by Louis Navellier
November 29, 2022
Overall, I’d say that 2022 will likely go down in history as the year that ESG (Environmental, Social, and Governance) investing died. Not only did most ESG investors (e.g., universities, public pension plans in blue states, etc.) grossly lag the overall stock market, since fossil fuel firms had the best earnings growth and price gains, but ESG has hurt Blackrock, Jim Cramer, Kevin O’Leary, and other noted investors.
The SEC is still trying to force companies to disclose their ESG activities, but this is a complicated and subjective process. The fact that S&P Global kicked Tesla out of its ESG index and replaced it with ExxonMobil earlier this year further dilutes and complicates how companies earn their ESG scores.
Also, in one of my podcasts, I broke my silence on the FTX crypto collapse. With $3.1 billion in creditors now looking for money in the FTX bankruptcy, this Ponzi scheme is only expected to get worse. FTX founder Sam Bankman-Fried, was at the White House at least twice this year. He was well-known by many members in Congress as well as SEC Chairman Gary Gensler, who taught cryptocurrencies at MIT. The fact that Bankman-Fried was the second biggest doner to the Democratic Party in this cycle (after George Soros) and pushed ESG policies may explain why he was so welcome in Washington, DC.
Complicating matters further, FTX speculated with client funds via Alameda Research, led by Caroline Ellison, daughter of Glenn Ellison, an MIT economic professor and former boss of Gary Gensler when he taught cryptocurrencies at MIT. Bankman-Fried went to MIT and the FTX fiasco may be the nail in the coffin for ESG investing. Multiple anchors on CNBC called Sam Bankman-Fried “the next J.P. Morgan,” including Jim Cramer. The most embarrassing tout for FTX came from Shark Tank’s Kevin O’Leary, who said, “If there’s ever a place I can be, and I’m not going to be in trouble, it’s going to be in FTX.”
My caution to investors is that any cryptocurrency scheme that promotes “tokens” needs to be registered with the SEC, since those tokens are considered securities. Furthermore, FTX’s downfall appears to be Alameda Research’s speculation in tokens. Previous interviews with Caroline Ellison did not inspire confidence. Although she was apparently a Stanford math wizard, when she arrived at Alameda Research from another crypto trading firm, Icarus (which also failed with the FTX collapse), Caroline told Forbes, “This was very much like, oh, yeah, we don’t really know what we’re doing.” Ms. Ellison also moved Alameda Research from Berkeley, California to Hong Kong for more a favorable regulatory environment.
The bottom line is that FTX used ESG as a cover to avoid scrutiny after Alameda Research used FTX client funds to speculate on cryptocurrency tokens, and political donations may have slowed any scrutiny.
Why Crude Oil Supplies May Shrink Soon, Not Increase
The G7 is set to impose an embargo on Russian oil on December 3rd. Last Wednesday, the Journal published a great article explaining how the war in Ukraine and the impending embargo have caused the cost of shipping crude oil to surge. I was pleased to see that the Journal cited a couple of our stocks, namely Ardmore Shipping (ASC) and Teekay Tankers (TNK). Since Russian crude oil must now spend more time at sea – since it has to be shipped farther – tanker rates have soared and may rise more.
Complicating crude oil supplies further is the assumption that the Biden Administration will stop draining the Strategic Petroleum Reserve (SPR) after December, which will reduce the supply by up to 1 million barrels per day in the supply of a predominantly light sweet crude oil that Europe likes to refine. Virtually all of the third-quarter GDP growth was attributable to the export of crude oil and refined petroleum products, so if the Biden Administration stops the SPR releases, GDP growth could potentially stall.
The other complication in crude oil markets is China’s surge in Covid-19 cases due to its Covid Zero policy. Although the central planners in Beijing want to relax China’s draconian Covid Zero policy, there are fears that big provinces in China will remain shut down. Nonetheless, China will not remain shut down forever, so its demand for crude oil will firm up in the upcoming months and certainly by spring.
If you want to go clinically insane, try trading crude oil futures. The supply and demand factors are that conflicting and confusing. The fact of the matter is that seasonal pressures are real and cannot be ignored, so I still expect crude oil demand to surge in the spring; but I should also add that the Energy Information Administration (EIA) reported on Wednesday that crude oil inventories declined by 3.7 million barrels in the past week, while gasoline and distillate (i.e., diesel, heating oil, and jet fuel) inventories rose!
As a result, any price relief at the pump is expected to be temporary, and since the U.S. is also a major exporter of refined products, much of the excess gasoline and distillates will likely be exported.
The Latest Financial News is “Mixed,” Implying Slow Growth and No Recession
The biggest economic news last week was that the Commerce Department announced that durable goods orders rose 1% in October, which was substantially higher than the economists’ consensus expectation of +0.5%. Orders for commercial aircraft surged 7.4% in October, but excluding all transportation orders, durable goods still rose by a very healthy 0.5%. Core durable goods, which is indicative of business spending, rose 0.7% in October. Shipments of durable goods rose 0.4% and unfilled orders rose by 0.6%. Overall, the durable goods report was strong for every industry surveyed, except for primary metals.
In the wake of this bullish durable goods report, the Atlanta Fed revised its fourth-quarter GDP estimate up to an annual pace of +4.3%, up slightly from its previous estimate of an annual pace of 4.2%, but the Atlanta Fed’s econometric model remains far ahead of private economists’ fourth-quarter estimates, which range from -1% (recession territory) to a much more modest +1.9% annual GDP growth.
On Wednesday, the Labor Department announced that weekly unemployment claims rose to 240,000 in the latest week, up from a revised 227,000 in the previous week. Continuing unemployment claims in the latest week rose to 1.551 million, up from a revised 1.503 million. The four-week moving averages of weekly unemployment claims and continuing claims continue to rise steadily. Continuing unemployment claims are now running at their highest pace in the past eight months. As a result, the Fed should not raise key interest rates after its December FOMC meeting, otherwise it risks increasing unemployment rates.
Speaking of the Fed, its November FOMC minutes were revealed on Wednesday, showing that “a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.” The FOMC minutes also revealed that the Fed wants to approach a “sufficiently restrictive” stance – which was the most interesting new comment, causing investors to ask, “What is ‘restrictive,’ relative to market rates? (These word games will launch a debate that Fed watchers will argue endlessly.)
My opinion is much simpler. I believe the FOMC wants to get “in parity” with market rates (equalize Fed rates with market rates) and then hit the pause button. Based on 10-year Treasury yields, the Fed has just 0.5% left to raise Fed rates before they pause, so the December FOMC statement should be fascinating!
The Black Friday and Cyber Monday sales will be closely scrutinized when they come out this week. In the wake of Best Buy’s 34% third-quarter earnings surprise, consumer spending expectations are running relatively high. Costco’s same-store sales growth rose 7.7% in October, down from 13.7% in the previous quarter, but I expect that the company’s same-store sales growth will remain much stronger in November and December. Overall, I expect that consumer spending will likely be strong during Black Friday and Cyber Monday sales events, which means the holiday shopping season is off to a strong early start!
Navellier & Associates Inc. owns Costco Wholesale Corp. (COST), Ardmore Shipping (ASC) and Teekay Tankers (TNK) in managed accounts. Louis Navellier and his family own Costco Wholesale Corp. (COST), Ardmore Shipping (ASC) and Teekay Tankers (TNK) via a Navellier managed account.