by Louis Navellier
June 28, 2022
If you wonder why Elon Musk seems so depressed lately, it may be because Tesla’s profitable Shanghai plant was shut down for much of the second quarter. Furthermore, there is just not enough lithium, nickel, and cobalt available for Tesla for its new Austin and Berlin plants to operate at full capacity, so battery shortages will keep constraining Tesla’s output there. Musk also said that a recession is “inevitable at some point” and near-term is “more likely than not,” so he announced that Tesla would lay off 10% of its salaried employees in the next three months, which should reduce its overall workforce by about 3.5%.
Musk’s Twitter bid also fell through, so I think it is safe to say that Musk is under a lot of stress lately!
Elon Musk then shocked the world when he said that Tesla’s new plants in Austin and Berlin are “losing billions of dollars” just as the company was planning to ramp up production. Specifically, Musk said, “Both Berlin and Austin are gigantic money furnaces right now.” Musk elaborated by saying, “The past two years have been an absolute nightmare of supply-chain interruptions, one thing after another, and we’re not out of it yet. Overwhelmingly our concern is how do we keep the factories operating so we can pay people and not go bankrupt” as “the Covid shutdowns in China were very difficult, to say the least.”
In the meantime, the European Commission (EC) is considering classifying lithium as a Category A1 reproductive toxin later this year, which will effectively destroy the battery plants being built in the eurozone and hinder battery recycling efforts. Specifically, at the end of 2021 the European Chemicals Agency’s Risk Assessment Committee published its opinion that it agreed with French proposals to classify three lithium salts as Category 1A reproductive toxicants. The committee determined that lithium carbonate, lithium hydroxide, and lithium chloride should be classified as substances that may damage fertility and unborn children. The committee also agreed these substances may harm breastfed children.
The eurozone currently accounts for 8.3% of global lithium-ion battery production, but many giga-factories are planned, and some are already under construction. The proposed regulations would hinder Tesla’s new Berlin factory and all the other new battery plants close to electric vehicle manufacturing plants. It will be fascinating if the EC destroys lithium-ion battery production in the eurozone with its new regulations. In the meantime, now you know why Elon Musk seems in a bad mood, since his production workers in Berlin may soon have to wear Hazmat suits to comply with EC regulation for handling lithium.
In other energy-related news, on Wednesday the Biden Administration proposed a three-month federal gas tax holiday. Currently, there is an 18.4 cent federal tax on gasoline and a 24.4 cent tax on diesel.
The biggest political problem with the focus on gasoline taxes is that the refining profit margins are smaller than both federal and state taxes in most states, so the Biden Administration’s criticism on refiners is backfiring with many voters. Back in March, Nancy Pelosi called suspending the gasoline tax “very showbiz,” so there is seemingly not a lot of unity in Congress pushing for a federal tax holiday.
The latest blowback on the prices at the pump came from Chevron’s chief executive, Mike Wirth, who in a letter to the Biden Administration said, “We need clarity and consistency on policy matters ranging from leases and permits on federal lands, to the ability to permit and build critical infrastructure, to the proper role of regulation that considers both costs and benefits.” When asked by a reporter for the Biden Administration’s response to Chevron’s letter, CEO Wirth said, “He’s mildly sensitive. I didn’t know they’d get their feelings hurt that quickly.” Chevron is based in California, which has its own unique fuel standards and is used to working with regulators, so if the Biden Administration does not reach out to CEO Wirth, it is not a good sign and guarantees that the prices at the pump will remain high.
Another sign of energy prices peaking comes from the weak economic news emanating from Europe, plus all the talk about a potential recession. Combined, this caused a mini “commodity crunch” last week as crude oil, copper, and other commodity prices declined. Even grain prices briefly fell below their level prior to Russia’s invasion of Ukraine, despite the fact that Ukrainian wheat is not reaching its normal markets in Africa, Europe, and the Middle East. Naturally, moderating commodity prices provide clear evidence that inflation is cooling. I should add that on Friday, commodity prices began to firm up, especially for crude oil, copper, and wheat, so many commodity-related stocks rebounded sharply, especially since they are expected to announce stunning second-quarter results in the upcoming weeks.
Is a recession really so certain? Federal Reserve Chairman Jerome Powell said on Wednesday before the Senate Banking Committee that a recession is “certainly a possibility” and warned that avoiding a recession largely depends on factors outside the Fed’s control. Essentially, Chairman Powell said it is more challenging for the Fed to focus on rooting out inflation while maintaining a strong job market.
U.S. Economic Statistics Show Other Prices May be Peaking
One more inflation indicator that may be peaking is real estate prices, as home affordability narrows for most Americans. The National Association of Realtors on Tuesday reported that the pace of existing home sales declined 3.4% in May to an annual pace of 5.41 million, the fourth straight monthly decline.
In the past 12 months, existing home sales have declined 8.6%, but median existing home prices have risen 14.8% in those same months to a record $407,600. Currently, there is a 2.6-month supply of existing homes for sale, which is historically low, so median prices may rise despite slower sales and higher rates.
The Commerce Department on Friday announced that new home sales surged 10.7% in May to an annual pace of 696,000. Also, April’s sales were revised up to a 629,000 annual pace (from 591,000 previously reported). In the past 12 months through May, new home sales have declined 5.9%, but the median new home price in May is up 15% in the past 12 months to $449,000. New home sales surged in the West (up 39.3%) and South (up 12.8%) but declined in the Midwest (down 19.3%) and slumped badly in the Northeast (down 51.1%). The inventory of new homes for sale now totals 444,000, which represents a 7.1-month supply, so there may be some price relief soon as new home inventories continue to rise.
The Labor Department on Thursday announced that unemployment claims in the latest week declined slightly to 229,000, vs. a revised 231,000 in the previous week. Continuing unemployment claims rose to $1.315 million vs. a revised 1.32 million in the previous week. Overall, the job market remains healthy, and the unemployment rate is expected to remain low despite some big companies announcing layoffs.
On Thursday, S&P Global announced that its flash estimate for the eurozone’s purchasing managers index (PMI) declined to 52 in June, its lowest level in 22 months. The service sector PMI also slowed to 52.8 in June, the lowest level since January. Although any reading above 50 signals an expansion, clearly the business climate in the eurozone is gloomy as both business and consumer confidence have declined.
It will be interesting to see how the gloomy atmosphere in the eurozone will impact the European Central Bank, which still – shockingly! – has not yet raised its key interest rate up from a negative 0.5%.
Navellier & Associates does not own Twitter Inc. (TWTR) in managed accounts. Navellier & Associates does own Chevron Corp (CHV), and Tesla (TSLA) for one client (per client request). Louis Navellier and his family do not own Twitter Inc. (TWTR), Chevron Corp (CHV) or Tesla (TSLA) personally.