by Louis Navellier

February 23, 2022

Most Americans realize that Russia has tremendous leverage over Europe, due to its massive reserves of crude oil, natural gas and other petroleum products, but they don’t realize Russia also has some leverage over the U.S. The U.S. has been importing more crude oil from Russia, especially on the West Coast, due to the decline of Alaska’s crude oil output. So, if the U.S. did what Germany just did and tried to curtail Russian energy imports, then the record prices at the pump on the West Coast could soar higher, so the Biden Administration is in a conundrum, since $5 per gallon gasoline is now common in California. Here is a link to a chart from the Energy Information Administration on U.S. crude oil imports from Russia:

In response to Russia’s initial incursion, Ukraine may potentially cut off electricity in the breakaway regions, just like it did when Russia seized Crimea back in 2014 – which ironically also happened just after the close of the Winter Olympics.  However, this time around, Russia has a nuclear power plant on board a big barge, so Russia can more quickly turn on the power.  Ironically, Crimea did not rattle the stock market too much in 2014, so I expect a similarly muted market reaction this time around.

Naturally, Russia may not stop at “recognizing” these two breakaway regions in Eastern Ukraine, but for now, Putin has made the West look weak and disorganized.  Putin has also tried to “sanction proof” the Russian economy, so it will be interesting to see how the Biden Administration, Britain, France and Germany respond.  Despite a potential rift between Germany and the U.S., I am sure that the West will try to show a united front, but Putin is apparently not afraid of economic sanctions and has tremendous economic leverage over Germany and other European nations that are dependent on Russian natural gas.

One other factor in these warnings about war with Ukraine is the “Wag the Dog” narrative – the habit of some politicians to mask their domestic problems with war rhetoric. Joe Biden has runaway inflation and other financial challenges at home, so forcing our attention to Ukraine helps change the media focus. He is clearly using the Russian/Ukrainian situation to distract our attention from bigger problems at home.

No politician is in more trouble right now than Canada’s Prime Minister Justin Trudeau, who is widely seen to have grossly mismanaged the Canadian trucker protests, which have expanded in Ottawa and are largely being fueled by Trudeau’s prolonged and stringent Covid-19 vaccine booster and mask mandates.

And then there’s British Prime Minister Boris Johnson, who seemed to ignore the uproar over his “bring your own booze” parties by staging another party at his residence, causing charges of hypocrisy about mask wearing and social distancing – so Johnson simply lifted virtually all of the Covid-19 restrictions!

China is Also Pushing “Green Energy” in Europe

Like Russia, China is pretty good at pushing the “green energy” buttons for Western Europe. It is already exporting EVs with cheaper iron-phosphate batteries, led by Tesla, but also followed by BYD, NIO, and MG (built in China by SAIC). Polestar is based in Sweden, but owned by Geely Holding in China. SAIC has been VW’s partner in China, but it is now competing directly with VW in Europe via its MG Marvel R Electric SUV. Geely is also expected to begin selling other Chinese EVs in Europe. Overall, I find it interesting that both China (via cheaper battery technology and EVs) and Russia (via natural gas) are pushing the “green” buttons in Europe to bolster their respective economies and market dominance.

One of the most interesting news tidbits about Tesla is that it is apparently not paying any U.S. corporate taxes, despite posting a $5.5 billion record profit in 2021. That’s because Tesla’s U.S. operations lost $130 billion in 2021, which means that virtually all of its profits were attributable to its Shanghai plant, where most if its electric vehicles are produced with iron-phosphate batteries from CATL.

Furthermore, BYD’s new blade batteries have gotten Tesla’s attention and it has been reported that Tesla may soon be producing cars with BYD’s innovative blade battery. Essentially, Tesla and virtually all its major competitors in the U.S. are making EVs with lithium-ion batteries. China’s domestic battery makers, like CATL & BYD, are becoming more dominant than ever before and making cheaper batteries than LG Chem, Panasonic, Samsung, SK Innovations, and other manufacturers of lithium-ion batteries.

Although CATL’s patent on iron-phosphate batteries has expired – so that other battery manufacturers can also make iron-phosphate batteries for VW Group and other manufacturers – the fact of the matter is that China’s lead in affordable battery technology is very impressive. Only the development of solid-state batteries by Panasonic and QuantumScape can potentially thwart China’s battery leadership.

Navellier & Associates does own Tesla (TSLA), for a few clients, per client request in managed accounts,    Panasonic Corp. (PCRFY), and Volkswagen Ag. (VWAGY), but we do not own Quantumscape  Kensington Capital Acquisition Corp (QS). Louis Navellier does not own Tesla (TSLA), or Quantumscape  Kensington Capital Acquisition Corp (QS), but does personally own Panasonic Corp. (PCRFY), and  Volkswagen Ag. (VWAGY), via a Navellier managed account.

Producer Prices Rise 1% in January & Nearly 10% Annually

Last Tuesday, the Labor Department reported that the Producer Price Index (PPI) surged 1% in January, which was substantially higher than the economists’ consensus estimate of a 0.5% increase. Excluding food, energy, and trade services, the core PPI rose 0.9% in January, which was also substantially above the economists’ consensus estimate of 0.4%. Wholesale food and energy prices surged 1.6% and 2.5%, respectively in January, so the prices at the grocery store and the pump were clearly rising. Service costs continue to rise, so wholesale inflation remains strong, even when food and energy are excluded.

In the past 12 months, the PPI is up a whopping 9.7%, the highest on record, with the core PPI up 6.9%.

Energy prices are volatile – that’s why they are not included in the “core” PPI. Case in point: Crude oil prices fell over $4 per barrel on Tuesday, based on reports that Russia pulled back some troops from the Ukraine border. Russia continued large scale maneuvers near the Ukrainian border as talks with German Chancellor Olaf Scholz commenced. Since Germany is potentially Russia’s largest energy client (if and when the Nord Stream 2 pipeline comes online), the outcome of this meeting will be carefully scrutinized.

In other economic news, the Commerce Department on Wednesday announced that retail sales soared 3.8% in January, substantially faster than the economists’ consensus estimate of 2.1%, but December retail sales were revised lower to a 2.5% decline from a 1.9% drop previously reported. January online sales surged 14.5%, vehicle sales rose 5.7%, and electronics/appliance sales increased 4.6%. Excluding vehicle sales, retail sales still rose an impressive 3.3% in January. Sales at bars and restaurants declined 0.9% in January, while gas station sales dipped 1.3%, a sign that consumers may becoming more cautious with their disposable income. Overall, in the wake of January’s surprising retail sales report, the Atlanta Fed revised its first-quarter GDP estimate up to an annual rate of 1.5%, from 0.7% previously estimated.

The Federal Open Market Committee (FOMC) minutes were released on Wednesday, and Wall Street seemed excited that the FOMC members said that if inflation does not move down as they expect, “it would be appropriate for the committee (FOMC) to remove policy accommodation at a faster pace than they currently anticipate.” Translated from Fedspeak, the Fed finally realizes it is behind the curve and needs to unwind its quantitative easing and raise rates a bit faster. The FOMC minutes also said, “Most participants suggested that a faster pace of increases in the target range for the federal-funds rate than in the post-2015 period would likely be warranted.” (There was a full year between the first and second rate increases in 2015 and 2016.) Right now, it appears that unwinding quantitative easing seems to be the Fed’s primary focus, so that it can clear the decks and start raising the federal funds rate next month.

On Thursday, the Labor Department announced that weekly jobless claims rose to 248,000 vs. a revised 225,000 in the previous week. Continuing unemployment claims declined to 1.593 million vs. a revised 1.619 million previously. Weekly jobless claims remain elevated, but continuing claims keep declining.

On Friday, the National Association of Realtors announced that existing home sales rose 6.7% in January to an annual pace of 6.5 million. The inventory of existing homes for sale declined to 860,000, reflecting an ultra-tight 1.6-month supply at the current sales rate. The median home sale price in January rose to $350,300, which is up 15.4% in the past 12 months. Existing home sales were strong in all four U.S. regions surveyed. Despite the fact that mortgage rates are now back above 4% (median mortgage rates were at 3.45% at the end of January), median home prices are expected to rise due to tight inventories.

Finally, Nvidia (NVDA) announced on Wednesday that its fourth-quarter revenue rose 52.8% to $7.64 billion, which was 2.9% better than analysts expected. The company’s earnings rose 103.4% to $3 billion or $1.18 per share, while its operating earnings of $1.22 per share were 8.2% better than the analysts’ consensus estimate. This essentially marks the end of the quarterly announcement season, so some consolidation is expected between now and mid-March, when quarter-end window dressing commences.

Do not worry about any consolidation, since this is normal. As long as forecasted sales and earnings remains strong, I plan on sticking with my stocks, regardless of any temporary price retracement.

Navellier & Associates owns Nvidia Corp (NVDA), in managed accounts. Louie Navellier and his family own Nvidia Corp (NVDA), via a Navellier managed account.

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

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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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