JRE - The 'Wall Of Worry' Is Crumbling Brick By Brick
2023-04-04 03:05:00 ET
Summary
- Many of last winter’s biggest worries don’t look so bad in the spring. The few big bank failures didn’t explode into a massive bank run.
- The solution to un-stressing the banking system is simple: the Fed has to un-invert the Treasury yield curve with its open market action.
- The breadth and power of the stock market will gradually improve as more evidence of an economic recovery emerges. Instead of a 15% stock market, I am hoping that we will soon be in an 18% market, where we will finally have a few more A-rated winners.
Many of last winter’s biggest worries don’t look so bad in the spring. The few big bank failures didn’t explode into a massive bank run, and the Congressional hearings about the failure of Silicon Valley Bank ( SIVBQ ) essentially blamed the banking examiners as the primary scapegoat. The inverted Treasury yield curve is what ultimately caused Silicon Valley Bank to fail, as this bank held way more long-term Treasury bonds than most other banks did. The other culprit that took out Silicon Valley Bank was a spike in Treasury yields in February in the wake of an unexpectedly strong January payroll report, grossly exaggerated by seasonal adjustments, as The Wall Street Journal, MarketWatch, Bain Capital, and I have explained.
In other words, if the Labor Department had not exaggerated January payroll growth, Treasury yields might not have spiked and SVB might still be solvent, so the federal government in the end aided and abetted the stresses that are now impacting the banking system. I still say the solution to un-stressing the banking system is simple: the Fed has to un-invert the Treasury yield curve with its open market action.
If the banks don’t fail, you might be wondering what will be the next big issue to scare the stock market? How about the federal government’s debt ceiling, which Congress will debate in the upcoming months? Another potential glitch is the ongoing Russian invasion of Ukraine. Although both sides seem to be “reloading” for another clash, they must first wait until “mud season” is over. In the meantime, French President Emmanuel Macron and other allies are wary of humiliating Russia too much, so there are some cracks emerging in the NATO alliance. In another hot spot, the U.S. escalation against the Iran-backed militias in Syria is a rising concern, especially now that Iran may soon develop its first nuclear weapon.
Inflation in Europe remains much higher than the U.S., so workers are restless. Protests in France have now expanded to Germany, where a transport strike is shutting down air, train, and public transportation. The French protests started over Macron raising the retirement age to 64 (from 62) without any legislative debate. Macron recently survived a no-confidence vote, but he is so unpopular he will not seek re-election.
Stick with Energy but Start Expanding into Other Sectors
As we approach first-quarter earnings season, The Wall Street Journal reported that Apple ( AAPL ) and Microsoft ( MSFT ) now have their highest weightings ever in the S&P 500 at a combined 13.3% of the index and a $4.75 trillion combined market cap as of March 31. However, their forecasted first-quarter sales and earnings are truly pathetic, so I think there is a great chance that many of our fundamentally superior stocks can break out and emerge as new market leaders in the wake of their stunning first-quarter announcements.
I expect that the breadth and power of the stock market will gradually improve as more evidence of an economic recovery emerges. A good example is that new home sales have risen for three consecutive months and mortgage rates have fallen for six consecutive weeks. Although home sales are still down year over year, there are “green shoots” appearing. Instead of a 15% stock market, where the best A-rated stocks have been performing the best, I am hoping that as the stock market’s breadth and power expands, we will soon be in an 18% market, where we will finally have a few more A-rated winners. That may not sound exciting, but it’s the next step to a 20% market, then 25% and higher as the market mood improves.
The American Petroleum Institute on Tuesday reported that crude oil inventories declined by 6.1 million barrels in the latest week, which is the largest weekly drop since November. Then, on Wednesday, the Energy Information Administration reported an even bigger decline of 7.5 million barrels of crude oil, as well as a 2.9 million drop in gasoline inventories, in the latest week. Further putting upward pressure on crude oil is the fact that Turkey is blocking Iraqi oil exports due to a dispute with Kurdish authorities.
Global crude oil demand is now beginning its seasonal spring surge, so oil prices are expected to steadily rise until demand peaks in the summer months. Adding to the supply crunch, Russia said that it is close to implementing its March announcement of a 500,000 barrel per day cut in crude oil production.
Turning to the energy investing sector, LG Energy Solutions Ltd. announced that it will invest $5.5 billion in a giant battery manufacturing facility in Arizona. Interestingly, LG will be building the cylindrical batteries that both Lucid ( LCID ) and Tesla ( TSLA ) utilize to manufacture enough batteries for 350,000 vehicles per year. LG will also be building a separate plant for iron phosphate batteries and is scheduled to begin production in 2026. Toyota ( TM ) and LG are also talking about a potential partnership. Overall, it is apparent that LG is striving to compete with Panasonic ( PCRFY ) for its business with Lucid, Tesla, and Toyota.
Japan and the U.S. reached a trade agreement for the minerals utilized in clean energy technologies. This effectively means that Japan now qualifies for U.S. domestic subsidies in the Inflation Protection Act for electric vehicles (EVs). This trade agreement will not only boost Japanese EV manufacturers, but it is also designed to attempt to move the EV supply chain away from China, which currently dominates the processing of lithium, cobalt, and other battery components. It will be interesting to see if Europe follows Japan and tries to get a similar trade agreement with the U.S., since the Inflation Protection Act’s domestic incentives for EV subsidies have irritated France, Germany, and other European countries.
The Financial Times reported last week that Tesla’s move to slash prices in China has backfired because EV rival BYD ( BYDDF ) continues to capture market share there. Chinese consumers have responded favorably to the cheaper new EV models from BYD. First-quarter sales for BYD are expected to surge 80% to more than a 40% market share, while Tesla’s market share slipped to 7.8%. China is removing its EV subsidies, so lower-priced EVs like BYD are a popular choice. It will be interesting to see how Tesla responds.
Economic Statistics Continue to Point toward Recovery, Not Recession
The Conference Board on Tuesday announced that its consumer confidence index rose to 104.2 in March, up from 103.4 in February, led by the expectations component, which rose to 73 in March, up from a revised 70.4 in February. This was encouraging and bodes well for an increase in March retail sales.
Also on Tuesday, S&P CoreLogic Case-Shiller announced that its National Home Price index declined 0.2% in January, the seventh straight monthly drop in home prices; but over the past 12 months, median home prices have still risen 3.8%. Mortgage rates are up from 4.42% a year ago to 6.42% now, putting a damper on home price appreciation. Formerly hot housing markets in the West are experiencing the fastest price declines. The National Association of Realtors put the median home price now at $363,000.
On Thursday, the Labor Department reported that unemployment claims in the latest week rose to 198,000, up from 191,000 in the previous week. Continuing unemployment claims rose to 1.689 million, up from a revised 1.685 million in the previous week. Overall, the labor market remains healthy.
On Friday, the Commerce Department announced that Personal Consumption Expenditure (PCE) prices rose 0.3% in February and 5% in the past 12 months (down from a 5.3% annual pace in January). The core PCE, excluding food and energy, also rose 0.3% and 4.6% in the past 12 months. Overall, the PCE report was a bit better than economists expected, so the Fed need not raise short-term interest rates again.
There has also been a lot of talk about replacing the U.S. dollar in foreign trade. China is Brazil’s largest trading partner and has vast investments in Brazil. The Brazilian Trade & Investment Promotion Authority announced on Wednesday that it will be transacting directly with China and bypassing the U.S. dollar to “reduce costs” and “promote even greater bilateral trade and facilitate investment.” (China told Brazil to make this statement if it wants to continue to benefit from Chinese investments.)
China’s currency is nowhere near as solid as the dollar, so China must make these demands one on one. The U.S. dollar dominates commodity trading, since commodities are priced in U.S. dollars, so this new Brazilian trade agreement with China is essentially meant to undermine the U.S. dollar and boost the credibility of the Chinese yuan. Since the U.S. has neglected Latin America for decades, China has stepped up its influence in the region, and more countries south of the border may follow Brazil, like Honduras, which recently broke off its diplomatic relations with Taiwan to appease China.
Navellier & Associates owns Microsoft Corp. ((MSFT)), Apple Computer ((AAPL)), Volkswagen Ag. ( VWAGY ), Panasonic Holdings Corporation Sponsored ADR ((PCRFY)), Toyota Motor Corp. Sponsored ADR ((TM)), and a few accounts own Tesla ((TSLA)), per client request in managed accounts. We do not own LG Energy Solutions Ltd., Silicon Valley Bank ((SIVBQ)), and Lucid Group ((LCID)). Louis Navellier and his family own Apple Computer ((AAPL)), Panasonic Holdings Corporation Sponsored ADR ((PCRFY)), Toyota Motor Corp. Sponsored ADR ((TM)), and Volkswagen Ag. ((VWAGY)), via a Navellier managed account, and Apple Computer ((AAPL) in a personal account. They do not own Tesla ((TSLA)), Microsoft Corp. ((MSFT)), LG Energy Solutions Ltd., Silicon Valley Bank ((SIVBQ)), or Lucid Group ((LCID)) .
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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The 'Wall Of Worry' Is Crumbling, Brick By Brick