time made it as low as $26. I think come January or February of 2017, we may very well be below $26 on what would be the front-month futures then. U.S. oil production has not declined meaningfully and the rig count has begun to rise again to take advantage of the price rebound since February.

Last year, crude oil was flattish throughout May and June and began a rather steep sell-off in July. I don't want to go blindly just by dates, but there have been no fundamental improvements in the crude oil market to warrant a new bull market in crude oil. I have viewed this rebound off the February lows as a seasonal cycle all along and am watching with great interest how July trading in crude oil will unfold.

Russian Ruble Versus Brent Crude Oil Chart

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

The situation in the crude oil market raises an interesting question for the Russian ruble or “рубль” as the Russians call it. Crude oil has begun to weaken but the ruble has not. The correlation of weak oil and a weak ruble – the USDRUB rate is inverted so more rubles per USD mean weaker ruble – has to be one of the more reliable indicators in today's markets. I think that the ruble will begin to follow the crude oil price lower very shortly, if a July decline this year resembles what happened last year.

There is also a very strong correlation between oil prices and emerging market stock prices as represented by the MSCI Emerging Markets Index (dark line, below). The year-to-date returns on the MSCI Emerging Markets Index look rather good when viewed from a short-term perspective.

Light Crude Oil - Continuous Contract Chart

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

Buyers of crude oil and/or the MSCI Emerging Markets Index at these levels must believe that both the imbalance in the crude oil markets is fixed and/or that China will not have a hard landing.

Sector Spotlight:

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

Playing the Volatility Game

by Jason Bodner

Tic Tacs claim they are sugar-free but in fact are 98% sugar! The company can do this because the FDA requires a serving of food containing more than .5 grams of sugar to label the sugar content. The serving size of a typical sugar-free Tic Tac is 0.49 grams, therefore legally they can say it’s sugar free. Touché!

Tic Tacs Image

Who can ever have just one Tic Tac? Most people wind up having multiple “servings” because one Tic Tac does not satisfy. But my point is that it’s not the actual packaging information that matters as much as how it is presented. How many times have you heard your mother say, “It’s not what you say, but the way you say it!”? We are emotional beings, wired to react first and then think later. This can be observed daily in the stock market as Wall Street tends to react first and think later. You can see it in all of those “knee jerk” intra-day reactions whenever an important number comes out – or a big global event like Brexit.

In times of uncertainty, our reactions become even more amplified. Looking at the daily performances of the equity markets is like watching a child agonize over a choice between two toys: Which one to choose?

“Get Used to Higher Volatility”

-- ECB President Mario Draghi

On June 3, 2015, European Central Bank President Mario Draghi said, “We should get used to periods of higher volatility. At very low levels of interest rates, asset prices tend to show higher volatility.”

I thought it would be interesting to look at some charts of market volatility in the 13 months since he made those comments. Looking at the two charts below, we see the S&P 500 Index prices against the realized volatility for the same periods. (“Realized volatility” is best defined as: the magnitude of daily price movements, regardless of direction, of some underlying investment over a specific time period.)

The left chart shows daily returns for a year (in blue). We see, as expected, when the market experiences sudden pressure, the volatility (white line) spikes in a more-or-less inverse relationship to the index. The relationship is obvious when we look at the monthly chart (right). The chain-link pattern, if it has any predictive value, suggests we are at the top end of the range for pricing and the bottom end for volatility. Does this mean Draghi’s comments are still valid today? Should we expect another convergence?

Standard and Poor's 500 Daily and Yearly Returns Chart

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

It is also interesting to look at the past 20 trading days for U.S. equities. Needless to say, we have had a wild few weeks of price action marked by unusual events. When markets suddenly fall off a cliff and then rebound nearly as fast, it can be easy to overlook the volatility we experienced after a few weeks go by.

In the table below, I took the peak and trough values for several U.S. equity indices, highlighting the peak-to-trough change vs. the actual 20-day price change. We can see that all the major indexes are up for the 20-day period, but the peak-to-trough change is noteworthy. The DJIA expectedly had lower volatility than the Russell 2000, yet when we look at the individual sector we see some very volatile action.

If we isolate the S&P 500 financials index first, it is down only 0.75% for the past 20 trading days, but in that time it had an extreme range of over 8%! Materials are off 1.65% for the same period but experienced a 7.62% range. Information Technology is flat for 20 days (+0.13%), but its range was still 6.47%. Consumer Staples posted healthy 3.31% gains while reflecting the most modest volatility range of 4.88%.

Twenty Day Equity Index Price Change Table

If we look at Utilities, Telecom, and Consumer Staples, we see that they retained much of their volatility in their returns. The higher volatility of the weaker sectors like Financials, Materials, Industrials, and Info Tech show us that they were just plain volatile and largely responsible for moving the broader markets.

If you look at the pie chart below, you can see that these four sectors account for just under 50% of the S&P 500 by weight. Financials and Info Tech account for 36%, while the three strongest sectors for the past 20 days – Utilities, Telecom, and Consumer Staples – account for just 17% weight in the S&P 500.

Standard and Poor's 500 Index Sectors by Weight Pie Chart

The takeaway here is that the volatility we are seeing is mostly in weaker sectors. The strength we are seeing is in defensive and yield bearing sectors like Utilities, Telecom, and REITs (which will become its own sector on August 31, 2016, the 11th GICS sector). Demand for yield is lifting the market, while Financials, Industrials, Materials, and Tech are lagging. The S&P 500 Index “air-kissed” its all-time closing high Friday, and surpassed it on Monday. Leadership clearly is not in growth, but in defense.

Standard and Poor's 500 Sector Indices Changes Tables

The volatility continues to make a bumpy road for the market as we move forward. We are seeing strength in safety, and weakness (or stasis) in the traditional growth sectors. That environment does not spawn a great deal of confidence in me for the near-term future of equities. Overall, this backdrop does not seem bullish from a macro standpoint. Yet bull runs must begin somewhere, and when weak sectors stabilize and strengthen, then the entire market has more solid footing to vault higher.

The global market environment is still one that favors U.S. equities as “best in show.” But this year’s beauty queen can quickly turn into next year’s old hag (by flipping the image, below).

Princess Old Hag Optical Illusion Image

A year ago, Mario Draghi warned us to expect volatility. We sure got it, but pay attention to what’s going on beneath the surface or you may get fooled into thinking you are eating a box of “sugar-free” Tic Tacs.

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 Tail (Yield) is Wagging the Dog (Price)

by Louis Navellier

The investing world is turning upside down.  Last Thursday, our friends at Bespoke Investment Group published a fascinating chart showing that Technology stocks – a group once noted for sporting sky-high price/earnings (P/E) ratios – now trade at a P/E ratio of 19.16, while stodgy old Utility stocks trade at a P/E of 19.85!  Clearly, investors are chasing high dividends and sometimes ignoring their P/E ratios.

The reason that the “tail” (dividend yield) is wagging the dog (the stock price) is that investors around the world are realizing increasingly that interest rates may never rise again; so there is a full-bore, worldwide buying panic into high yielding shares at almost any cost, ignoring any valuation (i.e, P/E) considerations.

Gold Smelting Image

In addition, we are seeing negative yields in Japan and Europe and a lack of confidence in central banks anywhere, causing investors to flock back to gold and silver, which hit two-year highs last week.  (Silver is up 47% so far this year.)  With the British pound at a 31-year low and Italy’s banking crisis escalating, investors in Europe are turning increasingly to gold as well as any U.S. dollar-dominated investments.

Italian banks now have a shocking 18.1% delinquent loan rate.  The European Commission has allowed Italy to use government guarantees of up to 150 billion euros for short-term liquidity support to banks, but that is not enough.  Italian Prime Minister Matteo Renzi is determined to defy Brussels and intervene with public funds to save the Italian banking system.  This intervention naturally further undermines the euro, since it creates the impression that both Brussels and the European Central Bank are losing control.

Don’t Put Too Much Credence in Monthly Jobs Reports

The market fell in early June on weak job creation and it rallied Friday on a strong jobs report, but monthly jobs reports are just not that big of a deal anymore, since declining market interest rates are messing up any plan for the Fed to raise key interest rates in the upcoming months.  These job reports are also subject to massive revisions in future months.  On Friday, the Labor Department announced that 287,000 new payroll jobs were created in June, substantially higher than economists’ consensus estimate of 170,000; but the May payroll report was revised down to only 11,000 (vs. 38,000 previously reported), while the April payroll total was revised up 21,000 to 144,000 jobs (up from 123,000).  Expect more revisions in August!

This monthly volatility – 11,000 in May vs. 287,000 in June – is disturbing.  Even though the May payroll report was unusually low due to the 35,000 Verizon workers on strike, these job reports are too volatile to trust.  In addition, we see the unemployment rate rising to 4.9% in June (with 287,000 new jobs), up from 4.7% in May, when only 11,000 jobs were created!  The reason is that more folks entered the workforce in June.  In addition, average hourly wages rose by only 0.1% (2 cents) to $25.61 per hour.  Fed Chair Janet Yellen wants to see significant real wage growth, so the Fed is not expected to raise interest rates in July.

The Federal Open Market Committee (FOMC) minutes were released on Wednesday, revealing a divided Fed that debated the health of the labor market, the economic outlook, and whether or not inflation was brewing.  In other words, the FOMC members did not agree on much of anything.  Due to the fact that the FOMC members could not agree, they agreed that it would be “prudent to wait” for additional economic data to get a better handle on the economy.  Translated from Fedspeak, the Fed is unlikely to raise rates until (1) there is consensus among FOMC members, (2) stronger economic data, and (3) market rates rise.


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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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