Yellen Calls “Time Out”

Fed Chair Yellen Calls a “Time Out” on Rate Increases

by Louis Navellier

July 18, 2017

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

The big news last week was that Fed Chair Janet Yellen resumed her “Fairy Godmother” role when she testified before Congress and made it clear that any future interest rates increases would be (1) gradual, (2) data dependent, and (3) probably few and far between, i.e., key interest rates would not need to rise much further.  Specifically, Chairman Yellen acknowledged the recent softness in inflation and said that the Fed could alter its policy if inflationary weakness proves to be more stubborn than the Fed expects.  As a result, the next key interest rate hike by the Fed may be postponed until as late as December.

Fairy Dust Image

This was a big surprise and a very dovish statement by Fairy Godmother Yellen, who is a labor economist who seems convinced that a tight labor market will eventually nudge inflation higher.  On Wednesday in her testimony before Congress, Yellen said that she believes the slowdown in inflation is “temporary.” However, this does not seem to fit the current pricing realities, where Amazon* is taking over the retailing world as price-conscious consumers shop for the best prices on their computers, tablets, and cell phones.

*Louis Navellier currently holds positions in AMZN. Navellier & Associates, Inc. currently holds positions in AMZN for some of its clients. 

In This Issue

I’ll expand on the latest inflation statistics and the rise of Amazon’s online sales dominance below.  But first, Bryan Perry finds some of the sweetest spots in the REIT sector during this time of slowly-rising short-term interest rates.  Then Gary Alexander dissects two recent (early July) “Flash Crashes” and what they imply for price trends in stocks and gold.  Ivan Martchev then examines two recent trend reversals – in the yield curve and emerging markets vs. oil prices, while Jason Bodner looks at Amazon (the river), as it applies to the latest sector trends.  In addition to inflation, I’ll also examine the latest China trade trends.

Income Mail:
Finding the Sweet Spots in the REIT Sector
by Bryan Perry
The Counterintuitive Trend in an Up-Rate Market

Growth Mail:
“Flash Crashes” Usually Precede Great Buying Opportunities
by Gary Alexander
Precious Metals Also Tend to Bounce Back After Panic-Selling Events

Global Mail:
A Curious Yield Curve Re-Steepening (and Why It May Be a Fluke)
by Ivan Martchev
The Bizarre Divergence of Emerging Markets and Commodity Prices

Sector Spotlight:
Which Way Does the Amazon Flow Today?
by Jason Bodner
Technology Returns to the Top Spot

A Look Ahead:
The Fed Surrenders to Inflation Trends – for Now
by Louis Navellier
China’s Exports Soar – Especially to North Korea!

Income Mail:

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

Finding the Sweet Spots in the REIT Sector

by Bryan Perry

Market commentators tend to talk in broad terms when describing the up-and-down performance of certain sectors. For some sectors, there is a fairly close correlation of stocks that fall into the categories of utilities, telecoms, big pharma, banks, industrials, materials, and aerospace defense issues. Other sectors, like technology, trade more in alignment with their sub-sectors, like enterprise software, semiconductors, cyber security software, cloud-based software, digital payments, ecommerce, networking, fiber optics, etc. They can trade in tandem on any day, but they have a history of trading independently of each other.

The same can be said for the REIT sector. REITs come in many different classes and, in general, are fantastic income vehicles for just about any kind of economic cycle – if the right REITs are owned. The Internal Revenue Service shows that there are about 1,100 U.S. REITs that have filed tax returns. As of the start of 2016, there were more than 200 REITs in the U.S. registered with the SEC that trade on one of the major stock exchanges – the majority on the NYSE. Here are some of the leading classes of REITs:

Mortgage REITs (residential and commercial)
Retail REITs (neighborhood strip malls, mega malls, outlet malls)
Industrial/Office REITs
Infrastructure REITs (data centers and telecommunications towers)
Lodging REITs
Healthcare REITs (hospitals, assisted living, nursing homes, medical offices)
Residential REITs
Casino REITs
Self-Storage REITs
Timberland REITs
Specialty REITs (movie theatres, amusement parks, outdoor advertising)

Diversification of REITs Chart

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

The Counterintuitive Trend in an Up-Rate Market

After a long period of exceptionally accommodative monetary policy, the Federal Reserve recently restarted the process of raising short-term interest rates to a more neutral range. Expectations of this rate increase and of future changes in monetary policy have at times affected the valuations of many investments, including the share prices of stock exchange-listed equity REITs.

It is not uncommon that asset prices decline in an immediate response to a rise in interest rates because higher interest rates reduce the present value of future cash flows, including bond coupons and stock dividends. If future cash flows are not expected to rise, then increasing interest rates would have a clear negative impact on asset values, including the prices of listed REIT stocks.

Despite this seemingly logical analysis, let it be known that history shows that the share prices of listed equity REITs have more often increased than decreased during periods of rising interest rates. There have been 16 periods since 1995 when interest rates rose significantly, and listed equity REIT returns were positive in 12 of those 16 episodes (source: REIT.com). That does not mean, of course, that one should ignore the four periods when share prices declined. However, the recent pattern of REIT resilience during periods of rising interest rates reflects earnings growth in those REITs, since a growing economy that generates stronger earnings can generally outpace the added cost coming from rising rates.

To illustrate this point, the chart below of the Dow Jones U.S. Select REIT Index shows the REIT sector topping out in early 2007 – along with the rest of the broader stock market – while the Fed Funds Rate was 5.25%. While the major averages have all traded to new all-time highs, by a wide margin I might say, the REIT sector has yet to break out. I would argue, based on history, that certain classes of REITs are set to trade to new all-time highs now that the second-quarter economy is staging a more rapid recovery.  For income investors, finding high-yield, high-quality assets that thrive in an up-rate market is great news.

Dow Jones United States Select REIT Index Chart

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

Changes in the level of interest rates often reflect changes in the level of economic activity. Today’s economic environment, for example, includes several factors that could reasonably be expected to boost future REIT earnings and dividends, even in the context of higher interest rates, helping to support or even increase stock valuations. It is in the context of this shift in monetary policy that investors have to be very selective in which kinds of REITs to invest in that will be viewed as benefiting. The perception here is one where revenue growth is well outpacing rising interest rates and the cost of money.

In the current investing landscape, I’ve focused on a few REIT sub-sectors that in my view fit to a tee the kind of businesses that thrive in the current economic cycle. In my view, there are several specific types of REITs poised for rising revenue growth and rising Funds From Operations (FFO) that should produce rising dividend payouts: First, I like Hotel and Casino REITs because they can easily raise overnight room rates as needed to offset rising costs or have the luxury of doing so because demand is strong.

Secondly, I like Industrial REITs that are leveraged to a stronger economy, where businesses are expanding and requiring more manufacturing space – and are willing to pay for it. In particular, Logistics REITs are prospering from the expansion of ecommerce distribution and are enjoying a multi-year transformational growth phase. Speaking of transformational, the shift to high-tech infrastructure in the form of cloud computing by major corporations is a boon to operators of Data Center REITs; and the explosive use of smart phones, streaming content, and mobile office applications that dominate the wireless world are driving the fortunes of the Cell Tower REITs.

Since the income from REITs is taxed as ordinary income, investors in the highest tax bracket can be subject to a 39.6% tax rate. For most REIT investors, who are taxed something more along the lines of 20% to 25%, finding high-quality REITs in these sub-sectors that pay 3% or more after taxes is well above what the 10-yr Treasury Note pays while offering the prospect of capital appreciation as well.

Growth Mail:

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

“Flash Crashes” Usually Precede Great Buying Opportunities

by Gary Alexander

In the first week of July, there were two Flash Crashes.  First, while markets were closed for the July 4th holiday, a computer glitch priced three large stocks at precisely $123.47 per share on the major electronic quote boards.  This represented a 14% drop for one stock but a huge (86% or more) drop in price for two other big stocks.  Thankfully, this happened during a holiday break.  If this had happened during regular trading hours, it likely would have caused a panic that would have spread far beyond these three stocks.

The second Flash Crash came on Thursday, July 6, in the silver futures market.  I’ll cover that event below, but first let’s look at the most recent stock market Flash Crashes and see if they are primarily a chilling example of what can go wrong – or a great buying signal for those looking for an entry point.

The term “Flash Crash” was coined on Thursday, May 6, 2010 after a 30-minute free fall of near-epic proportions.  The carnage began at 2:32 pm Eastern time, when the Dow Jones Industrial Index plunged almost 1,000 points (998.5, to be exact) in about 15 minutes, only to recover that loss just as rapidly.  The electronic bid prices for dozens of stocks and exchange-traded funds (ETFs) fell to a penny a share.  Investors who had placed “stop loss orders” or other automatic sell orders could have been wiped out.

The S&P 500 fell 100 points (-8.6%) at one point, then it closed the week at a promising binary alignment of 1111.  A year later (May 6, 2011), the S&P closed over 1340 for a 20% gain after the first Flash Crash.

Wall Street established some safeguards after that scary day, but not enough to prevent another Flash Crash on Monday, August 24, 2015, when prices of many ETFs collapsed, becoming technically worthless for minutes.  Once again, the S&P 500 fell over 100 points (-5.3%), closing at 1867, and once again, that was a great buying opportunity.  The S&P 500 rose over 15% in the following year.

After the latest (July 4, 2017) statistical glitch, the S&P 500 dropped under 2,410 the next two days, but the S&P recovered quickly to reach an all-time high of 2459 last Friday, up over 2% in barely a week.

Going back further, we’re coming up on the 30th anniversary of “Black Monday,” October 19, 1987, when the Dow fell over 508 points (-22%) in one day, mostly in the last hour.  Even in those pre-Internet days, the electronic computer trading systems (the “computer cowboys”) were blamed for the crash.  On the 25th anniversary of that crash, the New York Times (in “A Computer Lesson Still Unlearned,” by Floyd Norris, October 18, 2012), said the villain was “portfolio insurance,” in which traders “would simply sell ever-increasing numbers of futures contracts, a process known as dynamic hedging.”  But there were no fundamental reasons for selling stocks in 1987 – earnings were rising and there was no recession in sight.

Once again, October 20, 1987 was a great time to buy stocks.  The Dow rose from a closing low of 1738.74 on October 19, 1987 to new highs by July 1989 and within a whisker of 3,000 (2999.75) less than three years later, July 17, 1990 – and up nearly seven-fold before the bull market ended in 2000.

If you can block your eyes from the dates in this logarithmic chart of the Dow Jones index below, try to find the blip that represents the 1987 crash.  It was traumatic then, but the move looks trivial in hindsight.

Dow Jones Industrial Average Chart

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

Precious Metals Also Tend to Bounce Back After Panic-Selling Events

Getting back to current threats, a Flash Crash in the silver futures market took place shortly after 7:00 pm on Thursday, July 6, at a time of evening when trading is generally very light.  One trader apparently sold 5,000 contracts (25 million ounces), then another 5,000-contract sale came through minutes later.  With few bids to cover these huge sale orders, silver fell to $14.30 before recovering to $15.40 early on Friday.

A similar Flash Crash in gold took place on June 26, 2017 at 4:01 am (Eastern time), just as the European gold market was opening.  Gold plunged $18 in just a minute in a single trade of 18,149 gold contracts.

After the Flash Crash in gold on June 26, Wall Street traders turned bearish on the metals.  Trading trends often resemble mob behavior or, to use a more polite term, trend-following.  The Commitment of Traders report for the latest week shows that net long positions in gold and silver dropped for the fourth straight week.  According to Seeking Alpha (“Traders Increased Gold Short Positions at the Fastest Clip in Almost 2 Years – is it Time to Buy?” July 10, 2017), “Both gold and silver look extremely oversold.”

Commerzbank said that net longs were “at their lowest levels since February 2016 [for gold] and August 2015 [for silver].  Short positions in silver are currently at a record high…. In the past, such extreme positioning by speculative financial investors has often sparked a pronounced countermovement in prices” (MarketWatch, “Gold prices claw back from their lowest level in four months,” July 10, 2017).

In both cases, the metals recovered smartly after these cyclical lows in sentiment.  The previous low in net-long gold contracts was February 2016, when gold traded below $1,100.  Gold promptly shot up to $1,365 by July 2016.  The previous low in net-long contracts for silver was in August 2015, when silver was under $15 per ounce.  The price of silver reached $20 within a year of that low in sentiment.

The basic theory of contrarian investing is that when most big traders line up on one side of the trade, there are few big traders left on the other side of the trade, so a move in the other direction is more likely.   In this case, the big sellers have nearly all sold their gold and silver, so even a small amount of buying pressure can push the metals back up.  When selling pressure is exhausted, greater profits are possible.

Traders tend to sell and then find a “reason” (excuse) after the fact.  Traders often say they are selling gold or silver because the Fed might raise interest rates again – since (for instance) a jobs report is better than expected – but historically gold has risen after most of the previous 20 Fed interest rate increases.

In short, smart investors can use Flash Crashes in most markets as a strategic time to place a buy order.

Global Mail:

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

A Curious Yield Curve Re-Steepening (and Why It May Be a Fluke)

by Ivan Martchev

When fund managers start talking about yield curves, the average investor tunes out of the conversation. What is fascinating to professionals can be boring to onlookers, even though bond market developments often precede stock market moves by a long lead time and tend to be accurate predictors of the direction of the economy. To me it seems that the most fascinating development is the U.S. Treasury yield curve “re-steepening” (to coin a word), which started in the last week of June and kept on expanding in July.

In the last three weeks, we have gone from a slim 78 basis point difference between the 2-year Treasury note and the 10-year note all the way back to a 100 basis point spread in mid-July.

Ten Year Treasury Constant Maturity Minus Two Year Treasury Constant Maturity Chart

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

The average investor should cheer this development, since it means that the bond market is more upbeat about the prospects of the U.S. economy. It was very disappointing to see the yield curve collapse to its 2016 lows, signifying that the bond market had lost faith in the Trump team’s bombastic promises.

The present re-steepening, in my opinion, doesn't mean that the bond market has suddenly bought into Trump’s bombastic election promises again. As Jamie Dimon, CEO of J.P. Morgan Chase*, put it so eloquently on an earnings conference call last week: “We have become one of the most bureaucratic, confusing, litigious societies on the planet. It’s almost an embarrassment being an American citizen traveling around the world, and listening to the stupid s#!t we have to deal with in this country and at one point we have to get our act together or we won't do what we’re supposed to for the average Americans. And unfortunately, people write about this like it’s for corporations. It’s not for corporations. Competitive taxes are important for business and business growth which is important to jobs in wage growth and, honestly, we should be ringing that alarm bell to every single one of you every time you talk to a client.”

*Ivan Martchev does not hold any positions in JPM.

I couldn’t agree more. As far as I can tell, the new Trump administration has made very little progress in changing this “embarrassing” state of affairs. To me, the re-steepening of the yield curve means that the economy is not all that weak. It will be interesting to see if the re-steepening continues. The only way that would be possible is if the Trump team makes swift progress on the issues outlined by Mr. Dimon, which given the present speed with which the administration is executing its own agenda seems rather unlikely.

Still, this yield curve re-steepening caused a violent rotation in the market where a lot of money moved out of technology and into financials. Banks, as represented by the KBW Bank Index (charted below), dramatically outperformed technology in the first two months after the election. Then, banks began to dramatically underperform technology in the first five months of 2017, as represented by the Nasdaq 100. In June, that changed and a rotation into the banking sector started, which is progressing in fits and starts.

KBW Bank Index Chart

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

Could it be that the bond and stock markets are changing their minds about Mr. Trump? I think it is too early to make that call. I think the rally in the first part of 2017 is less about Mr. Trump and more about improved earnings for the S&P 500 Index, the dynamics of which were planted way before the election.

Mr. Trump has been in office for only six months – too short a time to do anything meaningful in terms of the prospects for the U.S. economy and, as a consequence, the prospects of the stock market. Q1 EPS growth for the S&P 500 was 13.9% vs. a stock market gain of less than 10% in the first six months of the year. Q2 EPS growth is likely to be anywhere between 6% and 7%. For all of 2017, the present consensus for EPS growth is 9.8%, while the present consensus revenue growth rate is 5.3%.

Ten Years of Standard and Poor's 500 Trailing Twelve Month Price to Earnings Ratio Chart

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

Based on the fact that valuations for the S&P 500 Index are stretched no matter which metric you look at, the only way that we can make significant progress to the upside is if we get meaningful results in tax reform and infrastructure spending, which looks unlikely at the present pace of progress in Trump’s stated economic agenda. It looks like the CEO of America’s largest bank is thinking along the same lines.

The Bizarre Divergence of Emerging Markets and Commodity Prices

Given the all-time highs in the U.S. stock market and the “risk-on” mode that we have seen so far in 2017 – now supported by the dovish comments from Fed Chair Janet Yellen last week – the MSCI Emerging Markets Index is flying high (see the red line, below). The MSCI Emerging Markets Index is the most widely-followed index by investors in the emerging markets – analogous to the S&P 500 for U.S. stocks.  The MSCI has closely tracked the price of West Texas Intermediate Crude (WTIC) – until 2017, that is.

MSCI Emerging Markets Index Chart

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

The long-standing correlation of emerging markets to the price of oil, and commodity prices in general, has broken down in 2017. There are many reasons why emerging markets are correlated to the price of crude oil. For instance, a strong global economy means strong commodity prices and vice versa. Some emerging markets are producers of commodities and some are consumers, the biggest of which is China. Because commodity prices are so disproportionately affected by China, it is possible that China's economy has depressed commodity prices but not yet slowed down its emerging market trading partners.

It is not a secret to readers of this column that I believe China is in the first stages of the unravelling of an epic credit bubble that has been inflating since the turn of the century. A trillion dollars of foreign exchange outflows since 2014 completely stopped in 2017. My understanding of credit cycles, which are very long-term in nature and can last 20 or more years, is that once they roll over it is nearly impossible to stop them. In that regard, I have kept a close eye on this commodity-emerging markets divergence.

I don't think this divergence will last till the end of 2017. Furthermore, I believe that the oil price is likely to win that battle: I think the MSCI EM Index will follow the oil price lower by the end of this year.

Sector Spotlight:

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

Which Way Does the Amazon Flow Today?

by Jason Bodner

The only constant is change. Take for instance the Amazon – not the big retail marketing firm, but the rainforest and river. Spanish explorer Francisco Orellana coined the name “Amazon” after being attacked by native women called Icamiabas, meaning “women without husbands.” He recalled the Amazons of Greek mythology – who also gave us the idea for Wonder Woman. By analogy, Amazon connotes “the biggest,” as in the world's largest and greatest rainforest and river (as measured by drainage volume).

Two Different Amazons Image

But time has a funny way of reminding us that there is no true permanence. Things can change. In 2006, geologists decided to study the rate of sediment deposited by the Amazon river. They were surprised to find that the oldest sediments were actually upstream of their source. They concluded that the river once flowed east to west, at least until the Cretaceous Period. The rise of the Andes Mountains 100 million years ago reversed the river's course, but for a while the Amazon flowed both ways simultaneously!

Jason Bodner does/does not currently hold any positions in AMZN.

Who would have thought that a small book-seller would name itself “Amazon” and would soon sell just about everything and dominate the retail space? Interestingly, Amazon was almost called Cadabra until Jeff Bezos’ lawyer misheard it as "cadaver." Needless to say, they discarded that ambiguous name.

Amazon Cadabra Image

Amazon made its Initial Public Offering in May of 1997 at $1.50. Last Friday, it closed at $1001.81, representing a nearly 67,000% return in just over 20 years. Wow! Time is the friend of long-term investors, but time in the media or the trading floor is measured in much shorter time frames. Remember the tech sell-off last month? Looking at a 12-month daily chart, the sell-off seems more like a burp; but if we were to chart the tech sector monthly over the last 10 years, the June sell-off hardly even happened.

Standard and Poor's 500 Information Technology Sector Index

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

Technology Returns to the Top Spot

Infotech was the winner last week, staging an immense bounce (+3.76% for the week). On June 25th, I wrote about the fact the Infotech sell-off was technical in nature with no change in the fundamentals.  Last week’s market action confirmed that! This puts InfoTech in the pole position yet again for 1-week, 3-months, and 12-months’ performance. I still believe in the strength of tech as this trend continues. I advise continuing to identify key profitable companies with growing earnings and sales in this leading sector.

Energy staged a nice recovery of over 2% this week. Like tech, energy showed positive growth each day last week. Here’s the caveat: Crude Oil rallied 5% this past week after a drop in its downtrend channel. I suspect that this bounce in the Energy sector is a technical squeeze as summer’s usual weakness is ringing true. I believe Energy will resume its downtrend and will move with oil should it resume selling off.

Standard and Poor's 500 Daily Sector Indices Changes Table

Standard and Poor's 500 Oil and Energy Sectors Indices Charts

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

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

Telecom saw continued weakness (again this caution: it’s the smallest sector by constituents). Next worst was Financials. JP Morgan Chase (I have no position) saw great earnings, but ultimately Janet Yellen’s dovish statements weighed on financials as we saw the sector take some selling.

In my view, the long-term trend remains strong for InfoTech, Financials, Industrials, Materials, Consumer Discretionary, and Health Care. After we highlighted Health Care last week, it posted a modest 1.01% gain this week and remains the third strongest sector for three months’ performance.

Change is constant, especially in markets. Stocks that are loved one week can be hated, then loved again. Amazon is a prime example (pun intended), as is Tesla. Almost every “story stock” takes its turn being adored, then admonished. The key is understanding that the long term favors winning stocks. As I have shown in recent columns, long-term winners can be hard to find (4% of stocks account for all of the net gains in the market since 1926) but when you do find a winner, the results can be spectacular over time.

Time can deliver major changes, depending on your perspective. Wait long enough and rivers flow backwards. Focus short enough, and one may fret over beaches that ebb and flow with the daily tides. Focusing on short-term rotations is important with the key distinction that I believe they help reveal the giant stocks of tomorrow. The ideal stocks are profitable companies that exhibit growing sales and earnings.  Yet all of these companies had to start somewhere. Amazon started at $1.50 and took 20 years to reach $1,000. As the sectors twist and turn, look for developing trends to reveal the best of the best.

The only constant in life is change. Expect change. “Panta Rhei (Life is Flux)” - Heraclitus of Ephesus

Heraclitus of Ephesus Image

A Look Ahead:

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

The Fed Surrenders to Inflation Trends – for Now

by Louis Navellier

Before Janet Yellen spoke last Wednesday, she had to notice that the inflationary barometers were all pointing down.  Amazon.com is leading the trend toward ever-lower prices combined with rapid free delivery in their “Prime” service.  In Amazon’s third annual Prime Day last Tuesday, sales soared 60% vs. 2016.  Furthermore, Amazon said that “tens of millions of Prime members” participated and 50% more members rang up purchases compared with 2016.  Amazon Prime is expected to be used by more than 50% of U.S. households by the end of this year, which is important for Amazon.com’s aggressive expansion into video streaming, cloud computing, food retailing, and other business ventures.

After she spoke, the June inflation indicators were released.  On Thursday, the Labor Department said that the Producer Price Index (PPI) rose 0.1% in June.  On Friday, they added that the Consumer Price Index (CPI) was unchanged in June.  Gasoline price declined 2.8%, while food prices were unchanged, so the “core” rate (excluding food and energy) rose 0.1% in June.  Economists were expecting the CPI to rise 0.1% in June and for the core CPI to increase 0.2%, so both the CPI and core CPI came in below expectations.  In the past 12 months, the CPI has risen 1.6%, while the core CPI has risen 1.7%.

The Fed’s favorite inflation indicator – the Personal Consumption Expenditure (PCE) index – dropped to only a 1.4% annual rate over the past 12 months, so no matter how you slice it, inflation is decelerating on the consumer level, which is why the Fed is now reluctant to raise key interest rates any time soon.

In addition to Amazon suppressing retail prices, low crude oil prices are also contributing to a lack of inflation.  On Wednesday, the Energy Information Administration (EIA) announced that crude oil supplies declined by 7.6 million barrels in the latest week, but they also reported that total crude oil production rose by 59,000 barrels to 9.397 million barrels a day.  Since non-OPEC crude oil producers are boosting their production and OPEC is not abiding by its self-imposed quotas, the oil glut should grow.  The next big drop in crude oil prices will most likely come in September, when demand plummets after Labor Day.

On Wednesday, the Fed released its Beige Book survey, which showed that economic growth was “slight to moderate,” which was less upbeat than its previous Beige Book Survey.  The Minneapolis Fed pointed out that “Employment was held back by tight labor availability” in its district.  The Philadelphia Fed also discussed labor problems and said that in its district “workers appear to have less loyalty to the job, and more job-hopping is showing up.”  The Atlanta Fed said that some businesses are “seeking out retirees to return to work” due to a labor shortage.  The Beige Book survey also revealed that with wages rising only modestly, some senior Fed officials believe inflation is likely to remain on the low side for a longer period than previously forecasted.  Specifically, the Beige Book survey revealed that the Fed clearly wants to take a cautious approach on raising interest rates until more evidence of inflation emerges.

The other reason that the Fed should hesitate before raising key interest rates is that retail sales have declined for two consecutive months.  On Friday, the Commerce Department announced that retail sales declined 0.2% in June, substantially below economists’ consensus expectation of a 0.2% increase.  Sales at department stores declined 0.7% in June, while online sales rose 0.4%, but I think the government is underestimating online sales.  As Amazon takes over the retailing world, retail sales may continue to be understated until the Commerce Department begins to incorporate a higher proportion of online sales.

The disappointing retail sales report caused the 10-year Treasury bond yield to decline to 2.33%.  Due to Fed Chairman Yellen’s testimony, the Beige Book survey, and the PPI, CPI, and PCE all confirming that inflation is ebbing, government bond yields in the U.S., Europe, and Japan all meandered lower last week.

Bank of England Statue Image

Since government bond yields rose in previous weeks on the perception that the Bank of England would raise key interest rates and the European Central Bank (ECB) might wind down its quantitative easing, the fact that government bond yields have now stabilized somewhat is good news for dividend stocks and other interest rate sensitive stocks.  The Federal Open Market Committee (FOMC) will meet again next week and then the Kansas City Fed’s annual conference in Jackson Hole, Wyoming in mid-August will most likely be the next key event that will impact government bond yields in the upcoming weeks.

Interestingly, ECB President Mario Draghi will attend the Fed’s Jackson Hole conference this year for the first time in three years, so there is speculation brewing that Draghi may provide further clues to how long the ECB will continue with its 60 billion euro (about $68.5 billion) per month quantitative easing program to buy back bonds.  Interestingly, Draghi announced the ECB’s quantitative easing program three years ago at Jackson Hole, so another August surprise may be forthcoming!

China’s Exports Soar – Especially to North Korea!

I should add that China received some criticism last week since its exports to North Korea rose 29.1% in the first half of 2017.  China’s General Administration of Customs on Thursday said that it is abiding by U.N. sanctions “comprehensively, carefully, accurately and seriously.”  Translated from China-speak, they allege the Chinese goods exported to North Korea were largely textiles and other products not covered by U.N. sanctions.  China is North Korea’s largest trading partner and accounts for more than 80% of the hermit state’s external trade in the past five years.  China’s Foreign Ministry is resisting global criticism that it’s not doing enough to pressure North Korea to abandon its nuclear and ballistic missile programs by saying that Beijing plays an “indispensable” role in trying to denuclearize that rogue state.

China’s exports are also rising to other nations.  On Thursday, China’s General Administration of Customs announced that exports rose 11.3% in June (vs. June 2016).  This was the fourth straight monthly gain, significantly higher than economists’ consensus estimate of 9% and a substantial acceleration from May’s 8.7% annual rate.  Strong demand from Europe and the U.S. helped to boost China’s exports and Apple’s upcoming iPhone 8 is expected to further boost exports in the upcoming months.

Additionally, China’s imports surged 17.2% in June compared to the same month a year ago and were substantially higher than economists’ consensus estimate of 12.4%.  The surge in imports also represented a significant acceleration from May’s 14.8% annual pace.  Since both exports and imports are booming in China, there is a lot of optimism about their second-quarter GDP announcement coming out this week.


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.

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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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