by Louis Navellier

October 3, 2023

Last week, crude oil prices reached their highest price since August 2022, with West Texas Intermediate Crude reaching $95/barrel on Thursday. What’s more, the Energy Information Administration (EIA) reported a bigger weekly inventory drop (2.2 million barrels) than analysts anticipated, placing inventories at a 14-month low. The inventory of refined products is now 13% below its 5-year average. As refineries shut down to shift to oxygenated winter fuels, refined product inventories will remain low.

Higher energy prices help shrink the trade deficit and boost GDP. That explains why the Commerce Department announced that the trade deficit declined 7.3% in August, as imports declined 1.2% to $253.1 billion, while exports surged 2.2% to $168.8 billion. At quarter’s end, the Atlanta Fed forecast 4.9% annualized third-quarter GDP growth, aided by a lower trade deficit and higher energy exports.

The good news from these price increases is that our energy stocks are reasserting their market leadership, especially after gasoline prices rose 10.5% in the August CPI and a whopping 20% in the PPI, mostly due to inventory declines. Furthermore, the diesel shortage is rising again, especially in Europe, so the U.S. is exporting more distillates (diesel, heating oil, jet fuel, etc.), which is causing the trade deficit to decline and boost GDP growth. Naturally, since gasoline prices are high, Joe Biden’s popularity is plunging in the polls. Saudi Arabia is controlling crude oil prices and appears to be striving to defeat President Biden.

Specifically, candidate Joe Biden said that he found, “Very little social redeeming value in the present government in Saudi Arabia” and promised that, as President, he would make the Saudi government an international “pariah.”  Furthermore, if that were not insulting enough, candidate Biden then went on to insult the entire Saudi royal family, so I think it is obvious that Saudi Arabia wouldn’t mind keeping crude oil prices uncomfortably high in the U.S., to help defeat Joe Biden in the 2024 Presidential race.

With $4+ gasoline prices (and up to $6 per gallon in California and other locations) and with an imminent debut of 4% unemployment rates due to an 11-month manufacturing recession, it should not be surprising that Joe Biden is almost 10% behind candidate Donald Trump in a recent ABC News/Washington Post poll.

Due to rising food and energy price inflation, consumers are not happy. The President’s war against fossil fuels is failing, especially against natural gas, since in America, we are blessed to have the cheapest natural gas in the world. More pipeline projects are now reemerging as natural gas prices meander higher. Natural gas prices are very sensitive to the weather and ideally perform best in hot, miserable summers (for peaker power plants) and very cold winters (for heating). This winter is forecast to be much colder in Europe and North America, due to an El Nino weather pattern, which indicates higher natural gas prices.

Candidate Donald Trump clearly wants to restore lower gasoline prices, shore up the U.S. southern border and end the war in Ukraine, but there are other qualified challengers. In fact, when I met Virginia Governor Glenn Youngkin after a Fox Business appearance, I shook his hand and said, “Please run.”

Russia may also want to keep energy prices high to impact the 2024 elections. Russian Foreign Minister, Sergey Lavrov, recently said, “No matter what they say, [the U.S.] controls this (Ukraine) war” adding, “They supply weapons, ammunition, intelligence data, data from satellites… waging a war against us.”

All this international chaos is expected to keep crude oil prices high. Furthermore, Joe Biden is going to have to defend spending billions to fund the war in Ukraine, while disaster relief in Maui and East Palestine, Ohio, is widely believed to be lacking. Since some Ukrainian generals have bought villas in Spain and are driving fancy sports cars, there is also concern that there are serious leaks in aid to Ukraine.

Amidst this chaos, plus ongoing labor unrest in the U.S., with the UAW being the biggest of several strikes this year, American consumers remain grumpy, but continue to spend up a storm as their credit card bills grow to record levels. However, due to a strong U.S. dollar, the price of imported goods should continue to decline, as falling EV prices have demonstrated, and the U.S. keeps importing deflation from China.

As a result of these many distractions, our best defense remains a strong offense of fundamentally superior stocks. In addition to all the refinery and energy stocks we own, I also recommend (1) the best AI stocks, (2) drug companies profiting from the booming demand for weight loss medication, (3) the strong demand for cruising and travel, (4) selected crop shortages, and (5) resurging semiconductor demand.

In other words, we invest in timely economic sectors with improving sales and exploding earnings.

The overall earnings environment is poised to steadily improve over the next four quarters. While a strong U.S. dollar may hinder the earnings of some big multi-national companies, since almost half of S&P 500 revenue comes from outside of America, the growth stocks I recommend are not expected to be hurt by a strong U.S. dollar. Furthermore, positive analyst earnings revisions could deliver big earnings surprises.

In other words, we remain “locked and loaded” for another earnings announcement season, starting soon.

Overall Inflation Remains Under Control –
Except for Energy (Which the Fed Can’t Control)

Last Friday, the Commerce Department reported that the Fed’s favorite inflation indicator, namely the Personal Consumption Expenditure (PCE) index, rose only 0.1% in August and 3.5% in the past 12 months. The core PCE, excluding food and energy, also rose 0.1% in August and 3.9% in the past year.

This is good news for future Fed policy decisions. If the PCE continues to cool off, the Fed will not need to (or want to) raise key interest rates further. The Commerce Department also reported that consumer spending rose just 0.4% in August, down from 0.9% in July, so consumers are becoming more cautious.

Inflation, excluding energy, is also decelerating around the world. One example is in Germany, where consumer price inflation decelerated to a 4.3% annual pace in September, down sharply from a 6.4% annual pace in August. German consumer prices are now running at their slowest pace in two years.

Eurostat on Friday also reported that consumer prices for the entire eurozone declined to a 4.3% annual pace in September, down from 5.2% in August. This was better than economists’ consensus expectation of 4.8% and the lowest pace for eurozone consumer inflation since October 2021. Due to decelerating inflation, it is now widely believed that the European Central Bank (ECB) will pause raising interest rates.

Will the Fed listen to reason? I think so. Of all current members of the Federal Open Market Committee (FOMC), I respect Minneapolis Fed President Neel Kashkari the most. Neel ran the TARP program under former Treasury Secretary Hank Paulson in 2008, so he has been stress-tested. Neel has been a dove in recent years, but he became a hawk in the past year. At the University of Pennsylvania’s Wharton School, Neel said, “If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher and then be held higher for longer to cool things off.”

Although the financial media assume Neel is in favor of another rate hike, I expect that higher jobless rates and slowing retail sales may force Neel and other FOMC members to reject another rate hike.

In other important economic releases last week, the Commerce Department reported on Thursday that it slashed its calculation of personal consumption in the second quarter, down to only 0.8% from its previous estimate of 1.6%. By comparison, personal consumption rose 1.7% in the first quarter, so consumers were clearly becoming more cautious in the second quarter. Overall, GDP grew at a 2.1% annual pace in the second quarter as strong business investment offset slowing consumer spending.

Also, the Conference Board announced that its consumer confidence index declined to 103 in September, down from a revised 108.7 in August. This was a much bigger drop than economists expected, since their consensus estimate was 105.5. Consumer confidence is now at its lowest level in the past four months.

My biggest concern now is high 10-year Treasury rates. I anticipate that Treasury bond yields will finally moderate when the debt ceiling is lifted, but in the meantime, these ongoing budget battles contribute to artificially high Treasury yields that are getting close to 5% across the entire yield curve.

Over the weekend, Congress merely kicked the can down the road to mid-November, but if Congress does not pass a stopgap funding measure between now and then, be aware that essential workers like TSA, air traffic controllers and customs officials would stay on the job. However, funding for the big bureaucracies, like the Commerce Department and Labor Department. would dry up, so economic data would cease to be released. This would obviously cloud the economic data the Fed is monitoring.

In the past, partial federal government shutdowns have suspended funding for the federal courts, the FTC, the SEC and other federal agencies. Typically, federal workers are reinstated within two weeks, with full back pay, so a shutdown for most workers is like a free vacation in the midst of stale old political theater.

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

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Crude Oil Prices Reach a 13-Month High

Income Mail by Bryan Perry
Lower Inflation May Not Mean Lower Treasury Yields

Growth Mail by Gary Alexander
The Fourth Quarter Explosion is About to Start

Global Mail by Ivan Martchev
The Selloff in Stocks is the Fed’s Fault

Sector Spotlight by Jason Bodner
October – the Good News and the Bad News

View Full Archive
Read Past Issues Here

About The Author

Louis Navellier

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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