by Louis Navellier

March 23, 2021

One reason behind rising interest rate fears is that import prices continue to rise. Last Tuesday, the Labor Department reported that import prices rose 1.3% in February, a bit higher than the economists’ consensus expectation of a 1.2% increase. Fuel import prices soared 11.1% in February, after rising 9% in January. Excluding fuel, import prices rose 0.4%, down from a 0.9% increase (excluding fuel) in January. Overall, import prices have risen 3% in the past 12 months, so inflationary pressures continue to build.

I should add that the Labor Department also reported that export prices rose 1.6% in February, following a 2.5% surge in January. Excluding food, export prices rose 1.5% in February and 2.2% in January. Economists were only expecting a 0.9% increase. In the past 12 months, export prices have risen 5.2% (the highest since June 2018), so inflation is brewing, which is putting upward pressure on T-bond yields.

There is more inflation brewing in the aftermath of the big February freeze in Texas, which has caused a shortage of plastic and polyurethane, since many chemical plants were shut down due to mass blackouts. As a result, the global supply chain is now disrupted, impacting auto manufacturing, furniture and most consumer products that use plastic. The prices for polypropylene and polyvinyl chloride (PVC) have more than doubled this year. Toyota and Honda warned last week that the shortage of plastic is causing them to curtail vehicle production in North America. The Container Store also warned that plastic shortages could impact profits, and since a lot of PVC pipe is used in home construction, housing starts could slow.

Navellier & Associates does not own Toyota (TM) or Honda Motors (HMC) but does own The Container Store Group, Inc. (TCS). Louis Navellier and his family own The Container Store Group, Inc. (TCS) personally via Navellier managed accounts but do not own Toyota (TM) or Honda Motors (HMC).

The other big news last week was February’s shocking retail sales report. Specifically, the Commerce Department reported that retail sales plunged 3% in February, which was substantially below economists’ consensus estimate of a 0.4% decline, but the good news was that January’s retail sales were revised up to a 7.6% surge, up from the already-torrid 5.3% initially estimated. After tallying up all the revisions, retail sales are now up 6% in the past three months. The culprit behind the plunge in February retail sales is bad weather due to the freeze that enveloped much of the center of the U.S., causing electrical blackouts.

Looking forward to March and April retail sales, market observers are now thinking that if the $600 debit cards from the federal government could spark a 7.6% surge in retail sales in January, there is a lot of excitement building about late March and April retail sales due to the $1,400 checks in the mail from the federal government. I should add that warmer spring weather should also boost springtime retail sales.

The Fed reported that industrial production declined 2.2% in February, due largely to the big freeze and blackouts, as manufacturing output declined 3.1%, while mining (including energy production) plunged 5.4%. Meanwhile, utility output soared 7.4% in February from the freeze, despite the blackouts.

The worst news came Thursday when the Labor Department announced that weekly jobless claims rose to 770,000 in the latest week, up from 712,000 the previous week. Continuing unemployment claims rose to 4.124 million, down slightly from 4.144 million in the previous week. Economists were expecting weekly jobless claims of 700,000 and continuing claims of 4.034 million, so these reports were disappointing.

In the wake of contracting retail sales and industrial production in February, the Atlanta Fed slashed its first quarter GDP estimate to a 5.7% annual pace, down from its previous estimate of 8.3% growth.

We are coming up to the months in which the year-over-year statistics will be spectacular in America, since April was the worst month of the pandemic recession. For example, look at China, where the worst months were in January and February of 2020. Industrial production in China surged 35.1% in January and February compared to the same period a year ago, when the Coronavirus impeded economic growth.

Also notable is that retail sales in China rose 33.8% in January and February compared to a year ago. The most shocking statistic is that home sales soared 143.5% in January and February, while home prices rose 38.3% in the past year, so China is experiencing home appreciation, just like the U.S. did during the pandemic. Due to all these pent-up growth statistics, plus easier year-over-year comparisons, China’s GDP is expected to grow by 15% in the first quarter, while the U.S. will shine best in the second quarter.

News from VW’s “Power Day” Last Week

VW’s “power day” last week is causing lots of industry gossip. The announcement of six gigafactories making batteries with multiple suppliers, like Northvolt, plus thousands of new fast charging stations in Europe, China and the U.S. (via Electrify America) has sent shock waves around the auto industry.

Analysts were predicting that VW would pass Tesla in overall electric vehicle (EV) sales in 2025, but I think that can be moved up to 2023, since VW Group already has more than double the models that Tesla offers and will soon have 25 EVs via its Audi, Porsche and Seat divisions. VW Group is also making a smaller, lower-cost city car via its new Seat EV that is expected to be a big hit in Europe.

What I liked most about VW’s “power day” is that VW Group is charging ahead with developing solid-state batteries with QuantumScape (QS) that will first appear in its top-secret Artemis project, code named Landjet. The head of the Artemis project, Alex Hitzinger, was poached from Apple’s secret EV project. Hitzinger previously developed the Porsche 919 hybrid race car that won LeMans three times, plus six world championships. Aerodynamics and system integration is expected to be ground -breaking on the Artemis project, which will be a luxury EV model for Audi, Bentley and Porsche in 2025.

The inevitable comparisons between Tesla and VW persist. When Tesla announced a new manufacturing plant in Berlin, VW announced four manufacturing plants around the world that would be making its popular ID.3 and ID.4 EVs. While Tesla may have up to three gigafactories, VW is opening no fewer than six gigafactories in Europe alone. VW is also intending to have more charging stations than Tesla in China and Europe, which will charge their EVs faster due to better cooling for their EVs.

So, in summary, VW is striving to beat Tesla by having substantially more models, faster charging, more gigafactories, more manufacturing plants and cheaper EVs as well as luxury EVs with solid-state batteries. No wonder VW Group’s stock (VWAGY) soared last week, while Tesla’s (TSLA) stumbled!

Interestingly, the International Energy Agency (IEA), based in Paris, is now forecasting that demand for diesel and gasoline is peaking due to growing market share for electric vehicles (EV). Specifically, the IEA does not expect that the demand for diesel and gasoline will ever return to pre-pandemic levels.

The IEA also forecasted that 60 million EVs will be on the road in 2026, up from just 7.2 million in 2019. IEA Executive Director, Fatih Birol, said “We do not think gasoline consumption will come back to 2019 levels again.” The IEA said daily gasoline demand dropped by a record 2.9 million barrels in 2020, down more than 10% from 26.6 million barrels per day back in 2019.

I do not doubt that diesel and gasoline demand may be peaking in Europe, which is the largest market for EVs in the world. However, in North America and Latin America, EV adoption is running at a slower pace, so I suspect that the global “peak demand” for diesel and gasoline will not happen anytime soon, since other government incentives to sell EVs are not as strong as they are in many European countries.

Finally, the era of self-driving cars has been postponed a bit, since there was another crash of a Tesla under a semi-trailer in Michigan last week. The National Highway Traffic Safety Administration (NHTSA) sent a special crash investigation team to gather details of the Michigan crash. Interestingly, the NHTSA has investigated at least 14 other Tesla crashes, many of which involved autopilot failures.

Tesla has expanded the testing of its new “full self-driving” software to approximately 2,000 of its customers. However, some drivers were revoked access to the latest full self-driving software because they “did not pay sufficient attention to the road.” After the Michigan semi-trailer crash last week, Elon Musk tweeted “FSD Beta has now been expanded,” and added, “No accidents to date.”

I hate to be a buzz kill, but the self-driving vehicle systems that I have in my cars do not work very well in heavy snow, fog or smoke (like during forest fires). Furthermore, Volvo has admitted that its animal detection system can avoid animals like caribou, deer or elk, but has not been able to adjust to detect the unique movement of kangaroos!  Also, when driving in Florida, one of my cars with self-driving radar failed to detect a big alligator sunning itself on the warm asphalt on a cold winter day, so I had to stomp on the brakes to avoid hitting an alligator. Near my home in the Mountain West, we have endless problem with deer, especially licking salt on the highways during heavy winters, so out West, I order vehicles with animal detection systems to help me avoid hitting the deer and other wildlife.

As much as I like self-driving vehicle systems, they are not 100% foolproof yet, so I wish Tesla well, but I worry that Elon Musk is selling a pipe dream that will not be approved by the NTSB and other regulatory agencies around the world for a long time. I should add that future self-driving systems are also going to have to monitor all construction zones as well as the depth of all ditches to protect vehicles and workers. We are a long way from any radar or GPS system measuring the depth of a construction ditch on the road.

Also, China has invested heavily in its own electric vehicle manufacturers, like NIO and Xpeng, so China does not have a vested interest in Tesla’s domestic success. As a result, multiple Chinese regulators have become less friendly to Tesla in recent months, and the technological battle with China and the U.S. over 5G is now expanding to other technologies that China intends to dominate, like EVs.

This caused a bit of concern when U.S. and Chinese officials met in Alaska last week. China sharply increased its crude oil purchases from Iran and Venezuela and refused to comply with U.S. embargos. Furthermore, China is no longer hiding its trade with North Korea and is ignoring the U.S. embargo.

The tension between China and the U.S. is also impacting U.S. companies that do business in China. For example, The Wall Street Journal reported on Friday that China is restricting the use of Tesla vehicles by Chinese military officials and employees of key state-owned companies. Chinese officials have cited concerns that the data collected by some of these EVs could be a source of national security leaks.

Despite China, Iran, North Korea, Russia, Turkey and Venezuela ignoring U.S. sanctions, embargos and/or being critical of the U.S., the good news is that thanks to higher Treasury bond yields, the U.S. dollar has been firming up. The key to a strong dollar is (1) a strong economy, (2) higher interest rates than the rest of the world and (3) confidence in its central bank as well as the Biden administration.

Right now, I would give the U.S. a score of 2½ for these 3 factors, which is why the dollar has firmed up.

Navellier & Associates does not own Quantumscape Kensington Capital Acquisition Corp (QS), Toyota (TM) or Volkswagen (VWAGY), but does own Apple Computer (AAPL) for a few clients, Tesla for 1 client (per request), in managed accounts. Louis Navellier and his family do not own Quantumscape Kensington Capital Acquisition Corp (QS), Toyota (TM), Volkswagen (VWAGY), or Tesla but does own Apple Computer (AAPL) personally.

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
Inflation Fears Continue to Mount

Income Mail by Bryan Perry
Corporate Investment in Tech is Set to Surge In 2021

Growth Mail by Gary Alexander
Which is Scarier – A Market Meltdown, or a Melt-Up?

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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