Over the past several decades, investors, investing in China, have gotten used to the dichotomy of China's Communist-run, centralized government and its free-for-all stock market. That situation appears to be ending.

 

The latest (and most controversial) sign of China's increased interest in regulating and extending control of its largest companies came over the weekend. Fresh off the heels of a global $4.4 billion initial public offering, Didi, China's ride-hailing giant, was ordered to cease accepting new users, and to close down its app by China's internet regulators.

 

By midweek, the newly, U.S.-listed share price of Didi fell by well over 20 percent. But Didi wasn't the only Chinese-based tech company to feel the red hand of regulation this week. Two additional tech companies, Full Truck Alliance, and online recruiting company, Kanzhun, were also targeted. Regulators are probing whether these companies illegally collected and utilized personal data.

 

In the past year or two, these regulatory probes have been increasing. Chinese, megaglobal growth companies like Alibaba, and its wholly-owned subsidiary, financial credit giant, Ant Group, have been ham-strung by the Chinese government's initiative to exert control over social media and how they handle, collect and share data. Regulators in November 2020, for example, simply halted Ant Group's multibillion-dollar dual listing in Hong Kong and Shanghai at the last minute.

 

Behind this new regulatory crackdown is the realization by China's Communist Party (CCP) that these big technology firms could be a potential threat to their own autocratic control. Based on their vast collective ability to gather and harness data, someday (possibly soon?), these corporations could become a competitive, or even an alternative center of power in China.

 

This was made abundantly clear to President Xi Jinping and the Communist party during the coronavirus pandemic. The government discovered how truly immense these tech companies' databases are in their effort to control the spread of COVD-19 and its mutations. Officials found they had to depend on these tech companies' databases in order to introduce health-monitoring, and a variety of software-based quarantine applications.

 

Up until that time, these corporations (like their overseas counterparts) had a fairly clear path in developing their businesses. They had free reign to cut deals, cripple competitors and collect all sorts of user data (both personal and otherwise), from customers worldwide. That same business model is now the subject of litigation, regulation, and various fines within dozens of countries. In that respect, China is just one more country waking up to the so-called danger of social media companies. But with China, there is a difference.

 

The CCP, unlike most other governments, believes, and therefore demands, that all the data collected from its social media giants, e-commerce, and other businesses (including those foreign companies doing business in China), is the property of the state.

 

This data can and will be used in any way the party and its leaders decide, now and in the future. It is considered part of the nation's assets. To bring that point home, China watchers have identified a virtual blizzard of new antitrust and financial regulation brought by the State Council and Cybersecurity Administration, including the passing of a new data security law in June (that goes into effect in September). In essence, almost all data-related activities by whatever means will now be subject to government oversight and control.

 

In the future, data will ultimately control just about every aspect of human life. Food, medicine, weather, security, finance, etc. Who gets it and how, will all come down to who has the most data and how it is used. President Xi is reported to have said privately that "whoever controls data will have the initiative." I believe he is correct.

 

It seems clear to me that while investors decry the short-term stock losses caused by the heavy-handed actions of the Chinese government on publicly listed Chinese companies, they may be missing the forest for the trees. There are all the signs that these new regulatory risks are here to stay. In which case, we can expect more of them and as a result, a re-rating of Chinese securities (downward) would certainly be in order.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

 

The S&P 500 Index is up 14 percent so far this year. Most other averages have similar double-digit gains. July is normally a fairly positive month (in general) for equities.  Does that mean we can expect equities to continue their bull run through the summer?

 

It certainly looks that way. Any pullbacks in stocks will likely be met by dip buyers. That could limit declines to a manageable level. A sustained rise in interest rates will likely wait until investors know with certainty the Fed's next move. The thinking is that there will be an announcement on tapering bond purchases, which may not happen until August, or September, if then.

 

Inflation has receded as a topic of concern for many on Wall Street. The decline in commodity prices has calmed nervous investors worried about runaway inflation. The U.S. dollar has also gained ground versus most other currencies. As a result, we appear to be in a sweet spot for equities.

 

This week, the NASDAQ, which had been lagging behind both the S&P 500 and the Dow Jones Industrial Average, finally broke to new highs led by the semiconductor index.

 

The PHLX Semiconductor Sector Index (SOX) is a capitalization-weighted Index of 30 semiconductor companies.  The SOX is an important telltale index. It has led the stock market higher throughout the year. I would advise readers who want to know where the markets are going to keep an eye on the SOX as a leading indicator for the markets' direction overall.

 

But the big story for investors is the continued rise in oil prices. The OPEC-plus producers meeting that was held on Thursday of this week carried over until Friday. One member, the United Arab Emirates (UAE) is objecting to any increase in production and supply because they are not convinced that there will be a strong global recovery, OPEC had planned to increase output in the coming months, but at a slower rate than anticipated. Monthly output increases by OPEC and its allies (including Russia) would amount to less than 500,000 barrels/day between August and December, if the UAE can be convinced to go along.

 

OPEC members are anticipating that demand for oil will increase by 5 million barrels in the second half of 2021, which could create a further supply and demand imbalance. Oil prices, under that scenario, could rise (some say to as high as $100 a barrel). That would put price pressure on consuming nations, while adding to the risk of higher inflation.

 

Cynics believe the organization (led by Saudi Arabia) is deliberately engineering this squeeze play to gain back some of the losses incurred by oil producers last year.

 

Of course, OPEC's consumption forecast of 5 million barrels could fail to materialize and that is what the UAE is worried about. The COVID-19 Delta variant, they believe, is a wild card. A surge in the virus variant could impact global energy consumption far more than expected. In the U.S., gasoline consumption might not be as high as anticipated. And if U.S. and Iran come to a nuclear agreement and embargos are lifted, increased Iranian supply could come back on stream in the months ahead.

 

As readers are aware, oil was one of my top picks to outperform this year. I still believe energy and energy shares are a good investment, despite the outsized gains of the first half. But buyers beware. Commodities can be great investments, but they also carry great risks. I would wait for a pullback before venturing into the oil patch. Depending on what happens over the weekend at OPEC, you may get your chance.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

The state and local tax cap, called SALT, has been the bane of many high-tax states since its passage as part of the 2017 Tax Cuts and Jobs Act. It created an effective tax hike for many high earners in high tax states, as well as many middle-class workers. That may be about to change, at least for some income earners.

 

Last week, the Senate Budget Committee, chaired by Vermont Sen. Bernie Sanders, presented a draft outline of a $6 trillion budget resolution. It included $120 billion for SALT relief over five years. Readers may recall that the controversial tax placed a $10,000 cap on the amount taxpayers could deduct from their federal income tax in state and local taxes. One of many unintended consequences was that it triggered a mass exodus of many wealthy residences from higher to lower tax states.

 

But don't break open the champagne just yet. The Sander's proposal falls far short of the cost of repealing the total tax. The Tax Policy Center estimates that in order to repeal SALT in full, the cost would be more like $460 billion over the same five years. 

 

Even so, the proposal is a victory for the caucus of 30 Republicans and Democrats from high tax states who have been lobbying for the repeal of SALT for years. They have their work cut out for them, however, in order to convince the various opposing factions between and within both parties to rescind the tax.

 

Progressive members of the Democrat Party view any change of SALT as a giveaway to the wealthy. They have a point, given that 57 percent of the benefits if SALT is repealed would fall to the top 1 percent of Americans. But what about the remaining 43 percent? Those are middle-income earners, who had fewer tax deductions as a result of the 2017 Republican tax cuts.

 

SALT also created some real fiscal problems for many states. The on-going migration from states such as New York, New Jersey, and California to places like Texas and Florida has drained the funds necessary to support schools, hospitals, police, fire, transportation and other basic services. To cope, higher tax states are forced to raise taxes even higher, which could cause even more residents to flee. Remember, too, that those large tax payments by the wealthy were largely used to support and expand social programs.

 

At the same time, receiving states, which at first applauded the tax cap that fell disproportionally on blue states, are now increasingly facing their own budget shortfalls. All these new residents expect the same basic services they enjoyed previously. These newcomers also increase the demands on existing infrastructure. Water, roads, bridges, hospitals, even the internet, may have to be upgraded as the population swells. This will cost money.

 

As a result, longtime residents of some states are suddenly seeing property taxes explode higher. Strapped for funds, legislatures, pressured by this influx of voters (many of whom are liberals), are being forced to introduce additional taxes to cope with this new demand for services.

 

A possible compromise solution to reduce the havoc caused by the 2017 tax act would be to repeal the SALT tax for those earning less than $400,000 per year. That could appease the progressive Democrats without alienating most Republicans. The cap would be lifted entirely for those under that threshold, while those over it would still be subject to the $10,000 cap.

 

There is plenty of motivation to compromise, at least among Democrats, since the cap caucus members (20 Democrats and nine Republicans) have pledged not to vote for any legislation that doesn't include a repeal of SALT. The SALT issue has already delayed the president's infrastructure plan and could hamstring his own tax plans as well. Since the Democrats cannot afford to lose even one SALT Democrat, given their slim majority in the Senate, I believe we will see some relief on the SALT taxes for at least some of the taxpaying population.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Airplanes are full, parkways are bumper to bumper, and restaurants are packed. The summer is in full swing, and for many, the coronavirus is a thing of the past. Let's hope it stays that way.

 

The last thing I want to do is spoil the re-opening party. Afterall, we deserve to feel good, go out, meet family and friends without a mask, even chance a hug now and then. The one fly in all of our ointments may be the onset of an extremely contagious, and virulent coronavirus mutation dubbed the "delta variant."

 

You have probably read about this super bug and its devastating impact on the population of India. It was first detected in that country in December 2020. To this point, it has spawned at least a dozen mutations. Some strains are vastly more contagious and lethal (as well as vaccine-resistant) than others. The virus effectively doubles the risk of a victim's hospitalization, and most delta-related cases occur in the under-50 age group. That unfortunately accounts for many who have yet to be vaccinated.

 

Since last December, the delta varient has spread throughout Southeast Asia, hopped over to Europe, and now has entered the U.S., where 10 percent of new cases have been identified as such.  In the U.K., the number of cases is doubling every 11 days. In Ireland, the delta variant accounts for 50 percent of new cases.

 

The danger of spreading is so great that the United Kingdom has delayed the re-opening of their economy by at least another month. That delay will hopefully give the British government more time to get as many people vaccinated as possible. And therein lies the good news. The present vaccines appear to be effective (but not entirely) against this variant as well.   

 

Most political leaders, including President Biden, understand that we are now in a numbers game to vaccinate as many people as possible before the spread of this mutation overwhelms hospitals, decimates the labor force, and damages the re-opening of the economy.

 

The good news for the U.S. is that more than half of all Americans are at least partially vaccinated (45 percent are fully vaccinated), and COVID cases are falling. It is the main reason why the country is resuming its pre-pandemic behaviors. In some states like New York and Massachusetts, 70 percent of the populations have been vaccinated.

 

Overall, 319 million doses of vaccine have been administered thus far in the U.S., but the rate of vaccination is dropping. The CDC data indicates from 3.3 million vaccinations a day two months ago to a little more than 1 million/day today. At this rate (assuming the vaccination rate does not decline further), it will take another five months before we reach 75 percent of the total population, which is the minimum number to attain for herd immunity. Folks, with the delta strain nipping at our heels, we are running out of time.

 

It is no surprise that the vaccination holdouts are split roughly along politically partisan lines. In at least 482 U.S. counties, less than 25 percent of the population is fully vaccinated, according to the Center for Disease Control (CDC). Many of these counties are in rural red states, and/or low-income areas.

 

But the holdouts come in all shapes and sizes. My niece and her family refuses to get vaccinated. She "heard" the vaccines may jeopardize her chances of childbearing. A neighbor, as a matter of course, does not believe in any kind of vaccination, while a local dental hygienist refuses because she just doesn't like needles.

 

In the recent past, virus-related surges in Europe and other countries, have acted as an early-warning signal for what could be in store for the U.S. in the next few weeks. I have noticed that in the past week, President Biden, his Chief Medical Advisor Anthony Fauci, the Chairman of the Federal Reserve Bank Jerome Powell, and a slew of medical experts have expressed their concerns over the spread of the delta variant within the U.S

 

Most businesses and consumers seem to be ignoring these foreign red flags. Certainly, the stock market doesn't appear to care, or see the delta variant as a "clear and present danger." I hope I am wrong in sounding the alarm. The last thing the economy needs at this point is to experience a roll-back of our newly won gains. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Supply chain shortages are showing up across the nation. Some items, such as chlorine for America's pools and used cars, just illustrate a lesson we need to learn.

 

 The chlorine shortages illustrate why supply chains are so important and how fragile they can be when faced with something as devastating as the pandemic. Last year, when lockdowns kept most Americans hunkered in their homes, an enormous home improvement wave swept through the country. Demand for home offices on the inside, and new recreational improvements on the outside, skyrocketed.

 

Gazebos, firepits, and swimming pools were just some of the items that consumers decided would make life bearable under a lockdown. New pool construction and upgrades were a savior to the pool industry, which saw their sales jump 20 percent or more. Roughly 66 percent of the 5.2 million in ground, residential pools in the U.S. use traditional chlorine systems. The last thing new and old pool owners were expecting was a chlorine supply shortage.

 

All it took was a fire at one chemical plant in Louisiana to drive prices of chlorine pool tablets into the stratosphere. Unfortunately, this facility accounted for a large share of domestic chlorine pool tab production, and there are few remaining sources of supply within the U.S. And as with so many other products in the global supply chain, China is the only significant foreign supplier.

 

Importing products from China is beset by a variety of problems ranging from bottlenecks in ports, China's own virus outbreaks, and the various economic sanctions and tariffs imposed by the U.S. We are paying a price, and a steep one at that, for our past and present policies of bashing China (and other nations) rather than investing in our own abilities to compete.

 

The scarcity of new and used automobiles in the U.S. is far a far more serious issue than chlorine, but its cause is just another example of how supply chain disruptions can ultimately impact consumers in unexpected ways. Semiconductors, for example, are used in so many products that they are considered indispensable to the world's economic health. As most readers are aware, there is at present a global semiconductor shortage. For today's gadget-filled automobile that has posed a real problem.

 

The pandemic is once-again the culprit behind the shortages. Demand by shut-in consumers seeking electronic equipment for home offices, and for chip-heavy gadgets for home entertainment exploded. The companies that build and sell these devices reacted by sending a wave of semiconductor orders through the supply chain all at once.  At the same time, many of these global chip makers were being forced to shut down due to their own coronavirus threat. As a result, those U.S. orders quickly overwhelmed the few chip foundries that manufacture most of the world's computer chips.

 

Automobile manufacturers were caught flat-footed by the semiconductor shortage. The electronic goods manufacturers had quickly gobbled up most of the relatively lean, worldwide inventory of chips. By the time they got around to realizing there was a shortage, it was too late. The production of many new models had to be halted, since many models just couldn't be completed without vital semiconductor components. New car production became a trade-off and dealerships found that their supply of new cars was being rationed.

 

At the same time, consumer demand began picking up. One reason is that the U.S. passenger auto stock is aging. The average age of America's vehicles is now approaching 13 years old. Consumers shopping for new cars realize there are few to be had and the waiting list is in months, not weeks, long. The result has been a growing shortage of new cars. That has led to a record increase in used car prices. The subsequent rise in used and new auto prices was so strong that it accounted for one-third of April's overall rise in consumer prices.

 

Cars and chlorine are just two examples of the present supply change imbalances.  There are lessons to be learned from this predicament. For one, the world's economies are a lot more vulnerable to catastrophes than anyone imagined. Second, global supply chains are just that — global. Whether we like it or not, we need and depend on the products other nations sell us, and they need ours.

 

The next calamity may be weather-related, or another virus (like the bird flu resurgence in China today); who knows? Whatever it is, we are dependent on each other if we hope to survive it. The sooner we wake up to that fact, the better off we will be.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.