by Louis Navellier

December 6, 2022

Last week started with violent Covid protests in Shanghai, China’s most populous city, where a large contingent of mostly young people protested stringent “Covid Zero” lockdowns. Similar protests also broke out in Beijing, Wuhan, Chengdu, and other major Chinese cities of over 10 million people each.

So far, Chinese authorities have resisted Western vaccines, so that may have exasperated the Covid crisis. These protests are raising concerns that China’s supply chains may be disrupted again. China’s “Covid Zero” policies force residents to “stay in place,” so many workers are prohibited from going home. That may explain why some Foxconn workers broke through barricades in their attempts to try to go home.

Any mass civil disobedience like the Tiananmen Square protests in 1989 would be a big challenge for the Communist Party, and so far, President Xi and his advisors have responded with massive police presence, including tanks on the streets. China is a surveillance state with facial identity software and security cameras everywhere, so the next step may be to round up and question protesters.

China can also track protestors via their cell phones, and some protestors have already been contacted by the police, who are asking protestors to write a declaration of why they were present at the protests.

Due to the disruptive nature of China’s Covid Zero policies, many auto manufacturers in China, including Honda and VW, have suspended production at some plants. VW cited parts shortages as well as local health protection measures as the reason for production being halted. Toyota has also “adjusted” its production in China. Obviously, China’s GDP growth will suffer if they keep locking down major cities.

India’s economy has been booming as China’s economy stumbles and large multinational companies, like Apple, turn to India to outsource manufacturing and services. India has a largely coal-fired electricity grid, and its Central Electricity Authority drafted a report that said it has to boost its coal usage by 40% to meet electricity demand for the next decade. India has pledged to meet net-zero emissions by 2070 and has invested in some renewable energy projects. However, India’s carbon footprint is growing much faster than its renewable energy projects, so global coal demand is expected to remain strong.

Strong Energy Returns (and the FTX Scandal) are Killing Many ESG Portfolios

The FTX bankruptcy is exposing the fact that FTX used ESG as a cover to avoid regulatory scrutiny, especially from Congress, where FTX was the second-largest donor, after George Soros, in the recent election cycle.  I find it interesting that Blackrock closed an ESG fund this year due to a lack of investor interest and the State of Florida fired Blackrock for a $2 billion ESG portfolio as it divests from ESG!

Investors no longer seem to seek out ESG portfolios that typically shun fossil fuel companies, especially coal companies. I think that it is safe to declare that 2022 will go down as the year that ESG investing died. Not only did those who specialized in ESG investing (like universities and public pension plans in blue states) grossly lag the overall stock market in 2022, since fossil fuel companies had the best earnings growth, but ESG also hurt the reputation of Blackrock, Jim Cramer, Kevin O’Leary, and other 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 in May and replaced it with ExxonMobil, just further complicates how companies are being assigned ESG scores.

Ironically, when S&P Global kicked Tesla out of its ESG index, they cited the Tesla plant in Reno as the primary reason as well as some worker complaints at Tesla factories. Specifically, one side of the Tesla plant in Reno makes electric motors and the other side is operated by Panasonic that makes lithium-ion batteries for both Lucid and Tesla. Technically, S&P Global cited the battery operations in Reno for kicking Tesla out of its ESG index but neglected to mention that Panasonic was making EV batteries.

The Biden Administration Favors Venezuelan Oil Over Domestic Sources

The big energy news last week was that the Biden Treasury Department issued Chevron a license that allows the company to pump Venezuelan crude oil in conjunction with PDVSA for the first time in several years. Ironically, this license also prohibits PDVSA from receiving any profits from Chevron’s crude oil sales. Instead, profits can be distributed to the “Unitary Platform” that supports the peaceful restoration of democracy, free and fair elections, and respect for the rights and freedoms of Venezuelans.

The Wall Street Journal pointed out that before Chevron resumes pumping crude oil in Venezuela, the company must collect its debt (more than $4 billion from PDVSA), which could take two to three years. Additionally, Chevron must repair its equipment, hire workers, and deal with power outages as well as security threats. In other words, Chevron’s Venezuelan production will not immediately offset the crude oil that the Biden Administration has been releasing from the Strategic Petroleum Reserve (SPR), so as soon the SPR release ends in the upcoming weeks, I expect crude oil prices to surge once again!

Biden Administration officials made a trip to Venezuela to meet with the Madero regime in March and since then, six imprisoned energy executives known as the “CITGO 6” were released in May.

In October, the Department of Homeland Security announced joint actions with Mexico to return Venezuelan immigrants to the U.S. to Mexico, where they may later be transported by air to a U.S. “interior port of entry” to reduce congestion on the U.S. southern border. Obviously, the Biden Administration’s dialogue with the Madero regime in Venezuela is expanding and it is expected that many economic sanctions may eventually be lifted as this cooperation with Venezuela expands.

The G7 last week agreed to a $60 per barrel price cap on Russia crude oil, but this price cap is destined to fail. First of all, if the G7 nations could buy Russian oil at $60 per barrel, the share of Russian oil would actually rise, since it would be so cheap!  Interestingly, Poland, Lithuania, and Estonia argued for a less restrictive price cap, since they actually rely on Russian crude oil, but were overridden by the G7.

The G7 price cap also includes a ban on shipping, insuring, or financing Russian crude oil. However, The Wall Street Journal reported that shipping companies have snapped up dozens of secondhand oil tankers that can navigate frozen seas around Russia’s ports in the Baltic Sea. This “shadow fleet,” according to the WSJ, will change flags, turn off transmitters, employ decoy signals, and swap crude oil at sea.

In the end, Russia will likely sell more crude oil to China, India, Saudi Arabia, and UAE, where it can be refined, so those countries, especially India, can then sell excess refined products like diesel and fuel oil.

If you buy an electric vehicle, you may be aware that the $7,500 tax credit is no longer available for many EVs. Furthermore, the Treasury Department is facing a year-end deadline to propose new guidelines for EV buyers to qualify for a $7,500 tax credit in 2023 in accordance with the Inflation Reduction Act.

The other problem is that Britain, the European Union, Japan, and South Korea have all objected to the Act’s provisions that propose that the eligible EVs must be assembled in North America, plus have stringent rules for sourcing and manufacturing batteries. The tax credit rules have not been finalized.

The Economic Statistics Mixed, But Net Positive

The economic statistics were mixed last week, but they were generally positive enough to indicate that no recession is in sight. First, Adobe Research reported that Black Friday sales came in at a record $9.12 billion. Interestingly, online sales only rose 2.3% on Black Friday, while “buy now pay later” sales surged 78% compared to the previous week. Consumer spending was strong on Thanksgiving Day and hit an all-time high of $5.29 billion online, which is up 2.9% from a year ago. Cyber Monday’s sales rose 5.8% to $11.3 billion according to Adobe Research, so this holiday shopping season is off to a good start.

Turning to the generally weak housing market, the S&P CoreLogic Case-Shiller National Home Price Index declined 1% in September and 10.6% in the past 12 months. This was the third straight monthly decline in home prices, according to Case-Shiller. As home prices cool, the “owner’s equivalent rent” component in the Consumer Price Index is expected to moderate, which will help inflation to cool off.

On Wednesday, the Commerce Department revised its estimate of third-quarter GDP growth to an annual pace of +2.9%, up from 2.6% previously estimated. An increase in consumer spending to a 1.7% annual pace, up from the 1.4% previously estimated, was the primary reason for the upward GDP revision.

The Commerce Department also announced on Thursday that personal spending surged 0.8% in October, which is positive for third-quarter GDP growth. On the same day, the Atlanta Fed lowered its fourth-quarter GDP estimate to an annual pace of 2.8%, down from its previous estimate of a 4.3% annual pace. The Atlanta Fed cited lower domestic investment (1%, down from 2%) and a decline in real net exports (0.16% down from 0.64%) as the primary reason for its downgraded fourth-quarter GDP estimate.

Turning to the job situation, ADP on Wednesday announced that only 127,000 private payroll jobs were created in November. Medium-sized businesses (those with 50 to 249 employees) created all of the jobs and more (283,000) as small and large businesses shed employees. The bottom line is that job creation is now becoming scarcer, which may cause the Fed to consider pausing after its December key rate hike.

The biggest job news, as always, comes on the first Friday of the month, when the Labor Department announced that 263,000 payroll jobs were created in November, substantially higher than the economists’ consensus estimate of 200,000. October payroll jobs were revised up to 284,000 (from the 261,000 first reported), while September payroll jobs were revised down to 269,000 (from 315,000 first estimated).

The unemployment rate remained at 3.7% and the overall labor force dropped by 186,000, as the labor force participation rate slipped to 62.1% in November, down from 62.2% in October. The average workweek declined to 34.4 hours in November, down from 35.5 hours in October. Average hourly earnings rose 0.6% (18 cents) to $32.82 per hour in November and are up 5.1% in the past year.

The most surprising economic news last week was that the Institute of Supply Management (ISM) announced on Thursday that its manufacturing index declined to 49 in November, down from 50.2 in October. Since any reading over 50 signals an expansion, the ISM manufacturing index ended 30 straight months of expansion from the U.S. manufacturing center. The New Orders component slipped to 47.2 in November (down from 49.2 in October) and the Backlog of Orders plunged to 40 in November (down from 45.3 in October). If the Fed were looking for a reason to stop raising rates, this would do the trick.

Another piece of negative news was that the Conference Board announced that consumer confidence declined to 100.2 in November, down from a revised 102.2 in October. Consumer confidence is now at the lowest level since July. However, it was based on inflation expectations, which have since declined. Lynn Franco, senior director at the Conference Board said, “Inflation expectations increased to their highest level since July, with both gas and food prices as the main culprits.” Franco added, “The combination of inflation and interest rate hikes will continue to pose challenges to confidence and economic growth into early 2023.” But if inflation fades and rate increases stop, confidence could rise.

Navellier & Associates owns Toyota Motor Corp (TM), Panasonic Corp (PACRFY), Apple Computer (AAPL), VW Group (VWAGY), Exxon Mobil Corp. (XOM), and Chevron (CHV) in managed accounts and a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own Honda Motors (HM), or Lucid Group (LCID). Louis Navellier and his family own Panasonic Corp (PACRFY), VW Group (VWAGY), Apple Computer (AAPL) and Toyota Motor Corp (TM), via a Navellier managed account and Apple Computer (AAPL) in a personal account. He does not own Exxon Mobil Corp. (XOM), Chevron (CHV), Tesla (TSLA), Honda Motors (HM), or Lucid Group (LCID) personally.

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

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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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