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September 7, 2022
Energy markets remain elevated as most of Europe strives to break away from Russia’s crude oil and natural gas supplies. Putin recently replaced his long-time ally, defense minister Sergei Shoigu, over frustration with the progress in his war with Ukraine. Furthermore, six of Putin’s allies have been shot or blown up, so Putin’s inner circle is becoming increasingly isolated, since Moscow is no longer safe.
Whether or not these assassinations originate from within Russia or from Ukrainian special forces, as the Russia media has claimed, is uncertain. As a result, there is a growing possibility that there could be a regime change in Russia that could disrupt the crude oil and natural gas markets.
In the event that there is a ceasefire between Russia and Ukraine, post-Putin, the stock market could explode 40% to the upside. However, as long as Putin remains in power, the Ukrainian war is expected to persist in a long, drawn-out conflict and Putin will continue to use energy as a weapon to punish the West.
Russia shut down its Nord Stream 1 natural gas pipeline last Wednesday for “maintenance” and will thereby provide Europe with a preview of how it must learn to cope without any new Russian natural gas coming in. Then, on Friday, Russia decided to indefinitely suspend natural gas to Europe after the G7 foolishly decided to push for price caps on Russian crude oil. Some European officials are saying that they have secured enough natural gas to avoid rationing this winter, but that depends on how cold this winter will be, and they are still struggling to replace Russian natural gas supplies for 2023 and beyond, despite LNG imports from Canada, Qatar and the U.S. Europe’s other alternatives include a new natural gas terminal in Estonia from Norway and the extension of a natural gas pipeline from Spain.
Regardless of where Europe gets its natural gas in the future, the net result will be much higher utility bills. Since Europe has an elderly population, these high utility bills are causing massive social problems as a growing number of retired folks and poor families cannot pay their utility bills. The European Union (EU) on Monday said that it is preparing to intervene to help families dampen soaring electricity costs, as the European Commission President, Ursula von der Leyen, is expected to provide details on how the EU will intervene to help consumers with high natural gas and electricity costs. Specifically, the EU is expected to impose price caps, like Spain is utilizing. The only problem with price caps is that they could cause shortages in the future, so Europe’s power crisis is expected to persist for the foreseeable future.
The Labor Day Employment Report Offered a “Mixed Review” of the U.S. Jobs Market
Going into the Labor Day weekend, the Labor Department on Friday announced that 315,000 payroll jobs were created in August, but the big surprise was that June and July payrolls were revised down by a cumulative 107,000 jobs, so the unemployment rate rose to 3.7%, up from 3.5% in July. The other reason the unemployment rate rose was that the number of workers looking for a job rose by 786,000 in August. That pushed the Labor Force Participation Rate up to 62.4% in August from 62.1% in July. Average hourly earnings rose 0.3% ($0.10) to $32.36 per hour in August. Wages have risen 5.2% in the past year.
ADP reported that private payrolls rose only 132,000 in August, down from 268,000 in July, so it appears that job growth is slowing dramatically. August is a notoriously volatile month, due to seasonal summer work. If the U.S. job creation machine winds down, then it will put pressure on the Fed to stop raising key interest rates, which is why I still expect that September 21st will be the Fed’s last key interest rate hike.
In other labor news, the Labor Department reported on Thursday that new unemployment claims declined to 232,000 in the latest week, down from a revised 237,000 the previous week. Continuing unemployment claims rose to 1.438 million in the latest week, up from a revised 1.415 million in the previous week.
I should add that the Labor Department also revised second quarter productivity on Thursday to a 4.1% annual decline, up from its previous estimate of a 4.6% annual decline. In the past 12 months, through the end of the second quarter, the Labor Department is reporting a 2.4% productivity decline, which represents the largest annual productivity decline since these productivity metrics began in 1948.
The best news released last week was that the Conference Board announced on Tuesday that its consumer confidence index surged to 103.2 in August, up from 95.3 in July. This is the first increase after three straight monthly declines. The “present situation” component rose to 145.3 in August (up from 139.7 in July), the first increase since March, and the “expectations component” surged to 75.1 (up from 65.6 in July). Based on Best Buy’s (BBY) better-than-expected results last week, and this report of surging consumer confidence, there is growing hope that retail sales can outpace inflation rates in the upcoming months.
In the last piece of news, the Institute of Supply Management (ISM) on Thursday announced that its manufacturing purchasing manager index (M-PMI) was unchanged in August at 52.8. The “new orders” component rose to 51.3 in August (up from 48 in July) and the “backlog of orders” component rose to 53 in August (up from 51.3 in July). Unfortunately, the “current production” component declined to 50.4 in August (down from 53.5 in July). Overall, any reading above 50 signals an expansion, but the ISM manufacturing PMI is running at its slowest pace since May 2020, after a 27-month expansion.
Corporate Earnings May Have Peaked and May Soon Decline… Except in Energy
Turning to third-quarter earnings, my favorite economist, Ed Yardeni, now expects S&P 500 earnings to decline 5.4% and 3.8% in the third and fourth quarters, respectively. A strong dollar is unquestionably hindering multi-national companies, since approximately half of the S&P 500’s sales are paid in foreign currencies. Furthermore, year-over-year comparisons are now becoming more difficult, so in the midst of this upcoming “earnings drought,” I expect that energy stocks will be more important than ever, since the energy sector is the only sector that is not characterized by analyst earnings estimate cuts and should post the strongest sales and earnings in the next two quarters, regardless of last week’s drop in crude oil prices.
The big drop in crude oil prices last week appears to be largely seasonal and also based on recession fears emanating from Asia and Europe. For example, Russia’s crude oil exports to Asia are now at a 5-month low, falling by more than 500,000 barrels per day. But the U.S. Energy Information Administration (EIA) reported on Wednesday that U.S. demand for crude oil was larger than analysts expected, since crude oil inventories declined 3.3 million barrels in the latest week vs. the forecasted 1.483 million barrel decline.
I must also add that Investing.com cited a news report from a pro-Iranian television station in London that quoted a former IAEA official saying, “Iran and the U.S. have reached an agreement (on revival of the Iran nuclear deal), and it will be announced in the next two to three weeks.” I am skeptical of this report, since it is second-hand and has not been corroborated by other news media. Furthermore, if the Biden Administration announced that it has allowed Russia to negotiate a new nuclear deal with Iran, Israel would be furious, giving Republicans strong ammunition just before the mid-term elections.
Naturally, the prospect that Iran could expand its crude oil exports is also weighing on crude oil prices, but again, I remain skeptical that a new Iranian nuclear deal will be announced in the upcoming weeks.
In other earnings news, Nvidia (NVDA) warned on Wednesday that it could lose as much as $400 million in quarterly sales after the federal government imposed new licensing requirements on shipments of some of its most advanced chips to China and Russia. Although Nvidia does not sell its chips to Russia, the U.S. is clearly worried that its chips will end up in Russia via China. Advanced Micro Devices (AMD) is also being hit by these new export restrictions by the federal government, so the war over artificial intelligence (AI) chips is now underway and, unfortunately, the first casualties are the leading U.S. chip companies.
Complicating matters further, Nvidia on Thursday said that the U.S. government told the company that it can continue to develop its H100 AI chip in China! Let’s hope that both AMD and Nvidia do not move their plants overseas, since China has been a big developer of AI devices.
In the meantime, China’s spokesman for the Ministry of Foreign Affairs, Wang Wenbin, on Thursday said that the U.S. was attempting to impose a “technological blockade” on China. Wenbin said the ban showed that America was trying to maintain its “technological hegemony.” In the meantime, Nvidia said that it is merely “engaging with customers in China” and “seeking to satisfy their planned or future purchases of our data center products with products not subject to the new license requirement.”
Interestingly, Hewlett Packard (HPE) is also upset at the new U.S. restrictions and said, “AMD and Nvidia have manufacturing locations throughout Asia, in China, the Philippines, Hong Kong, Taiwan, and Malaysia.” I should add that Taiwan Semiconductor (TSM) also makes Nvidia’s graphics and AI chips.
Navellier & Associates owns Nvidia (NVDA), Taiwan Semiconductor (TSM), and Advanced Micro Devices (AMD), in managed accounts. We do not own Hewlett Packard ), in managed accounts. We do not own Hewlett Packard (HPE) or Best Buy (BBY). Louis Navellier and his family personally own Nvidia (NVDA), and Advanced Micro Devices (AMD) via a Navellier managed account, and Nvidia (NVDA), in a personal account. He does not own Hewlett Packard (HPE), Taiwan Semiconductor (TSM), or Best Buy (BBY).
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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