by Louis Navellier
August 3, 2021
I am getting a lot of questions about Jeremy Grantham predicting that small cap stocks and international stocks and bonds are poised to lose money over the next several years relative to inflation. Grantham is apparently predicting a crash similar to 1929, and the major media have picked up on his gloom-and-doom forecast because negativity sells advertising and gets the blood stirring among their TV viewers.
First of all, realize that Jeremy Grantham is a value manager, and most value managers have probably been depressed about this market for a long time, since value stocks have not performed well since 2008.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Second, I agree with Jeremy Grantham on bonds, but not on stocks. Specifically, although value-related investment strategies have performed better in the first half of this year, those value stocks that do not have strong sales and earnings will remain vulnerable in the current inflationary environment.
In this case, I sense that value investors like Jeremy Grantham are hoping for a revival of value stocks.
Of one thing I am certain: It is very hard for me to convince depressed investors like Jeremy Grantham, since they usually do not seem to fully appreciate the impact of positive sales and earnings on stocks.
The Major Economic Indicators Continue to Be “Mixed,”
Allowing Further Fed Accommodation
The economic news last week continued to be “mixed.” The Commerce Department announced that sales of new home declined 6.6% in June to an annual pace of 676,000, which is a post-pandemic monthly low. May’s new home sales were revised lower to an annual pace of 724,000, down from 769,000 previously reported. According to S&P CoreLogic Case-Shiller, median home prices have risen 16.6% in the past 12 months, through May, while the National Association of Realtors said that median existing home sales in the past 12 months have risen 23.4% (through June), to a record high of $363,300.
New home sales have now declined for three consecutive months and are now down 19.4% in the past 12 months. As a result, the supply of new homes for sale has risen to a 6.3-month inventory at the current annual sales pace, up from a 5.5-month supply in May. Homebuilders have been constrained by higher material prices (e.g., copper, lumber, PVC pipe, etc.) as well as an acute shortage of construction workers.
In some more positive news, the Commerce Department on Tuesday reported that durable goods orders rose 0.8% in June as orders for commercial planes and vehicles rose. However, economists were expecting a 2% rise in June. The good news is that May’s durable goods orders were revised up to a 3.2% increase from the 2.3% initially estimated. Durable goods orders have now risen in 13 of the past 14 months and are expected to remain strong, since order backlogs persist due to supply chain bottlenecks.
Also on Tuesday, the Conference Board announced that its consumer confidence index rose to 129.1 in July, up from 128.9 in June, thereby reaching the index’s highest level since February 2020. This was a big surprise, since economists expected consumer confidence to drop to 123.9 in June after the University of Michigan’s preliminary consumer sentiment index declined. Also, the present situations component rose to 160.3 in July, up from 159.6 in June, while the expectations component was virtually unchanged. Overall, July’s strong consumer confidence index bodes well for continued strong consumer spending.
The preliminary estimate for second-quarter GDP from the Commerce Department’s U.S. Bureau of Economic Analysis came in at a slower annual rate of 6.5%, which was substantially below economists’ consensus estimate of 8.4%. The good news is that personal consumption rose at an 11.8% annual pace, significantly higher than economists’ consensus expectation. There will be multiple revisions to this GDP estimate, but there is no doubt that the weaker-than-expected preliminary report will provide the Fed with more time to sustain their accommodative policy of low interest rates and aggressive quantitative easing.
On Thursday, the Labor Department reported that weekly unemployment claims declined to 400,000 in the latest week compared to a revised 424,000 in the previous week. This was significantly higher than the economists’ consensus estimate of 380,000. As a result, the Fed can remain accommodative, mostly due to the fact that unemployment claims are not declining as fast as economists are anticipating. Some of GM’s auto plants, shut down due to the global semiconductor shortage, are apparently responsible for last week’s higher-than-expected unemployment claims. The good news is that job openings have reached a record level, so wages are expected to increase steadily due to the shortage of workers in many industries.
The biggest news last week was that Wednesday’s Federal Open Market Committee (FOMC) statement said that “progress” had been made towards meeting its goal and that the Fed would continue its $120 billion per month in quantitative easing until “substantial further progress.” Essentially, the FOMC kicked its “tapering” decision down the road but it admitted it would address tapering later this year. Translated from Fedspeak, that means the Fed will likely update its tapering guidance after its December meeting.
The Latest News from Tesla and Other EV Markets
A major flagship stock, Tesla, reported that its second-quarter regulatory tax credits declined 31.7% from $518 million to $354 million, but the company nevertheless posted record GAAP income of $1.14 billion. This was a significant milestone for Tesla, since in past quarters virtually all of its net earnings were attributable to these regulatory tax credits. This also means that Tesla is finally making money from its electric vehicles (EVs) after reporting an impressive 98% surge in sales vs. the same quarter a year ago.
CEO Elon Musk announced that Tesla’s semitruck would be delayed and that it still faces production risks from semiconductor component shortages. (Apple also warned of semiconductor chip shortages.)
In my opinion, what is most impressive about Tesla is that it is not being held back by the shortage of the high-grade lithium nickel cobalt batteries that the Panasonic Gigafactory in Reno, Nevada, produces for Tesla. In China, Tesla has switched to cheaper lithium iron-phosphate batteries with a shorter range, which has allowed Tesla to sell cheaper versions of its vehicles in both China and Europe.
Furthermore, although the Model S Plaid deliveries have been temporarily postponed for software upgrades after a new Plaid vehicle caught on fire in Philadelphia, GM’s mass recall of all the new Chevy Bolts due to fire risk is masking any problems with Tesla’s new Plaid battery. I should add that LG Chem is citing a manufacturing defect for the GM Bolt battery problems. I have LG Chem batteries in my Audi e-tron and I would like to add that Audi, Porsche, and other EVs in the VW Group family pack a lot of extra weight, since they offer more battery cooling, so they can accommodate faster charging, like the new Tesla Plaid battery. Just so you know how fast the Electrify America chargers can charge, my Audi e-tron charges at a rate of over 6.1 miles per minute versus 0.4 miles per minute on my home charger.
Fast charging is definitely the way to go, and the VW Group recently had the fastest charging vehicles, until the Model S Plaid was introduced. Longer term, when EVs switch to solid-state batteries in the upcoming years, the charging will be even faster, plus the fire risk will be largely eliminated, and there will be better range in cold climates; so in my opinion, whoever wins the solid-state battery war – like Toyota via Panasonic or VW Group via QuantumScape – will be the ultimate EV winner.
The most impressive new EV is the super-aerodynamic Mercedes EQS, which utilizes smart regeneration tricks and has a beautiful interior. Mercedes also “teased” that its new EQXX would have a 620-mile range due to more energy-dense batteries and aerodynamics. Audi is also expected to announce new e-tron SUV models next year with more energy-dense batteries as well as more efficient electric motors.
There is no doubt that Tesla is facing formidable competition via Mercedes and VW Group, but right now it has a competitive edge with its cheaper lithium iron-phosphate batteries that allows Tesla to price its Chinese-made Model 3 & Y models very competitively; so even though VW Group is selling more EVs in Europe this year, Tesla is putting up a good fight and beating VW Group in China and the U.S.
In upcoming years, the consumer is going to have a lot of great EV choices. I expect the eventual leaders to be NIO (China), VW Group (EU), and Tesla (U.S.), with Mercedes capturing impressive market share.
Navellier & Associates owns Apple Computer (AAPL) and one account owns Tesla (TSLA), per client request in managed accounts. We do not own General Motors (GM), VW Group, Panasonic, or Toyota Motors (TMC). Louis Navellier and his family own Apple Computer (AAPL) in a personal account. He does not own Tesla (TSLA), General Motors (GM), VW Group, Panasonic, or Toyota Motors (TMC).