by Louis Navellier

May 23, 2023

Tax revenues have slowed down dramatically, partly due to a slowdown in capital gains tax receipts, causing pressure on the President and Congress to accelerate their negotiations on raising the debt ceiling.

California has historically become a boom/bust state for tax collections, since approximately 3,000 people pay the vast majority of the state’s taxes, especially from capital gains. As a result, California has gone from a surplus a couple of years ago to a big deficit now. The federal government has also increasingly become more dependent on capital gains for tax revenue, but due to lackluster stock and real estate markets, it appears that the federal government’s deficit ceiling deadline may occur sooner than later.

Last week, the Biden Administration canceled a second meeting with Congressional leaders set for last Friday to debate an increase to the deficit ceiling. Officially, this delay will allow the White House and Congressional staff members more time to prepare for negotiations over budget cuts that the Republican-led House of Representatives is demanding. If a deal is not reached by June 1st, pension payments for federal retirees could be postponed to provide lawmakers more time to hammer out details. A partial government shutdown is also possible, which has happened before, but that would be the last resort.

In a Bloomberg interview last week, Treasury Secretary Janet Yellen said, “If Congress fails … it really impairs our credit rating. We have to default on some obligation, whether it’s Treasuries or payments to Social Security recipients.” In Japan for a meeting of G7 finance ministers, Treasury Secretary Yellen added this hopeful note: “I think the negotiations are very active. I’m told they have found some areas of agreement,” but in the wake of the cancelled Friday meeting with Congressional leaders, she may be guilty of wishful thinking going into the G7 meeting slightly embarrassed at our financial ineptitude.

The G7 meeting in Japan will be interesting this week. They can’t seem to agree on how to fight global warming, or climate change, or how to label various fuels. First, Germany disagrees with Britain and France over support for natural gas. In fact, Germany has strived to label natural gas as “green.” In North America, we do not even know what to do with all the natural gas we have, which is why North Dakota “flares” the natural gas in their crude oil fields – since there are no pipelines to transport natural gas.

So, if California, New York, Britain, and France succeed in curtailing natural gas usage, the excess natural gas will just be flared away. I cannot fathom such stupid policies and remain perplexed about the growing war against natural gas, especially since natural gas will be needed to make the hydrogen that the green folks are calling for as the “fuel of the future.” (Currently, any such “green hydrogen” is cost prohibitive.)

Speaking of carbon emissions, Canada’s Alberta province is burning, as are the boreal forests in Russia, from thunderstorms. In Alberta alone, over 1 million acres have burned this year, causing 30,000 people to relocate. The annual wildfires in Alberta often disrupt crude oil and natural gas production, as 320,000 barrels per day of oil equivalent, representing 3.7% of Alberta’s production, were offline last week.

The boreal forests in Alberta and Russia have ground characterized by peat, whose fires are next to impossible to put out until snow falls on the forest floor. Due to an early start to the boreal forest fire season this year, 2023 will likely set the record for carbon emissions. Naturally, the G7 has no plan to squelch these seasonal forest fires, so the green police literally cannot see the forest through the trees.

ScienceAdvances published a study last year forecasting that the annual boreal forest fires in the Northern Hemisphere could release 12 gigatons of carbon dioxide per year into the atmosphere. Historically, forest fires have accounted for approximately 25% of global carbon emissions. By comparison, the International Energy Agency said that carbon dioxide emissions from energy and industry globally hit a record of 36.8 gigatons in 2022, mostly due to China, India, and other emerging economies; so for anyone worried about carbon dioxide emissions, which were not originally named in the Clean Air Act, major problems include natural forest fires from thunderstorms as well as fossil fuels, especially coal, in emerging economies.

As a result, I am not sure the G7 or COP28 can do much to impact global carbon emissions. Naturally, a super volcano could also erupt and boost carbon emissions, and there is virtually nothing that mankind can do about that, other than to maybe tap into geothermal energy for electricity generation.

According to Clarkson’s Research, there are 625 liquid natural gas (LNG) ships in the world and the fleet will be expanded to 907 ships by 2027. By comparison, there are 849 very large crude oil carriers (VLCC) operating around the world and the fleet will be expanded to 903 by 2027. In other words, by 2027, there will be four more LNG carriers than VLCCs, so despite a war on natural gas by California, New York, Britain, and France, the rest of the world is following Germany’s advice and increasingly turning to natural gas. Obviously, the chaos surrounding Russia is boosting the fleet of LNG carriers and since its natural gas pipelines to Europe were blown up, even Russia is now fueling LNG carriers.

Speaking of Russia, the International Energy Agency (IEA) reported that Russian crude oil exports rose by 50,000 barrels per day in April to a post invasion high. Almost 80% of Russian crude oil exports go to China and India, according to the IEA. Specifically, Russia shipped 5.2 million barrels of crude oil in April. China received 2.1 million of those barrels and India got 2 million barrels. In a report on Tuesday, the IEA said, “Russia seems to have few problems finding willing buyers for is crude and oil products.”  However, due to lower crude oil prices,  Russia’s crude oil revenue has declined 27% in the past year.

In other energy news, the patent on China’s CATL’s iron-phosphate (LFP) battery has expired, so the big South Korean battery manufacturers, namely LG Energy Solution, Samsung SDI, and SK On are all now developing LFP batteries that utilize no expensive cobalt, nickel, or magnesium. The advantage of LFP batteries is that they can be 100% charged, do not catch on fire, and are cheaper. The disadvantage of LFP batteries is that they are heavier and lose range in cold climates. Currently, LFP batteries are being used in cheaper electric vehicles (EVs) as well as energy storage (e.g., powerwalls). So far, SK On has a head start on LFP batteries compared to its South Korean rivals. Since SK On has a big battery plant in Georgia to supply predominately Ford and VW Group, its LFP batteries could help make EVs more affordable.

Chinese consumers prefer LFP batteries and, due to a glut of EVs in China, price wars have broken out, with BYD being the big winner. The other Chinese EV companies are now looking at exporting their EVs, since selling in China has become less profitable. Longer-term, the threat of Chinese EVs with cheaper LFP batteries being exported to Europe and North America is expected to make domestic EV manufacturers nervous. Chinese EV sales rose 26% in the first quarter, while overall Chinese vehicle sales contracted 6.7%, so EVs now account for approximately 27% of China’s domestic vehicle sales.

Retail Sales at Big Box Stores in April Were Disappointing

On Tuesday, the Commerce Department announced that retail sales in April rose by a disappointing 0.4%, which was significantly below economists’ consensus estimate of a 0.8% increase. Due to lower fuel prices, gas station sales declined by 0.4% in April. Excluding gas stations, retail sales rose 0.6%.

In the past 12 months, retail sales have risen just 1.6%, well below the annual pace of inflation. The bright spots include online retail sales, up 1.2% in April and +8% in the past 12 months, and spending at bars & restaurants, up 0.6% in April and +9.4% in the past year. But consumer spending at department stores, electronic stores, and furniture/appliances all declined in April. Overall, seven of the 13 retail categories surveyed in April rose, so U.S. economic growth persists, but at a snail’s pace.

The U.S. consumer remains the driving force behind U.S. economic growth. Typically, consumer spending picks up in the spring and summer months, but spending on higher priced durable goods, like appliances remains soft. For example, Home Depot reported on Tuesday that its same-store sales in the U.S. declined 4.6% in the first quarter and warned that it expects its fiscal 2023 sales to decline 2% to 5% compared to 2022. This is the first forecasted annual sales decline for Home Depot since 2009. Sales at Home Depot remain a good barometer that discretionary consumer spending is waning.

Another barometer for consumer spending is Target, which on Wednesday reported better than expected first-quarter results. However, Target warned that the consumer remains cautious and cited “softness” in discretionary merchandise such as apparel and home goods. Target’s second- quarter guidance was below analyst estimates and cited that consumers continue to cut back on non-essential items.

Finally, Wal-Mart on Thursday reported stronger-than-expected first-quarter sales and operating earnings, and raised guidance for its fiscal year. In the past quarter, Wal-Mart’s same-store sales rose an impressive 7.4%. Groceries and on-line sales are helping to boost Wal-Mart’s results. Thanks to Wal-Mart’s positive guidance, optimism for consumer spending is rising. Amazingly, the Atlanta Fed raised its second-quarter GDP estimate to a 2.9% annual pace this week, up from its previous estimate of a 2.7% annual pace.

There’s some good news on the labor front. On Thursday, the Labor Department reported that weekly unemployment claims declined to 242,000 in the latest week, compared to 264,000 in the previous week. Continuing unemployment claims declined to 1.799 million in the latest week, down from a revised 1.807 million. Overall, the unemployment surges in previous weeks seem to be cooling off a bit, since the four-week moving averages of unemployment and continuing claims both declined slightly.

Navellier & Associates owns Volkswagen Ag. (VWAGY) in managed accounts and Wal-Mart Stores Inc. (WMT), and Home Depot (HD), in a few managed accounts only. We do not own Target (TGT) or Ford Motors (F). Louis Navellier and his family own Volkswagen Ag. (VWAGY) via a Navellier managed account. He does not own Home Depot (HD), Wal-Mart Stores Inc. (WMT), Target (TGT), or Ford Motors (F) 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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