Inflation is worrying investors. Every new data point seems to be heightening their anxiety. Oil and other commodities are raging higher. The rate of wage increases is also climbing, but the most important variable the Fed is watching is about to move higher.

 

Housing and/or home ownership is one of the most important components of the U.S. economy. However, housing prices per se are not included in the Consumer Price Index (CPI). Instead, the CPI measures the cost of shelter, which is broken down between actual rents paid and the Owners' Equivalent Rent or OER.

 

OER is the amount of rent that would need to be paid in order to substitute a currently owned house as a rental property. It measures (in an indirect way) the value of the present price increases in the real estate market including your home.

 

One could call it the "shelter" component of the Consumer Price Index, which is published by the Bureau of Labor Statistics. The OER represents about one third of the CPI basket and it is a number the Fed watches carefully.

 

You may wonder why rent is included in the CPI, but not food and energy. The Fed considers price fluctuations in food and energy as transitory. If, for example, OPEC decides to raise oil production next month, the price of oil would probably decline. That, in turn, would likely impact how much consumers will pay at the gas pump. Rents, on the other hand, are stickier and tend to last longer.

 

It is obvious to most readers that housing costs have skyrocketed during the last two years. Since the start of the pandemic, inflation-adjusted home prices have increased 11.8 percent annualized. To put that in perspective, real house prices have been rising 100 times faster than they did from 1955 to 1998.

 

But there has been no commensurate increase in the OER, until recently. That is because there is usually a lag time between increased housing prices and rent increases (by roughly five quarters). That lag time is now up, and right on schedule we are beginning to see OER impact the inflation rate in both the CPI and the PPI (Producer Price Index). In September 2021, the shelter index rose by 0.4 percent, accounting for nearly one third of the increase in prices across all goods and services in the CPI.

 

That is the largest increase in 20 years. OER rose by 0.4 percent, while rents of primary residences rose by 0.5 percent. Those were the biggest one month increases since the early 2000s. Economists blame the results on rapid housing price gains, more aggressive landlord pricing, low inventory and faster wage growth.

 

For the Fed, this is bad news. As the headline number of the Fed's inflation gauges, the CPI and the Producer Price Index (PPI), continue to climb higher, the pressure to raise interest rates sooner rather than later is building. The idea that broad-based inflation pressures will continue to rise thanks to supply chain issues and aided and abetted by wage growth has the financial markets nervous.  They also know that some of the long-lasting economic forces that have kept inflation low for decades have been turned on their heads. China, for example, is exporting inflation right now, after functioning as a massive deflationary force for the last thirty years.

 

Consumer expectations for inflation are continuing to surge, rising to 5.3 percent over the next year, and 4.2 percent over the next three years. Both are the highest in the history of data going back eight years, according to the New York Fed.

 

 As it stands, about half of the Fed's policy makers are expecting to start raising interest rates next year and think borrowing costs should increase to at least 1 percent by the end of 2023. That timetable may have to be pulled forward if the present trends continue. Watching the OER may give us an early warning of what the Fed will do next.

 

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.

It appears that we have established a range in the stock market over the last few weeks. The bears have not seen their worst predictions come true. My hope is that we leave this month where we entered it.

 

September 2021 was treacherous. Bears were calling for a 10 percent correction at a minimum. Bulls, already on the back foot after witnessing a 5 percent pullback in the indexes, insisted we had seen the lows. Since then, we had been bouncing back and forth in a range. This week, however, appears to be a game changer.

 

We have not re-tested the lows on the S&P 500 Index, which we hit on Oct. 1, 2021, at 4,288 (intraday), nor have we come close to the highs made on September 24, 2021, at 4,555. But we did regain the 50-day moving average (DMA), which is a good sign for the bulls.

 

Stocks daily have been opening higher in the mornings but giving back their gains and closing lower by the end of the day. Bulls argue that the markets are simply consolidating after more than a year of fantastic gains with few corrections. The bulls could be right.

 

On the other hand, the bears point to the imminent removal of the Fed's punch bowl in November 2021 (the beginning of asset purchases tapering) as a reason to remain cautious into that event. If we then throw in all the other worries that are creating angst among investors — supply chain issues, inflation, political chaos in Washington — the October volatility we have been experiencing thus far should come as no surprise.

 

If I could, I would call off this present stalemate and declare both sides a winner. Afterall, we did suffer a 5-plus percent selloff, which should satisfy the bears' need to see some "blood in the streets." The bulls should be thankful that the downside has been contained.

 

Readers who follow my columns regularly know that I highlighted the seriousness of the supply chain shortages months ago. Today, that's all you read about in most media outlets. I am not crowing about my forecasts, rather, I am reminding investors that this is old news and has already been discounted in the price of stocks, in my opinion, so ignore the headlines.

 

The only question to ask is how long this global condition will persist, and what that may do to the inflation rate. My own belief is that it won't be resolved until well into next year.  Even then, some shortages will persist, but it is impossible to predict which ones will remain. Clearly, this problem will continue to act as a weight to further global growth, but it won't kill it, as some are predicting. As for its inflationary impact, it adds another variable to the factors that are already contributing to a rate of inflation that has surprised everyone, including the Federal Reserve Bank.

 

One reason the markets rallied this week above that all-important 50-DMA was a less than anticipated rise in both the Consumer Price Index (5.4 percent year-over-year), as well as the Producer Price Index (8.6 percent year-over-year) for September 2021. Prices paid to U.S. producers increased in September at the slowest pace of the year, thanks to cooling costs of services. Final PPI demand increased just 0.5 percent from the prior month.

 

Since PPI is one of the main variables that the Fed studies when making monetary decisions (like when to raise interest rates), markets rose over 1.5 percent on Thursday and added to those gains on Friday. But one set of monthly numbers does not tell the whole story. I expect further increases in the inflation rate before the pressure subsides.

 

However, I am hopeful that we enter a more positive period for stocks in the last two months of the 2021 led by cyclical sectors of the market. I began the year by recommending commodities, industrials, financials and some technology. That advice remains viable. We are halfway through October and the markets are already shaking off their worries. Let's keep our fingers crossed.

 

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.

Despite this new age of video games, electronic toys, and diminishing attention spans, children are returning to a toy that is almost as old as me. Mattel's Barbie doll is back and at the top of many holiday shopping lists.

 

Some of the credit for Barbie's new-found popularity can be attributed to the pandemic. The lockdowns and the subsequent search for things to keep children occupied had mothers remembering their own fascination with all-things Barbie. Buying a Barbie, however (at least until recently), had parents wrestling with several negative stereotypes. Leading the list was the doll's image of a whites-only toy that ignored the realities of the melting pot we call America. Then there was the all-too-perfect body, which critics said promoted an unrealistic body image.

 

Consumers took the criticism to heart. In years past, sales declined, competitors gobbled up Barbie's long-reigning market share, and there was even talk of discontinuing the 62-year-old model from the company's lineup.

 

Instead, Mattel's management, after much soul-searching, decided to revamp their products to better reflect the world we live in.  Taking their cues from the success of Disney's Marvel and it's cast of superheroes of every race, age, gender, and walk of life, Barbie entered the 21st century.

 

Mattel revamped their entire product line and produced news dolls with various skin tones as well as body types. The doll now comes in 94 hair colors, 13 eye colors, and five body types. But they haven't stopped there. Some models have prosthetic legs or wheelchairs. Ken dolls have also been updated with their own skin colors, body types, and hairstyles.

 

Mattel has also delved into areas such as wellness and has introduced a line of role-model Barbies. The company, for example, recently announced a series of dolls honoring the heroes of the novel coronavirus pandemic. COVID-19 vaccine developer Sarah Gilbert, a 59-year-old Oxford University professor and co-developer of the Oxford/AstraZeneca vaccine, is one of six women who have new Barbies modeled after them. Others include an emergency room nurse, a frontline doctor in Las Vegas, as well a Brazilian scientist and a Canadian psychiatry resident at the University of Toronto who battled systemic racism in health care.

 

Mattel has also established a film department and enlisted some social media influencers to help propel their toys into the forefront of popular culture. It appears to be exceeding. Last year, Barbie had its best sales growth in 20 years. The company's stock price has risen by almost 50 percent, and analysts are expecting good results for 2021 as well.

 

And given its long history, certain dolls have become collectors' items. Barbie debuted at the American International Toy Fair in New York on March 9, 1959. Over the years, thanks to limited edition models, or exclusive collaborations that resulted in a unique doll design, there are about 60 Barbie dolls worth as much as $667,757.

 

The "I Love Lucy" Barbie fetches as much as $1,050, while other expensive collectables such as the Coach Barbie ($1,500) or the Christmas Show Barbie ($2,000) are in demand. There are also Chicago Cubs versions, as well as a NASCAR Official Barbie. Both models are commanding $2,000 or more. Not bad, for a new doll that usually retails for under $40. It should come as no surprise that the Mattel is now considering turning its collector brands into non-fungible tokens (NFTs) as the next market to explore.

 

In the coming months, a Barbie movie, starring Margot Robbie, should keep the kids and their parents' pocketbooks quite busy into the holiday season. In anticipation of the film's release, management has increased prices for the iconic doll, due to higher commodity prices and transportation costs. The company said it expects full-year net sales to increase by 12 percent to 14 percent driven by Barbie's new-found popularity, as well as demand for toy cars (Hot Wheels) and other action figures.

 

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.

 

In 2020, during the midst of the pandemic, golf made a comeback. More than 24.8 million people discovered outdoor refuge on the links, last year and the popularity of the sport continues to grow.

 

Golf, as many have discovered, is an outdoor activity that has proven to be an almost perfect answer to the limitations of the pandemic. Players can get outside, exercise, and at the same time, socially distance themselves from one another. Last year the U.S. saw the largest increase in golfers (2 percent) in 17 years. This year, the number of rounds played was up 16.1 percent, compared to the same period in 2020, according to the National Golf Foundation. And with this increase has come an upsurge in both golf equipment and apparel.

 

Golf equipment sales in the U.S. have grown by double digits (37 percent) so far this year, as have food service shipments to country clubs (plus-32 percent) and golf courses (plus-51 percent) compared to last year. Typically, for those who do not play golf, the reward for playing a good round of golf is usually the food and beverage consumed afterwards. The top items this summer included bottled water and energy/sports drinks, juice, chicken wings, hot dogs and French fries.

 

There are roughly 15,000 golf courses in the U.S. that account for the almost 25 million outdoor golfers. However, there are another 21 million people who are enjoying the sport through different entertainment venues like Drive Shack, Big Shots Golf, and Top Golf.

 

TopGolf, which started in China and now has 70 locations in six countries, offers an alternative to driving ranges. It is a high-tech golf game that appeals to players whatever their skill level.  It is only one of a growing list of interactive golf experiences and virtual simulators that go beyond the traditional 18-hole golf course. Throw in a more social and gamified atmosphere, plus food and drinks, and the appeal to neophyte golfers is understandable.

 

The sport is also attracting more women as well as younger players, and even families. The number of female golfers jumped by 8 percent in 2020, which was the largest gain in more than five years and 44 percent of those who played at least one round of golf last year was under the age of 40. That is not to say that the older, passionate golfer is on the down swing. They are still in the game and their average number of rounds played continues to increase.  An all-time high of rounds played (20.2) was hit last year, according to NGF, and that number will probably be surpassed this year.

 

It appears that the same wave of golfing popularity is surging worldwide as well. In the U.K, golf staycations are skyrocketing, while China's growth rate in new players is above 7 percent. Both Japan and Canada, which are top golfing countries, are also seeing robust growth.

 

Golf equipment companies such as Callaway, Titleist, and Dick's Sporting Goods are all forecasting increased strength in the future. The only caveat is the difficulty in obtaining product due to supply chain disruptions. Some managers are already seeing a slowdown in deliveries for certain golf equipment.

 

The good news is that Americans are exercising more and perhaps realizing that playing golf is not as difficult as they thought. If this develops into an entirely new generation of golf enthusiasts, so much the better.   

 

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.

It was another tumultuous week in the markets. Volatility spiked as events in Washington and around the world injected an atmosphere of caution and indecision among investors. I expect more of the same.

 

Welcome to October. A month in which I see a continuation of the last few weeks of uncertainty. The political circus in Washington, D.C., is not helping, and is set to continue making headlines in the days ahead. The debt limit controversary is probably the largest challenge investors face this month. Simultaneously, the battle between progressive and moderate Democrats over the passage of two government spending programs, will continue to monopolize investor's attention.

 

The bipartisan infrastructure package and the larger, "Democrat only" Biden social safety net program is the scene of an unusual battle between splinter groups of the same party. Republicans have already said that the larger Biden program would be dead on arrival in the U.S. Senate, so passage will depend on getting Biden's program passed via the reconciliation process. In order to achieve that, the progressive wing of the party demands that the programs be twin tracked, otherwise no deal. At stake is a lot of spending that would power the economy in the years ahead, but also increase the federal debt substantially.

 

I expect both will pass at some point. The Biden $3.5 trillion spending plan will need to be whittled down by a $1 trillion or so for the moderates to agree. The $1 trillion bipartisan, infrastructure plan will probably pass as is, because polls show that most American voters are in favor of the infrastructure spending on roads, bridges, and transportation. Parts of the larger package — boosting education, care of the sick and elderly, health care, and climate change — also have strong voter support. But the areas that have lower support among voters will probably determine what will get cut (or modified) and what stays in the plan.

 

As I advised last week, the shutdown in government was averted. A stop gap measure passed on Thursday, Sept. 30, effectively kicked that can down the road until December 2021. It is still on the plate, but on the back burner for now.

 

Expectations of the U.S. economy's third-quarter performance, as well as the yearly results for 2021, continue to be ratchetted down. As I warned readers, economic growth has been slowed somewhat by both the Delta variant of the coronavirus and supply chain bottlenecks. That said, the GDP is still expected to grow by 5.6 percent, compared to the 6.7 percent forecasted in a May 2021 survey conducted by the National Association for Business Economics. 

 

Although the economy may be slowing, inflation remains stubbornly high, contrary to the Fed's belief that any inflation we experienced would be "transitory." In fact, the word has disappeared from Fed statements and speeches altogether. Instead, Fed Chair Jerome Powell called inflation "frustrating" and sees it running into next year. Some market forecasters wonder if we might be heading toward stagflation, which might be in the cards for next year.

 

It is too early to tell, but whatever the outcome, the Fed has already decided to taper, beginning sometime this quarter. About the only thing that might delay that decision would be the non-farm payroll report set to be released next Friday, October 8, 2021. If job gains slow dramatically, it might cause the Fed to postpone tapering, or so the market believes.

 

As for the markets, last week, I warned that we were not out of the woods just yet. This week we suffered another pullback, re-testing and broke last Monday's lows on the S&P 500 Index. This is a change from the recent behavior of the stock market since last March. Up until now, every dip has been bought, and stocks never looked back. We have now broken the uptrend channel in place since last April This change in behavior and the technical charts argue for further downside ahead, maybe even to the 200-day moving average, which would be another 5 percent down from here.

 

Large cap technology suffered the brunt of the selling, while cyclical sectors managed to outperform on a relative basis. I expect the selling will continue if the U.S. dollar continues to rise and bond yields rise along with the advancing greenback.  If we are headed downward, there will be oversold bounces that could last for a week or two along the way. I believe that after this volatile period, markets will rebound into the end of the year.

 

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.