by Louis Navellier

January 5, 2021

One of the keys to China’s rapid growth in the last 40 years is the establishment of Free Enterprise Zones near the coastal cities under the enlightened leadership of Deng Xiaoping, who emerged as China’s new leader in 1979 after the death of Mao Zedong in 1976. While China still paid lip service to the tenets of Marxism, Deng first allowed farmers to plant some portion of their acreage for themselves, and then he allowed some port cities to create private business zones geared toward marketing exports to the world.  This turned around China’s economy, while allowing hundreds of millions of Chinese to escape poverty.

While many in the far-left wing of the Democratic Party are calling for more socialism and a Green New Deal, one key to American prosperity would be to retain the federalism in our Constitution by allowing all 50 states to be competitive laboratories for luring corporations to their state, effectively turning several states into massive economic “free enterprise” zones. This has already been going on, since some states, like Florida and Texas, are very pro-business, while other states, like California and New York, continue to punish businesses, so they often suffer from an exodus of their businesses to more pro-business states.

Companies like Goldman Sachs, Hewlett-Packard, Oracle, and Tesla are leading the flight to more pro-business states, with Texas being the clear winner in recent years. No matter who is president, what “makes America great” is that many of our 50 states strive to lure businesses from other states with tax incentives, more educated workforces, and other incentives. Also, during the Covid attack, some states shut down most businesses, instead of working with those businesses to remain safely open for business.

Due to the precarious nature of the U.S. economy as we recover from Covid-19, the Biden Administration is not expected to significantly increase income taxes for the first two years. Furthermore, the eventual outcome of the Georgia senate races today will also impact tax policy. I do not expect that the Biden Administration will significantly increase the favorable tax rates on qualified dividends or capital gains either, especially if the Republicans retain their majority control in the Senate, even with a slender lead.

So essentially, 2021 is shaping up to be a positive year – at least at the start of the year. As millions more get vaccinated each month, states are expected to slowly but steadily lift their coronavirus restrictions. Due to favorable year-over-year comparisons, as well as higher trading volume due to new pension funding and other seasonal factors, I expect that the stock market will have a strong first quarter and steadily appreciate through May. There could be some consolidation in mid-February as the fourth-quarter announcement season winds down, but otherwise, 2021 is shaping up to be a very strong year.

Navellier & Associates does not own Goldman Sachs (GS), Hewlett-Packard (HWP), or Oracle (ORCL) in managed accounts, 1 account only owns Tesla per client request. Louis Navellier and his family do not own Goldman Sachs (GS), Hewlett-Packard (HWP), Oracle (ORCL) or Tesla (TSLA) personally.

Last Week’s Very Few Economic Indicators Were Mostly Positive

There was not a lot of economic news released last week. On Tuesday, it was announced that the S&P Case-Shiller 10-city index rose at an 8.4% annual pace in October, while its 20-city index rose at a 7.9% annual pace. These gains are now running at the fastest pace in 14 years and are up from September’s annual pace of 7.0% and 6.6%, respectively. The Phoenix region had the fastest annual appreciation rate of 12.7%, followed by the Seattle region with an 11.7% annual pace. As long as mortgage rates remain low and inventories remain tight, median home prices should keep rising.

Global trade volume is picking back up. The Commerce Department reported on Wednesday that U.S. exports rose 0.8% in November and imports rose a whopping 2.6%, resulting in a rising U.S. trade deficit (imports rising faster than exports). In the past 12 months, exports have declined 6.6%, but imports have risen 5.5%. Clearly, China and other major exporters are winning the “trade war,” although I should add that U.S. exports have been hindered by lower energy prices. The growing trade deficit is one reason the U.S. dollar remains weak and will likely cause economists to cut their fourth-quarter GDP estimate.

We closed the year with more good news on Thursday as the Labor Department reported that jobless claims in the latest week declined to 787,000 (vs. a revised 806,000 in the previous week). Continuing unemployment claims were revised down to 5.219 million compared to a revised 5.337 million in the previous week. It appears that unemployment claims have plateaued near 800,000 per week, which is approximately four times higher than pre-pandemic levels, but continuing unemployment claims should keep declining due to the expiration of unemployment benefits for many workers.

An Update on QuantumScape and the Competition for Electric Vehicles

As I predicted last week, solid-state battery manufacturer QuantumScape (QS) has retreated from its too-rapid surge, as its market capitalization has fallen from over $47 billion to approximately $32 billion.

Bear in mind that only 5% of QuantumScape’s fully diluted 447.5 million shares (including unexercised stock options, restricted stock, and additional shares allocated to VW Group) are currently trading, so about 82% of QuantumScape’s current shareholders are subject to lockups. This means that as options are exercised, and restricted stock becomes available for trading, the outstanding float of QuantumScape stock will increase dramatically and likely weigh down the stock price. Also, investors are watching out for what VW Group will do with its sizeable stock position of 71 million shares, plus another 15 million shares that are expected to be issued. These shares will be carefully watched, since VW Group is spending more than any other automaker, including Tesla, on making the transition to electric vehicles (EVs).

What sent QuantumScape soaring recently was the news of the Apple Car and its revolutionary battery technology, which many observers, including myself, thought would most likely be provided by QuantumScape. There are now rumblings that Apple may instead use batteries from Toshiba or even develop them internally. Specifically, the Apple car would use “monocell” batteries, which eliminates the pouch cells that LG Chem and other lithium-ion battery manufactures utilize.

The monocell design is very confusing, even to Tesla’s Elon Musk, who said that “A monocell is electrochemically impossible, as max voltage is ~100X too low. Maybe they (Apple) meant cells bonded together, like our structural battery pack?”  Musk also noted that Apple’s reported plans to utilize lithium iron phosphate (LFP) cells, which are typically less prone to overheating and inherently safer, so the mystery of a possible Apple Car battery supplier continues, which is why QuantumScape consolidated.

Overall, due to VW Group’s investment in QuantumScape, plus its Project Artemis, nicknamed “LandJet,” to build the first truly revolutionary vehicle with solid-state batteries for Audi, Bentley, and Porsche (all owned by VW Group), I think QuantumScape still remains on track to be the most successful manufacturer of solid-state batteries. The best window to buy QuantumScape will likely be in the upcoming years, after most of its restricted stock is unrestricted, plus all significant options are exercised.

Furthermore, QuantumScape has to prove that its initial manufacturing facility (scheduled to open in 2024), will be viable before it scales up to build a much larger manufacturing facility in 2025. Finally, QuantumScape hopes to be profitable in 2027. So if you missed out on buying QuantumScape recently, please do not fret, since there will be a safer buying window in the upcoming years that I will alert you to.

I should add that in Tesla’s race to make 500,000 vehicles in 2020, they offered three free months of “Full Self Driving” on all sales before January 1st. Interestingly, Full Self Driving is not available yet, but it is expected to be released in 2021 as a $10,000 option. Complicating matters further, there seems to be a brewing problem for Tesla in the hottest EV market, namely Europe.

On Tuesday, it was announced that Tesla sold 5,014 Model 3s in November, which placed it fourth overall in Europe after the Renault Zoe (9,953), VW ID.3 (8,496), and Hyundai Kona (5,375). In October, the Tesla Model 3 was not even in the Top 20 in European sales. Traditionally, Tesla does a “quarter end” dump, so it will be interesting to see if Tesla’s sales in Europe significantly improve in December.

The other reason that Europe is important to Tesla is that it is selling lucrative carbon credits to Fiat Chrysler, Honda, and other auto companies, so they can comply with strict EU emission guidelines.

In the meantime, due to eroding EV market share in Europe, China has become much more important to Tesla’s overall EV sales after selling 12,143 Model 3s in October and another 21,606 in November, which makes the Model 3 the second-best seller of EVs in China.

Tesla’s stock remains priced for perfection, so if it sells 500,000 EVs in 2020, its shareholders may ignore its slowing fourth-quarter EV sales in Europe, unless that subsequently messes up its lucrative carbon credit business, which so far has totaled $1.18 billion in the first nine months of 2020.

Navellier & Associates does not own Quantumscape  Kensington Capital Acquisition Corp (QS), Toshiba Corp, LG Chemical , Fiat Chrysler, Honda Motors (HMC) or Volkswagen (VW), in managed accounts, 1 account only owns Tesla per client request. Navellier & Associates does own Apple Computer (AAPL) in managed accounts. Louis Navellier and his family do not own Quantumscape  Kensington Capital Acquisition Corp (QS), Toshiba Corp, LG Chemical, Fiat Chrysler, Honda Motors (HMC), Volkswagen (VW), or Tesla (TSLA) personally but they do own Apple Computer (AAPL) in a personal account.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

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Louis Navellier
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Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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