Navellier Weekly Market Commentary
Our growth stocks got off to a strong start this week with a NVIDIA’s announcement that it is acquiring Mellanox (MLNX) at $125 per share in cash. Although my management company no longer holds NVIDIA in a sub-advised mutual fund and managed account models, we still hold some NVIDIA for tax-sensitive clients and in a family account. Fortunately, we own Mellanox in a sub-advised mutual fund and managed account models, so this was a very exciting week.
The Wall Street Journal had an interesting article this week entitled “Riskier Stocks Are Paying Off.” This WSJ article then went on to conclude that companies with weaker earnings are outperforming those with steadier profits and cited the S&P Dow Jones quality rankings. These S&P Dow Jones rankings range from A+, A, A-, B+, C, B-, C & D. Frankly, my Dividend Grader and Stocks Grader databases are not experiencing the same issue, probably because my Quantitative grade that measures persistent institutional buying pressure is overpowering my grading systems … see link:
So the moral of the story is fundamentals are working, especially if they have high Quantitative grades. My friends at Bespoke recently pointed out that the bottom 50 stocks in the S&P 500, based on market capitalization, continue to substantially outperform the overall S&P 500. These bottom 50 stocks are more domestic, so they are less adversely impacted by a strong U.S. dollar that continues to negatively impact large multi-international companies that are also being hurt by a global economic slowdown.
As an example of the global economic slowdown, at the Geneva Motor Show, major automakers seemed downbeat due to slowing sales in China and Europe. Additionally, these automakers introduced predominately new electric vehicles (EV), which cost them tremendous research and development costs, so their profitability is under enormous pressure. Although most automakers are confident that they can beat Tesla in the EV market, some uncertainty persists, since the EV customers may view their vehicles more like an appliance than as an appealing vehicle. However, Audi had the best looking EV models at the Geneva Motor Show and Porsche will follow up with its Taycan EV soon, so hopefully these vehicles will generate plenty of customer excitement. In fact, for every Audi e-tron buyer with deposits, there are reported to be at least 10 more interested customers, many of which are Tesla owners.
Brexit is simply turning out to be a disaster. On Tuesday, members of Parliament overwhelming defeated Prime Minister Theresa May’s Plan B for Brexit by a 391 to 242 vote. Even though this vote was less than the Brexit plan the Prime Minister May proposed in January (i.e., Plan A), this was still a very decisive vote. Then on Wednesday, British lawmakers rejected by a super slim margin of only 4 votes (312 to 308) for a “no deal” plan for Brexit on March 29th, setting up a Brexit delay. On Thursday, members of Parliament voted 412 to 202 to Article 50 to delay Brexit pursuant to article 50 for an unspecified extension that the European Commission is expected to grant. Even though the British pound and euro rallied in anticipation of Brexit delay, U.S. Treasury bond yields continue to meander slightly lower in a clear sign of a flight to quality and continued international capital flight.
Fed Chairman Jerome Powell did a good job as a cheerleader for the U.S. economy on 60 Minutes. Specifically, Powell said “We’ve seen a bit of slowing, but still to healthy levels, in the U.S. economy this year” and then added “I would say there’s no reason why this economy cannot continue to expand.” The truth of the matter is that the U.S. economy often suffers from slow economic growth during the first quarter when there is severe winter weather. Now that spring is coming, consumers’ mood should continue to improve and I expect that retail spending will improve. Furthermore, the economic data in recent weeks have been encouraging and are signaling that there is pent up demand that should help GDP steadily grow in the upcoming months.
As an example, the Commerce Department announced that retail sales rose 0.2% in January, but when autos and gasoline were excluded, core retail sales rose a robust 1.2%. Discounts for vehicles and lower gasoline prices hindered the overall retail sales for January, since auto sales declined 2.4% and sales at gasoline stations declined 2%. December retail sales were revised down to a 1.6% decline, down from 1.2% originally reported, which marks the largest monthly drop since 2009. However, an early Thanksgiving remains the primary culprit for weak December retail sales. Overall, the January retail sales were encouraging and should help to boost the perception that consumer spending will be steadily improving in 2019.
On Tuesday, the Labor Department announced that the Consumer Price Index (CPI) rose 0.2% in February, which was in-line with economists’ expectations. This was the first monthly increase after three straight months of 0% change. Food and energy prices each rose 0.4% in February. Excluding food and energy, the core CPI rose 0.1% in February, which was the smallest monthly increase in six months. In the past 12 months, the CPI and the core CPI have rise 1.5% and 2.1%, respectively. I should add that gasoline prices rose 1.5% in February, but have declined 9.1% in the 12 months, so there appears to minimal inflation risk.
Then on Wednesday, the Labor Department announced that the Producer Price Index (PPI) rose 0.1% in February, which was below economists’ consensus estimate of a 0.2%. The core PPI, excluding food and energy, also rose 0.1% in February, so there was little evidence of any inflation on the wholesale level. In the past 12 months, the PPI and core PPI rose 1.9% and 2.3%, respectively. Last summer, the PPI and core PPI were running at an annual pace of 3.4% and 3%, respectively, so wholesale inflation has cooled off dramatically in the past several months, which is why the Fed has hit the “pause” button.
The Commerce Department also announced on Wednesday that durable goods orders rose 0.4% in January, which was substantially higher than economists’ consensus estimate of a 0.1% decline. Excluding transportation orders, durable goods orders declined 0.1%. Although commercial aircraft orders remain strong, the transportation sector is still hindered by a 1% decline in auto parts is due predominantly to weakening auto sales. The good news is the orders for core durable goods rose 0.8% in January, which was the largest increase in six months (since last July). December durable goods orders were revised up to a 1.3% increase, up from 1.2% previously estimated.
Overall, this was a positive durable goods report, but in the upcoming months durable goods orders could plunge, if Boeing has any order cancellations due to the 737 Max grounding. The 737 Max issue seems to be related to autopilot software stall characteristics that some pilots may have not been properly trained for, so hopefully between a software update and better pilot training, Boeing will not have massive order cancellations. I actually bought more Boeing this week in a sub-advised mutual fund, managed accounts and a family account, since I am confident that Boeing will act swiftly to address the necessary software and pilot training issues. I should add that the 737 Max is substantially more efficient than older 737 models, so I would be shocked if any airlines cancelled their orders, since there is not a viable competitor from Airbus.
The construction sector is heating up. On Wednesday, the Commerce Department reported that construction spending rose 1.3% in January, which was substantially higher than economists’ estimate of 0.4%. This was the largest monthly increase since last April and driven by a dramatic 4.9% increase in public construction projects, which is the largest monthly increase in over eight years (since September 2010). December’s construction spending was also revised up dramatically to a 0.8% increase, up from a previous reported 0.6% decline. Overall, this was a very bullish report for continued strong GDP growth.
On Thursday, the Commerce Department announced that new home sales declined by almost 7% in January to an annual pace of 607,000, which was below economists’ consensus estimate of 616,000. December new home sales were revised higher to an annual pace of 652,000, up from 621,000 initially reported. Furthermore, November new home sales were revised up to 628,000, up from 599,000 previously reported. I think it I safe to assume that January new home sales may be revised higher, since the Commerce Department samples are not reflective of the final new home sales numbers.
Finally, I hate to be a party pooper, but I need to inform you that the VIX volatility is now at its lowest level since early October, when the stock market fizzled as ETF arbitrage spun out of control. In fact, before other major selloffs in recent years, the VIX volatility has plunged and is an early warning sign that something ominous may be about to occur. Specifically, low volatility seems to encourage the arbitrage traders to come out and ruin the party for other investors. Here is a link to Jason Bodner’s excellent white paper that explains how ETF arbitrage triggered the correction in the fourth quarter … see link:
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Navellier & Associates does not own Tesla or Volkswagen in managed accounts or our sub-advised mutual fund but does own BA in managed accounts and our sub-advised mutual fund. Louis Navellier and his family do not own Tesla or Volkswagen in personal accounts but they do own BA, NVDA.