EFFORTPOST This week Market in review (3/16 -3/23)

Macro Conditions

Inflation is still sticky. This affects Mid cap Tech because of interest exposure. Also there is a slight mean reversion of the Magnificent 7 after their extremely bullish run from Q3 2023 to Q1 2024. As AI is looking it's glaze, investors are looking more and more towards the core businesses of this behemoths.

Labor market is also seemingly cooling which is a worry for the federal reserve. Since the Fed has assured investors of 3 cuts in 2024, this might be problematic since after a June cut, a November cut might be interpreted politically. Hence the Fed will be stuck with 2 cuts in 2024 thereby lessening the confidence of investors. The Fed had 4.5T of assets in 2020. Currently it has a cumulative asset of 7.5T. With the pace of rate cuts, it could take another 3 years to offload all these assets.

Mortgage rates are still high and out of line with Fed expectations which is another headache. FannieMae 30 year mortgage rates to end at 6.4% while the Fed expects them to go down to 5.7% at least.

Bank of England has held steady its rates at 5.25%. The highest in 16 years since the Great Recession while the Swiss Government is the first to decrease rates among western countries.

As long as S&P 500 is populated with companies with positive Cash Flows, Fed hikes weren't ever going to affect it as much as 2007.

As for evidence that June rates have a high probability of going down, the Fed would probably want to avoid November as well as boost the economy out of a possible recession.

Ripple Effects

Real Estate broker Compass has agreed to pay $57.5mil in fines to settle anti trust claims. M&A has also seen a slump due to anti trust claims.

Stock Picking is key in Regional and Smaller banks as these have large leverage and low liquidity. If Fed doesn't even make two rate cuts this year, consider these banks and financial institutions gone. Several Mid and Small cap stocks will also be filling Chapter 11 (high probability).

Demand for EV

With the exception of China and Korea, compared to 2022, there has been a contraction in EV sales. Many US car rentals have been selling off their EV fleets at a huge discount after seeing very low demand which have been a catalyst for Tesla's poor performance. GM and Ford have cut CapEX and Investment as well as R&D regarding EV. Companies like Tesla and Rivian which produce only EV are haemorrhaging money. While Tesla may be well diversified to withstand this shock, Rivian debts will soon be downgraded because its Cash Flow and Liquidity are not enough to grow/invest in new PP&E.

EU EV Situation.

With a stringent emission targets of 2025, the situation in EU might be a little different and the EU has set its penetration targets very high (some skeptical about whether it will be able to deliver). Also, on top of this, EU companies face tough competition from Chinese companies like BYS and MG which already have 2% of European EV share, offer 20-25% lower prices and like BYD have already planned to build plants inside the EU.

If this was not enough, Hyundai and Toyota are also bringing in their EV sectors over to Europe. As EU rejoices that the Russian gas cutoff hasn't affected the consumers in any devastating manner as Y-o-Y demand for gas has gone down 20%, it should be kept in mind that a commensurate amount of non essential manufacturing units have outsourced or moved away from Europe to China or the USA.

Two things are of note here:

The Euro Commission has launched an investigation into the export of Chinese EV due to it being the beneficiary of state subsidy, particularly the battery of the EVs.

BYD is gaining ground at a never before seen pace in LatAm which might very well soon become an all Chinese EV playground.

Utilities and Surging Power Demand

Power demand had remained flatlined in the US from 2006 to 2021. However there has been a big surge which has pushed the grid to an almost breaking point due to chip manufacturing being brought back, EV ramp up and Green Hydrogen Manufacturing. For now, the surge is met and managed via the surplus gas produced.

Just 2 days ago, the CEO of Duke Energy lined out three new gas power plants to be built soon, more investments in renewables and also hinted at the possibility of nuclear power plants to be ramped up at some point.

Due to the subsidies and zero tariff quota by the Biden Government, 54GW of solar power plants have been imported from South East Asia. Inside the US, Texas is providing subsidies for Gas Power Plants.

All this is coming to a head as there are no additional capacity for installations of transformers or other distribution and transmission infrastructure.

On top of this, there are the Data Centres(DC) which use as much energy as a small city. So not only do grids need to be developed, the entire infrastructure needs to be expanded by orders of magnitude too. These DC are moving towards hourly matching to keep renewables as an option. Hourly matching simply means investing in tech to required to realize Zero Carbon Electricity grid by getting Carbon free electricity procurement.

The DCs have also lobbied for building their own smaller nuclear power plants although nobody knows the state of that proposal now.

Meanwhile the SEC has made requirement of material disclosures of emissions data mandatory(till now it was voluntary).

Smaller newer tech firms like Fervo which seek to harness Geothermal Energy have come into play in recent times, although nobody can be sure about their tech in long term other than tech enthusiasts.

Biden's ALL of the ABOVE ENERGY STRATEGY (AAE) and why everyone hates it

AAE picked up steam with the 2008 election in tandem with Sarah Palin's Drill Baby Drill slogan. John McCain used the AAE as a rallying cry. Obama picked up on it too during his presidency as renewables boomed and O&G boomed after a long downward trend.

The idea was simple. The US needed all the sources it could find to protect its economy(from a recession) and its consumers(from inflation).

In 2012, Obama stuck with it and Romney used it too.

But in 2024, Biden is the closest to achieving it. (Although he never used it because he used the term “energy transition” too many times in his campaign to do a 180.

But due to advances in fracking and directional drilling, which opened up vast new O&G reserves, in 2023, US produced more oil than any other country in the history of the world.

Natural Gas saw an even bigger jump with the US becoming the biggest LNG exporter in the World. The geopolitical impact of this became clear after 2022 as Russia invaded Ukraine, the US shifted its exports from China, Japan and Korea to flood the European Market and nullify Putin's weaponization of Energy.

With Renewables, Wind and Solar got a 80Billion stimulus package under Obama in 2009 which became disproportionately successful, so much so that 15% of the entire US energy production comes from renewables today, just 15 years later.

The problem with AAE is twofold.

Republicans claim that the renewables part of AAE works only because of subsidies and that more O&G should be produced, while the Democrats complain that O&G should be reduced while Wind and Solar should be given more priority as production costs come down exponentially. Both the behemoth bills passed by Biden, the IRA and the Infrastructure Act contain provisions for Wind and Solar as well as Oil & Gas so neither camp is happy.

SEC Mandate, CSRD, EPA, CERAweek and Further discussions into the Macro of Fed decisions will be in tomorrow's post. Digest this first.