by Louis Navellier
December 20, 2022
Last Tuesday, the Labor Department announced that the Consumer Price Index (CPI) rose only 0.1% in November and 7.1% in the past 12 months. The monthly CPI was lower than the economists’ consensus expectation of 0.3%, and that triggered a massive bond rally that caused Treasury yields to plummet.
The core CPI, excluding food and energy, rose just 0.2% in November and 6.0% in the past 12 months. Energy prices plunged 1.6% in November (as gasoline prices declined 2%), while food prices rose 0.5%. Used vehicle prices declined 2.9% in November and they have now fallen 3.3% in the past year. The CPI component that remains problematic is housing (owners’ equivalent rent), which rose 0.6% in November.
The 10-year Treasury bond yield has declined 80 basis points since late October, while the 2-year Treasury note has declined 55 basis points since early November. As I have said many times, the Fed never fights market rates, so even though the Chairman is warning us of more possible rate increases, I feel they will pause after last Wednesday’s 0.5% rate hike, since they will be in synch with market rates.
On Wednesday, the FOMC statement did not change much from its previous statement in November. However, the Fed lowered its economic growth outlook, which is dovish. Its famous “dot pot,” however, indicates that the Fed funds rate will rise to 5.1%, up from 4.6% back in September, which is hawkish. However, the “dot plot” is not unanimous, and dissension among members has finally materialized with a wide (70 basis points) deviation. The Fed also plans on continuing to reduce its balance sheet.
The Wall Street Journal last week discussed how there is a growing consensus that the Fed will be able to engineer a “soft landing” in 2023, where economic growth slows, but the labor market remains healthy. Furthermore, Treasury Secretary Janet Yellen said on 60 Minutes that inflation would cool in 2023, and she painted a relatively upbeat economic outlook, despite acknowledging the risk of a recession.
On Thursday, the market declined when the Commerce Department announced that November retail sales plunged 0.6%, which was significantly below economists’ consensus estimates of a 0.3% decline. This was the largest monthly decline in 11 months, but retail sales rose 6.5% in the past 12 months. Vehicle sales declined 2.3% in November and other big-ticket items, like furniture, building materials, and electronics, also declined, but excluding gasoline and vehicle sales, retail sales declined by only 0.2%.
Nine of the 13 industries surveyed reported sales declines in November, but sales at bars & restaurants rose 0.9% in November, so at least consumers were “out and about.” However, this was still a very disappointing report, as economists will now revise their fourth-quarter GDP estimates lower.
I should add that the Atlanta Fed revised their fourth-quarter GDP estimate down to a 2.8% annual pace last Thursday after the retail sales report came out below its previous estimate of 3.2% annual growth.
Additionally, the Labor Department on Thursday announced that weekly unemployment claims declined to 211,000, down from a revised 231,000 in the previous week. Continuing unemployment claims rose to 1.671 million, up slightly from a revised 1.672 million in the previous week. Taken together and given the long-term trend, the labor market remains healthy and will not likely impact Fed policy.
The Winter Fuel Market is Tightening Up
Winter officially starts tomorrow, December 21. It is now very cold in much of Europe and the U.S., so natural gas prices are rising. Furthermore, crude oil inventories have plunged in recent weeks, so the decline in crude oil prices for the past several days is expected to be short-lived. However, a glut of gasoline should keep the prices at the pump relatively low until demand picks up in the New Year.
The jury is still out on the G7’s $60 price cap on Russian oil. All I can tell you is that my tanker stocks “gapped” up on Monday, so I suspect crude oil transportation is picking up. The LNG business is also robust, now that a cold front enveloped Europe and natural gas demand is soaring. The easiest way for Russia to get around the G7 $60 price cap is to just sell crude oil to China, India, Saudi Arabia, and the UAE, who can refine the Russian crude and sell it as refined products, like diesel, heating oil, and jet fuel.
Due to the phasing out of COVID lockdowns, China’s refiners have started purchasing more crude oil from Brazil, West Africa, and the Middle East in anticipation of rising demand. Russia has traditionally been a big energy supplier to China, so I expect they will export more crude oil and natural gas to China.
The electric vehicle (EV) industry is still struggling with high battery costs and supply shortages. For those who have followed my struggle with the battery in my family’s Audi e-tron, it is still “dead” with only 23,095 miles and it has now been dead for almost five months, ever since we took it in to be fixed under warranty. Two new battery cells have arrived, so we will see if it accepts a charge. The fact that the older EVs have to have batteries replaced, with long delays, will likely exacerbate the battery shortage.
Due to these and other delays and price increases, some EV firms are now seeking consolidation. Rivian was shunned by Ford after discussing a joint venture and now Rivian has canceled its plans to build vans in Europe with Mercedes-Benz, just three months after that joint venture was announced.
FTX Corruption is Just Beginning to Unwind
FTX founder Sam Bankman-Fried was scheduled to testify before Congress on Tuesday, but he was arrested (to the relief of many members of Congress that accepted money from Sam Bankman-Fried) the day before, so the most interesting Congressional testimony will now be from CNBC’s Kevin O’Leary.
Since CNBC’s Jim Cramer and others on CNBC called Sam Bankman-Fried “the next JP Morgan,” there has been some soul searching on CNBC. Squawk Box hosts were very condescending when Kevin O’Leary appeared, so it will be interesting how he handles questions in front of Congress. Since O’Leary was paid almost $15 million to be a FTX spokesman, he is receiving relentless criticism.
Interestingly, Sam Bankman-Fried has appeared before Congress more than SEC Chairman Gary Gensler in the past 12 months. Since Chairman Gensler taught cryptocurrencies at MIT, I am curious if Sam Bankman-Fried was one of his students. Caroline Ellison, the daughter of the head of MIT’s Economic Department, was the CEO of Alameda Research that apparently sank FTX, but was not a Gensler student, since she attended Stanford. However, Gensler apparently met Caroline Ellison via her father at MIT.
I should add that Caroline Ellison hired the recent former head of SEC Enforcement, Stephanie Avakian, for her defense. The FTX scandal is just beginning, and since Bankman-Fried was the second biggest political donor this election cycle (to #1 George Soros), we’ll see if he gets any special treatment.
When the new leadership of the House takes over in January, Sam Bankman-Fried’s actions to buy influence in Congress will likely be endlessly debated, in part to humiliate some of our elected leaders.
The SEC lawsuit filed against Bankman-Fried accuses him of using client funds to buy influence in Congress. Interestingly, when Bankman-Fried was doing his apology tour after the FTX bankruptcy, he said that the $39 million that he donated to members of Congress was from earnings from Alameda Research. Some of the members of Congress that accepted money from Sam Bankman-Fried have offered to donate that money to charity, but in fact, if the SEC allegations are true, that money should be returned to the bankruptcy court trustee for restitution to clients, not charity, since the money belonged to clients.
Navellier & Associates does not own, Mercedes-Benz or Rivian Automotive (RIVN). Louis Navellier and his family do not own Mercedes-Benz or Rivian Automotive (RIVN) personally.