by Louis Navellier
April 18, 2023
The financial media has been warning that first-quarter earnings forecasts may be decelerating from their original estimates at the start of the quarter, but I do not see that from the analyst community covering our stocks. That’s why it’s important to own the right stocks in the right sectors. Analysts have been issuing positive statements about our stocks and I look forward to earnings reports for the stocks we hold.
There also seems to be a big disconnect from the top-down strategists in the big Wall Street firms versus the actual analyst community that covers individual stocks. Although major bank earnings were released last week, and most reported big surprises, we do not own the major banks, so we should not worry about the inverted yield curve and other banking woes. The Fed has opened its discount window for a year to help any troubled banks and it appears that many banks have taken advantage of the discount window.
The FOMC minutes were released last Wednesday, revealing a significant minority of FOMC members who did not want to raise key interest rates at the last FOMC meeting, mostly due to the banking turmoil. These FOMC minutes also revealed that Fed staffers predicted a “mild recession” later this year. Overall, these FOMC minutes revealed that a minority of FOMC members are dovish, so in light of the latest CPI and PPI data, plus lower Treasury yields, I expect that the Fed will not hike key interest rates any further.
Despite terrible retail sales in the first quarter, the Atlanta Fed actually raised its first-quarter GDP estimate to a 2.5% annual pace, up from its previous estimate of 2.2%. However, I expect that many economists will be revising their first-quarter GDP estimates lower than 2% in the upcoming weeks.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Bloomberg published a great article last week about the money supply contracting in Britain, and in the European Union and the U.S. This article was critical, showing that central banks may have gone too far and “need to restore positive money growth.” Although “monetarism” is not currently influencing central bank policies, when the money supply is reduced, economic activity naturally contracts. This Bloomberg article implies that central banks have to cut their interest rates to restore money supplies, so it will be interesting to see how fast central banks move as inflation continues to cool in the upcoming months.
We Continue to Favor the Energy Sector
We continue to make a big bet on energy stocks, despite (and also because of) the Biden Administration’s “Green New Deal.” The latest ruling came last Wednesday when the head of the Environment Protection Administration (EPA), Michael S. Regan, announced new emission limits that would require as much as 67% of new vehicles sold by 2032 to be fully electric. This would effectively be a death blow to internal combustion engines and even more restrictive than the current regulations covering EPA emissions.
The strict new EPA emissions on light and medium duty trucks would take effect in 2027 and become increasingly strict each year through 2032. Specifically, the EPA is proposing that emissions decline 18% in 2027, then 13% in 2028, 15% in 2029, 8% in 2030, 9% in 2031, and 11% more in 2032. Essentially, these EPA regulations are designed to force consumers to switch to electric vehicles (EVs). It will be interesting to see the reaction from Detroit and other automotive manufacturers to these strict new rules.
The New York Times published an article on Tuesday that questioned whether or not automakers can possibly comply with these new EPA rules that will force nearly all vehicles to be electric within a decade. The article said the new EPA rules are expected to force EVs to make up 54% to 60% of new vehicles sold in the U.S. by 2030, and 64% to 67% by 2032. The article further cited the fact that the world now only makes 10% of the lithium that the EPA will require under these new emission rules.
Sociedad Quimica y Minera de Chile S.A. (SQM) is the second largest lithium mining company in the world and should benefit from these new EPA rules. However, shortages of lithium, nickel, and cobalt have made EVs more expensive than vehicles with internal combustion engines and are therefore preventing new EV manufacturers, like Lucid and Rivian, from reaching profitability.
Currently, there seems to be a glut of overpriced electric vehicles in inventory after China and Germany recently ended their tax incentives to build electric vehicles (EV). Tesla’s inventories at its Berlin plant are apparently growing, so the company announced more price cuts last week.
In Tesla’s defense, the prices of lithium, nickel, and cobalt have all moderated as electric vehicle demand in China has softened. However, long-term, the demand for battery components is expected to soar due to more EV models in the pipeline as well as the anticipated higher electricity storage demand.
Tesla announced that it is building a new factory in Shanghai, China, to build its large-scale batteries for electricity storage, called the Megapack. Australia has been shutting down all its coal plants and has been expanding its electricity storage. California is another big market for Tesla’s Megapacks, which are made with cheaper iron phosphate (LFP) batteries sourced from CATL. It will be interesting to see how fast these storage facilities expand across the U.S., since rising demand usually causes electricity rates to rise.
The Aftermath of Macron’s Flirtation with China
The strikes in France have also disrupted energy markets around the world. Specifically, work stoppages and blockades at key import terminals, distribution hubs, and oil refineries have resulted in fuel shortages all over France. Africa and the East Coast of the U.S. receive refined products from France, like gasoline, so prices at the pump are expected to rise. The French government has relied on its emergency stockpiles during recent strikes, but must replenish its inventories, which should put upward pressure on oil prices.
French President Emmanuel Macron is getting diplomatic heat after saying that Europe should distance itself from the brewing tensions between China and the U.S. over Taiwan. In the wake of massive Chinese military maneuvers last week, Macron’s comments were considered ill-timed by many. In a Politico interview when Macron was asked if the confrontation between China and the U.S. made it see Europe as “a chess piece between two blocs,” Macron responded by saying, “Is it in our interest to accelerate on the subject of Taiwan? No. The worst thing would be to think that we Europeans must become followers on this topic and adapt to the American rhythm and Chinese overreaction.”
Furthermore, Macron also warned of a “trap for Europe” if it got “caught up in a crisis that is not ours.” It is obvious that this rift between the Biden Administration and French President Macron would spill over to Ukraine, since France has been making overtures to its business interests in Russia.
China’s recent military exercises were designed to intimidate Taiwan and the U.S. However, the easiest way for China to take over Taiwan is to merely influence the upcoming Taiwan Presidential election and install a pro-China president. This is how China began to take over Hong Kong, via a pro-China mayor.
China is very patient and pragmatic. China is very good at fighting economic wars and taking over industries. Since Taiwan dominates semiconductor manufacturing, China would like to dominate that industry as well, so it will be interesting to see if the U.S. can diversify semiconductor manufacturing in the upcoming years, since currently the U.S. and the rest of the world are heavily dependent on Taiwan.
I should add that one of China’s largest trading partners, namely Brazil, doubled down on breaking away from the U.S. dollar. Specifically, the new Brazilian President, Luiz Inacio Lulu de Silva. called for developing countries to work toward replacing the U.S. dollar with their own currencies, essentially aiding and abetting China’s efforts to undermine the U.S. dollar. On his first state visit to China, Lulu called for the BRICS nations – Brazil, Russia, India, China, and South Africa – to come up with their own alternative currency for use in trade. In an impassioned speech at the New Development Bank in Shanghai (known as “the BRICs bank”), Lulu said, “Every night I ask myself why all countries have to base their trade on the dollar.” Lulu added, “Why can’t we trade based on our own currencies?” and, “Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”
Yikes! Clearly, the U.S.’s neglect of Latin America for decades is now having profound consequences.
Navellier & Associates owns Sociedad Quimica Y Minera De Chile S.A. (SQM), a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own Rivian Automotive (RIVN) or Lucid Group (LCID). Louis Navellier and his family own Sociedad Quimica Y Minera De Chile S.A. (SQM), via a Navellier managed account. He does not own Tesla (TSLA), Rivian Automotive (RIVN), or Lucid Group (LCID) personally.