In This Issue

The cut-off date for this report’s data was Thursday, November 3, 2022.

SCHACHTER ENERGY REPORT: November 10, 2022 - Index

Welcoming Comments.
Conference Presentations On Demand: Free for Subscribers
No Federal Reserve Pivot Plunges Stock Markets – Final Decline Phase Underway.
Review of Ten Covered Company Q3/22 Results.
Coverage List and Valuation List.
Action Alert BUY & SELL Lists, and SER Ownership Disclosure.

Welcoming Comments

Last week the Fed Chairman denied stock market bulls the joy they were looking for with neither a pivot in the direction of rates nor a pause in regular rate increases. From the 2PM ET release of the FOMC announcement and the 75BP increase in the Fed Funds rate, the market bulls took the wording in the report to imply that the Fed was leaning towards a pivot in rates. On this premise, The Dow Jones Industrials rocketed over 500 points up to 33,100. Once Chairman Powell finished his press conference remarks and the Q&A started, it became clear that he and the Fed members unanimously voted to remain inflation hawks and that there would be no pivot or a pause in rate increases, as the Fed realized that the inflation battle has not yet been won. The view now is that on Wednesday December 14th the Fed will increase the Fed Funds rate by 50BP. As always the FOMC decision will be data dependant. The stock market reversed sharply after the Q&A was over and by the end of the day, the Dow had fallen 505 points to 32,148. A pictorial of the nasty swing from last Wednesday can be seen in Chart #1 of the S&P500 which ended the day down 2.5% or 96 points to 3,760.

US Inflation remains too high with wage pressures increasing (pilots are fighting for double digit wage increases) and food and shelter costs continuing to rise. The Fed needs (mentioned by Powell in the Q&A) to see a rise in unemployment and for the CPI, PPI and PCE Deflator results to roll over and show repetitive declining data points, before they halt rate rises and reverse monetary tightness. Easing too soon was worse in their minds than being ‘behind’ the data. They were wrong about inflation being ‘transitory’ as they initially thought. So we expect to see interest rates rise up to levels last seen in 2008, just before the GFC meltdown. Rising interest rates are lifting the US dollar to new highs for the year.

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So with a rise in the price of money and tight money supply (QT – US$95B/month) and earnings and earnings guidance, that for the most part have been disappointing, the stock market’s bear market bounce is ending. The Dow broke down last Wednesday and closed the week at 32,403. In Chart #2, we show the peak of the stock market (Dow Index) in January at 37,000 and the four legs down so far (1,2,3,4) and the four bear market rallies (A,B,C,D) which all failed at some point and then reversed to the downside. Note the lower lows (1,2,3,4) and lower highs compared to the prior bear market rally levels (A,B,C,D). The arrows show the breakdown areas and the following sharp declines. The recent bear market bounce lifted the Dow to 33,100 and a breach of the mid-October low of 28,700 should cause a nasty decline exacerbated by tax loss selling. Our expectation of a bottom in mid-December in the 24,000 – 25,000 range for the Dow remains our forecast Chart #3.

Chart #1

No Fed Pivot – Market Plunges

Source: Bloomberg.com November 3, 2022

Chart #2

Dow Jones Industrial Index

Source: stockcharts.com November 3, 2022

Chart #3

Our Market Forecast

Source: stockcharts.com October 21, 2022

The important exchange leading global markets lower has been Hong Kong’s Hang Seng Index Chart #4. During the Global Financial Crisis (GFC) this market fell 67%. It peaked ahead of US markets in 2018 versus early 2022 as President Xi started attacking the capitalist titans of China and reigned in their growth plans, offshore listings and fund raising. Independence of thought and now of financial power is to be controlled by the Communist party. Since then the Hong Kong Index has fallen 56% to 14,597 and is nearing the lows of the bottom of the GFC crash. We expect it will reach the crash lows in the near term as China has tightened up again due to Covid. They have locked down Foxconn plants making Apple iPhones and Shanghai Disney with people inside, with a requirement for a negative Covid test to be allowed to leave. President Xi has obtained absolute power after the recent leadership review and has stacked the ruling committee with his allies. Descension is now not allowed. He announced after his inauguration that China will increase its military and that Taiwan will be resolved one way or another during his current term. The US is now concerned about some action being taken in the coming months from a blockade to an outright invasion.

The next 5-7 weeks may be difficult for investors. We expect a decline of around 8,000 points from last week’s high to our projected tax loss selling low for the Dow Index. Stocks may fall precipitously if they announce poor results or give disappointing guidance. Amazon, Lyft, Qualcomm and AMD all gave the market frustration last week with their poor results and guidance. For example Qualcomm (QCOM) fell 8% or nearly US$9 per share last Thursday to just under US$104 per share.

In the coming weeks we expect to see bargains develop again as the general market plunge drags down energy securities. If so, we will be sending out multiple Action Alert BUY lists and take our Action Alert BUYs from eight ideas to over twenty. These ideas won’t be as cheap as in March 2020 but will be very attractive versus historic norms. In the 1999-2008, the last energy super cycle, there were three market declines (pauses that refresh) and this is our first one in this new energy super cycle which commenced in March 2020. We see this energy super cycle lasting into the end of this decade. Get your BUY lists ready – it will soon be time to pounce on the bargains again!

Videos of the ten companies in the large presentation rooms at the ‘Catch the Energy’ conference and my plenary overview session are now available. If you want to review these important presentations, the details follow in this report.