by Louis Navellier
January 31, 2023
The Biden Administration has stopped releasing one million barrels per day of light sweet crude oil from the Strategic Petroleum Reserve (SPR), so crude oil prices are expected to meander higher, despite a domestic glut of crude oil. As I have repeatedly said, crude oil demand naturally rises in the spring as the weather in the Northern Hemisphere improves and people travel more. Natural gas is more weather dependent, but since the U.S. is “the Saudi Arabia of natural gas,” and Europe needs LNG, I also expect that natural gas prices will firm up after recently falling to their lowest level since April 2021.
The Biden Administration’s call to start following California to ban natural gas stoves and possibly other appliances is anticipated to fail due to the new Republican-led House of Representatives. In fact, the fuss over natural gas stocks by the Consumer Product Safety Commission may just have been a political ploy to distract the news media over the mounting problems associated with classified documents being found at Joe Biden’s Wilmington, Delaware home. The truth of the matter is President Biden is now effectively a lame duck in his Party, especially if he continues getting opposition from within the Democratic Party.
I should add that at my Reno home, I added natural gas to one of my decks, so I could install a natural gas barbecue and a fire bowl that will be nice on cold, crisp evenings. At our Reno home, we had a lot of snow this winter and my family also likes to have a natural gas fireplace roaring. When spring comes, I believe we will be outside more due to the new natural gas fire bowl, which helps to promote more family gatherings. I for one cannot imagine life without natural gas, especially in the Mountain West, due to our crisp evenings several months a year. As Americans, we should be proud of our vast natural gas reserves and production. Despite the Biden Administration’s new tax on natural gas (as well as on coal and crude oil production), I do not foresee other states following California and banning natural gas appliances.
In the meantime, The Guardian on Tuesday had an article that predicted “environmental havoc” as the U.S. transitions to electric vehicles. The Guardian said that the U.S alone would triple the worldwide demand for lithium, “causing needless water shortages, Indigenous land grabs, and ecosystem destruction.” This may be one reason why ESG is being redefined to shun Tesla and the battery suppliers.
Then, on Wednesday, The Wall Street Journal published an article about how a natural graphite shortage for making batteries is forcing the use of man-made graphite. Specifically, the WSJ stated that “most lithium-ion batteries use synthetic graphite, which is produced from a petroleum byproduct, mostly from China. The WSJ then went on to say that, “using an energy-intensive, high-emissions process to produce graphite defeats the purpose of the batteries that power EVs and store renewable energy.”
According to Benchmark Mineral Intelligence, which tracks the battery supply chain, the production of synthetic graphite can be four times more carbon-intensive than that of natural graphite. Confused? We all are. As ESG constantly gets redefined, it has the potential to blow your brain, since clean mining does not really exist, and making anything without significant carbon emissions is problematic, at best.
The Fed’s Dilemma – Raising Rates While Our National Debt Soars
The other political distraction is that due to the federal government’s $31.4 trillion debt ceiling, the Treasury Department is now taking extraordinary measures to keep the U.S. government operating through June. Obviously, the federal government’s debt ceiling is going to be a political football that will be debated endlessly, so one side can embarrass the other. In the end, the debt ceiling will likely be raised, so as investors, we should not worry unless it adversely impacts Treasury bond yields. Our bigger worry should be how we are going to service those astronomical debts at the new Treasury yields averaging 4%.
By far the best news last week was that the Treasury auctions have been going amazingly well. We are now in the midst of the strongest bidding for Treasury securities since October 2021. Frankly, this means that bond investors are now expecting inflation to cool off. They believe that the Fed will soon announce that its cycle of interest rate hikes will soon end, perhaps with just a small 0.25% rate increase tomorrow.
The Fed has succeeded with its interest rate policy of driving existing home sales down 34% in 2022 to a 4.02 million pace, which is the slowest pace in over 12 years (since November 2010). Additionally, the Fed has also spooked consumers, since retail sales declined 1.1% in December (the largest drop in a year) and 1% in November. The ISM manufacturing index also contracted in December and November, while the ISM non-manufacturing (service) index plunged to 49.6 in December, so it is now signaling a contraction.
Despite all this dire economic news, the Commerce Department announced that its preliminary estimate for fourth-quarter GDP growth is a 2.9% annual rate. The fourth-quarter GDP will be revised after trade and other data come in, but from the last quarter of 2021 to the 2022’s last quarter, the BEA said last Thursday that our GDP grew only 1%, down from a robust 5.7% from the end of 2020 to the end of 2021.
I should also add that the Conference Board announced that its Leading Economic Index (LEI) declined 1% in December, following a 1.1% decline in November. The LEI decline for December was worse than the economists’ consensus estimate of a 0.7% decline and marks the tenth straight monthly decline. The LEI is designed to forecast recessions, which we have so far avoided, but one may still be forthcoming!
The Commerce Department on Friday announced that consumer spending declined 0.2% in December and they revised November lower to a 0.1% decline (down from a 0.1% increase previously reported), so the consumer spending data is in line with retail sales, which also declined in November and December.
I should add that the Commerce Department on Friday also announced that the Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, rose 0.1% in December and 5% in the past 12 months. The core PCE, excluding food and energy, rose 0.3% in December and 4.4% in the past 12 months. Food prices increased 0.2% in December, while energy prices declined 5.1%.
Although the core PCE decelerated from a 4.7% annual pace in November to a 4.4% rate in December, the deceleration may not be as strong as some Fed members wanted to see. However, the core PCE is now at the lowest annual rate since October 2021. The most fascinating tidbit in the PCE data was that the prices for goods declined 0.7%, while the price of services rose 0.5%. The Fed is trying to squelch service inflation, so that may be the Fed’s justification for another rate increase at its FOMC meeting this week.
The Wall Street Journal reported that in the past five months, the U.S. economy has shed 110,800 temporary workers, including 35,000 in December. This is a warning sign that the job market is getting weaker. 3M is just the latest company to announce layoffs in the wake of disappointing quarterly sales and earnings. As soon as this weak job market shows up in weekly unemployment claims and weak payroll numbers, the Fed will have to take notice, since one of its mandates is a low unemployment rate.
Despite so many announced layoffs, the Labor Department announced that weekly unemployment claims declined to 186,000 in the latest week, down from a revised 192,000 the previous week. Continuing unemployment claims rose to 1.675 million in the latest week, up from a revised 1.655 million in the previous week. Overall, the four-week average declined to 197,500, so the labor market remains healthy.
If you are confused by these contradictory statistics, you are not alone. The Biden Administration “fixed” inflation, GDP, and the trade deficit in one Executive Action, when he released approximately 200 million barrels of light sweet crude oil from the Strategic Petroleum Reserve in 2022. That grossly reduced the U.S. trade deficit, which exaggerated overall economic growth. Furthermore, China’s declining exports also boosted the U.S. trade deficit, which caused economists to revise their U.S. GDP estimates higher.
The truth of the matter is that China is reopening after its severe “Covid Zero” restrictions were abruptly discontinued, and it reopened its international air travel. In the meantime, India, Indonesia, South Korea, Taiwan, Thailand, and Vietnam all benefited from China’s economic woes. Europe is also faring much better than expected due to an unusually warm winter, as well as more accommodative central banks.
In the U.S., the Fed has led the worldwide fight against inflation. Although the Fed cannot influence food and energy prices, they did succeed in squelching final demand in services prices to only 0.1% in the December PPI. Now that the Fed funds rates is above Treasury yields, it is anticipated that the Fed will only raise key interest rates by 0.25% tomorrow. More important than the Fed action will be the FOMC statement, which I am hoping will signal that the Fed is nearing the end of its key interest rate hikes.
In the meantime, the most certain economic event will be that crude oil prices will rise in the upcoming months due to growing global demand and the fact that the Biden Administration will no longer be releasing up to one million barrels per day from the SPR to manipulate crude oil prices. It will also be interesting to see what happens to EV sales now that Tesla and other EV makers have an inventory glut.
Earnings News from Tesla and Other EV News Reports
Tesla announced its fourth-quarter results on Wednesday, saying that its fourth-quarter sales rose 37% and earnings rose 59%. Although Tesla’s sales were slightly below analyst expectations after its Chinese price cuts, its earnings were a bit better than analyst expectations. Tesla future sales are expected to be strong due to recent European and U.S. price cuts. The fact that the company announced that the Tesla semi-truck would be built in Nevada inspired confidence in the company’s cash flow and long-term prospects.
The news that Elon Musk was exploring options to pay off Twitter’s debt also helped Tesla’s stock rebound 50% from its recent low, and I do not expect that its January lows will be retested.
Concerns about Tesla’s operating margins are diminishing, but until its Shanghai plant re-opens and its first-quarter results are announced, it is anticipated that the company’s margins will be under compression. Long-term, Tesla is facing more competition, but Tesla is expected to remain the EV leader for 2023.
Speaking of EV sales, Germany has joined France in calling for European Union (EU) support to counter the green subsidies in the Inflation Protection Act that favor U.S.-based EV sales and battery manufacturing. Specifically, German Chancellor Olaf Scholz is looking to provide similar aid to manufacturers within the EU, which has already lobbied the U.S. to expand the green subsidies in the Inflation Protection Act to European manufacturers, but the Biden Administration has been resistant.
Scholz said, “The EU shouldn’t be treated worse than Canada or Mexico.” This tiff between the U.S. and Europe is escalating, so it will be interesting to see if other countries join France and Germany in protest.
Navellier & Associates owns Tesla (TSLA) per client request in a few managed accounts only. Louis Navellier does not own Tesla (TSLA) personally.