SPACs
You may not remember about 18 to 24 months ago when the big rage was SPACs. These are special purpose acquisition companies, and many were formed back in 2020. We talked about not investing in these blind pools for fear of being hurt and losing money. Fast forward to the spring of 2022 and we find that 602 SPACs holding roughly $162 billion in funds are still hunting for companies to acquire. The problem is if they don’t find the acquisitions after 24 months, they generally have to give the money back to the investors. They can get a six-month extension if they have a letter of intent for a definite agreement with a business. The problem is investors will simply get their money back and they missed out on many great opportunities of great public companies that were on sale mid-2020. That is what investing in hype will do to investors.
Oil Price Spikes
Russia has made a bold call that if the West proceeds with a ban on energy exports, oil prices would skyrocket to $300/barrel if not more. This would be a devastating situation for our economy, but I do not see this as likely. Currently the major oil companies and the government are playing a blame game with one another. The White House is saying that there are 9,000 approved drilling permits that are not being used and the oil companies are placing blame on the paused leasing on federal lands. According to American Petroleum Institute’s CEO Mike Sommers, “Once you lease land there is a whole process that you have to go through. First you have to actually discover whether actually there is oil and gas in that land. Second of all, you have to get a permit to actually develop that land." Energy Workforce and Technology Council CEO Leslie Beyer similarly said, "some permits are viable, and some are not." Rather than going back and forth it’d be great to see the major oil companies and institutes work with the government to get through this problem and slow the increasing oil prices. During the last oil price spike, it was the innovation of fracking companies here in the US that greatly reduced oil prices. One area that is of greater concern is Europe’s gas situation. The European Union currently receives about 40% of its gas from Russian pipelines. Europe needs to find work arounds quickly or they will be hit with major prices increases.
Tax on Big Oil Companies
I was disappointed to see congress members solution to higher oil prices is to tax big oil companies at extremely high rates. The proposal which comes from Elizabeth Warren and Sheldon Whitehouse would require oil companies that produce or import at least 300,000 barrels of oil per day to pay a per-barrel tax equal to 50% of the difference between the current price of a barrel and the average price from the years 2015 to 2019. This would create a top line tax which can be dangerous as it does not consider all the costs a company has to pay. The benefit would also be extremely limited as it's estimated single filers would receive approximately $240 a year, and joint filers would get about $360. The benefits would phase out for individuals earning more than $75,000 or couples earning $150,000. Again, I'd much rather see government work with these oil companies rather than attack them to help reduce energy prices.
JOLTS
Our favorite Job Openings report (JOLTS) came out today and the openings continue to remain strong with 11.26 million in the month of January. This level is currently 4.75 million more than those that are counted as unemployed. The other number that continues to amaze me is the quits number which came in at 4.25 million. This was the lowest level since October, but it has now remained above 4 million since June of last year. This is amazing because if you look at a long-term chart of quits, we had never seen the 4 million marks until last year. With all this competition in the workforce I do see elevated wage inflation continuing through the rest of this year.
Ford & GM
I continue to be impressed by both Ford & GM’s innovation and advancement in electric vehicles. GM has announced a pilot program with Pacific Gas and Electric that would allow its electric vehicles to power the home in the event of a power outage or grid failure. This follows Ford which has highlighted this feature on its new F-150 Lightning. This would be an awesome advancement as power outages cause such a disruption in our tech heavy lives.
Nickel Supply
Many people are aware that for electric cars the batteries require lithium, up to about 50 kg. But you may not know up to 40 kg of nickel is used in batteries. The problem that has come to light is that the nickel supply is dropping dramatically, and the price has tripled from just under five dollars in March 2017 to today’s price around $18. Unfortunately, Russia is the third largest producer of nickel in the world and now with the supply constraints Morgan Stanley has estimated the price increase could add $1,000 to the input cost of an average electric vehicle. With electric vehicles requiring these metals and also putting a strain on the electric grid will we have a problem in the next 5 to 10 years? Maybe electric vehicles won’t be the savior we think they are?
TSA Mask Mandate
I just don't get it.... The TSA announced they are extending the mask mandate on airplanes, at airports, on trains and buses until April 18th. The mandate was set to expire March 19th. The CDC has said it "plans to work with government agencies over the next month to help inform a revised policy framework for when, and under what circumstances, masks should be required in the public transportation corridor.” The CDC has also said the new rules will be based on Covid cases, new variant risk and the latest science. Quite frankly, I'm tired of them using the term science without providing any scientific data. What are your thoughts?
CPI Report
The much-anticipated CPI report was released today with more unfavorable news. The CPI for February rose 7.9% compared to last year which marks the largest gain since January 1982. Energy prices continue to dominate inflation as the energy index grew 25.6% compared to last year and the gasoline component was up 38%. Unfortunately, this does not incorporate much of the recent surge in gas prices and will lead to another large increase in the month of March. The current national average for gasoline stands at $4.318 which compares to $3.728 just 7 days ago and $2.815 one year ago. The elevated energy prices will also likely lead to sustained inflation as companies raise prices to offset input costs. One positive is that we will start to lap the high inflation numbers from last year which should put less pressure on the headline year over year numbers. For example, used car prices climbed 41.2% in the month of February compared to last year. If we look at April 2021 used car prices grew 21.0% compared to April 2020. I believe it is unlikely we will see a 40+% climb in used car prices in April 2022. With this said I am looking for inflation to remain elevated around the 5% level for the remainder of the year.