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The Independent Investor: India's Bid for More Trade

By Bill Schmick
iBerkshires columnist
India's Prime Minister Narendra Modi is aggressively pushing for a greater share of global trade now that its neighbor to the north (China) is squabbling with the United States. In doing so, India is hoping to regain some economic momentum, kick-start employment, and reverse its slowing economy.
 
For those readers whose knowledge of India is limited to the next Bollywood musical, India's economy has been in the doldrums. It is still growing at a 5 percent clip, which may sound high to some, but it is at the lowest level in six years. The country's unemployment rate is presently at 8.19 percent, versus 6.27 percent last year.
 
Despite the poor performance of the economy, Modi was re-elected last year with an even larger majority. He is the leader of the largest political party on the planet, the Indian People's Party (BJP), with 180 million members strong.  Modi is considered by most to be a populist and in the same camp as President Trump when it comes to the economy and in his anti-Muslim "Islamophobia." 
 
But India, which was one of the largest and fastest growing economies in the world, has been hit by the global downturn in manufacturing, as well as depressed agriculture and basic materials prices. As a result, consumer spending has slowed, and given the country's population (1.36 billion), that downturn is a big problem. The U.S-China trade war, however, has opened up a new opportunity for India.
 
Vietnam, as my readers are aware, has been the biggest winner so far from the fallout of between the U.S. and China. As international companies abandon China to escape U.S. tariffs threats, they have looked to Vietnam as an alternative center of operations. It is business friendly, offers low tax rates, and has a fairly efficient labor force.
 
This trend has not escaped other countries in the region. Since most observers in Southeast Asia believe that there is no end in sight to the trade wars, several countries are doing what they can to entice some of that business their way. India is one of them.
 
Last week, Prime Minister Modi surprised the financial markets by announcing a $20 billion tax cut for domestic corporate taxes from 30 percent to 22 percent. In one fell swoop, India has gone from having one of the highest business tax rates in Asia to one of the lowest. In addition, he promised that companies formed after Oct. 1, 2019, will only pay a 15 percent corporate tax rate.
 
In addition, most economists in India expect India's central bank to cut interest rates again next month in what appears to be a coordinated fiscal and monetary effort to spur the economy. But Modi is leaving nothing to chance. It is therefore no accident, in my opinion, that he appeared alongside Donald Trump in Houston last Sunday.
 
As 50,000 voters of Indian descent filled a sports stadium, the two leaders heaped praise on one another. For Modi (who also had a private meeting with Trump at the United Nations), he is hoping for help in wooing more American companies to move from China to his country. For Trump, Indian voters in the U.S. are a growing political force. They have historically voted for Democrats, but generally, many Indian voters are business-minded and have  benefited from Trump's business tax cuts, and just might be ripe to switch sides, especially with an endorsement from a popular politician from back home.
 
Indian investors have so far approved of Modi's latest moves, sending their stock markets up almost 7 percent since the tax cut announcements last week. It is too early to say whether Modi's tax cuts will work any better than those of Donald Trump in growing India's economy.  In the case of the U.S., corporations used the tax cuts to buy back stocks, pay extra dividends, and generally enrich those who had investments in the stock market, which went to record highs. If Modi's tax cuts produce the same result, you might want to look at the Indian stock market.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 

 

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The Independent Investor: The Era of U.S. Oil Independence

By Bill Schmick
iBerkshires columnist
Last weekend's surprise drone attack on Saudi Arabia's major oil fields was a disaster, but it could have been worse. Fifty years ago, an attack like that would have sent the world's financial markets into a tailspin and rocked global economies. None of that happened — thanks to the U. S. energy production.
 
Granted, there was an initial decline in the markets until the damage was assessed and experts concluded that the 5.7 million barrels per day (bpd) of crude production could be put back online within three weeks. The short-fall represented about half of the Saudi's daily production. Yet, the markets rebounded quickly, and for the most part, it is business as usual again in the global markets. An initial $10 per barrel spike in oil subsided quickly. Oil has now given back more than half the price rise.
 
While Saudi production of 10 million barrels a day is, and will continue to be, an important source of energy supply, U.S. energy production has already surpassed not only Saudi output, but that also of any other energy producer worldwide. This is an enormous stabilizing factor in energy markets today and possibly into the future.
 
The Department of Energy indicates that U.S. oil production in 2019 will average 12.1 million barrels in 2019, and an additional 12.9 million barrels next year. The shale fields of the Permian region of Texas and New Mexico are largely responsible for that increased production. Those fracking wells should continue to goose production, breaking record after record over the next two years.
 
The saga of how we became the world leader in energy production is a long story, full of ups and downs, beginning way back in the time of John D. Rockefeller. He formed the Standard Oil Company and by 1879, controlled 90 percent of America's refining capacity. The key drivers in the use of oil at the time were the electric light bulb and the automobile. By the end of World War I, oil-powered ships, trucks, tanks and airplanes impressed on the world how oil had become a strategic energy source and also a critical military asset.
 
The developed nations of the world used any excuse to capture the global oil output, which was largely centered in the Middle East.  During my lifetime, the Organization of the Petroleum Exporting Countries (OPEC) was founded in response to the efforts of Western oil companies (and the governments that backed them) to first control, and then drive down, the price of oil. Over time, the control and ownership of production and pricing shifted from the West to Middle Eastern-producing countries and their national oil companies.
 
From the beginning, the U.S. has historically viewed OPEC as a threat to its supply of cheap oil. The cartel could (and did) set the world market price of oil wherever and whenever it wanted. This impacted the economies of developed countries causing undue strain and dislocations.
 
As supplies of energy tightened, world demand for oil continued to grow, and energy prices for both oil and natural gas rose higher and higher. In the 19702, oil became a political football during the first and second world oil embargos. Those events spurred a response from both the private and public sector of the U.S.
 
It was a combination of luck and cooperation between the Department of Energy (DOE) and Texas wildcatters that launched the United States onto its path to oil independence in the form of fracking technology. The idea dates back to 1947 (in this country) when the first commercial fracking job was accomplished. The real breakthroughs, however, happened more than 30 years later.
 
That's when The Eastern Gas Shales project, a research effort supported by the DOE in the Appalachian Basin, proved shale rock was rich in natural gas. It was no accident that this was the same year (1979) that the second oil embargo took hold in this country (the first was in 1973-74, in response to U.S. support of Israel during the Yom Kippur War). This second time around, the price of oil doubled, and I remember standing in gas lines for hours, as did many other Americans. There was a general feeling among us of helplessness and anger that, for the first time in a long, long time, we were not in control of our own destiny.
 
In the meantime, a Houston oilman by the name of George P. Michell was poring over those DOE Eastern Shale analysis and used the results to develop today's fracking technology. The rest is history. The government continued to support fracking by funding research and providing subsidies to all sorts of renewable energy projects.
 
As a result, fracking has not only boosted productivity in our energy sector but has also reduced costs and single-handedly increased the output of U.S. oil by 84 percent over the last decade. It has also increased the production of natural gas by 39 percent since 2009. We are, by the way, the world's top producer of natural gas as well.
 
All of this production means that the U.S. is less reliant than ever before on foreign oil. Net OPEC imports of oil and petroleum products fell to 1.5 million bpd so far this year, which is a 75 percent decline over the past decade. By next year, some energy experts believe imports could total just 100,000 bpd and in the final three months, we could become a next exporter at long last.
 
The morale of this tale is that this country can still accomplish astounding things when we put our mind to it. If only we stopped fighting and started cooperating again, think of what could be accomplished.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

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The Independent Investor: Europe Throws in the Towel

By Bill Schmick
iBerkshires columnist

The European Central Bank (ECB) announced a major new stimulus package on Thursday. A key interest rate was reduced, and a new bond-buying program was announced, amounting to $22 billion per month. In the past, those efforts would have been enough to boost the European economy, but will it be enough this time around?

It is not as if we haven't seen this before. Through the years, ever since the Financial Crisis of 2009, the ECB, as well as other central banks around the world, have stimulated their economies to avoid recession, or something worse. The problem is that monetary policy can only do so much before central banks find themselves "pushing on a string."

The ECB is wrestling with deflation. The effective inflation rate in Europe is a little more than one percent, while the bank's target is twice that at 2 percent. At the same time their economy is slowing. Interest rates are already yielding a negative return, so a 10-basis point cut in Europe's main deposit rate to -0.5 percent. (which is a record low), probably won't do much to stimulate lending or growth.

The asset purchases program is hefty and will likely provide support to Europe's bond market, as well as its equity markets, at least in the short-term. The issue is whether it will do anything to improve economic growth, which is now forecasted to slow to a measly one percent.

What struck me most about ECB President Mario Draghi's statements was the acknowledgement that monetary policy has done all it can do over the course of the last 6-7 years. He reminded the world that the ECB was largely responsible for any improvement in Europe's economic growth and employment. It was time, he said, for Europe's governments to address the fiscal side of stimulus if they hoped to improve their economic fortunes.

His warnings have been echoed repeatedly by central bank officials worldwide (including our own Fed) throughout the past several years. And yet, global governments, divided by ideology, have refused to pick up the challenge, preferring to leave the responsibility to bodies of appointed officials who can't be voted out of office.

No sooner had the ECB announced its program than the Euro plummeted against the dollar This immediately evoked a tweet from our president, who blamed the Fed for allowing it to happen: "And the Fed sits, and sits, and sits."

Draghi also pointed out that his central banks view of the world was fairly optimistic, since the committee did not include the possibility that Trump's trade war would worsen. It also assumed that there would be no hard Brexit. If those events took a turn for the worst, the ECB's forecast for future growth in Europe would need to be adjusted downward again.

What lessons can we draw from the actions of the ECB? In our own country, growth is slowing, thanks to Trump's trade war, geopolitical turmoil on several fronts, and unpredictable domestic and foreign policies. Congress is so divided that the chances of getting any kind of fiscal stimulus through Washington is thought to be non-existent.

As a result, the powers to be are relying entirely on Jerome Powell and the Federal Reserve Bank to save the U.S. economy, right every wrong, and control our currency, which, by the way, is under the control of the U.S. Treasury, and not the Fed.

The markets, the president, and the media are all expecting the Fed to cut interest rates next week by 25 basis points at a minimum. They also expect the Fed to embark on some milder version of the ECB's new stimulus program. My own advice would be entirely different.

President Trump should announce a trade deal with China now, while working with both sides of the aisle in Congress to launch a large, simulative infrastructure project in this country. If that were to occur, I don't think we would need the Fed to save us.

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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@theMarket: Markets Break Out of 3-Month Trading Range

By Bill Schmick
iBerkshires columnist
Investors received a bucketful of good news this week. Brexit got a reprieve, Hong Kong authorities caved in to protestors demands, and another round of trade talks is set for October between the U.S. and China. Welcome to September.
 
As of Friday, the S&P 500 Index was less than 2 percent from all-time highs. The other indexes are close as well. And while September is historically not a good month for the markets, this time around, September is starting off with a big bang. Can it continue?
 
Yes, in my opinion. We could see all three averages break out into new, all-time highs before all is said and done. While traders and computers trade on the headlines, I am more interested in looking underneath the hood to see if these gains are justified and can be sustained. So far, I'm betting they can.
 
Last week, I advised investors that the markets would remain in a trading range until some new tweet or announcement on trade changed the dynamics. Thursday night's revelation that trade talks would resume in October at the ministerial level between the two countries was the catalyst we needed to break out of a three-month, 100-point trading range on the S&P 500 Index.
 
Earlier in the week, we also had some good news when Hong Kong leader, Carrie Lam, announced the withdrawal of an extradition bill that would have allowed Hong Kong's citizens to be extradited to China for trial. Whether that will appease the thousands of protestors remains to be seen, but for now it was a positive development and removed one brick in investors' wall of worry.
 
Over in the U.K., Brexit took a bizarre new turn. Boris Johnson, the prime minister, was handed several defeats this week, culminating in what can only be called a palace coup. His no-deal Brexit departure, scheduled for Oct. 31, went up in smoke as both the opposition parties, as well as members of his own party, rebelled. They not only overturned his strategy, but insisted on an extension request from the EU if Johnson could not work out a deal by Oct. 14.
 
In response, Johnson called for snap elections, but no decision has been made (and won't be) until at least next week by the parties in Parliament. Investors took these developments as a positive, both for the UK as well as for the European Union.
 
In the meantime, readers may have noticed that I have resisted joining the "recession next year" crowd. Despite all the angst generated by the inverted yield curve and what it may or may not portend, I have not seen enough evidence to convince me that recession is knocking on our door.
 
There is no question that areas of the economy, notably manufacturing and possibly farming, are faltering, but services, which largely represent consumer spending, seems more than healthy to me. I will blame Donald Trump for the present woes in agriculture thanks to his tariff war. Manufacturing, despite our president's rhetoric, it continues to slump.
 
Linking "Making America Great Again" to a new American-led age of manufacturing has been a dismal failure. Manufacturing jobs are still leaving. Companies are still fleeing and this weeks' Institute of Supply Management report (ISM), which measures the health of the nation in manufacturing and non-manufacturing sectors, continues to tell a tale of two sectors.
 
The manufacturing sector took another nosedive in August, with employment falling from 51.2  percent to 47.4 percent. Fortunately, the America we live in today does not depend on manufacturing jobs to grow the economy.
 
Instead, consumer spending is the engine that drives our economic growth. The release on Thursday of the ISM report on the non-manufacturing sector showed continued growth that was 2.7 percent higher than July's number. As long as the consumer stays healthy, I believe, so will the economy.
 
As for the markets, I am looking for the rally to continue with fits and starts for the next week or so. At that point, all eyes will be on the Fed and a possible interest rate cut of 0.25 percent.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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The Independent Investor: Business Roundtable's Change of Heart

By Bill Schmick
iBerkshires columnist
Now that the media is on to more interesting topics, the August announcement by the Business Roundtable deserves further examination. Afterall, it is not every day that a group of the nation's most powerful chief executives redefines the goals of American corporations.
 
The maximization of shareholders' profits, above all else, has been the motto of the Business Roundtable (BRT) since the 1980s. Critics claim that this attitude has led to all kinds of negative consequences for society overall. The environment, the individual worker, suppliers (think underage Bangladesh garment workers), consumers and local communities have been needlessly harmed by this myopic view of a corporation's purpose.
 
It is probably no accident that the modern age of inequality coincided with the establishment of this guiding corporate principal. Boosting their return of capital and generating as much profit as possible was "good for business," as was shipping American jobs overseas to cheaper labor markets like China.
 
The membership of the BRT is made up of the CEOs of America's 192 largest companies. They are paid to be smart, to be far-ranging thinkers who can be expected to steer their companies through future challenges. As such, all of them are keenly aware that the nation is in the throes of a heated debate over exactly what are the responsibilities of corporations now that they are considered equal citizens under the law.
 
Should Walmart, for example, take the lead and cut back their gun sales, since no one in Washington has the courage (or ability to create a compromise) that would lead to a solution in curbing the almost-daily massacre of innocents throughout the nation? Should CEOs and other managements voluntarily cut back their compensation, which has grown by almost 1,000 percent since 1978, versus the 12 percent worker compensation, during the same time period?
 
The rise of the millennial workforce makes taking corporate workers for granted no longer an option, nor is paying women less than men for the same job. More and more younger employees want their companies to stand for something other than profit. And in this age of historically low unemployment, it is getting harder and harder to recruit young talent (especially in the tech world) if the greenback is the only thing that companies offer.
 
In national politics, both Republicans and Democrats are increasingly targeting the business community as the cause of many of society's ills. A line of Democratic candidates is demanding that businesses start acting like good social citizens or be penalized for ignoring the needs of said society. Both parties are attacking the medical and health sector on everything from drug pricing to the escalating costs of health services and insurance.
 
As the incidence of data hacks intensifies and impacts millions of Americans, companies in the financial, retail, and other industries are under fire for failing to protect consumers from data theft. The rise of social media leaves every company vulnerable to damaging social campaigns on issues as diverse as chemical poisoning to greenhouse gas emissions. They can create public relations firestorms that cannot be controlled or managed.
 
The move by the BRT was a wise move, in my opinion. For the most part, it was an exercise in catching-up to some individual members who have already taken the initiative to make far-reaching investments in employees, communities and the broader society.
 
It does not mean, however, that shareholder value will now only be an equal consideration with another stakeholder's interests. It only acknowledges that shareholder value is no longer their sole business. In a country where capitalism has morphed into a system that favors corporations over individuals, and the rich over the poor, this is simply a first tiny step in recognizing that reality.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

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Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



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