by Louis Navellier
September 27, 2022
Last Wednesday, in clear tones, Fed Chair Jerome Powell said, “Inflation is running too hot. You don’t need to know much more than that.” He added, “This committee is committed to getting to a meaningful, restrictive stance of policy and staying there until we feel confident that inflation is coming down.”
Yikes! It’s great to speak clearly, but I wish that Mr. Powell had used some dovish language – like “near neutral” or “data dependent,” or even smiled a little – but any softening was conspicuously absent.
Naturally, his talks raised recession fears. The Atlanta Fed on Wednesday revised its third-quarter GDP estimate down to a +0.3% annual pace, down from its previous estimate of a +0.5% annual pace.
U.S. interest rates also shot up in response to his words. Currently, some short-term interest rates are at their highest level in over 25 years, as are mortgage rates. There is now a whole generation of home buyers that have never seen interest rates this high, so I suspect that home prices will continue to decline, since inventories are climbing, and homebuyers are shocked seeing the high underlying mortgage rates.
I should add that the National Association of Realtors on Wednesday announced that existing home sales declined 0.4% in August to the lowest rate since May 2020. Existing home sales have declined for seven consecutive months now, as the Fed has very effectively “pricked” the housing bubble that was so strong in early 2022. The Fed is now systematically destroying other sectors of the economy, like auto sales.
The Fed may try to prick the real estate bubble to fight inflation, but last Tuesday the Wall Street Journal examined the results of a survey of rents and shelter costs and found that housing is a stubborn inflation problem, since shelter costs have been rising steadily – up 0.7% in August after rising 0.5% in July.
Although there is no doubt that the Fed is striving to break the real estate bubble around the country, rents and shelter costs are a lagging inflation indicator, which is why the Fed must raise key interest rates now and then keep interest rates high for an extended period, until shelter costs begin to cool off. As a result, the soonest we can hope the Fed will reverse its high interest rate policy will likely be late 2023.
Another outcome of the Fed’s policy meeting is that they will raise rates right before the mid-term elections, and that means the House will undoubtedly have a leadership change. The Senate may also have a leadership change. It just depends on turnout and which side is more upset and willing to vote.
Sweden and Italy just shifted to the right and that could happen in the U.S., too. In the end, all that Wall Street wants is more “gridlock,” and that appears to be much more likely after the mid-term elections.
The Global Impact of a Soaring U.S. Dollar
With Treasury yields surging to multi-year highs – for instance, the 10-year Treasury bond is over 3.7% and 2-year Treasury yields are over 4.1% – the U.S. dollar has emerged as the reserve currency for the rest of the industrialized world. The euro has yielded less than zero for many years, but now it offers close to 1%. Last Tuesday, Sweden raised its key interest rate 1% to 1.75%, while the Swiss National Bank and Bank of England on Thursday raised their key interest rates by 0.75% and 0.5%, respectively. Still, the traditionally strong Swiss franc and British pound both remain weak vs. the U.S. dollar. Furthermore, Norway, South Africa, and other central banks followed the Fed and raised key interest rates last week.
A strong U.S. dollar is sending ripples around the globe, putting weaker currencies at risk of devaluation. In my opinion, Argentina will not be the only nation forced to devalue its currency in the next couple of years. Sri Lanka now has acute food and fuel shortages, which caused its people to storm the Presidential Palace and force its President to flee to the Maldives. Lebanon has drafted bank withdraw restrictions and Pakistan is seeking a bailout from the International Monetary Fund (IMF) after floods devastated a third of the country. Laos and Zambia are also in the midst of a currency crisis and looking for IMF aid.
Another major global inflation threat centers around energy prices going into winter. The EU says it has sufficient natural gas supplies for winter (if it is not overly cold) and is now striving to lock up energy supplies for 2023, when worldwide demand for crude oil rises due to renewed seasonal pressures.
Russian President Vladimir Putin’s behavior remains a wild card that could keep energy prices high as the West continues to try to isolate Russia. Last Wednesday, Putin called up roughly 300,000 reservists and in a rare address to the nation said that he was prepared to declare four Ukrainian regions as parts of Russia. Putin said he would defend these regions and implied by “all means.” Putin also told the West. “I’m not bluffing… Those trying to blackmail us with nuclear weapons should know that the tables can turn on them.”
At home, the Biden Administration has depleted the Strategic Petroleum Reserve (SPR) by releasing one million barrels per day for several months, so the SPR is now at its lowest level since 1984. Hopefully, the Biden Administration will begin refilling the SPR during the winter months, when demand is lighter.
The EV Revolution is Sputtering, Threatening to Slow the Entire Economy
The Wall Street Journal recently published a great article (“Electric-Car Demand Pushes Lithium Prices to Records,” September 21, 2022), which explained why the Biden administration’s transition to electric vehicles (EVs) has created long waiting lists that are frustrating buyers, since prices are being increased substantially while they wait. Many buyers are now wondering if they can still afford an EV.
The Journal reported that EVs are in such short supply that they account for only 6% of all new vehicles sold. Although Ford, GM, and VW Group all expect to rival Tesla in EV sales, they are hampered by insufficient supplies of critical parts, especially lithium-ion batteries. For example, Ford wants to double production of its F-150 Lightning but must employ a worldwide task force scouring for batteries.
Even though Ford signed a supply deal with CATL, it will take several years for CATL to build its U.S. battery plants. Ford even warned potential car buyers last Tuesday that its supplier costs will be $1 billion higher than expected, and up to 45,000 trucks & SUVs must be stored this quarter waiting for key parts.
In the article, the Journal reported that lithium prices are now about $71,000 per metric ton, up from less than $10,000/ton at the end of 2020. The Journal also highlighted Sociedad Quimica y Minera De Chile (SQM), which I have recommended and hold in managed accounts, as the best-performing lithium stock.
Finally, the Journal article said that California’s tax on lithium extraction is expected to delay the startup of new lithium mines. I find it ironic that California, the most pro-EV state, is now impeding new lithium production by taxing it! So far this year, lithium prices have risen by 119% (and +610% since 2020) as supply chain woes continue to impede the auto industry’s EV components and semiconductor chips.
Speaking of supply chain issues, I should add that LG Energy Solutions recently completed a new battery plant in Ohio, but this plant is only suppling GM, which is way behind in throttling up its EV production, despite 90,000 orders for its new Hummer EV. I was in Alabama last week and Mercedes opened a new battery plant next to its manufacturing plant, but initially this new plant was assembling lithium-ion battery packs modules that will eventually be outsourced by the end of the decade.
An acute shortage of lithium, nickel, and cobalt is unquestionably hindering EV production. The Journal also reported recently that Tesla is considering pausing its plans to make battery cells at its Berlin factory in order to qualify for U.S. EV and battery manufacturing tax credits. The Journal article said that Tesla is considering shipping the equipment destined for battery production in Germany to the U.S.
The new tax credits from the Biden Administration’s green energy bill include a $35 per kilowatt-hour (kWh) credit for each U.S.-produced battery cell. The bill also affords $10 per kWh for domestically produced modules, and additional assistance for companies making raw and intermediate battery materials in the U.S. Overall, these production tax credits could offset more than a third of the cost of EV battery packs, provided the rechargeable cells are made and packaged in the U.S. Tesla recently dropped application for European Union aid, so it appears it may be gearing up to make its battery cells in the U.S.
Speaking of EVs, our family’s Audi e-tron still has not recovered from surgery after six weeks and only 23,095 miles and three years’ use. Specifically, after the service crew dropped its battery pack, the cells that had to be replaced worked, but other problem cells materialized. As a result, more cells from LG Energy Solutions (formerly LG Chem) now have to be replaced. Frankly, I am lucky the Audi e-tron is still under warranty and has an 8-year warranty on its battery back. But some EVs are just costly toys for driving around town, since I would hate to get stuck on a long road trip with an electric car that failed!
The excitement about Porsche’s IPO in late September is helping to lift the overall stock market. The demand for the initial $9.4 billion in stock being sold in the IPO is now grossly oversubscribed, so the stock is now expected to surge, post IPO. Since I recommend VW Group (VWAGY) and hold the stock in many managed accounts, shares of Porsche will tentatively be distributed this Thursday, September 29th. The exact details of VW Group’s Porsche share spinoff will be released shortly.
I should add since Porsche has high operating margins, massive brand loyalty and it has been assisting VW Group’s EV transformation, it will undoubtedly be compared to Tesla on a market valuation basis.
Currently, Tesla is trading at 53 times estimated 2023 earnings, but Tesla still gets lots of EV tax credits, plus they have not yet had to pay any U.S. taxes. I should add that Porsche will initially electrify its iconic 911 via a hybrid model that will compete with its Porsche Turbo S model, so that its fastest performing sport cars will be utilizing electrification in the upcoming years. I think Porsche is a great company making great products, so I would not be surprised if Porsche soon trades at Tesla-like valuations.
Navellier & Associates Inc. owns Ford Motor Co. (F), and Volkswagen Ag. (VWAGY), in managed accounts. We do not own General Motors (GM). Louis Navellier and his family own Ford Motor Co. (F), and Volkswagen Ag. (VWAGY), via a Navellier managed account. He does not own General Motors (GM) personally.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
What the Fed Will Do Next, and What it Means for Investors
Income Mail by Bryan Perry
This is a Good Time to Re-Check the Charts
Growth Mail by Gary Alexander
Surprise! October is the Best Month in Mid-Term Election Years
Global Mail by Ivan Martchev
Some Global Markets are Starting to Break
Sector Spotlight by Jason Bodner
There’s Nowhere to Hide in This Market
View Full Archive
Read Past Issues Here
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.
Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not a solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.To the extent permitted by law, neither Navellier & Associates, Inc., nor any of its affiliates, agents, or service providers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this communication or for any decision based on it.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report. Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.
None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients and the reader should not assume that investments in the securities identified and discussed were or will be profitable.
Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for every investor. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.
One cannot invest directly in an index. Index is unmanaged and index performance does not reflect deduction of fees, expenses, or taxes. Presentation of Index data does not reflect a belief by Navellier that any stock index constitutes an investment alternative to any Navellier equity strategy or is necessarily comparable to such strategies. Among the most important differences between the Indices and Navellier strategies are that the Navellier equity strategies may (1) incur material management fees, (2) concentrate its investments in relatively few stocks, industries, or sectors, (3) have significantly greater trading activity and related costs, and (4) be significantly more or less volatile than the Indices.
ETF Risk: We may invest in exchange traded funds (“ETFs”) and some of our investment strategies are generally fully invested in ETFs. Like traditional mutual funds, ETFs charge asset-based fees, but they generally do not charge initial sales charges or redemption fees and investors typically pay only customary brokerage fees to buy and sell ETF shares. The fees and costs charged by ETFs held in client accounts will not be deducted from the compensation the client pays Navellier. ETF prices can fluctuate up or down, and a client account could lose money investing in an ETF if the prices of the securities owned by the ETF go down. ETFs are subject to additional risks:
- ETF shares may trade above or below their net asset value;
- An active trading market for an ETF’s shares may not develop or be maintained;
- The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track;
- The cost of owning shares of the ETF may exceed those a client would incur by directly investing in the underlying securities; and
- Trading of an ETF’s shares may be halted if the listing exchange’s officials deem it appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
Grader Disclosures: Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. The sample portfolio and any accompanying charts are for informational purposes only and are not to be construed as a solicitation to buy or sell any financial instrument and should not be relied upon as the sole factor in an investment making decision. As a matter of normal and important disclosures to you, as a potential investor, please consider the following: The performance presented is not based on any actual securities trading, portfolio, or accounts, and the reported performance of the A, B, C, D, and F portfolios (collectively the “model portfolios”) should be considered mere “paper” or pro forma performance results based on Navellier’s research.
Investors evaluating any of Navellier & Associates, Inc.’s, (or its affiliates’) Investment Products must not use any information presented here, including the performance figures of the model portfolios, in their evaluation of any Navellier Investment Products. Navellier Investment Products include the firm’s mutual funds and managed accounts. The model portfolios, charts, and other information presented do not represent actual funded trades and are not actual funded portfolios. There are material differences between Navellier Investment Products’ portfolios and the model portfolios, research, and performance figures presented here. The model portfolios and the research results (1) may contain stocks or ETFs that are illiquid and difficult to trade; (2) may contain stock or ETF holdings materially different from actual funded Navellier Investment Product portfolios; (3) include the reinvestment of all dividends and other earnings, estimated trading costs, commissions, or management fees; and, (4) may not reflect prices obtained in an actual funded Navellier Investment Product portfolio. For these and other reasons, the reported performances of model portfolios do not reflect the performance results of Navellier’s actually funded and traded Investment Products. In most cases, Navellier’s Investment Products have materially lower performance results than the performances of the model portfolios presented.
This report contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are “forward-looking statements” within the meaning of The U.S. Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, and projections, are not guarantees of future results or performance, and involve substantial risks and uncertainty as described in Form ADV Part 2A of our filing with the Securities and Exchange Commission (SEC), which is available at www.adviserinfo.sec.gov or by requesting a copy by emailing firstname.lastname@example.org. All of our forward-looking statements are as of the date of this report only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. You are urged to carefully consider all such factors.
FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.
IMPORTANT NEWSLETTER DISCLOSURE:The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.
Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.
Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report.
FactSet Disclosure: Navellier does not independently calculate the statistical information included in the attached report. The calculation and the information are provided by FactSet, a company not related to Navellier. Although information contained in the report has been obtained from FactSet and is based on sources Navellier believes to be reliable, Navellier does not guarantee its accuracy, and it may be incomplete or condensed. The report and the related FactSet sourced information are provided on an “as is” basis. The user assumes the entire risk of any use made of this information. Investors should consider the report as only a single factor in making their investment decision. The report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. FactSet sourced information is the exclusive property of FactSet. Without prior written permission of FactSet, this information may not be reproduced, disseminated or used to create any financial products. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. Past performance is no guarantee of future results.