by Louis Navellier
October 11, 2022
I expect that our big energy bet will pay off handsomely in the upcoming months. I was out west last week and am truly shocked that gasoline prices are already hitting record levels as they switch from summer gasoline to oxygenated winter gasoline, which often causes refinery shutdowns and supply glitches. In fact, The Wall Street Journal on Thursday reported that retail gasoline prices have risen for the past 14 days. As a result, the refineries I recommend are expected to continue to post very strong earnings this quarter.
The enlarged producer cartel called OPEC+ on Wednesday announced that they plan a production cut of up to two million barrels per day. However, the real production cut may be more like 900,000 barrels per day after factoring in Russia’s production declines and some smaller OPEC members. The bottom line is that OPEC+ wanted to “shock” energy markets to get crude oil prices back up to $100 per barrel. As always, Saudi Arabia can implement the biggest cuts and its output will likely determine the ultimate cut.
Furthermore, I should add that the Biden Administration’s manipulation of the domestic crude oil market is anticipated to end soon, since the releasing of one million barrels per day from the Strategic Petroleum Reserve (SPR) is expected to end sometime after the mid-term elections. The primary reason that the prices at the pump moderated in recent months is that the Biden Administration was manipulating oil prices by releasing reserves from the SPR. I am sure that after the mid-term elections, the Biden Administration will have to start refilling the SPR, since it is now at the lowest level it has been since the early 1980s.
Interestingly, The Wall Street Journal on Thursday reported that the Biden Administration is preparing to scale down sanctions on Venezuela, which would allow Chevron to reopen Venezuelan crude oil exports to Europe and the U.S. In exchange for significant sanctions relief, the government of Venezuelan President Nicolas Maduro would have to resume long-suspended talks with the country’s opposition to discuss conditions needed to hold free and fair presidential elections in 2024. Furthermore, the U.S., the Venezuelan government, and some Venezuelan opposition figures have also worked out a deal that would free up hundreds of millions of dollars in Venezuelan state funds, now frozen in American banks, to pay for imports of food, medicine, and equipment for the country’s battered electricity grid and water systems. The Journal added that details are still under discussion and cautioned that any deal could fall through.
The green energy revolution remains constrained by supply glitches and soaring battery component costs. Tesla delivered a record 343,000 vehicles in the third quarter, but analysts were expecting 364,660, so the stock was hit with profit taking. Tesla actually produced 365,000 vehicles in the third quarter, so they were in-line with analyst estimates, but some vehicles were still in transit. Wedbush called Tesla’s delivery shortfall a “logistical speed bump,” and I would agree that the company is dealing with supply glitches better than most auto manufacturers. However, Porsche trades at less than a third of the forecasted earnings of Tesla and has bigger operating margins. I should also add that Porsche fell below its IPO price and is a good near-term buy.
Due to Volkswagen’s successful spinoff of Porsche shares, VW is now evaluating a possible IPO for Lamborghini to raise additional capital. The electrification of Audi, Bentley, Lamborghini, Porsche, Seat, and VW’s various brands is an expensive undertaking, so a Lamborghini IPO may be next in line.
Navellier & Associates owns Ford Motor Co. (F), Volkswagen Ag. (VWAGY), and Chevron Corp (CHV), a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own Rivian Automotive (RIVN) or Lucid Group (LCID). Louis Navellier and his family own Ford Motor Co. (F), and Volkswagen Ag. (VWAGY), via a Navellier managed account. He does not own Tesla (TSLA), Lucid Group (LCID), Chevron Corp (CHV) or Rivian Automotive (RIVN) personally.
The ISM Indexes and The Job Situation Indicate a “Soft Landing”
The Institute of Supply Management (ISM) announced that its manufacturing index slipped to 50.9 in September, down from 52.8 in August. Since any reading over 50 signals an expansion, the index for manufacturers is still growing, but at a slower pace. Some troubling signs were that the “new orders” component fell to 47.1 (down from 51.3 in August) and new “export orders” declined to 47.8 (from 49.4 in August). If new orders and exports are falling, it appears that slowing global GDP growth is also impeding U.S. manufacturing activity. Furthermore, a strong U.S. dollar is also hindering U.S. exports.
On Wednesday, ISM announced that its non-manufacturing (services) index slipped to 56.7 in September, down slightly from 56.9 in August. This was the 28th straight month that the ISM service has been above 50, which signals an expansion. The “new orders” component slipped to 60.6 in September (down from 61.8 in August) and the “business activity” component slowed to 59.1 in September (down from 60.9 in August). Overall, the ISM service index is high enough to be consistent with a “soft economic landing.”
Job growth is slower, but still positive. On Wednesday, ADP announced that 208,000 private payroll jobs were created in September. Trade, transportation, and utilities accounted for most (147,000) of these private jobs. Goods producing industries lost 29,000 jobs, while natural resources and mining (mostly energy production) lost 16,000 jobs. According to ADP, average pay rose 7.8% in the past 12 months.
On Thursday, the Labor Department announced that new unemployment claims rose to 219,000 in the latest week, up from a revised 190,000 in the previous week. Continuing unemployment claims were 1.361 million, vs. a revised 1.376 million the previous week. The 4-week moving averages of weekly and continuing unemployment claims are declining, so the Fed will not be deterred from hiking rates further.
Finally, the Labor Department announced that 263,000 payroll jobs were created in September, which was below August’s 315,000 and July’s 537,000 payroll jobs. Despite fewer payroll jobs being created, the unemployment rate dropped to 3.5% vs. 3.7% in August. The primary reason for the declining jobless rate was that the labor force participation rate declined to 62.3% in September from 62.4% in August.
Average hourly earnings rose 0.3% (about 10 cents per hour) to $32.46 per hour in September and have risen 5% in the past 12 months, well below the inflation rate. The September payroll report showed that wages are not keeping up with inflation and fewer jobs are being created, despite 11 million job openings.
Finally, the Atlanta Fed is now estimating a robust 2.9% annual GDP growth for the third quarter. The reason for their upgrade was that personal income rose 0.4% in August and the trade deficit continues to shrink. In fact, the trade deficit now accounts for most (2.2%) of the Atlanta Fed’s estimate for annualized third-quarter GDP growth. Their revision came after the Commerce Department announced that the trade deficit declined 4.3% in August as imports fell faster (-1.1%) to $326.3 billion than exports, slipping 0.3% to $258.9 billion.