by Louis Navellier

June 2, 2020

Plane and Car

What essentially drove last week’s short covering rally was hope emanating from Europe that a bigger-than-expected 750-billion-euro ($833 billion) stimulus package would be implemented, stimulating more travel. That, in turn, lifted some beaten-down airline and cruise-line stocks. In arguing for the stimulus package, European Central Bank (ECB) President Christine Lagarde warned that an 8% to 12% GDP contraction was likely for the European Union (EU) this year, which seemed to convince EU bureaucrats that a bigger stimulus package was necessary than the original 500-billion-euro ($555 billion) package.

French President Macron on Tuesday signaled that his government would spend eight billion euros ($8.8 billion) to prop up its ailing auto industry. Essentially, France is implementing its own “cash for clunkers” program, to encourage citizens to trade in their older vehicles for a 5,000 euro ($5,555) subsidy, effective June 1st, as well as an additional 7,000 euro ($7,770) rebate on new, cleaner vehicles, especially electric and hybrid models. The Renault Zoe is the top-selling electric vehicle in Europe, but sales plunged 50% in April, hence the sales incentive. France is also negotiating a 5-billion-euro loan for Renault.

In Germany, Lufthansa is expected to receive a 9-billion-euro ($10 billion) rescue package that will provide the German government with a 20% stake as soon as the rescue package is approved by the European Commission. Chancellor Angela Merkel’s government is also under intense pressure to bail out its massive auto industry. The IG Metall trade union, BMW, Daimler (Mercedes), and VW Group (Audi, Bentley, Bugatti, Porsche, Seat, & VW) commenced talks with Chancellor Merkel after truly horrific sales in April. They may also get aid, especially since VW Group is now the biggest seller of electric vehicles in Germany – the kind of vehicles now being mandated by the European Commission.

Over in Britain, their luxury boutique automotive industry is in chaos. Layoffs commenced last week at McLaren, where slightly more than 25% of their workforce was laid off. A big change in management is also now underway at Aston Martin after reporting a big quarterly loss. Nissan is also expected to announce layoffs in Britain. Although much of Britain’s auto industry is foreign owned, its engineering and manufacturing base remains large, so do not be surprised if Britain follows the example of France and Germany by creating incentives for its domestic auto industry.

Navellier & Associates does not own Nissan (TYO), Lufthansa, VW Group, Daimler, or Aston Martin in managed accounts or our sub-advised mutual. Louis Navellier and his family do not own Nissan (TYO), Lufthansa, VW Group, Daimler, or Aston Martin in personal accounts.

The Start of Encouraging Economic News – Finally!

The economic news last week was largely encouraging – for a refreshing change.

The Conference Board on Tuesday announced that its consumer confidence index rose to 86.6 in May, up from a revised 85.7 in April. The bad news is that the “present situation” component declined to 71.1 in May, down from 73 in April. The good news is that the “future expectations” component rose to 96.9 in May, up from 94.3 in April. Also encouraging is that the percentage of workers who said that jobs were hard to find dipped to just 27.8% in May, down from 34.5% in April. Overall, there is no doubt that consumers are cheering up fast, which bodes well for resurging consumer spending in future months.

The other amazing news is that the Commerce Department reported on Tuesday that new home sales rose 0.6% in April to an annual pace of 623,000. Although new home sales were up compared to March’s revised sales, in the past 12 months, new home sales declined 6.2%. Three of the four regions surveyed reported that new home sales rose in April, led by an 8.7% increase in the Northeast. Only the West reported a decline of 6.3%. That’s because in some states, construction workers are deemed “essential,” while in other states they were deemed “non-essential.”  Nonetheless, new home construction persists, and it appears that due to record low mortgage rates, new home sales will continue to steadily rise.

On Wednesday, the Fed released its Beige Book survey, which reflected a contraction in all 12 Fed districts. The survey said that economic activity “sharply” declined during May, which left businesses “highly uncertain” about their future and “pessimistic about the potential pace of the recovery.”  Due to these unusually dire words, it is safe to say that the Fed will keep rates low for the foreseeable future.

On Thursday, the Commerce Department reported that durable goods orders plunged 17.2% in April, which was better than the economists’ consensus estimate of an 18.2% decline. Excluding volatile transportation orders (including commercial aircraft and vehicles), which plunged 47.3%, durable goods orders declined only 7.4%. The most encouraging news is that core orders, which represent business investment, declined only 5.8%, which was substantially better than the economists’ consensus estimate of a 15.4% decline, so there were some “green shoots” in the April report. Durable goods orders are expected to improve in the upcoming months as manufacturing activity picks up.

I should add that the Commerce Department also reported on Thursday that its revised estimate for first-quarter GDP was moved down to a -5% annual rate, from a -4.8% annual pace, due largely to inventory calculations. For second-quarter GDP, the consensus estimate by economists is a whopping -27.7% annualized decline. The Atlanta Fed is currently forecasting an incredible -41.9% annual GDP decline in the second quarter, which I think is way too pessimistic. Obviously, if large portions of the U.S. economy can start recovering in June, second-quarter GDP estimates may be revised up a bit.

The Commerce Department also reported on Friday that the trade deficit rose 7.2% in April to $69.7 billion, up from a revised $65 billion in March. This was a big surprise, since economists were expecting the April deficit to shrink to $63 billion. Exports plunged 25.2% to $95.4 billion, while imports declined less (-14.3%) to $165 billion in April. A wider trade deficit hinders GDP growth and may explain why so many economists and the Atlanta Fed are so pessimistic when forecasting second-quarter GDP growth.

Finally, the Labor Department on Thursday reported that new unemployment claims declined to 2.1 million in the latest week, down from 2.4 million claims in the previous week, but this was the 10th straight week that unemployment claims were over two million. The best news was that the total number of people collecting unemployment insurance actually declined by 3.86 million to 21.05 million in the latest week, which is a sign that the U.S. economy is recovering faster than some pessimists expected!

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

Please see important disclosures below.

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Lessons from a National “Coming Out” Weekend

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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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