by Louis Navellier
May 31, 2023
Several new forces may soon combine to push our energy stocks higher. First, the energy disruption from the massive forest fires in Alberta is reducing North American supply and helping the energy stocks that I continue to hold. Also, a collapse in gasoline inventories before the Memorial Day weekend bodes well for our refining stocks, since the U.S. will soon be approaching peak summer demand. And finally, OPEC+ meets June 4th and may announce further production cuts. As a result, I plan on continuing to hold many energy companies, especially those that posted strong quarterly results and positive guidance.
The June 4th event is promising because I suspect another OPEC+ cut on top of the recent 1.6 million barrel per day production cut could be in store. Summer represents peak demand for U.S. energy, so I expect crude oil prices will rise either way. I should add that due to the big budget fight in Washington D.C., the Strategic Petroleum Reserve (SPR) will not start being significantly refilled until the fall or later, despite the SPR being depleted by over 200 million barrels by the Biden Administration last year.
The Energy Department’s first attempt to refill the SPR failed after it asked companies to sell crude oil for prices between $67 and $72 per barrel. The Energy Department is now making another attempt to buy up to 3 million barrels of cheaper sour crude. This second attempt solicited proposals that are due tomorrow, (May 31) with contracts that are expected to be awarded on June 9th. The bottom line is that if the Energy Department will not pay full market prices to refill the SPR, they may not receive many proposals!
Last Wednesday, the Energy Information Administration (EIA) announced that crude oil inventories plunged by 12.5 million barrels in the latest week. Additionally, gasoline inventories declined by 2.1 million barrels in the latest week, while the inventory of distillates (e.g., diesel, heating oil, jet fuel, etc.) declined by 600,000 barrels. Bespoke Investment Group also reported that crude oil inventories are now well below the 5-year average, while crude oil exports are at an all-time high and crude oil imports are near a 5-year low. Since gasoline demand is very close to a 5-year high, seasonal demand this Memorial Day weekend is expected to reduce inventories further, so the prices at the pump are expected to rise.
With last month’s energy prices down and peak inflation figures posted a year ago, there is going to be some good inflation news coming in June and especially in July, since the Consumer Price Index (CPI) peaked last June at 1.2% (a 15% annual rate). In other words, the annual rate of the CPI will be collapsing when the CPI is announced, since the biggest monthly surges will be eliminated this month and next.
The lower CPI will help market rates move lower and increase the likelihood that the Fed will start to cut key interest rates later this year. Officially, the Fed wants the annual rate of inflation to decline to its target rate of 2%, based on the Personal Consumption Expenditure (PCE) index, before cutting rates. I am now in the camp that the Fed will start to cut key rates at their December FOMC meeting.
Speaking of the Fed, the latest FOMC minutes, released last Wednesday, reveal that many members were reluctant to raise key interest rates further. Specifically, the FOMC minutes said, “Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary.” In the wake of three major bank failures, some members wanted the FOMC to move more cautiously. The FOMC minutes also revealed that the Fed’s staff expects a recession to start in the fourth quarter after all their credit tightening as well as recent banking stresses.
Adding further ammunition, the Minneapolis Fed President Neel Kashkari told The Wall Street Journal that he could support holding key interest rates steady at the upcoming June FOMC meeting. Specifically, in a Journal interview last Friday, Kashkari said, “I’m open to the idea that we can move a little bit more slowly from here.” Then, in his best Fed double speak, Kashkari backtracked somewhat, saying: “I would object to any kind of declaration that we’re done. If the committee (FOMC) chooses to skip a meeting because we want to get more information, I could make the argument why that makes sense.”
Kashkari then returned to common sense, reminding us of the Fed’s major mandate (supervising bank stability) when he told the Journal, “There’s no question an inverted yield curve doesn’t work for banks. It violates the fundamentals of their business models, and the longer it’s inverted, the more challenging the environment becomes for banks.” I have been a big fan of Kashkari ever since he helped implement the TARP program. After working for the Treasury Department, Kashkari moved to Truckee, California, to write a book and then run as the Republican candidate for governor of California in 2014.
So, with debt ceiling concerns and worries about the Fed’s next interest rate hikes waning, you may be wondering what Wall Street will stress about next. The yield curve is a likely culprit. The recent financial troubles in big banks that catered to wealthy customers that moved their money if they were not paid a good yield on deposits just demonstrates why the Fed needs to un-invert the Treasury yield curve, as Neel Kashkari emphasized, since an inverted yield curve naturally stresses the banking system. So be on the lookout for the Treasury yield curve getting flatter and eventually un-inverting in the upcoming months
Cash on the Sidelines Could Fuel a Major Market Surge Soon
There is a tremendous amount of cash on the sidelines, which could pour into the stock market and spark a major market rally at any unknown day or hour, as soon as there is a significant “spark.” So far this year, NASDAQ and the S&P 500 are up, but seven large technology stocks now account for about 25% of the capitalization weight in the S&P 500 and a shocking 55% of the NASDAQ 100. Much of this surge comes from the “AI” buzz, led by Nvidia. Another up-and-coming AI stock is Super Micro Computer, which is helping to make cloud computing smarter as AI is invading the cloud computing space.
Nvidia announced quarterly earnings and revenues on Wednesday. Its first quarter revenues rose 18.9% to $7.192 billion compared to $6.051 billion in the fourth quarter. In the past four quarters, Nvidia’s revenue actually declined 13.2% to $7.192 billion; but during the same period, Nvidia’s first-quarter earnings rose 28.1% to $2.043 billion or 82 cents per share compared to $1.618 million or 64 cents per share a year ago. The analyst community was expecting revenues of $6.53 billion and operating earnings of 92 cents per share, so Nvidia posted a 10.1% revenue surprise and an 18.5% earnings surprise.
For the current quarter, the company provided revenue guidance of $11 billion, a whopping 52.8% higher than analyst community’s consensus revenue estimate of $7.2 billion! Clearly, Nvidia is the AI leader and prospering, so its success may coax some of the money on the sidelines to return to the stock market.
Since AI and technology stocks currently lead the overall stock market, the “spark” that triggers the cash pouring in from the sidelines could be any positive news emerging from the technology sector, such as Apple’s new iPhone announcement in September. However, that spark could also come from the Fed saying that inflation is cooling. Since 2024 is a Presidential election year, the Fed does not want to cause a recession in 2024, so key interest rate cuts may be forthcoming later this year and into early 2024.
In other stocks, Ford announced last week that it secured lithium supply deals with Albemarle, Livent, and SQM to save $7 billion in costs relative to its competitors. As Ford shifts to utilizing more iron-phosphate (LFP) batteries, it actually needs more lithium, since LFP batteries require more lithium than lithium-ion batteries, which also use expensive cobalt and nickel. The electric vehicles (EVs) that use LFP batteries will be cheaper, and a price war is expected to break out for EVs, just like it has in China. In other words, in the race to build cheaper EVs, Ford is striving to cut its costs via direct lithium suppliers.
Despite recession fears, the stock market may surge if we see wave after wave of positive news on inflation, interest rates, and economic growth that coax investors back into the stock market in the next few months. The leadership of the stock market will undoubtably change in the upcoming months, although some of the seven giant technology stocks, like Nvidia, are also prospering from the AI boom.
Now that summertime has arrived, it is time for investors to cheer up. The velocity of money typically picks up in the summer as folks get out and about more. The retail sales report showed that consumer spending at bars & restaurants rose 0.6% in April and 9.4% in the past year. Additionally, Wal-Mart’s same-store sales rose an impressive 7.4% in the first quarter. Groceries and on-line sales are helping to boost Wal-Mart’s results. Wal-Mart provided positive guidance for 2023, so optimism is rising.
Last Friday, the Commerce Department announced that personal income rose by 0.4% to $80.1 billion in April, while personal consumption expenditures rose by 0.8% to $151.7 billion. The Fed’s favorite inflation indicator, the personal consumption expenditures (PCE) index, rose 0.4% in April and 4.4% in the past year. The core PCE, excluding food and energy, rose 0.4% in April and 4.7% in the past year.
Overall, investors should soon have less to worry about. Whatever investors have been fearing the most is fizzling fast. It is not healthy to be perpetually bearish, like famous super-bears Jeremey Grantham and Nouriel Roubini, to whom the financial media regularly turn to get “crash” and “super bubble” comments.
Currently, our large-capitalization growth stocks are trading at only 15.7 times median forecasted 2023 earnings, despite delivering phenomenal annual earnings growth! The good news is that slow earnings growth is past and earnings momentum is expected to pick up for the rest of 2023 after positive guidance. I strongly advise all investors to cheer up and be happy, since our growth stocks are poised to prosper!
Navellier & Associates owns Nvidia Corp (NVDA), Apple Computer (APPL), Super Micro Computer, Inc. (SMCI), Livent Corp (LTHM), and Sociedad Quimica Y Minera De Chile S.A. (SQM) in managed accounts. We do not own Wal-Mart (WMT), Ford (F), or Albemarle Corp (ALB). Louis Navellier and his family personally own Nvidia Corp (NVDA), Apple Computer (APPL), Super Micro Computer, Inc. (SMCI), Livent Corp (LTHM), and Sociedad Quimica Y Minera De Chile S.A. (SQM) via a Navellier managed account, and Apple Computer (AAPL) in a personal account. They do not own Wal-Mart (WMT), Ford (F), or Albemarle Corp (ALB) personally.