by Louis Navellier
April 25, 2023
In a meeting in Japan, the G7 nations pledged to accelerate a gradual phase out of fossil fuels and shift to renewable energy. Specifically, in the city of Sapporo, the G7 ministers committed “to accelerate the phase out of unabated fossil fuels so as to achieve net zero in energy systems by 2050.” The G7 pledged to dramatically increase wind and solar electricity, plus reduce Russia’s dominance in supplying nuclear fuel. Ironically, since the Fukushima nuclear disaster in 2011, Japan has become increasingly reliant on coal, natural gas, and crude oil. No matter what the G7 communique says, actions speak louder than words, so I do not believe that many G7 counties will meet net zero carbon dioxide emissions by 2050.
Not only is the G7 striving to disconnect from Russia, but they also want to diversify away from China. There is growing concern about how dependent the G7 is on China, especially for commodities used in solar panels, EVs, and battery backup systems. Like the U.S., the G7 will try to onshore these industries; but for now, China remains in the driver’s seat, so there is little they can do for the next few years. As a result, if the G7 does not embrace China and their supply chains, their climate goals will be derailed.
The Wall Street Journal reported that Saudi Arabia and UAE have stepped in to buy discounted Russian crude oil, ignoring U.S. objections. Both Saudi Arabia and the UAE are utilizing the Russian heavy sour crude oil for electricity generation, which frees up their lighter crude oil for export. UAE also operates a key storage and trading hub for Russian crude oil. Russian crude oil exports to the UAE tripled to a record 60 million barrels last year. Currently, Russia is shipping 100,000 barrels of crude per day to the Saudis, further proof that the BRIC nations, plus Saudi Arabia and UAE, no longer respect U.S. foreign policy.
Speaking of UAE, the COP 28 environmental conference will be hosted by UAE between November 30th and December 13th this year. The Abu Dhabi crude oil chief, Sultan al-Jaber, will host COP 28, which has raised some eyebrows. Teresa Anderson, who leads climate justice at ActionAid, said, “This appointment goes beyond putting the fox in charge of the henhouse.” By way of explanation, COP 26 in Scotland in 2021 concluded by most countries pledging to develop hydrogen as the fuel of the future. Then COP 27 in Egypt was a bit of a bust, since it amounted to all of the poor countries demanding money from the rich countries for causing climate change, so what COP 28 will be about seems mysterious, since the UAE either wants to showcase hydrogen energy, or maybe just hedge their future energy investments.
Regardless, many COP attendees are nervous, so it will be up to the UAE to make them feel welcome and take their objectives seriously. My main comment about utilizing hydrogen as fuel is that it is very hard to store and transport, since hydrogen is a tiny molecule and notorious for leaking. Perhaps at COP 26, the delegates should have taken a chemistry class before declaring hydrogen as “the clean fuel of the future.”
I mentioned in the opening that Berkeley – soon followed by New York City, San Jose, San Francisco, Seattle, and other progressive cities – has implemented natural gas bans, but Appeals Court Judge Patrick Bumatay explained that the EPCA explicitly prohibits states and localities regulating “energy efficiency, energy use or water use” once a federal energy conservation standard becomes effective for a “covered product.” So for now, it appears that the Biden Administration is in charge of our natural gas appliances!
Corporate News from Tesla, Schwab, Apple, and More
Tesla released its first-quarter results last Wednesday and there are some interesting points. First, CEO Elon Musk signaled that Tesla was not done cutting prices, despite six price cuts this year. Second, Tesla’s first-quarter operating margin was 11.4%, down from 16% in the fourth quarter and 19.2% a year ago. Third, Tesla’s regulatory credits are starting to diminish and came in at $521 million in the first quarter, down from $679 million in the same quarter a year ago. Fourth, Tesla cited an “underutilization of new factories,” and Musk said the “uncertain” macroeconomic environment was impeding vehicle sales, keeping operating margins under pressure. Finally, Musk said that Tesla is building “alpha versions of the Cybertruck” to be launched in the third quarter of 2023, just in time for the Zombie Apocalypse!
Now that Tesla is utilizing CATL’s iron-phosphate batteries for its entry level Model 3, a cheaper urban electric vehicle (EV) is desperately needed to spark sales, especially if Tesla wants to compete with BYD in China. Volkswagen Group is also planning to launch city EVs with iron-phosphate batteries to try to capture market share in China and other nations. One of the big problems that all EV manufacturers face is that operating margins on EVs remain lower than on internal combustion vehicles, so as Tesla keeps cutting its prices, a big shakeout in the EV industry is anticipated, which Rivian and Lucid may not survive.
The other big shakeout in the EV business is that Chilean President Gabriel Boric on Friday unveiled a new state-led strategy to develop its vast resources of lithium with private companies. Currently, Albemarle (ALB) and Sociedad Quimica y Minera de Chile (SQM) have leases to mine lithium in Chile. Although President Boric wants to retain a majority interest on new lithium mining projects, it will be interesting to see if Albemarle and Sociedad Quimica y Minera de Chile cooperate on new lithium projects. Both companies sold off on the news of President Boric’s announcement, but both companies have long-term leases that are not expected to be impacted by the new proposed lithium mines.
In other corporate news, Charles Schwab borrowed $45.6 billion from the Federal Home Loan Bank in the first quarter, which is more than three times what it borrowed in the fourth quarter. Furthermore, Schwab suspended its stock buy-back program and cited “regulatory uncertainty” as the primary reason. Schwab is under pressure, but I am not worried and have my family and many client accounts at the firm.
Apple last week announced a 4.15% annual yield on saving accounts to its Apple Card clients. The Apple Card is a joint venture with Goldman Sachs Group, so the war for consumer savings is picking up. As consumers move their free cash around searching for higher yields, Apple is trying to be one of the beneficiaries. It will be interesting to see which financial institutions win the war for consumer cash.
The Beige Book and Other Economic Indicators are “Mixed”
The Fed released its Beige Book survey last Wednesday in preparation for its next Federal Open Market Committee (FOMC) meeting in early May. Overall, 9 of the 12 Fed districts reported little or no change in economic activity. Due to these mixed signals, I think a split vote might emerge at the May meeting.
I think the Fed should at least “pause” in their rate increases, but influential Fed districts, such as New York, are apparently willing to raise rates another 0.25%. New York Fed President Christopher Waller recently said, “I would welcome signs of moderating demand, but until they appear, and I see inflation moving meaningfully and persistently down toward our 2% target, I believe there is still more work to do.” The new Chicago Fed President, Austan Goolsebee, said at the Economic Club of Chicago, “At moments like this of financial stress, the right monetary approach calls for prudence and patience.”
The Beige Book survey implied that there was minimal fallout from recent bank failures. However, the survey noted that many banks tightened their lending standards and experienced outflows after high profile bank failures. The San Francisco Fed, which is home to Silicon Valley Bank and First Republic Bank said, “Lending standards tightened notably,” adding that, “Existing and planned projects across sectors were delayed or canceled due to higher funding costs, heightened uncertainty, and more limited access to credit.” Ouch! Maybe the San Francisco Fed district will vote against further rate increases.
Housing statistics were mixed. First, the Commerce Department on Tuesday reported that single-family housing starts rose 2.7% in March to an annual pace of 861,000. All regions were strong, except the West, where wet winter weather caused housing starts to plunge 16% in March. Multi-family starts declined 6.7% to an annual pace of 542,000. Looking forward, single-family building permits rose 4.1% in March to a 5-month high, while multi-family permits declined 24.3%. Overall, building permits declined 8.8% in March to an annual pace of 1.413 million. A weak rental market is clearly impacting starts and permits.
The National Association of Realtors announced on Thursday that existing home sales declined 2.4% in March after surging 14.5% in February. The median home price declined 0.9% in March to $370,300 vs. $375,700 in the same month a year ago. The median home price peaked at $413,800 last June and has declined 10.5% in the past nine months. The inventory of existing homes for sale now stands at 980,000, up 1% from February and 5.4% compared to a year ago. In March, the average home was on the market 29 days, down from 34 days in February, so inventories remain tight. However, after mortgage rates declined for five weeks, the 30-year fixed mortgage rose to 6.39% in the latest week, up from 6.27% in the previous week, so home sales may continue to decline due to affordability issues. I should add that approximately 27% of existing home sales are paid 100% in cash with no mortgage financing.
On Thursday, the Conference Board announced that its index of Leading Economic Indicators (LEI) declined 1.2% in March to the lowest level since November 2020. In the past six months, the LEI has declined 4.5% and is accelerating its decline, since in the previous six months the LEI declined 3.5%. As a result, the Conference Board now forecasts “economic weakness will intensify and spread more widely throughout the U.S economy over the coming months, leading to a recession starting in mid-2023.”
The Labor Department on Thursday reported that weekly unemployment claims rose to 245,000, up from a revised 240,000 the previous week. Continuing unemployment claims rose to 1.865 million, up from a revised 1.804 million in the previous week, reaching the highest level since November 27, 2021. The four-week average of continuing claims is at its highest level since December 18, 2021. I suspect that this may influence the doves on the Fed to call for no key interest rate hike at their May FOMC meeting.
Overseas, the China National Bureau of Statistics on Tuesday revealed that China’s GDP expanded at a 4.5% annual pace in the first quarter due to stronger-than-expected consumer spending. Retail sales rose 10% over a year ago. A resurgent China bodes well for world economic growth and energy demand.
Poland and Hungary have banned Ukrainian wheat to protect their domestic agriculture production. Not surprisingly, the European Commission in Brussels has been critical of Poland and Hungary’s actions, but they are also doing what other European Union nations have done to protect their domestic agriculture sectors. Since Ukraine is not part of the EU, there is little recourse to sell its wheat to EU nations that are protecting their domestic wheat production. Naturally, this is another crack in the EU support for Ukraine.
The Bank of England is the latest central bank to consider a digital currency. Specifically, Bank of England Deputy Governor Jon Cunliffe said, “We recognize very clearly the potential transformative effect on wholesale financial markets of tokenization of financial assets, atomic settlement, smart contracts and other emerging technologies.” Since crypto firms, like FTX, got in trouble with “tokens,” I suggest the Bank of England not use the word “tokenization,” since it makes financial markets nervous.
Navellier & Associates owns Apple Computer (AAPL), and Sociedad Quimica Y Minera De Chile S.A. (SQM), and Volkswagen Ag. (VWAGY), in managed accounts and a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own Charles Schwab Corp (SCHW), Albemarle (ALB), Rivian Automotive (RIVN), or Lucid Group (LCID). Louis Navellier and his family own Apple Computer (AAPL), Sociedad Quimica Y Minera De Chile S.A. (SQM), and Volkswagen Ag. (VWAGY), via a Navellier managed account, and Apple Computer (AAPL), in a personal account. He does not own Charles Schwab Corp (SCHW), Tesla (TSLA), Rivian Automotive (RIVN), Albemarle (ALB), or Lucid Group (LCID) personally.