by Louis Navellier

May 29, 2024

Last Tuesday, the Biden Administration announced that it will sell one million gallons of gasoline from a strategic reserve in the Northeast. Energy Secretary Jennifer Granholm said that, “The Biden-Harris administration is laser-focused on lowering prices at the pump for American families, especially as drivers hit the road for the summer driving season.” Let’s do a little math, Ms. Granholm. This move was purely cosmetic; the U.S. consumed nine million gallons of gasoline per day in 2023, so the release of a million gallons (0.03% of annual demand) will not significantly impact the prices at the pump. Instead, this announcement seems to be more designed to score political points in the Northeast, since the price of wholesale gasoline has risen by 19% so far this year, and that hurts President Biden’s re-election chances.

As President Joe Biden’s re-election chances have fallen, he will try to turn around his campaign in a CNN debate with Donald Trump on CNN on June 27th. However, the biggest problem that Joe Biden may face a month from now is if Ukraine’s second largest city, Kharkiv, falls to Russian forces as they seize more Ukrainian territory – or if Ukraine sabotages the Russian Arctic oil pipelines – either of which could send crude oil prices over $90, or close to $100 a barrel. Despite tough talk from France and other NATO nations, I suspect Europe will not defend Ukraine, since that would represent a major war escalation.

If international chaos escalates in June, that may embarrass Joe Biden and possibly trigger a domestic political crisis. The Presidential debate on June 27th with Donald Trump should prove once and for all if Joe Biden still has his “mojo” or if he should step aside for Gavin Newsom. In the meantime, during June there will be a lot of central bank news, the annual Russell realignment and quarter-end window dressing.

There might also be some central bank shocks in June, based on future rate cut guidance, especially if we see a new “dot plot” from the FOMC members due to be released on June 12th. Then, in the event that Joe Biden has a few senior moments during the June 27th debate, calls from within the Democratic Party to replace him with Gavin Newsom will likely get louder. This may explain why Joe Biden overrode his advisors and agreed to debate Donald Trump, since he wanted to quiet his skeptics from within the Democratic Party.

This is why I am holding on to most of my energy stocks for now. In addition, companies that support the expansion of electricity generation to support growing demand from cloud computing and EVs are also prospering. Specifically, Eaton Corporation (ETN), Emcor Group (EME), Quanta Services (PWR) and Vistra Corporation (VST) that help utilities manage higher electrical loads. The recent electricity disruption to almost a million customers in Houston demonstrated how fragile the utility grid can be. Also, companies that help to provide security for cloud computing, like Crowdstrike Holdings (CRWD), Nutanix Inc. (NTNX), Parsons Corporation (PSN) and Vertiv Holdings (VRT) also prosper, as AI takes over the cloud.

A Struggling Economy May Force the Fed to Cut Rates Sooner Than Expected

The Atlanta Fed’s 3.5% forecasted GDP growth for the second quarter remains controversial, since most economic statistics are downbeat, while consumer confidence and retail sales remain particularly weak. It is imperative that consumer spending improves, otherwise GDP growth will stall. The basic problem with the U.S. economy is that consumers in the top 20% of income (mostly affluent Baby Boomers) are in good fiscal shape, due to a rising stock market and real estate gains, while the bottom 20% (mostly those under 30) are struggling. This could have profound consequences for the upcoming Presidential election.

Citigroup’s chief economist, Andrew Hollenhurst, is forecasting a significant increase in the jobless rate and a Fed that will be forced to cut four times this year (!), for a total of one full percentage point before the end of this year. There is no doubt that Hollenhurst is a contrarian in a sea of economists that think we are in a “Goldilocks” economic environment that is neither too hot nor too cold. Frankly, Hollenhurst seems to be more in tune with the bottom 20% of frustrated consumers, living paycheck to paycheck.

I’d say that more than just the bottom 20% of consumers are restless and upset due to higher food and energy prices. These financial struggles were evident in Target’s earnings report last week. First, Target announced price cuts on 5,000 frequently shopped items – like groceries, household essentials and health and beauty products. Then on Wednesday, Target announced that its same-store sales had declined 3.7% in its latest quarter, the fourth straight quarter of same-store sales declines. Then, in its earnings call, Target announced that its latest quarterly revenue declined 3.1% to $24.53 billion, while its operating earnings slipped 0.8% to $942 million, or $2.03 per share. The analyst community was expecting earnings of $2.06 per share, so Target posted a small earnings miss, plus guidance below analysts’ estimates.

Another sign of a struggling consumer economy is the growing inventory of new vehicles on dealer lots. Some brands have 143-day to 151-day inventories. Hyundai is now discounting its Ioniq 5 and Ioniq 6 EVs by $7,500 and will soon boost that discount to $10,000 with a “competitive vehicle” trade-in.

This glut of new vehicles is not just limited to slow-selling EVs. The total supply of new unsold vehicles in the U.S. at the beginning of May stood at 2.84 million, which is 961,000 (51%) above a year ago. This is why you probably saw some big price discounts on new vehicles offered on Memorial Day weekend!

Looking forward, the Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE), index will be announced this week, and the annual rate of the core PCE should improve in the upcoming months. This is because core PCE inflation rose 0.3% in May 2023, 0.2% in June 2023 and 0.1% in July 2023, so the larger numbers will soon disappear from year-over-year comparisons. Also, Business Insider reported that unemployment has risen in 21 states in the past 12 months, so the U.S. economy is not hitting on all cylinders, so the Fed may have to refocus on its unemployment mandate, not just inflation.

And finally, the Federal Open Market Committee (FOMC) minutes were released on Wednesday, revealing that the Fed agreed that credit conditions were tight. The most fascinating tidbit in the FOMC minutes was that they mentioned the booming private credit industry market, signaling that the Fed may want to closely monitor that private market, especially after it was reported by Bloomberg that Blackstone is trying to unload some bad loans. The private credit industry typically returns money to investors in four principal installments over a couple of years. As the private credit industry explodes and companies compete to provide investors with 11% annual yields, I am worried that this debt is being increasingly leveraged to boost yields. In other words, a new “Black Swan” event similar to 2008 may be developing. (Here is a free link to a white paper that I wrote about the last Black Swan event that occurred in 2008).

Navellier & Associates owns EMCOR Group, Inc. (EME), Vistra Corp. (VST), Quanta Services, Inc. (PWR), CrowdStrike Holdings, Inc. Class A (CRWD), Nutanix, Inc. Class A (NTNX), Parsons Corporation (PSN), Vertiv Holdings Co. Class A (VRT), and Eaton Corp. Plc (ETN), in managed accounts. We do not own Target Corporation (TGT). Louis Navellier and his family own EMCOR Group, Inc. (EME), Vistra Corp. (VST), Quanta Services, Inc. (PWR), CrowdStrike Holdings, Inc. Class A (CRWD), Nutanix, Inc. Class A (NTNX), Parsons Corporation (PSN), and Vertiv Holdings Co. Class A (VRT), via a Navellier managed account. He does not own Eaton Corp. Plc (ETN), or Target Corporation (TGT) personally.

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

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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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