The Treasury Department May Have Bitten Off More Than It Can Chew

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In his podcast addressing the markets today, Louis Navellier offered the following commentary.

Spooky Treasuries

Financial markets were spooked that the Treasury Department now wants to auction $1 trillion in Treasury securities this quarter, up from $733 billion that was anticipated.  In other words, the Treasury Department may have bitten off more than it can chew, but that will be ultimately determined by the bid to cover ratios at the actual Treasury auctions.

Fitch Ratings on Tuesday cut its AAA rating on U.S. Treasury debt to AA+ due to worsening financial conditions and governance. Specifically, Fitch cited “expected fiscal deterioration over the next three years.”

Fitch also cited an “erosion of governance” over the past two decades “that has manifested in repeated debt limit stand-offs and last-minute resolutions.”  Apparently, Fitch has been listening to the Financial Times and former Treasury Secretary Lawrence Summers’ criticism of the U.S. fiscal policy.

Energy Wildcards

My big energy bet is paying off now that we are in the midst of peak seasonal demand for crude oil. The American Petroleum Institute (API) on Tuesday announced that crude oil inventories in the U.S. collapsed by 15.4 million barrels in the latest week.  API also reported that gasoline inventories declined 1.68 million barrels per day in the latest week, while distillate (diesel, heating oil and jet fuel) inventories declined by 512,000 barrels. 

Goldman Sachs said that worldwide crude oil demand rose to an all-time high of 102.8 million barrels per day in July and raised its 2023 forecast for crude oil to 550,000 barrels per day.  Interestingly, Goldman Sachs is sticking to its forecast of $93 per barrel for Brent sweet crude oil.

Another wildcard putting upward pressure on crude oil prices aside from Russia is Mexico-based Pemex whose largest export terminal was closed on Tuesday due to a crude oil leak. Pemex has faced a series of operational challenges recently, including the recent shutdown of its Salina Cruz terminal and an explosion on a company gas platform that resulted in two fatalities.

Out-of-Sync Labor

ADP on Wednesday announced that 324,000 private payroll jobs were created in July, which was substantially higher than economists’ consensus estimate of 189,000.  The June private payroll report was revised lower to 455,000 jobs, down from ADP’s previous estimate of 497,000.

Interestingly, ADP continues to report manufacturing job losses and reported that another 36,000 manufacturing jobs were lost in July.  The strongest sectors for job creation were leisure and hospitality which added 201,000 new jobs in July, while natural resources and mining added 48,000 jobs. Since the Labor Department has been grossly out of sync with ADP, especially on manufacturing jobs, Friday’s payroll report will be closely scrutinized.

GM’s Transition To EVs

There is an interesting observation regarding General Motors Co (NYSE:GM)’s transition to EVs.  Specifically, GM’s new Ultium platform is having acute supplier problems, so its battery packs are being manually assembled. CEO Mary Barra called the situation with the Ultium platform supplier problem “disappointing” and that she is “personally been reviewing the lines.”

Barra added that “We’ll get this behind us” and hopes the situation will be resolved by the end of the year.  In the meantime, GM has only delivered 49 Hummer EVs this year due to the Ultium platform manufacturing problems.

Consumers Aren’t Excited About Ford’s F-150 Lightning

Ford Motor Co (NYSE:F) recently acknowledged the lack of consumer excitement about the F-150 Lightning, which are sitting on dealer lots and being discounted, so its executives quickly pivoted and said they will be focusing on making many new hybrid models, which they hope consumers will be more likely to purchase.

Obviously, a hybrid F-150 can offer the electric hookups for power tools and tailgating, but not have the range and that may be hindering the F-150 Lightning sales.  In the second quarter, Ford’s EV business lost $1.08 billion in the second quarter, so its EV business is not profitable at the present time.

Ford said that it expects its EV business to lose $4.5 billion in 2023 and lowered its EV production forecast to 600,000 per year, which it hopes to achieve sometime in 2024.  Interestingly, Ford backed off of its previous goal of 2 million EVs per year in 2026, apparently due to lackluster consumer demand.

I should add that Ford restarted its Rouge Electric Vehicle Center in Michigan this week after a 6-month shutdown for retooling and expansion. The Rouge facility can now make 150,000 F-150 Lightning models annually.

Ford also mentioned that recent price cuts stimulated sales of the F-150 Lightning, but whether or not there will be sufficient consumer demand for 150,000 F-150 Lightning models annually remains to be seen.  One the of problems that Ford has had is that most 150,000 F-150 Lightning buyers were not its regular F-150 customers. However, if Ford can convince some of its F-150 customers to switch to the F-150 Lightning, then it could easily sell 150,000 vehicles per year.

Coffee Beans: Beat the Heat

A bear was sighted in a residential neighborhood enjoying a dip in a Jacuzzi behind one of the homes. The Burbank police have issued warnings for residents to avoid bears and to keep all garbage and food locked up to discourage bears from coming to their residences. Source: AP News. See the full story here.