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@theMarket: Are Stocks Close to a Bottom?

By Bill SchmickiBerkshires columnist
As the market enters October, there is both good and bad news. The sell-off that started in September is continuing. The good news is that we should be close to the bottom.
 
Blame the waterfall decline in the price of the 10-year U.S. Treasury bonds, the continuing gains in the U.S. dollar, and the seasonal pattern in the equity market. Throw in the absolute mess in Washington and the market's free fall can be understood.
 
None of this should be new to readers because this is exactly what I predicted would happen back in August. I expected markets to correct into the second week of October and here we are with one week to go. The argument over government spending levels and the potential shutdown has forced investors to focus on not only the amount of our national debt but also the rising cost of servicing it.
 
The fiscal deficit this year is more than $1.5 trillion. Overall, the U.S. government debt is roughly $33 trillion with a debt-to-GDP ratio of 120 percent. Estimates are that we are now paying 8 percent of Gross Domestic Product (GDP) to holders of Treasury bonds worldwide just to service this debt. That number could easily rise to 9-10 percent, or more.
 
I suggest that you take a peek at my Thursday column. It will explain the background and risk to the markets caused by the dysfunction in Washington. Bottom line: we can expect Moody's credit agency to cut its rating of our government debt unless the country and its politicians can get their act together.
 
The Fed's policy of keeping short-term interest rates higher for longer doesn't help. But the bond market is now also bidding up the yields on the longer-end of the bond curve as well. The 30-year bond is almost 5 percent. This is shaking investors' confidence in the soft-landing scenario popular among many economists.
 
As such, all eyes are on the employment numbers. These are the keys some believe to what is happening to the economy. Stronger job numbers and wages mean more tightening from the Fed. Weaker data is okay, but if it is too weak, that would set off fears of a deeper recession. That leaves investors in an impossible situation where they are looking for a Goldilocks scenario where jobs are neither too hot nor too cold. Good luck with that.
 
This Friday's non-farm payroll numbers were almost double the 171,000 job gains expected. The U.S. economy added 336,000 jobs, which sent yields even higher, and stocks lower on the news. And yet, yields, the dollar and stocks all reversed during the day. That should tell readers that we are in the bottoming process.
 
Yield-wise, the benchmark 10-year, U.S. Treasury bond hit 4.83 percent, which was its highest level since 2007. And we all know what happened in 2008 (the financial crisis). Not that I am expecting something similar, but a lot of the investment community is freaking out at where interest rate yields can go from here.
 
I think we may be close to a short-term top in yields, at least in the short-term. That is one reason I am expecting a bottom in the equity markets. And where yields go, so does the U.S. dollar. The two asset classes have moved together over the last month. Friday's jobs number pushed the greenback up .65 percent on the news but it quickly gave all its gains back. The dollars’ gains have trashed just about everything from commodities, foreign markets, U.S. equities, and precious metals. That could be changing.
 
Underlying the rise in yields has been the avalanche of U.S. Treasury auctions that began in earnest this quarter. I'm guessing that yields have risen in anticipation of that event. Could we therefore see a "sell on the news" event where bond traders cover their shorts and buy back bonds at some point soon? Stanger things have happened.
 
Last week I targeted the 4,200 area on the S&P 500 Index, which is the 200-day Moving Average as a level we could look for in the bottoming process. I also said that looking for a perfect number like that is not usually the end of the story, since markets overshoot on the upside and the downside. We could easily slip below that number before all is said and done.
 
Keep an eye on the dollar and yields because they are the big dog wagging the tail of the equity markets. When they roll over, as they may be next week, stocks will have reached a bottom.
 

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.

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 OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

     

The Retired Investor: Government Dysfunction Can Lead Debt-Rating Reduction

By Bill SchmickiBerkshires columnist
The ongoing partisan battles in Congress over a government shutdown are making daily headlines. However, whether a shutdown ultimately occurs or not may not be the most important outcome of this squabble.
 
Over the weekend, at the 11th hour, Congress and the White House passed a continuing resolution to postpone a government shutdown until Nov. 14, 2023. Axing funding for Ukraine was the price Republicans demanded to kick this spending can down the road. This was somehow hailed as a bipartisan victory, one of the few in this deeply divided Congress. It seems to me that the only victor in this mess was Russia. 
 
Since then, a handful of radical right Republicans in the House, led by Matt Gaetz, a Republican congressman from Florida and the subject of an ethics probe, forced a vote to push House Speaker Kevin McCarthy out of his post. Combined with most Democrats, the House voted to oust McCarthy.
 
Gaetz and the radical right had accused McCarthy of breaking his word to conservatives on spending bills and how he would run his house. They pointed to McCarthy's behind-the-scenes, side deal with the Biden administration to restore funding for Ukraine as just another reason not to trust the speaker. The straw that broke the radical's back, however, was when McCarthy reached out across the aisle to come up with a compromise that would keep the government's lights on at least temporarily.
 
Democrats were divided on their response to the turmoil within the Republican Party. But few Democrats trusted the speaker, given his partisan track record. In the end, partisan politics dictated they voted to oust the speaker, even though it meant that no work could be done in Congress until a new speaker was elected.
 
If one steps back from the hour-by-hour circus in Washington and looks at this debacle from the perspective of others, the U.S. government appears to be in a precarious state. Many developed countries plan their budgets, their spending levels, the level of debt, etc. in five-to-10-year increments. Our government can't even agree on whether they will be able to pay its employees next month.
 
It is also becoming increasingly apparent that the U.S. government is unable to control spending on both the short-term and long-term levels. This failure to manage continues to happen under both parties. This is not just my opinion. Two of the three largest credit agencies, Fitch and Standard and Poor's, have come to the same conclusion.
 
Back in 2011 Standard and Poor's reduced our long-held triple-A credit rating to AA, citing a weakening in the effectiveness, stability, and predictability of American policymaking and political institutions. 
 
This year, thanks to the debt ceiling debacle spawned by this same group of dysfunctional politicians, Fitch, another big credit rating agency, downgraded our debt as well. Fitch cited a "steady deterioration in standards of governance over the last twenty years." They went on to explain that "repeated debt limit political stand-offs and last-minute resolutions have eroded confidence in fiscal management."
 
And here we are again — more than two months later — repeating the same suicidal behavior. The actions among U.S. legislators befit a banana republic economy, not the U.S. Only one credit agency is left, Moody's, that still maintains a AAA rating for our sovereign debt. How long that status remains is my concern.
 
Politicians of both parties fail to realize (or don't care) that these rating changes have a real cost to the nation and taxpayers for decades to come. The cost of issuing U.S. debt and paying bondholders interest is climbing year after year. As it stands today, interest payments alone are costing the country 8 percent of GDP. That percentage is expected to increase exponentially. We are talking billions of dollars, readers, if not trillions, when we consider the cost that we will have to bear (as will our children and their children).
 
Moody's has already commented that a shutdown would have credit implications. A downgrade in their rating based on "the weakness of U.S. institutional and governance strength," as well as "the fractious bipartisan politics around a relatively disjointed and disruptive budget process" indicates to me that unless things change dramatically next week, we could see yet another downgrade.  
 

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.

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 OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

     

@theMarket: Countertrend Bounce Ends Quarter But Sell-down Should Continue

By Bill SchmickiBerkshires columnist
September has been a story of higher-bond yields, a stronger dollar, and spiking oil prices. The higher these assets climbed, the lower the stock market fell. And now we enter October, a month that is notorious for providing negative returns at least in the first weeks of the month.
 
"Tread cautiously" was how I described September-October several weeks ago. History indicates that those are the two worst months for stocks. So far that advice has proven accurate. The stock market has had its worst decline all year and the prospects that this sell-off will continue are high despite the dead cat bounce we are enjoying right now.
 
While yields, the dollar, and oil are separate asset classes, they are interrelated when it comes to explaining the "why" of this present downturn. Let's start with the price of oil. As I explained last week, since oil is used worldwide in practically everything it is an important element in gauging future inflation.
 
 Oil is now trading above $90 a barrel and some expect it to hit $100 a barrel shortly. The spike in energy prices therefore has convinced many traders that the decline in inflation we have enjoyed may reverse and as it does bond yields need to rise to compensate for the real rate of return bond holders should demand.
 
In addition, readers may recall my warning that the U.S. Treasury needs to replenish the government's general account by auctioning more than a trillion dollars in various bonds. In anticipation of that auction program, bond traders had already pressured yields higher.
 
By the way, that avalanche of government bond issuance will begin in earnest during this quarter, so yields could continue to move higher. As it is, the U.S. 10-year Treasury is yielding 4.60 percent, its highest level since 2007 while mortgage rates have hit a 23-year high.
 
The U.S. dollar has strengthened to 10-month highs as yields have risen. Currency traders still expect that the U.S. economy will remain more resilient to higher interest rates than other economies. The combination of all three elements has conspired to pressure stocks downward.
 
By mid-week the markets were exhibiting extreme oversold readings. Sentiment as measured by the AAII Sentiment Survey gave the highest bearish reading and the lowest bullish score since May 2023. The "Fear" Index, according to CNN, was showing extreme fear.
 
These are all short-term contrarian indications that tell traders to expect a countertrend bounce. Yields fell slightly and the dollar followed suit which gave equities some breathing room to rally. Stocks could continue higher for a day or two, especially on the back of the latest Personal Consumption Expenditures Index (PCE), which is the Fed's preferred inflation measure. The PCE came in cooler than expected. The Algo traders took that to mean inflation was not as strong as the markets expect and pushed stocks higher.
 
I still think the markets have more to fall before this sell-off is said and done. The 200-Day Moving Average for the S&P 500 Index is about 125 points below at 4,200. However, stocks do not usually bounce off that line perfectly. Many times, the averages will overshoot to the downside, so that we could see 4,100 or maybe lower before we regain the 200 DMA.
 
It is a process that I am expecting to play out between now and the second week of October before we begin to rise once again. But to do so, we would need to see yields drop as well as the dollar. If things do develop the way I see it, I would be a big buyer of that pullback, but probably not in the same sectors that had been winners in the first half of the year. A declining dollar and lower yields would be beneficial to overseas markets, especially emerging market countries, as well as mines and metals, precious metals, and other sectors that have an inverse relationship with the dollar.  
 

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.

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 OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

     

The Retired Investor: The Day-Care Crisis

By Bill SchmickiBerkshires columnist
On Saturday, Sept. 30, 2023, $24 billion in emergency funding for the nation's child day-care industry expires. Estimates are that as many as 70,000 care centers or more will close over the next year, impacting as many as 3.2 million kids. The downside for working women with young children could be even more substantial.
 
In recent columns, I have written of the gains women have made in the post-pandemic labor force. Women's workforce participation, especially women with children under 5, is higher than it has ever been (at 70.4 percent, compared to a pre-pandemic high of 68.9 percent). That brings the employment gap between men and women to record lows.
 
This progress was made possible in part by the $1.9 trillion American Rescue Plan of 2021. During the pandemic and its aftermath, the federal government, under the Biden administration, a congressional bipartisan bill passed one of the largest economic rescue plans in U.S. history. The legislation earmarked $24 billion in spending to bail out the faltering day-care industry. It gave wage increases to woo workers back into the sector, helped to offset rising costs, and made several more improvements to help an area reeling from the impact of COVID-19. The result was to give mothers the ability and freedom to rejoin the workforce. They did so in droves.
 
Those gains will now be threatened. The care centers that remain open will need to reduce staffing and operating hours, while raising tuition and fees. This will take time to unfold, but probably over the next six to 12 months the results of this change will be in full force.
 
A Hail Mary hope within the day-care industry is that the states might come to their rescue. The disruption could cost states $10.6 billion in tax and business revenue annually and reduce family earnings by as much as $9 billion, according to the Century Foundation.
 
This crisis is going to force parents (especially women) into working fewer hours or leaving the workforce altogether. For many others, it may mean switching to less demanding roles with obvious consequences for career advancement.
 
It will also resurrect a litany of economic inequalities that have plagued American women for decades. If they become part-time workers, they will lose employer medical benefits. And if they must once again leave the workforce it will reduce their Social Security benefits at retirement.
 
A viable child-care system is considered a public good by most Americans. Studies indicate that children who receive high-quality care become better educated and ultimately receive better-paying jobs. Unfortunately, in this country, the myth that the private sector can do a better job at this than the government has proven not to be the case.
 
Providers operate on slim margins, pay workers a lot less than most fast-food chains, and experience high turnover. Low-wage workers have plenty of other choices in this tight labor economy, which leaves care centers in many areas of the country unable to provide the services needed. 
 
Today the industry is short 40,000 positions from early 2020 levels. The end of government funding could mean as many as an additional 232,000 jobs could be lost. Day-care waiting lists are years long. And that is if you are lucky enough to live in an area that still provides child care. Even with the government funding, child-care costs have skyrocketed in this inflationary environment. Families, especially in lower-income jobs, can't pay the freight any longer. 
 
It all creates a combination that turns out to be a disaster when it comes to child development. "Child care is a textbook example of a broken market," said Janet Yellen, the U.S. Treasury secretary, back in 2021.
 
As I write this, the new battle cry of partisan politics in Washington revolves around cutting government spending. We suffered through the debt ceiling debacle because of it and now a potential government shutdown is in the making. The government appears ready to abdicate its responsibility to ensure the continued existence of child care. We will all suffer, but women most of all.
 
As the Sept. 30 expiration approaches, couples and single parents will be faced with some hard choices. Pay for the coming higher costs and reduced services of a dwindling number of child-care providers or figure another way to keep working and take care of the kids at the same time. Let's hope there are still a lot of grandparents available to fill the child-care gap.
 

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.

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 OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

     

@theMarket: Fed's 'Higher for Longer' Message Disappoints

By Bill SchmickiBerkshires columnist
The financial markets were expecting a lot of good news out of the Federal Open Market Committee meeting this week. Investors were betting that not only would the Fed pause, but possibly announce an end of interest rate hikes altogether. Some even expected a timetable for future rate cuts that would be sooner than later.
 
The market was right on the pause in interest rate hikes. The U.S. central bank decided not to hike the Fed funds rate but that was about the extent of the good news. In his Q&A session after the meeting, Chair Jerome Powell reiterated his message that further rate hikes were still on the table, but they would proceed "carefully." They have already raised rates 12 times over 17 months. He also left the audience with an expectation that there would be at least one more interest rate hike, if not two, this year.
 
In addition, the dot plot chart, which represents Fed members' expectations for future changes in interest rates indicated that most members had backed off from a prospective four cuts next year to only two, maybe. Most thought an interest cut would not occur until sometime in the latter part of 2024 — if then. Part of the problem, Powell said, was the continuing strength in the U.S. economy, which is performing far better than fed officials expected.
 
When everyone is on one side of the boat (as they were before the meeting), the risk is that a disappointment could capsize the boat. That was what exactly happened as Powell came out much more hawkish than anyone expected. Traders pulled the plug on bullish trades driving the main averages down by more than 1 percent and followed through on Thursday with similar losses.
 
In the bond market, the thinking was just as dire. If interest rates were going to stay higher for longer than yields needed to adjust to reflect that new reality. 
 
Traders sold bonds across the board sending yields to 15-year highs. The yield on the 10-year, U.S. Treasury bond spiked to 4.6 percent, which sent the dollar higher and equities lower.
 
Technology was the hardest hit, but few sectors escaped the selling. Sectors that have an inverse correlation with the dollar, such as precious metals, and materials. etc., were dumped and speculative stocks took it on the chin.  Energy was one of the few bright spots with oil prices holding up in the $90/bb. range. However, higher oil prices only complicate the Fed's work. As I wrote last week, higher energy prices fuel higher inflation and the longer it stays at this level, the harder the Fed's job becomes in reducing inflation.
 
Several negative short-term events are adding to the pessimistic attitude of investors. The UAW strike, which threatens to expand, could dent economic growth. The looming government shutdown, caused by the chaotic atmosphere within the Republican party, does not inspire buyers either. The sharp climb in bond yields has also tempted more investors to seek safety.
 
The Fed's hawkish stance ruined my hopes for a bounce this week, and we are still in a weak seasonal period. I warned readers this is historically a negative time for the markets. I had expected that the SP 500 Index would at least re-test the August lows and that did occur this week (the intra-day low for that index was 4,335). Right now, the S&P 500 Index is oversold, more so than at any other time this year.
 
A relief rally on Friday was to be expected. It seemed anemic to me but could continue into next week. I advise readers to remain cautious for now and most likely into mid-October. There could be further downside, especially if we see yields and the dollar move higher.
 

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.

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 OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

     
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