Stocks Open the Second Half of 2018 on a Positive Note

Excerpt from Louis Navellier's Marketmail - 07/10/2018

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The S&P rose 1.52% last week with the biggest surge (+0.85%) on Friday. NASDAQ did even better (+2.37%) while the Russell 2000 doubled the S&P 500 with a 3.10% gain. Earlier in the week, market oscillations were caused by air pockets that are common in the summer months and may continue in upcoming weeks. However, thanks to record stock buyback activity as well as dividend increases, the market continues to meander steadily higher. Whenever the market meanders higher on light trading volume, that is a very good sign, since it can potentially go up a lot more when trading volume rises when the second quarter announcement season begins.

If you drove a lot during the long holiday week, don't get mad about the high prices at the pump. Instead, you can profit from those higher gas prices. Refiners are expected to post very strong earnings from the highest "crack" spreads in approximately three years. Our stocks that receive a double-A grade ("A" in both Dividend Grader and Portfolio Grader) are dominated by refiners like Valero Energy (VLO), which should post exceptionally strong earnings from those spreads.

(Please note; Louis Navellier currently personally owns a position in VLO, Navellier currently owns a position in VLO for client portfolios)

I also bet that your weather has been sizzling hot lately! Not only is the US setting record-high temperatures, but so is Canada, Europe, the Middle East and Asia. This hot weather is helping boost natural gas demand, since much of the US has natural gas power plants designed to meet extraordinarily high air conditioning demand. That means the only weak energy commodity, natural gas, is now resurging, since the weather is expected to remain hot well into September.

Also, multiple "heat domes" around the world are creating tropical depressions, so it looks like this could be a record season for hurricanes, so re-insurance companies like Berkshire Hathaway may be at risk if we suffer more natural disasters, such as the new wave of fires out West.

(Please note; Louis Navellier currently does not own a position in Berkshire Hathaway, Navellier currently does not own a position in Berkshire Hathaway for client portfolios)


In This Issue of Marketmail

Overall, our authors deliver a side of the trade war story that you don't often hear, and our angle is beginning to resonate with investors who are tired of the scare stories that have dominated the press since January. Bryan Perry begins by showing how the bulls bought stocks big on the day the tariffs were added. Then Gary Alexander shows Trump's secondary goal of attacking product piracy as well as our trade deficits. Ivan Martchev shows how far more tariffs have been imposed than implemented, while Jason Bodner shows why America is still the best place for your stock money. I'll return to give you a media report on trade jitters, along with the latest jobs data.

 

Income Mail:  The Bulls Want to Bust Out of the China Shop  

Utilities: A Surprising Summer Sweet Spot

 by Bryan Perry

  

Growth Mail:  Of Doomsday Books and Articles, There Will Be No End  

Case in Point: Trump's Tariffs are Not "Smoot Hawley II" 

by Gary Alexander

  

Global Mail:  What the Goldman Sachs Indicator is Telling us Now
Business Cycle Statistical Distribution

by Ivan Martchev

 

Sector Spotlight:  When to Bet on "Impossible" Comebacks - In Sports and Stocks
Leading Sectors for First Half: Consumer Discretionary & Info Tech 

by Jason Bodner

 

A Look Ahead:  All the Scary Tariff Talk is Beginning to Backfire  

US Job Growth Soars, But We Need More Qualified Workers

by Louis Navellier

We're in the 2nd Longest Bull Market Run, EVER...

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original article from John Waggoner (InvestmentNews.com)

It's been said that “bull markets don’t die of old age; they die of fright.”

Usually, that fright doesn't come from high prices or panic in the market...it comes from external events: war, oil shortages, unexpected financial collapse, etc.

Here’s a look at the nine bear markets since World War II — and the events that precipitated them.

May 1946 — May 1947

Dow decline:  -23.2%

Cause: Sharp Winding Down of the War Effort

Stocks had soared starting in 1942, once victory in World War II seemed more likely. As the troops came home, however, government factory jobs ground to a halt, industrial production plunged and investors feared the return of the Great Depression.


December 1961 — June 1962

Dow decline:  -27.1%

Cause: Rising Cold War Fears, Labor Unrest

The failed Bay of Pigs invasion of Cuba in August 1961 stoked Cold War fears. Under pressure from President John F. Kennedy, unions negotiated modest salary increases. The president was furious when the industry promptly hiked prices $6 a ton. "My father always told me that all businessmen were sons of bitches, but I never believed it until now,” he said, sparking fears of an anti-business administration.


February 1966 — October 1966

Dow Decline:  -25.2%

Cause: The Costs of War

The “Go-Go” years hit a speed bump. The Federal Reserve warned in March 1965 that the economy was close to overheating. Treasury bill rates and the consumer price index began rising. The U.S. bombing of Hanoi marked a substantial increase in the Vietnam war effort.


December 1968 — May 1970

Dow Decline:  -35.9%

Cause: Political Turmoil

Race riots in Detroit in July 1967 were just a taste of what was to come in the next two years as the nation struggled with rioting after the murder of Martin Luther King Jr., the murder of Robert Kennedy and massive anti-war demonstrations. Inflation rose to 6% and Treasury bill yields headed north of 7%.


January 1973 — December 1974

Dow Decline:  -45.1%

Cause: Oil Embargo, Watergate

The Arab Oil Embargo started in October 1973, sparking long gas lines, price spikes and an 11.5% prime rate. The Watergate scandal helped push stocks down even more as President Richard Nixon resigned and President Gerald Ford pardoned him.


April 1980 — August 1982

Dow Decline:  -24.1%

Cause: Inflation Whipped

Paul Volcker became chairman of the Federal Reserve in July 1979, and set out to crush soaring inflation by raising rates to unprecedented heights. By December 1979, the prime rate hit 21.5%, and by August 1982, unemployment was at 10.5%.


August 1987 — October 1987

Dow Decline:  -36.1%

Cause: Rising Interest Rates

One of the greatest bull markets of all time was born in the wake of the 1982 bear market, buoyed by falling interest rates and Reagan-era tax cuts. Inflation jitters sent the bellwether 10-year Treasury note yield to 10.1% in October 1987 from 7% in January, sparking a flight to safety. The Dow plunged 22.6% on Oct. 19, 1987, still the sharpest one-day drop in history. (An equivalent drop today would take the Dow down nearly 5,000 points.)


March 2000 — October 2002

Dow Decline:  -38%

Cause: Insane Prices

Here’s a bull market that actually did die of fright. Stock prices gleefully soared to astonishing heights, and some of the highest fliers didn’t actually have earnings. Selling began in March 2000, tearing the technology-laden Nasdaq the hardest.


October 2007 — March 2009

Dow Decline:  -53.8%

Cause: Housing Market & Banking Collapse

For a brief time in 2006, all you really needed to buy a $1 million starter castle was a bright smile and a cowboy mortgage broker. Thanks to the miracles of Wall Street engineering, investors found that bundles of bad loans were just as bad as individual bad loans. The mortgage miasma sucked down some of the biggest institutions on Wall Street, from Countrywide bank to Lehman Brothers.

 

Mid-Year Review: A "Goldilocks" Investment Environment Continues

Excerpt from Louis Navellier's Marketmail - 07/03/2018

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In my podcast last week, I pointed out that the stocks being added to the Russell 2000 index were very firm. Furthermore, I named multiple stocks that would benefit from the quarter-ending smart-Beta realignment. The bottom line is that money is not leaving the stock market, it is merely being reshuffled.

I should add that so far this year, stock buy-backs have risen 42%. In the first quarter, stock buy-backs in the S&P 500 hit an all-time record of $137 billion and I expect that the second quarter figure will be even larger. It is important to point out that the stock market has not risen as much as earnings have risen this year, so price-to-earnings ratios continue to decline. Since companies with a high return-on-equity (ROE) and low forecasted price-to-earnings ratios love to buy their shares, this buy-back trend should continue.

I was also watching the bid-to-cover ratios during last week's Treasury auctions and there were a lot more bidders than buyers, so the bid-to-cover ratios continue to rise, and Treasury yields continue to moderate. Market rates remain soft, especially the 10-year Treasury bond. This will continue to take pressure off the FOMC to raise rates further, despite robust GDP growth. Overall, the current interest rate environment, combined with robust sales and earnings means that we remain in a Goldilocks investment environment.

 


In This Issue of Marketmail

Our authors agree that uneven trade barriers need fixing but talk of a "trade war" is overblown. Bryan Perry believes that Chinese and American leaders need to find a way to overcome their "language barrier" by next Friday or the market could undergo another "tariff tantrum." Gary Alexander looks beyond the media headlines to find an under reported story - this time, in European immigration and GDP reduction. Ivan Martchev looks at the trade war through the measuring rod of the Chinese yuan. He also surveys China's "ghost cities" to see where the Chinese credit bubble began. Jason Bodner's angle on the trade war is how the algorithmic traders keep generating new buying opportunities by creating mini-market quakes after every new tariff announcement. I'll close with a little wisdom from the auto makers I met in Alabama last week, plus late news on Sunday's Mexican election and the latest U.S. economic barometers.

 

Income Mail:  Is Tough Trade Talk Risking a New "China Syndrome"?  

Comparing American Apples and Chinese Oranges

 by Bryan Perry

  

Growth Mail:  After 242 Years, America is Still the World's #1 Safe Haven   

First Half Winners: Oil, Nasdaq & Small Stocks (Big Loser: Bitcoin)   

by Gary Alexander

  

Global Mail:  China's Empty Cities Sure Don't Come Cheap
Weaponizing the Yuan

by Ivan Martchev

 

Sector Spotlight:  Don't Mind the Small Market Quakes
The Ups and Downs of the Trade War Story 

by Jason Bodner

 

A Look Ahead:  Alabama Sees Through the Media's Scare Tactics

The Other Economic News Was Not So Exciting Last Week

by Louis Navellier

S&P 500 - Sector Change

S&P 500 SECTOR CHANGE ANNOUNCEMENT

Recently the GICS (Global Industry Classification Standards) Index Manufacturers, together with S&P Dow Jones Indexes, announced that they were re-aligning the Sectors of the S&P 500. The major changes include:

  • Renaming Telecommunications to Communications.
  • Repositioning 18 media and entertainment companies from Consumer Discretionary and adding them to Communications, including Netflix, CBS and Walt Disney.
  • Repositioning 5 entertainment and software services companies from Technology and adding them to Communications including Google and Facebook.
  • Repositioning EBAY from Technology and adding it to Consumer Discretionary.

In Summary, these changes will result in a 6% reduction in the size of the Technology Sector and a 3% reduction in the size of the Consumer Discretionary Sector. The updated Communications Sector will comprise about 10% of the S&P 500. The final Index changes are expected to be announced on July 1st and the official rebalance of the Index Sectors is expected to take place on September 24th.

The Cavalier Tactical Rotation Fund now incorporates the Communications Sector.  The Fund utilizes all 11 S&P 500 Sectors in the Tactical Rotation methodology.

The First Half of 2018 Should Close with a "Big Bang" in Small Stocks

Excerpt from Louis Navellier's Marketmail - 06/26/2018

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Even though a wave of tariff escalations sent the Dow Jones average down 2% last week, the truth of the matter is that the U.S. has the leverage, since China needs the U.S. because it is its biggest export market. 

This week marks the annual Russell realignment, so I expect to see many stocks surging higher as they are added to the Russell 1000, 2000, and 3000 indices (Note: The Russell 3000 index is composed of the Russell 1000 & 2000 indexes). Quarter-ending window dressing will also positively impact stocks this week, especially growth stocks with strong sales and earnings, Furthermore, the crisis in emerging markets is causing worldwide capital flight to the U.S. dollar. In 2017, most investment funds flowed into international stocks, including emerging markets and multinational stocks, but in 2018 that flow has been diverted to domestic stocks, propelling the Russell 2000 index higher. The critical path now is into domestic micro-, small-, and mid-capitalization companies with strong forecasted sales and earnings.

On my Tuesday podcast, I reiterated that the stock market is still the best place to be, since the S&P 500 yields approximately 1.9% and dividends are taxed at a maximum federal rate of just 23.8%. That means investors earn more staying in the stock market than by putting their money in a bank, where their interest income is taxed at a maximum federal rate of 40.8%. Furthermore, the 10-year Treasury bond yield has declined significantly since mid-June's Federal Open Market Committee meeting. This means the yield curve is "flattening," removing pressure on the Fed to hike key interest rates in upcoming months. This creates a 'nirvana' environment of moderate interest rates, 4% GDP growth, and strong company earnings

 


In This Issue of Marketmail

Bryan Perry sees the stars lining up for a second-half rally, particularly in dividend growth stocks. Gary Alexander takes time out to honor Charles Krauthammer, including some of his financial commentaries. Ivan Martchev expands on something I've long said about many ETFs - they act like a scam on small investors, and Jason Bodner gives us an example of how it often pays not to sell into a panicky market.

 

Income Mail: Setting Up for a Sizzling Second-Quarter Earnings Reporting Period

"FOMO" Will Make Domestic Dividend Growth Investing the Second-Half "Sweet Spot"  

by Bryan Perry

  

Growth Mail: R.I.P. Charles Krauthammer (1950-2018)  

Krauthammer's Common-Sense Solution to the Entitlements Crisis  

by Gary Alexander

  

Global Mail: The ETF Industry is Like a $3.6 Trillion Scam
A Practical Example of a "Bad" ETF

by Ivan Martchev

 

Sector Spotlight: Don't Let the Bad News Bewitch You into Selling
An Example of Not Selling into Bad News

by Jason Bodner

 

A Look Ahead: This "Trade War" Will Likely End with Fewer (and Lower) Tariffs   

Despite Negative Political News, "Positive Business Outlook" is at Record Highs  

by Louis Navellier

World Leaders Pose and Strut but Will Likely Cooperate in the End

Excerpt from Louis Navellier's Marketmail - 06/12/2018

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As we go to press, President Trump is meeting North Korean Supreme Leader Kim Jong-un in Singapore. Over the weekend, there was a lot of outraged reaction by G7 leaders to President Trump's appearance at the G7 meeting, but I expect that most countries will follow China, which offered last week to purchase nearly $70 billion of U.S. farm, manufacturing, and energy products in order to keep the trade flowing.

The truth of the matter is that the U.S. has the leverage, since it is typically the biggest buyer of exports. Countries with big trade surpluses, like China and Germany, do not want to jeopardize their lucrative trade relationships. President Trump's tariff threats are merely tactics to negotiate more favorable trade deals. It will be interesting to see how each country responds, but I expect the U.S. to prevail in the end.

The Fed is also meeting this week. New Fed Chairman Jerome Powell was reportedly hand-picked by Treasury Secretary Mnuchin to be more "market friendly." The Fed wants stable financial markets, since it is good for the banking industry, especially now that some major money center banks are under stress from troubled emerging markets and the flattest Treasury yield curve in over a decade. So again, I expect a relatively dovish FOMC statement that will continue to boost both the bond and stock markets.


In This Issue of Marketmail

In bringing the global headlines back to the world of investing, Bryan Perry favors covered calls on U.S.-based technology stocks. Gary Alexander also counsels focusing on domestic stocks, due in part to the rise in global conflicts - soon to be dramatized in the World Cup matches in Russia. Ivan Martchev sees problems in several emerging-market currencies as well as the deflating bitcoin bubble, while Jason Bodner compares sectors to sports teams (and stocks to sports stars) with Info Tech being the new sector "dynasty." In the end, I'll return with a look at small stock realignment and the Fed's meeting this week.

 

Now That's How You Beat The Algos!

Written by:  Rich Farr, Chief Market Strategist for Bluestone Capital Management and Jim McGovern, Market Strategist for Bluestone Capital Management
info@bluestonecm.com 

Bluestone Capital Management is the Sub-Advisor to the Cavalier Multi Strategy Fund

 

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

* Now we know who’s been buying the Italian government debt … the Italian government!

* ECB won’t have Italy’s back if Inflation remains elevated, but PPI today provides some relief.

* Wall Street continues to raise earnings estimates.   U.S. outlook remains strong.

* U.S. Factory Orders fell in April, but improved on Y/Y basis.

* Australian Retail Sales slow further … we are getting closer to declaring Aussie a problem.

ITALY BUYS ITS OWN DEBT BACK:

Who would have thought that the Italian government could manipulate the algorithms for its own benefit in a way that would make the fake news, some of the world’s largest hedge funds (no offense), and even Cambridge Analytica jealous?

But sure enough, at the same time Italy was scaring the markets that they were about to blow up all of Europe, the Italian Treasury was in the market bidding on its own bonds below par.   Genius we have to say.  Pure genius.   Wish we thought of it ourselves.  See here:  https://is.gd/AElF0X

All we have to say is don’t get too comfortable that the Italian Treasury has your back.  Italy bought back 2B Euros worth of debt, that’s 0.9% of the 223B Euros worth of debt it needs to refinance over the next twelve months.  Clearly, Italy is going to need the ECB to do some of the heavy lifting from here and it still seems likely that the ECB’s QE program is coming to an end in roughly 3 months.   This trickery can only last so long.

Not to mention, Italy’s new government seems set on blowing up the budget.  The new government wants to cut taxes via a flat tax that will cost the Treasury an additional 30B Euros (see here:  https://is.gd/dAAUX7).

And let’s not forget that the market was incredibly afraid when Paolo Savona was about to become Italy’s new Economic Minister.  Yet, somehow the market seems to have completely missed the news that he’s actually STILL part of Italy’s new government (rather he’s now Italy’s Minister of EU Affairs … we’re not sure how that’s to be viewed as more ‘market friendly’).   As for Italy’s other new appointees … well, some of them not only support Mr. Savona’s views, but they actually want Germany kicked out of the E.U. (yes, that was said over the weekend.  But hey, Savona isn’t Economic Minister, so let’s all get bullish and buy Italian debt then?  Hmm.  See here:  https://is.gd/3FKUO9).

We wish you good luck buying those Italian bonds.   At least you now know who the other buyer is when you need to sell in a hurry.

EURO AREA PPI UP +2.0% Y/Y IN APRIL:

Eurostat reported today that the Euro Area PPI was unchanged M/M in the month of April.  This follows eight consecutive monthly increases.  It should be noted that PPI slowed slightly to +2.0% Y/Y (versus +2.1% Y/Y prior).  Note that Durable Goods prices increased +0.1% M/M, Capital Goods prices increased +0.1% M/M, and Intermediate Goods prices increased +0.2% M/M; however, Energy prices fell -0.4% M/M.  Also, Eurozone PPI increased +0.1% M/M and +2.4% Y/Y (also +2.4% Y/Y prior).

WALL STREET CONTINUES TO UP ESTIMATES AS Q1 EARNINGS SEASON REACHES AN END:

As of May 31st, 493 of the S&P 500 Index companies have reported Q1 earnings, of which 376 have beaten earnings (76.27%) and 88 have missed (17.85%) earnings estimates.  Thus far, 62 out of 68 Tech companies have beaten their earnings estimates, while 49 out of 60 Health Care companies and 25 out of 31 Consumer Staples companies have beaten estimates.  On the other hand, only 51.52% of Real Estate companies has beaten Q1 earnings estimates.

Despite the earnings beats in Q1, Wall Street analysts have lowered their 2018 Q1 EPS estimates over the past two weeks by -$0.04/share to $36.37.  However, the street increased their full year 2018 EPS estimates by +$0.21/share to $157.30 and their 2019 EPS estimates by +$0.44/share to $174.51.  This implies EPS growth of +26.3% Y/Y and +10.9% Y/Y in 2018 and 2019, respectively.  We are still below those lofty forecasts but we still see decent growth for 2018 and 2019.   However, we must ask if lofty street estimates are both sustainable and realistic.  We have concerns about rising employee costs, commodity inflationary pressures, rising borrowing costs, the effect of instant depreciation on earnings, as well as, some deterioration we are picking up internationally, as well as, in our GDP model.

U.S. FACTORY ORDERS DOWN -0.8% M/M IN APRIL BUT ACCELERATE ON Y/Y BASIS:

The Census Bureau reported that U.S. Factory Orders declined -$3.995 billion M/M to $494.45 billion in April.  Thus, factory orders declined -0.80% M/M; however, orders are now up +9.37% Y/Y (+7.19% Y/Y prior).  Factory orders ex-transportation increased for the 10th consecutive month (20 out of the past 21 months), up +0.38% M/M and +8.67% Y/Y to $407.28 billion (+5.90% Y/Y prior).  Lastly, Nondurable Goods orders increased +0.06% M/M but Durable Goods orders declined -1.64% M/M.

AUSTRALIAN RETAIL SALES CONTINUE TO SLOW ON Y/Y BASIS:

With home prices now negative, and household debt levels a mile high, we have Australian on our macro risk “yellow card” list.  According to the Australian Bureau of Statistics, Australian Retail Sales increased +0.43% M/M(seasonally adjusted) in the month of April.  This is the fourth consecutive monthly gain; however, retail sales slowed to +2.62% Y/Y (versus +3.16% Y/Y prior).  In the month, Food store sales increased for the fifth consecutive month (+0.30% M/M), Restaurant sales rebounded +1.31% M/M, other Retailing sales increased +0.87% M/M, and Household Goods sales increased +0.69% M/M.  However, Department Store sales fell -0.90% M/M and Clothing sales fell -0.83% M/M.

AMERICAS:

U.S. GDP:  Our GDP model points toward 3% Real GDP growth through 2018, but sees slightly slower growth in 2019.   Note that our model doesn’t factor in potential stimulus from tax reform or other policy proposals, so GDP could outperform our model.

U.S. Inflation:  U.S. inflation remains in an upward trend, and we continue to believe that wage inflation should turn higher as labor slack (particularly in prime working age groups) continues to decline.    Note that the Fed’s preferred inflation metric, the Core PCE Deflator, increased to +1.9% Y/Y in March.

U.S. Federal Reserve:  We still believe two additional rate hikes will happen in 2018 and that the FOMC will become increasingly more data-dependent as the year progresses – but last week’s data increased the odds of 3 more hikes in 2018.  The Fed simply isn’t “dovish” folks.

U.S. Treasuries:  With inflationary pressures slowly building, and Real GDP trending toward +3.0%, we believe 10-year U.S. Treasury Yields will continue to trend higher and we would expect to see yields approach 3.25% by year end 2018.

U.S. Equities and Earnings:  S&P 500 operating earnings are rising materially, but the question remains, will the market put a 20 P/E multiple on forward earnings?  We think a 20 forward multiple is aggressive, but 18.5 may not be.   Our SPX target is for an 18.5x P/E on 2019 forward earnings of $162, bringing our 2018 SPX target to 3,000).  We prefer financials given expectations for economic growth and our expectation for an improving (steepening) yield curve.

Argentina:  Argentina’s overall economic condition appears to still be on an improving track, as Industrial Production increased +3.4% Y/Y and Retail Sales accelerated to +35.6% Y/Y.  However, Consumer Confidence slipped to 36.1 from 40.1, Exports slowed to +6.2% Y/Y, and Construction Activity slowed to +8.3% from +16.6%.  Any signs of weakness are a problem when you are dealing with 7.2% unemployment and 26.5% inflation.

Brazil:  Unemployment continues to remain elevated (12.9% in April), which raises some concerns.  However, the unemployment data is not seasonally adjusted and has been improving Y/Y.  Also, Retail Sales accelerated to +6.5% Y/Y in March and Personal Loan Defaults improved in March (to 5.0% from 5.1%).  Overall, Brazil’s data have been mixed in 2018, as PMI’s improve but Industrial Production slows.   Of all the major global bond markets, Brazilian 10-year bond yields are the richest in the world at 11.42% which is attractive given that tax receipts are up +10.8% Y/Y (so long as the money is coming in, they can pay the coupon).  As such, we remain bullish on Brazil 10-Year Sovereign Bonds.

Canada: Canada’s housing market has deteriorated further, as existing home sales and prices have been weakening alongside building starts.   However, Canada’s monthly GDP continues to increase (+0.3% M/M to +2.9% Y/Y), unemployment is still trending lower, Consumer Confidence remains at high levels, manufacturing PMI’s remain strong, and retail sales are elevated (+4.1% Y/Y in March).

Mexico: Mexico’s GDP has been in a slowing trend since Q1 2017 (+3.3% then, now +1.3% Y/Y), Unemployment Rate increased to 3.4% in April, Industrial Production is now down -3.7% Y/Y, and PMI’s slowed in May, thus Mexico remains on our macro risk watch.  The Mexican Central Bank has been increasing interest rates since late 2015 (mainly because of fear of dollar weakness).   Meanwhile, Exports accelerated to +17.0% Y/Y, Consumer Confidence improved in April, and Retail Sales improved to +1.2% Y/Y.

Venezuela: We will leave this as a placeholder in the event that Venezuela ever becomes an investible market again.  We are hopeful …

EMEA:

United Kingdom:  The U.K. economy has been reasonably resilient throughout the BREXIT process (PMI’s mostly better in April) and therefore the Bank of England has been raising rates.  But now inflation is slowing, Consumer Confidence has remained negative, Retail Sales have been weak, and home prices have begun to turn lower in London.  Nonetheless, Unemployment continues to improve (4.2% in March) and Industrial Production accelerated to +2.9% Y/Y in March.

European Union:  The stronger Euro may now be a problem for Mario Draghi as CPI has been in a slowing trend for several months (and PPI may have topped out, as we discussed earlier).   Not to mention, Industrial Production slowed to +2.9% Y/Y, Economic Sentiment is turning lower, and PMI’s have turned back from recent highs.   We think the idea of an ECB hike within the next year is basically out the window, and as such we remain bullish on the Euro STOXX 50 Index, as well as European Financials.

European Central Banks:  The ECB is slowly removing accommodation and will likely end its asset purchases by year end.  But Mario Draghi has given no indication about raising rates and the recent decline in CPI will give them even further pause for doing so.  We will watch to see if current ECB tapering has any meaningful impact on the economic outlook.

Eastern Europe: We continue to believe risks remain for Eastern Europe given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).   Yet, economic data have been robust this year across most of Eastern Europe.

South Africa:  Now that Zuma’s out, Confidence (Business and Consumer) appears to be on an up-swing, PMI’s have turned further positive, Retail Sales accelerated to +4.9% Y/Y, and Inflation has cooled.  But these improvements are going to need to get significantly stronger to crush unemployment (26.7% in Q4).

Turkey:  What a mess … the currency is deteriorating, inflation is accelerating, PMI’s turned negative, and Erdogan is blaming everyone but himself.

ASIA / PACIFIC:

Australia:  The RBA has cut rates twice in the past year and Australian data is mixed.  So far, the Unemployment Rate appears to be ticking up slight (to +5.6% in April), the value and number of home loan approvals have turned negative, and Consumer Sentiment has ticked slightly lower recently.  We remain neutral on Australia at this time, on concerns about China exposure but so far China is still posting strong data.

China:   With China cracking down on shadow banking, pollution, industrial overcapacity, and removing migrant workers from its cities, we expect China GDP to continue to trend lower and we are monitoring the situation closely.   Overall, China data have been mixed.  PMI’s continue to indicate solid growth, Industrial Production improved in April to +7.0% Y/Y (+6.0% prior), Industrial Profits accelerated to +15.0% in April, the jobless rate reportedly fell to +4.9% in April.  However, Retail Sales slowed to +9.4% Y/Y in April (was +10.1%) and Home Prices are up +5.3% Y/Y (half the rate of change from a year ago).

India:  Indian economic activity appears to have recovered nicely since the new Goods and Services Tax (GST) was implemented as Commercial Credit accelerated to +12.6% Y/Y, Exports rebounded +5.2% Y/Y, inflation appears to moderated, and PMI’s improved slightly in April. However, Industrial Production slowed to +4.4% Y/Y in March.

Indonesia:  Indonesia’s GDP and Private Consumption Expenditures have been stable at 5% Y/Y, Consumer Confidence has been stable, Manufacturing PMI has been stable in the 49-51 range for a year, Retail Sales are up +3.4% Y/Y, and Exports are up +9.0%.  However, Industrial Production is down -3.5% Y/Y.  Also, the Bank of Indonesia raised rates for the first time in four years in response to the US FOMC rate hikes and subsequent stronger US Dollar.

Japan:  Overall, we remain bullish on Japan given that Japan’s economic activity remains in an improving trend:unemployment remains low (2.5% in March), Industrial Production is up +2.5% Y/Y, Retail Trade is up +1.6% Y/Y, PMI’s improved in April (but consumer confidence slipped), and Exports are up +4.6% Y/Y.

RussiaThe Russian economy isn’t setting the world afire, but GDP came in at +1.3% in Q1 2018.  Overall, economic data continue to suggest economic growth, as Retail Sales were up +4.7% Y/Y in April, Real Wages are up +7.8% Y/Y, Unemployment is improving, Industrial Production is up +1.3% Y/Y, and exports are up +17.8% Y/Y despite sanctions.  Meanwhile, Core CPI is muted at +1.9% Y/Y, which has allowed the Bank of Russia to remain accommodative.   Russian equities remain among the cheapest in the industrialized world and we remain bullish.

South Korea:  While the world looks forward to peace on the Korean Peninsula, we are keeping an eye on trade data into China, which improved in March.   Overall, SK is beginning to show signs of slowing post-Olympics (imports are slowing, Industrial Production is only up +0.9% Y/Y, Retail Sales slowed to +6.6% Y/Y, and the Nikkei South Korea PMI has been below ‘50’ for three months in a row).

GLOBAL CENTRAL BANK SCORECARD:

MACRO TRADE IDEAS:

 

WEEK IN REVIEW – BEST & WORST PERFORMERS:

S&P 500 SECTOR PERFORMANCE:

Source: Bloomberg

 

BEST/WORST PERFORMING WORLD BOND MARKETS:

Source: Bloomberg

 

BEST/WORST PERFORMING GLOBAL STOCK MARKETS:

Source: Bloomberg

 

CURRENCIES PERFORMANCE:

Source: Bloomberg

 

COMMODITIES MARKET PERFORMANCE:

Source: Bloomberg

 

MAJOR GLOBAL STOCK MARKETS:

Source: Bloomberg

 

MAJOR GLOBAL BOND MARKETS:

Source: Bloomberg

Italy Now Infected by the Emerging Market Debt Crisis

Excerpt from Louis Navellier's Marketmail - 06/05/2018

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Screen Shot 2018-06-05 at 2.25.07 PM.png

The emerging market crisis spread to Brazil and infected Italy this week. Even though Italy is not an emerging market, the country holds a disproportionate amount of emerging market debt. Furthermore, Italian President Sergio Mattarella blocked two anti-establishment parties, the 5 Star Movement & League parties, from taking power, effectively denying Italian voters their chosen political leaders from the March 4 election. These new political parties are not friendly to the European Union (EU), reflecting the fact that Italian voters are increasingly hostile to the EU leadership. However, on Thursday, the 5 Star Movement & League struck a deal to form a new government, raising hopes of forming a coalition. 

In the meantime, Carlo Cottarelli has been named Italy's new Prime Minister to lead a "caretaker" government if a coalition cannot be formed. Spain's leadership is also under siege, since Prime Minister Mariano Rajoy faces a no-confidence vote in Parliament. Between the chaos in Italy and Spain, the euro hit a six-month low against the U.S. dollar, which is causing the 10-year U.S. Treasury rates to retreat.


In This Issue of Marketmail

Our main theme this week is that the U.S. has become a safe haven in a world filled with turmoil. In addition to our dominant GDP, Bryan Perry looks at some numbers under the radar, including hot new earnings and GDP estimates, which imply a potential summer rally. If it's June, there must be a European crisis, says Gary Alexander, but the U.S. recovery keeps sailing along, now the second longest in history. Ivan Martchev covers ways to hedge against the dollar short squeeze, a byproduct of the emerging markets crisis, while Jason Bodner looks for clues of future long-term leadership in the early warnings system of the sector scoreboard. I wrap up with the implications of a strong dollar and strong economy.

 

 

News from Asia Whiplashes the Market... Unnecessarily

Excerpt from Louis Navellier's Marketmail - 5/20/2018

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The stock market got off to a strong start last week after China and the U.S. agreed not to impose tariffs on each other. Specifically, China's Vice-Premier Liu He said the two sides "reached a consensus, will not fight a trade war, and will stop increasing tariffs on each other." A joint statement issued in China and Washington said China would "significantly" increase its purchases of American goods, so in the end, the financial media overreacted to trade war talk, since these tariffs were used merely as negotiating tactics.

 Later on, the stock market sold off on Thursday due to news that the North Korean nuclear summit in Singapore in June had been cancelled (temporarily, as it turns out). The stock market usually rallies going into holiday weekends and last week was no exception, with the S&P rising 0.3% and Nasdaq up 1.1%. People are usually happy leading up to holiday weekends and that tends to rub off on investor sentiment.

We have a lot to be thankful for, such as the fact that the 10-year Treasury bond yield has fallen under 3% and the Fed's FOMC minutes revealed that any inflation fears are just "temporary." Furthermore, the fact that small-capitalization stocks in the Russell 2000 continue to exhibit tremendous relative strength is a good sign, since the breadth and power of the overall stock market is expanding. Traditionally, when the Russell 2000 leads, it is very bullish for the market, so June and July are shaping up to be very positive!


In This Issue of Marketmail

Bryan Perry will analyze an interesting new word from last week's Fed minutes, and what it implies for summer market performance. After his usual jaunt down memory lane, Gary Alexander looks at corporate liquidity for clues to the market's next big move. Ivan Martchev sees danger in the emerging markets and a delayed reaction to the dollar strength in the commodity markets. Jason Bodner advises us to watch the institutional traders more than the silly stories about news events which supposedly "move the market." In the end, I'll bring you a few more reasons to expect continued strong market performance in June.

Small Stocks are "Melting Up" in May

Excerpt from Louis Navellier's Marketmail - 5/22/2018

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As the first-quarter earnings announcements wind down, the announcement of new dividend increases, stock buy-backs and new acquisitions have put a strong foundation under many stocks. In addition, the amount of stock outstanding continues to shrink, so there are fewer shares to buy. The main switch in allocations over the last month has been caused by a resurging U.S. dollar, which is causing many institutional investors to cut their allocations in multinational stocks as they focus on domestic stocks. As a result, the small-cap Russell 2000 has risen by 5% so far in May vs. just 2.4% for the S&P 500.

The 10-year Treasury bond has risen decisively above the 3% level to the highest yield in seven years. However, thanks to strong buy-back activity and positive analyst community reports, there is persistent institutional buying pressure, so every dip should be viewed as a buying opportunity. Since computers and algorithms tend to sell without thinking, this opens up plenty of buying opportunities most weeks.


In This Issue of Marketmail

Bryan Perry examines the likely market impact of a new trifecta of economic concerns: a rising dollar, spiking oil prices, and rising interest rates. Gary Alexander examines the latest data to expose another false alarm in the recent concern over "peak earnings. Ivan Martchev examines the recent decline in gold and silver prices in light of a rising U.S. dollar and gold buying in China and Russia. Jason Bodner focuses on the once-weak, now-strong Energy sector. In the end, I'll also look at the energy fundamentals, along with hopeful signs for 2nd and 3rd quarter GDP growth based on the Leading Indicators and other data.

Here Comes the Deficit

Written by:  Rich Farr, Chief Market Strategist for Bluestone Capital Management and Jim McGovern, Market Strategist for Bluestone Capital Management
info@bluestonecm.com 

Bluestone Capital Management is the Sub-Advisor to the Cavalier Multi Strategy Fund

 

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

* Tax season ends and U.S. tax receipts tanked in early May.

 

U.S. TAX RECEIPTS DOWN -18% Y/Y IN 1H MAY:

Tax seasons is over folks and here comes the deficit spending.  We’re not sure why anyone would want to own U.S. Treasury Bonds when tax receipts are going down and federal spending is going up.   On that note, according to the U.S. Treasury, tax receipts are down -18.4% Y/Y through May 10th.  Furthermore, overall tax receipts slowed to +1.9% Calendar YTD (versus +3.6% at the end of April).  The decline in the month was led by Income Taxes, as Income and Employment Withholdings Taxes fell -16.7% Y/Y and slowed to +0.1% Calendar Y/Y (+1.8% Y/Y at the end of April).  Furthermore, Excise & Other Taxes declined -50.9% Y/Y and slowed to +29.4% Calendar YTD (versus +32.8% Y/Y at the end of April).  Conversely, Corporate Income Taxes increased +27.1% Y/Y but they are still down -18.3% Calendar Y/Y (-18.5% Y/Y at the end of April).

 

AMERICAS:

U.S. GDP:  Our GDP model points toward 3% Real GDP growth through 2018, but sees slightly slower growth in 2019.   Note that our model doesn’t factor in potential stimulus from tax reform or other policy proposals, so GDP could outperform our model.

U.S. Inflation:  U.S. inflation remains in an upward trend, and we continue to believe that wage inflation should turn higher as labor slack (particularly in prime working age groups) continues to decline.    Note that the Fed’s preferred inflation metric, the Core PCE Deflator, increased to +1.9% Y/Y in March.

U.S. Federal Reserve:  We still believe two additional rate hikes will happen in 2018 and that the FOMC will become increasingly more data-dependent as the year progresses.

U.S. Treasuries:  With inflationary pressures slowly building, and Real GDP trending toward +3.0%, we believe 10-year U.S. Treasury Yields will continue to trend higher and we would expect to see yields approach 3.25% by year end 2018. 

U.S. Equities and Earnings:  S&P 500 operating earnings are rising materially, but the question remains, will the market put a 20 P/E multiple on forward earnings?  We think a 20 forward multiple is aggressive, but 18.5 may not be.   Our SPX target is for an 18.5x P/E on 2019 forward earnings of $162, bringing our 2018 SPX target to 3,000).  We continue to favor the homebuilders, despite higher interest rates given the demographic tailwind and lack of inventory.   We also prefer financials given expectations for economic growth and our expectation for an improving (steepening) yield curve.

Argentina:  Argentina’s overall economic condition appears to still be on an improving track, but data came in weaker recently as Industrial Production slowed to +1.2% Y/Y (from +5.3%), Consumer Confidence slipped to 40 from 43.8, and Construction Activity slowed to +8.3% from +16.6%.  Any signs of weakness are a problem when you are dealing with 7.2% unemployment and 25.4% inflation.

Brazil:  Unemployment has been steadily picking up in 2018 (13.1% in March versus 11.8% in December), which raises some concerns.  However, the unemployment data is not seasonally adjusted and has been improving Y/Y.  Also, Retail Sales accelerated to +6.5% Y/Y in March and Personal Loan Defaults improved in March (to 5.0% from 5.1%).  Overall, Brazil’s data have been mixed in 2018, as PMI’s improve but Industrial Production slows.   Of all the major global bond markets, Brazilian 10-year bond yields are the richest in the world at 10.07% which is attractive given that tax receipts are up 6.7% Y/Y (so long as the money is coming in, they can pay the coupon).  As such, we remain bullish on Brazil 10-Year Sovereign Bonds.

Canada: Canada’s housing market is still on the radar, as building permits and housing starts weaken but Canada’s monthly GDP rebounded in February (+0.4% M/M to +3.0% Y/Y).  Unemployment is still trending lower, Consumer Confidence remains at high levels, manufacturing PMI’s remain strong, and retail sales are elevated (+3.5% Y/Y in February).

Mexico: Mexico’s GDP has been in a slowing trend since Q1 2017 (+3.3% then, now +1.2% Y/Y), Industrial Production is now down -3.7% Y/Y, and PMI’s slowed in April, thus Mexico remains on our macro risk watch.  The Mexican Central Bank has been increasing interest rates since late 2015 (mainly because of fear of dollar weakness).   Consumer Confidence has been trending slightly downward since September (although improved in April).  Meanwhile, Exports are up +12.5% Y/Y, Retail Sales improved to +1.2% Y/Y, and unemployment improved to 2.9%.

Venezuela: We will leave this as a placeholder in the event that Venezuela ever becomes an investible market again.  We are hopeful …

EMEA: 

United Kingdom:  The U.K. economy has been reasonably resilient throughout the BREXIT process (PMI’s mostly better in April) and therefore the Bank of England has been raising rates.  But now inflation is slowing, Consumer Confidence has remained negative, Retail Sales have been slowing, and home prices have begun to turn lower in London.  

European Union:  The stronger Euro may now be a problem for Mario Draghi as CPI has been in a slowing trend for several months.   Not to mention, Industrial Production slowed to +2.9% Y/Y, Economic Sentiment is turning lower, and PMI’s have turned back from recent highs.   We think the idea of an ECB hike within the next year is basically out the window, and as such we remain bullish on the Euro STOXX 50 Index, as well as European Financials. 

European Central Banks:  The ECB is slowly removing accommodation and will likely end its asset purchases by year end.  But Mario Draghi has given no indication about raising rates and the recent decline in CPI will give them even further pause for doing so.  We will watch to see if current ECB tapering has any meaningful impact on the economic outlook.

Eastern Europe: We continue to believe risks remain for Eastern Europe given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).   Yet, economic data have been robust this year across most of Eastern Europe.

South Africa:  Now that Zuma’s out, Confidence (Business and Consumer) appears to be on an up-swing, PMI’s have turned further positive, Retail Sales accelerated to +4.9% Y/Y, and Inflation has cooled.  But these improvements are going to need to get significantly stronger to crush unemployment (26.7% in Q4).

Turkey:  What a mess … the currency is deteriorating, inflation is accelerating and PMI’s turned negative. 

ASIA / PACIFIC:

Australia:  The RBA has cut rates twice in the past year and Australian data is mixed.  So far, Unemployment Rate remains at 5.5%, Retail Sales increased +3.1% Y/Y in March, PMIs indicate solid growth, Auto Sales are up +6.7% Y/Y in December, and business and consumer confidence have been strong.    Conversely, we are starting to see mixed data in the housing market (although private sales were down -6.1% M/M, building approvals were up +2.6% M/M).  We remain neutral on Australia at this time, on concerns about China exposure but so far China is still posting strong data.

China:   With China cracking down on shadow banking, pollution, industrial overcapacity, and removing migrant workers from its cities, we expect China GDP to continue to trend lower and we are monitoring the situation closely.   PMI’s continue to indicate growth, but are now in a clear slowing trend as backlogs and new orders weaken, Industrial Profits slowed to +11.6% in March, and Durable Goods Orders fell 12% M/M in February.  Home Prices are up +5.4% Y/Y (half the rate of change from a year ago). However, CPI slowed to +2.1% Y/Y in April, Retail Sales are up +10.1% Y/Y, and Industrial Production is up +6.0% Y/Y thus far in 2018.  We are watching for further signs of stress within China’s credit and housing markets.

India:  Indian economic activity appears to have recovered nicely since the new Goods and Services Tax (GST) was implemented as Commercial Credit accelerated to +12.6% Y/Y, inflation appears to moderated, and PMI’s improved slightly in April. However, Industrial Production slowed to +4.4% Y/Y in March and Exports are down -0.7% Y/Y.

Indonesia:  Indonesia’s GDP and Private Consumption Expenditures have been stable at 5% Y/Y, Consumer Confidence has been stable, Manufacturing PMI has been stable in the 49-51 range for a year, Retail Sales are up +3.4% Y/Y, and Exports are up +6.1%.  However, Industrial Production is negative and CPI ticked higher in March.

Japan:  Overall, we remain bullish on Japan given that Japan’s economic activity remains in an improving trend: unemployment remains low (2.5% in March), Industrial Production is up +2.2% Y/Y, Retail Trade is up +1.0% Y/Y, PMI’s improved in April (but consumer confidence slipped), and Exports are up +1.8% Y/Y.

RussiaThe Russian economy isn’t setting the world afire, but GDP came in at +1.5% in 2017, despite Q4 being weaker than expected at +0.9% Y/Y, Services PMI jumped to 55.5 in April, and manufacturing PMI remains in an improving trend (+0.7 points to 51.3 in April).  Overall, economic data continue to suggest economic growth, as Retail Sales were up +4.2% Y/Y in March, Real Wages are up +6.5% Y/Y, Unemployment is improving, Industrial Production is up +1.0% Y/Y, and exports are up +21% Y/Y despite sanctions.  Meanwhile, Core CPI is muted at +1.3% Y/Y (weekly CPI as of May 7), which has allowed the Bank of Russia to remain accommodative.   Russian equities remain among the cheapest in the industrialized world and we remain bullish. 

South Korea:  While the world looks forward to peace on the Korean Peninsula, we are keeping an eye on trade data into China, which improved in March.   Overall, SK is beginning to show signs of slowing post-Olympics (imports are slowing, Industrial Production is negative, Consumer Confidence has been declining since November, and the Nikkei South Korea PMI has been below ‘50’ for two months in a row).

GLOBAL CENTRAL BANK SCORECARD:

MACRO TRADE IDEAS:

WEEK IN REVIEW – BEST & WORST PERFORMERS:

S&P 500 SECTOR PERFORMANCE:

Source: Bloomberg

BEST/WORST PERFORMING WORLD BOND MARKETS:

Source: Bloomberg

BEST/WORST PERFORMING GLOBAL STOCK MARKETS:

Source: Bloomberg

CURRENCIES PERFORMANCE:

Source: Bloomberg

COMMODITIES MARKET PERFORMANCE:

Source: Bloomberg

MAJOR GLOBAL STOCK MARKETS:

Source: Bloomberg

MAJOR GLOBAL BOND MARKETS:

 Source: Bloomberg

Source: Bloomberg

Market Mood Turns Up Despite News that Once Seemed "Bad"

Excerpt from Louis Navellier's Marketmail - 5/15/2018

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Last week, my headline was "The Best Earnings in 7+ Years Deserve a Better Market Than This!" and the market must have been reading what we wrote. The Dow rose seven days in a row, rising 2.34% for the week. The S&P 500 rose 2.41%, the Russell 2000 rose 2.63%, and NASDAQ rose 2.68% last week.

First-quarter announcement season is winding down and the S&P 500 has so far posted 25% average annual earnings growth and 8.3% average annual sales growth. First-quarter S&P 500 earnings have been an average 7.1% better than analysts' consensus expectation, so it has been a stunning earnings season.

On Tuesday, President Trump announced that the U.S. was pulling out of the nuclear inspection deal with Iran. The market initially fell, but then quickly resumed rising. No matter what other "bad" news came out, the market kept rising. With the underlying sales and earnings growth of the stock market so strong, I wonder what the financial media will cook up next to try to spook investors into selling stocks..

Despite Monday's Retest, April Should be a Strong Month

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April 3, 2018 - by Louis Navellier

 

The S&P 500 has now retested its lows three times and bounced back, but NASDAQ had yet to test its February 8 lows - until yesterday. I know yesterday felt like a stomach-churning roller-coast ride, but all that's happening is that NASDAQ is retesting its February 8 low of 6,777. Several of the leading tech stocks are being hit hard, including most of the FAANG stocks, as well as the "driverless car" problem hitting Tesla and Nvidia (which I'll discuss later on). As a result, NASDAQ may continue to test its lows later this week, but many tech stocks are also set to post strong first-quarter earnings in the upcoming weeks. Until then, the market is not always liquid, so these "air pockets" can emerge. 

One encouraging point is that the market picked up in the last two hours on Monday - that's the opposite of the past two weeks, when the market tended to fall off sharply in the last two hours of the trading day. Yesterday, the Dow was down 750 points around 2:00 pm, but it rallied nearly 300 points in the last two hours.

Looking forward, April is seasonally a very strong month. According to Bespoke Investment Group, April is the strongest month over the last 50 years, with an average 2.04% gain. Over the last 20 years, April has done even better, averaging +2.39%, but in those years April ranks #2 to October, which averaged 2.49%. 

Looking backward, the first quarter was volatile but essentially flat, with the S&P 500 down 1.2% and NASDAQ up 1.0%, but April should look better. As trading volume perks up in April, I expect stocks to surge due to an onslaught of stunning first-quarter sales and earnings announcements, beginning soon!

 

Some Welcome Good News Turns the Market Around

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March 13, 2018 - by Louis Navellier

Last week, the S&P 500 rose 3.54%, the Dow rose 3.25%, and NASDAQ set a new all-time high. There is no doubt that buying pressure by institutional investors in fundamentally superior stocks was behind last week's strength, which bodes well for quarter-ending window dressing in the upcoming weeks.

The Friday jobs report gave the market a big boost, pushing the Dow up 440 points after the Labor Department announced that 313,000 payroll jobs were created in February, substantially above the consensus estimate of 205,000. Also bullish was that December and January's payrolls were revised up by a cumulative 54,000 jobs, so an average of 242,000 jobs have been created in each of the past three months. The labor force participation rose to 63% in February, up from 62.7% as more workers continue to enter the labor force. As a result, the unemployment rate remained at 4.1% for the fifth straight month. 

The news that North Korea would suspend nuclear testing and hold talks on denuclearization with the U.S. is also welcome news; but the hopes of a successful resolution is premature, since previous talks with North Korea have come to nothing. However, President Trump has put the U.S. in a strong negotiating position with its increasing military buildup and sanctions, so there is hope of an eventual successful resolution, even though almost all experts (including President Trump himself) are skeptical.

Top Themes for The Week (02/04/2018)

Source: WALLACHBETH

1. US EQUITY MARKET SELLOFF DYNAMICS

Last week's 4% equity market selloff was accompanied by a spike in interest rates, volatility, and correlation. Those who followed our recommendation to be long VXX until it is solidly above $30 saw a quick 19.1% gain this week and those who positioned for higher SPX implied correlation with reverse dispersion trades or correlation swaps discussed in our 2018 outlook, also saw large gains with 3-month  SPX Top-100 implied correlation going from 22.7% to 32.6% on the week. The graph below shows S&P e-emini futures (ES1) in white, I-Path S&P 500 VIX Short-term futures ETF (VXX) in orange, and the 10-year yield index (TNX) in green over the last 5 days:

 Source: Bloomberg

Source: Bloomberg

Among the characteristics of this selloff were:

  1. Initial complacency, relatively low skew, and volatility selling earlier in the week where VXX was sold down to $28 as S&P seemed to initially stabilize), probably exacerbating the vol super-spike on Friday.  VIX options volume printed at an amazing 4.34mm contracts on Friday with 597k of the Feb 25 calls and 533k of the March 25 calls trading and the VVIX was up 18.7% on the day.  Volatility spreads such as the VXN/VIX and VXXLE/VIX had already closed at wide levels (6.44 and 8.32) going into the week and collapsed to 3.35 and 5.90 given the bigger vol demand for the VIX.   
  2. Bad response to rising interest rates/inflation fears, especially after the FOMC minutes and the higher than expected average hourly earnings Friday. 
  3. We had bad earnings reactions in several high-profile US names (AAPL -4.3%, GOOGL -5.3%, XOM -5.1% on earnings) as well as Europe which offset the positive news from AMZN (+2.9%). 
  4. The Nunes memo that questions the methods the FBI and Justice Department used to get a warrant to wiretap Carter Page was another negative Friday. 
  5. Underperformance of cyclical and high-beta sectors. The 6.5% rout in Energy (XLE) in the past week was an example of an exit from cyclical sectors that included Materials (XLB -5.7%)  and Semiconductors (SMH -4.7%) challenging the consensus view going into this year of positioning for "synchronized global growth." We had made a high conviction call for clients to get out of the high-beta factor two weeks ago and this worked well with SPHB (S&P high beta) underperforming SPLV (S&P low volatility) by another 169 bps on the week in addition to last week's 90 bp underperformance. 
  6. Healthcare had a sharp selloff, with XLV down 5.1% on the week. On Tuesday, Express Scripts, Cigna, Anthem, Mylan, and United Healthcare were all down over 3% after AMZN said it will work with BRK/B and JPM to form a non-profit providing healthcare to their employees with a goal of cutting cost. The escalating cost of healthcare was discussed by Warren Buffett and is making the electorate angry ahead of the mid-term elections, and it can again re-surface as a popular topic. Several healthcare analysts incorrectly defended the stocks that were down but we took the other side this week. If Amazon, for example, offers healthcare to their prime members at a discount and gets even a small percentage to sign up, this could be extremely disruptive and affect healthcare valuations. This week we will get a fair amount of high profile healthcare and biotech earnings with Bristol Myers on Monday, Gilead and Allergan on Tuesday, GlaxoSmithKline, Humana, and Sanofi on Wednesday and Regeneron, Alexion, CVS, and Cardinal Health on Thursday. 
  7. No asset class to hide as bonds, commodities, and real estate sold off with equities with increasing cross-asset correlation adding to the increase in stock correlation to increase portfolio risk. This can become problematic for those relying on diversification instead of explicit hedging for risk reduction in their portfolios, including balanced funds and risk-parity strategies, as well as any advisor implementing a strategy exclusively with long positions in ETFs. Also note that high yield (HYG) was down more in price than intermediate treasuries (IEF). 

S&P futures have broken below their 20-day moving average for the first time since November and broke down below support in the 2,760 area. If there is no bounce on Monday, or a very weak bounce to a lower high,  the next support level to target could be as low as 2,698/2,701 on continuing long liquidation (see chart below).  If there is a bounce in S&P, expect a quick pullback in the VIX/VXX from elevated levels.

 Source: Bloomberg

Source: Bloomberg

 

2. THE VIEW OUTSIDE SPX/US EQUITIES

Friday's average hourly earnings data actually steepened the US Treasury 5s/30s yield curve, which was a break with the prior strong flattening trend. The 19 bp rise in 10 year yields on the week was much higher than anything we could have imagined in any scenario and the bond market seems to have over-reacted to the actual news. We believe FOMC members are still set for a central scenario of three hikes this year and will not over-react to one employment number. Those who follow the Fed know that it has started to seriously look at the VIX and does not want to de-stabilize the system.  Adding to worries, the CBO said last week that the U.S. may run the risk of default without a debt-ceiling increase in the first half of March. T-bills maturing March 8th have had a risk premium priced into them and have yielded more than longer-term bills, creating a "hump" in the short-term yield curve.  

The rise in interest rates has hammered "income" areas of the market such as XLU, VNQ, USMV, and IYR which saw net outflows last week. These, along with other more "safe" and low volatility areas in the US seem better risk/reward here relative to high beta, cyclical, and international exposures. 

Implied yields in short-term cash management strategies such as SPX boxes and rev/cons continue to be attractive with very short times to expiration, especially for those who fear interest rate and credit spread risk and we have been active in this space. For example, the March SPX 1000-point box traded last week at an implied 2.19% annualized yield for a 46-day instrument guaranteed by the OCC compared to a 2.14% yield on 2-year notes and a 1.78% yield on NEAR (I-Shares Short Maturity Bond). 

We view the Nunes memo as another step in the escalation of US political risk. The rout in precious metals after Friday's inflation data seems excessive to us, especially in SLV (-4.6% on the week) and GDX (-5.9%) for which higher political risk, higher volatility, and bad news on bitcoin (CBOE Bitcoin futures -22% this week)  should eventually offset the negative impact of higher real interest rates. In addition to positioning long SLV and GDX in ETFs, buy/writes and OTM call ratio spreads can be considered with the recent uptick in implied volatility on OTM calls in metals and commodities in general.

In Europe, Deutsche Bank (ADR: DB), a name in which we had continuously recommended being long volatility, was down 12.4% after revenues were the lowest in 7 years. Note that 5-day and 20-day historical volatility in DB was 73.9% and 41.3% versus the DB March 18 puts coming into the week at 33.9% implied vol, highlighting the opportunities in US-listed options on ADRs, which we believe will continue.  Despite the DB rout, the SX7E (Banks) is still at the highest relative level versus the SX5E since August, as Italian and Spanish banks have rallied and many have been rotating to sectors benefitting from higher interest rates and not hurt too much by the stronger euro. 

Other European fundamental news has also been negative this week including Siemens which was down over 6% in 2 days. The German DAX which was considered a poster-child of “synchronized global growth” and a large over-weight in many portfolios because of their over-weight to Europe is now down 1% YTD, badly lagging SPX as we expected in our 2018 outlook and EWI and EWP were also down hard after a prolonged rally. 

Other areas in international markets that had been over-weighted and crowed going into 2018 on are also lagging SPY, including a selloff in EEM, down 5.8% on the week and INDA down 7%.

 

www.wallachbeth.com

An Old Adage for an Out-Of-Date Way of Retirement Planning

Maybe you’ve heard this old retirement planning rule of thumb before? Take your age and subtract it from 100. The remaining number represents the percentage you should have invested in equities. Your age then is what you should have in bonds. So if you’re 45, your portfolio should be 65% equities and 45% in fixed income holdings.

As rules of thumb go, it’s not the worst. It’s straightforward and very easy to follow. And, frankly, if an investor has no other guidance, at least it has them thinking about a glide path, whether they know it or not.

The problem is, like many old adages, it’s just that, old, and not truly responsive to the challenges of today’s markets or adequate for the realities of today’s investors. There are many factors that should have us all looking very closely at the efficacy of this dated thinking.

First, people are living longer and working well into their ‘golden years.’ Some are doing so out of a personal desire to keep working and are fortunate to be healthy enough to do so. Others, however, must keep working out of financial necessity to not touch their retirement savings or take Social Security too early.

Second, and this relates to that last group, many investors are playing catch-up in their retirement savings. There are myriad reasons for this, from crippling medical bills or a costly divorce to wiped out portfolios from the Great Recession or just a late start on a savings and investment plan. Regardless of the reason, the reality is that many 50-60 year-olds may need to look at their investments as if they were decades younger.

Third, those fixed-income positions may not be as safe and secure as many believe. We’ve seen just in the past week-plus since the election  of a new U.S. President that the bond market can and does move quickly. And, as our friends at Beaumont Capital Management  (sub-advisor on the Cavalier Tactical Rotation and Global Opportunities funds) have written about, “Bonds Have Bear Markets Too! ” The clouds may be gathering over the bond market now and those closest to retirement age, with the largest portion of their portfolios invested bonds, could be most vulnerable to sizeable losses.

Some advice may be timeless, and useful across the ages. The “Subtract-your-age-from-100” portfolio rule of thumb may not be one of them. Our industry must look at these old ways of thinking and test them against the realities of today’s volatile and uncertain markets, and the often challenging situations of today’s investors.

 

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