by Louis Navellier

June 15, 2021

Last Thursday, the Labor Department reported that the Consumer Price Index (CPI) rose 0.6% in May, bringing the total rise in the past 12 months to 5%, the fastest pace since August 2008. The core CPI, excluding food and energy, rose 0.7% in May and 3.8% in 12 months, the highest rate since June 1992!

In the past 12 months, energy prices have risen 28.5%. Used car prices rose 7.3% in May alone after rising 10% in April, so the semiconductor chip shortage is a major inflation catalyst.

Overall, the May CPI was not a big surprise, but now we want to see what the Federal Open Market Committee (FOMC) will say about inflation in its meeting today and tomorrow. Do they still think that inflation is just “transitory?” – and will they begin to change their current accommodative policy?

The Fed is now in the process of unloading some of the corporate bonds and ETFs that it bought a year ago during the worst of the pandemic. Specifically, the Fed owns $5.21 billion in corporate bonds and $8.56 trillion in corporate debt through ETFs. Bolstered by strong earnings and cash flow, the corporate bond market is now very healthy – offering record low yields relative to Treasury bonds – so unloading these corporate bonds should be very easy and nothing to be alarmed about, but as of now, the Fed is still buying $80 billion in Treasury securities and $40 billion in mortgage-backed securities each month.

If and when the Fed decides to “taper” those purchases, I suspect that the mortgage-backed securities will get their biggest haircut, due to the health of the housing market. Since the Fed has effectively embraced Modern Monetary Theory (MMT) without saying so in public, it will be interesting to see if the Fed is willing to entirely eliminate its quantitative easing (QE), since the bid-to-cover ratios at upcoming Treasury auctions might get too tight. On Fox Business last Monday, I mentioned to Maria Bartiromo that quantitative easing may become almost permanent, simply because the U.S. budget deficit has gotten too large to entirely eliminate quantitative easing (i.e., bond buying). Here is a link to that interview.

I’d also say that the Fed is definitely more obsessed with its employment mandate than its inflation mandate, but as many states cancel their federal government’s supplemental unemployment benefits, I believe we’ll see folks return to the workforce. Within 90 days, most federal government supplemental unemployment benefits should be pulled. Then, we can properly assess the status of the U.S. workforce.

Speaking of unemployment, the Labor Department on Thursday reported that unemployment claims in the latest week declined to 376,000, down from 385,000 in the previous week. Continuing claims also declined to 3.499 million, down from a revised 3.757 million in the previous week.  Economists were expecting continuing claims to come in at 3.665 million, so this latest decline was a pleasant surprise.

The G7 “Tax Agreement” is “Less Than Meets the Eye”

Treasury Secretary Janet Yellen achieved a major victory when she got the G7 to agree to her idea of a minimum global tax on corporations. However, the minimum figure, at 15%, was far lower than her desired 21% (or even higher), and it did not include Ireland, with its low 12.5% corporate tax rate, which has become home to many U.S. corporations. Ireland agreed to opt out on the 15% minimum global tax.

Furthermore, a divided U.S. Congress is expected to be reluctant to ratify the 15% minimum global tax, since one thing major corporations know how to do is lobby Congress!  The top tax-writing Republicans in Congress, namely Representative Kevin Brady (Texas) and Senator Mike Crapo (Idaho), noted that the U.S. effectively imposed a 10.5% minimum tax in 2017 and that other countries have not followed the U.S. It will be interesting to see which countries in the G7, if any, will impose this 15% tax rate.

In other news, the Commerce Department announced that the U.S. trade deficit plunged 8.2% in April as imports declined 1.4% to $273.9 billion and exports rose 1.1% to $205 billion. A shortage of semi-conductors was one reason imports declined. Higher crop prices also helped boost U.S. exports.

And finally, the Atlanta Fed revised its second-quarter GDP estimate last Wednesday to an annual pace of 9.3%, down from 9.4% on Monday and 10.3% the previous week.  Since the trade deficit has a major impact on GDP growth, I expect we’ll see more GDP revisions in the upcoming weeks.

Jeff Bezos Into Space & Elon Musk Back on Earth

In the weirdest news last week, Amazon founder Jeff Bezos will apparently fly on the maiden voyage of Blue Origin on July 20th.  Accompanying Bezos will be his brother and the winner of a public option for one of the seats. Blue Origin is a big rocket that is designed to go to the edge of space, but not entirely leave the earth’s atmosphere. Bezos wholly owns the Blue Origin space flight business. I am curious what Richard Branson, who has a competing business via his Virgin Galactic space flight company, will say.

Elon Musk will also likely have a notable comment, but back on earth his company Tesla abruptly cancelled its Model S Plaid Plus model with its innovative 4680 battery cells. The Model S Plaid Plus was supposed to offer 1,100 horsepower and a range of 520 miles, but it has only a 390-mile range and 1,020 horsepower. Still, it leaps from 0 to 60 miles in just 2 seconds. As a way to “sugar coat” its lower range and power, Tesla said the Model S Plaid is just as fast as the Model S Plaid Plus and $20,000 cheaper.

This “bait & switch” has some Tesla fans worried, since they made deposits on the Model S Plaid Plus and wanted the innovative 4680 battery cells that Tesla had been touting as the key to longer range and more power.  Essentially, the 4680 battery cells were the latest great Tesla development, since they were the first batteries to also be a structural component that supposedly allowed Tesla to lower vehicle weight.

Both the Austin and Berlin Tesla manufacturing plants now under construction are supposed to be making the 4680 batteries for new Tesla vehicles. If there is a problem with the engineering associated with utilizing the 4680 batteries or making them a structural component, then Tesla has grossly miscalculated, which is worrying some investors. Clearly something happened to delay the 4680 batteries that were supposed to provide Tesla with a competitive and engineering edge. For Tesla’s sake, I hope they figure out the problems associated with their much-hyped 4680 battery cells; otherwise concerns about its two new manufacturing plants will emerge, perhaps causing the stock to lose even more of its “mojo.”

As someone who owns a few high-performance vehicles, I can tell you that the engineering geeks I know do not want to get a new Model S Plaid instead of a Model S Plaid Plus, and they will likely ask for their deposits back. What Tesla did is like Ferrari or Porsche telling its customers that one of their much-hyped new performance models is now not being sold because the base model was just as good! Car fanatics like the latest and greatest engineering marvels, so they often cancel their orders, not settling for a base model.

The good news for Tesla is that its China sales in May surged to 21,936, up sharply from 11,671 in April.  The company’s sales tend to spike at the end of each quarter (for example, Tesla sold 35,478 vehicles in China in March, which was the strongest month ever in China). This is raising expectations for strong China sales in June, especially now that the Model Y is being manufactured in Shanghai.

Speaking of strong Tesla sales in June, thousands of new Tesla Model 3 vehicles from China were spotted at the Port of Zeebrugge in Belgium on Wednesday. As a result, it appears that Tesla is gearing up to do its “quarter-end dump” in Europe, which is now becoming the norm, since a lot of vehicles are leased by corporations at the end of each quarter in Europe. Here are some of the Model 3s at Zeebrugge’s port:

Model 3s at Zeebrugge’s Port Image

Navellier & Associates owns Tesla (TSLA) and Amazon (AMZN) for a few managed clients only, per client request. Louis Navellier and his family do not own Tesla (TSLA) but they own Amazon (AMZN) personally.

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

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Inflation Continues to Surge at Fastest Pace Since 2008 (or 1992)

Income Mail by Bryan Perry
G-7 Bulls in A China Shop

Growth Mail by Gary Alexander
“Nice Work If You Can Get It

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Louis Navellier
CHIEF INVESTMENT OFFICER

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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