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@theMarket: Higher Bond Yields Keep Markets in Check
The continued concerns over oil prices, inflation, debt/deficit, and renewed hostilities in the Middle East kept a lid on equities in these last days of summer. Despite all the fear and loathing over higher long-term bond yields in the last week or two, the markets are only down a few percentage points from all-time highs.
As readers are aware, I have been cautious in August and September, although I would see any consolidation as a buying opportunity. That said, there are more than enough concerns plaguing the market at the moment to make anyone cautious.
Oil almost $90 a barrel again, a re-engaged, shooting war of sorts in the Middle East; bond yields at highs not seen in years; and, of course, the midterm elections, which are now only 60 days away. It is the last event that keeps me looking over my shoulder the most.
It bears repeating that during the last three midterm elections in 2014, 2018, and 2022, the S&P 500 fell more than 10 percent during either August or September. All three times the sell-off occurred during the third week of the month. That doesn't mean it will, but it might.
In the meantime, the U.S. Treasury will begin buying back bonds beginning today, Sept. 4. And like clockwork, the bond vigilantes pushed up yields on long-dated Treasury bonds until the middle of the week before taking profits yesterday. Stocks, precious metals and the dollar all fell as a result.
While the financial media wailed and gnashed their teeth at this predicament, bond traders (of which there are few dummies) prepared to take profits and cover their shorts. Why take the risk that Treasury Secretary Bessent orders his guys to step in and start buying bonds beginning Friday or over the weekend? For those who missed it, take a gander at my latest columns on the bond market for more background on the present situation in that world.
That brings us to Friday, and the results of the latest non-farm payrolls report for August. With earnings results mostly over, and most trading desks with a "do not disturb" poster on their computer screens this week, the number took on added importance. Even though everyone knows by now the number will be inaccurate and subject to large revisions.
The job gains for August were 162,000, much better than the 50,000 forecasted. Wow! What a surprise, good employment numbers just two months before elections! Markets took the number in stride even though it builds the case for an interest rate hike by the Fed. I am still doubtful that will happen, although the Fed probably sees what I see — higher inflation data in the future.
The announcement that the U.S. will purchase one-fifth of Venezuela's crude oil reserves through a private company run by a buddy of the country's dictator (with a checkered past) was no surprise to me. I guess it is better than just stealing 20 percent of their oil reserves.
Back in November of last year, in "The Return of Gunboat Diplomacy," I argued that President Trump had his eye on obtaining Venezuela's vast oil reserves as opposed to wanting regime change and the end of the non-existent smuggling of Fentanyl into the U.S.
I am ignoring all the social media posts about how this will bring down gas prices and refill the Strategic Petroleum Reserve (SPR) lickety-split. It won't. If you read my November column, you will understand that it will take years and many billions of dollars to repair Venezuela's energy infrastructure and further develop that country's oil reserves.
In addition, the crude coming out of Venezuela is heavy oil. Our SPR was built for light and medium crude. That's going to be a problem. Is the deal worth doing? Yes, and we will do it — provided both countries agree to cooperate over the coming decade.
We have had a difficult past with that country's leaders and their oil wealth for a long time. U.S. oil companies have pumped massive amounts of wealth and expertise into the Orinoco Basin only to see a series of expropriations, takeovers by the state, graft, bribes, and you name it. It's a risk, but that was the strategic objective of our gunboat diplomacy last year and could over time double our own oil reserves.
The three-day Labor Day weekend marks the end of Wall Street's summer. It would not surprise me to see a little government action in the days ahead to bolster bond prices, with yields hovering at the top of their range. On the energy front, the summer driving season is coming to an end. That may relieve some of the price pressure on gas prices.
As for the markets, they will still be there on Tuesday, so focus instead on relaxing, fun, and the family. Happy Labor Day.
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: High Noon for the Bond Vigilantes
It was to be expected. Financial markets almost always confront a new Fed chair. That may still be true, but Kevin Warsh isn't the one in the firing line. It is the U.S. Treasury Secretary Scot Bessent.
The bond vigilantes have had their way in the bond market recently. When Kevin Warsh took over the Fed in May, he made it clear the Fed would take a back seat and let the markets set the proper level of interest rates, at least on the long end. OK, said the bond vigilantes, let's see what you got.
Since then, fixed income traders, or bond vigilantes as Wall Street calls them, have trashed the 10-, 20-, and 30-year U.S. Treasury bonds. They have sold or shorted bonds, sending yields on the thirty-year higher than at any time since 2007 (just before the Financial Crisis). The U.S. ten-year benchmark bond yield hit 4.50 percent as well, with strategists predicting it's on its way to 5 percent. Around the world, the same thing was happening in other countries' fixed income markets. Why?
The continued rise in oil prices, record deficit and debt levels, rising interest costs, and demand for borrowing were too much weight on one side of the scales. Up until this week, equity markets tried to ignore the moves; despite strong corporate earnings fueled by the enormous boom in AI infrastructure investment, they faltered.
Truth be told, some of that AI investment has also been an issue. Worldwide, companies that need trillions of dollars more in the AI race have been tapping bond markets globally for funds. That has set up further competition between private and public needs in the borrowing arena worldwide.
This was not what the administration wanted to see, at least here in the U.S. The stock and bond markets have become the lynchpin of success for a president already battling a multitude of negatives with midterms less than three months away. Something had to be done and fast as yields ticked higher and markets crumbled on Wednesday a week ago.
In this financial gunfight steps the government's financial sheriff, a hedge fund manager by trade, and one of the real gunslingers in town. Scott Bessent, Secretary of the U.S. Treasury, announced his department planned to double government debt buybacks, beginning in September, to the tune of $4 billion. Bond yields immediately tumbled, and the stock market surged.
The Treasury's purchases, he said, will target the long end of the yield curve where the bad guys had shorted massive amounts of long-dated Treasuries. To pay for this added expenditure, investors surmised that the Treasury will probably need to sell even more bills and bonds on the short end at their weekly auctions. And herein lies the rub.
Unlike the Federal Reserve Bank, the Treasury cannot print money. They indeed have a lot more money than any single bond vigilante, but it's not inexhaustible. The Vigilantes, after a day or two of indecision, were back to their old tricks and yields began to rise again. To gun down the guys in the black hats, Bessent would need more than a couple billion.
So, a few days later Treasury people floated the story that they could use the Treasury's almost $1 trillion General Account (the government's checking account) to finance the purchases. Nobody said they would, but the threat was enough to at least push yields down slightly on government bonds this week.
Wall Street immediately mounted up the free-market posse. From their high horse, various well-known managers decried this interference in the free-market system where price discovery is the bible in determining the worth of any asset. "Let the bond market speak," said one famed investor. Interesting how that works. It's OK for the government to buy shares in various companies, bail out industries, determine how much companies can sell and to whom, but don't mess with something so sacrosanct as the nation's Treasury markets.
Will Bessent's plan work? In the short term, he had stemmed the rapid rise in yields that had thrown the stock market into a dizzy. Both the 10-year and 30-year bond yields had moved down by about 10 basis points. However, Friday's speech at the Jackson Hole Economic Forum threw a wrench into Bessent's play.
The Fed chief made it clear that the Fed had more work to do on the inflation front. Markets took that to mean an interest rate hike could be imminent. Bond yields went right back up and are now trading at yields higher than before Bessent's announcement. It appears the Fed and the U.S. Treasury are working at cross purposes.
Critics say that without fixing the underlying causes of the backup in interest rates — government spending, inflation, debt, etc. — his efforts are no more than a pimple on an elephant's derriere. They may be right but don't be surprised that in the days ahead, Bessent decides to increase the amount of bond purchases the Treasury makes.
Next week, I will discuss where the Fed stands and why this could simply be part of a developing and ongoing plan first mentioned to readers in my columns on sovereign wealth funds back in June.
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: Nvidia Earnings Beat Pushes Markets Higher
It was a lovefest, as strong quarterly results from Nvidia, the linchpin of all things AI, once again wowed investors. Not even Kevin Warsh's hawkish speech at Jackson Hole could make much of a dent in investors' enthusiasm.
But looks can be deceiving. Yes, all three indexes gained on the back of the semiconductor company's earnings, but 10 out of 11 equity sectors fell on Thursday. How can that be, you might ask? Simple, technology stocks are now the largest weighting in just about every index. As such, the results rippled through so many tech stocks that everything else was dragged up with it.
That said, investors' love/hate relationship with certain aspects of the world's rollout of the artificial intelligence ecosystem took a turn for the better this week. Why so much attention on Nvidia? Because the semiconductor giant is at the center and the hub of the world's build-out of the infrastructure of AI. It beat second-quarter earnings and revenue expectations handily. And, even more importantly, Jensen Huang, the chairman, also provided a better-than-expected outlook for the third quarter.
Unlike previous quarters, when the company's stock price fell despite strong results, NVIDIA jumped almost 10 percent this time. Its report also helped other AI chip stocks and the technology sector in general recover after several weeks of lackluster performance. The company still derives the lion's share of its revenues from hyperscalers like Google, Microsoft, and Amazon.
Investors have worried that these companies were already spending too much to build out their own infrastructure, as the trillions of dollars they are spending on and off their balance sheets have raised concerns. The revenues from this area more than doubled in Nvidia's second quarter.
Investors are also concerned that these hyperscalers are beginning to build their own chips to reduce their dependence on Nvidia's chips. But none of that seemed to matter this week as investors eyed the $20 billion stock buyback and the $6 billion in dividends ($ 0.25/share) the company returned to existing shareholders.
In the meantime, Oman and Iran are working on a deal to jointly "administer" the Strait of Hormuz. Tolls figure prominently in that discussion. On the U.S. side, the latest economic pressure is to convince those who are trading with Iran to stand down. If companies and countries ignore the American directive, they would then be excluded from the dollar-based global financial system.
Exactly when and how this could be accomplished is up for discussion. Given that China imports more than 90 percent of Iranian crude in non-U.S. dollar trade, their cooperation would be of paramount importance. So far, their response has not been encouraging. Oil traders are unimpressed and have held crude prices in the $80- to $83-barrel range all week.
As for last week's attempts to cap the climb in U.S. Treasury bond yields, Secretary Scott Bessent appears to have succeeded, at least over the last few days. Yields on the Ten-year bond have dropped about 10 basis points. Those waiting to see whether the Fed would jump in and back the Treasury secretary's play were disappointed.
Fed Chairman Kevin Warsch underscored his commitment to reducing inflation instead. His speech in Jackson Hole was taken seriously enough to put an interest-rate hike back on the table by the betting markets. On Friday mid-morning, the probability of a rate hike was back up to 50 percent for the September FOMC meeting. So, the Treasury and the Fed are somewhat at odds on where they think interest rates should be, at least on the long end.
The three major indexes notched a positive week. An almost 2 percent move in the Nasdaq, a 1.2 percent gain in the S&P 500 Index, with the Dow trailing with less than 1 percent, indicates buyers are still willing to chase markets.
Gold fell toward $4,500 an ounce, its lowest level in a week, as investors digested what was perceived as hawkish commentary from Warsh. Given its rise over the last few weeks, the Fed comments provided an excuse for some profit-taking in bullion and in most precious metals and mining stocks.
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: Saver’s Match Offers Some Workers up to Half Their IRA Contribution
The Trump administration’s ongoing effort to help low- and moderate-income taxpayers save towards retirement took another step forward last week. The new program will impact millions of Americans who have struggled to save in an economy where they can barely make ends meet.
In a follow-up to my mid-May column on President Trump’s efforts to provide new retirement savings vehicles to low-income Americans, a new modification to his existing program was announced last week.
As I wrote previously, "Many workers say they cannot save for retirement, especially as inflation reduces their paychecks. Others find the application process too complicated or paperwork heavy. Some do not bother because they already have employer retirement plans. For many, retirement seems unreachable due to their background and income."
The Internal Revenue Service and the Department of the Treasury plan to propose a new federal program that will provide up to 50% of the first $2,000 in retirement savings contributions for eligible taxpayers. The amount caps at $1,000 annually and will be paid to individuals based on income beginning in 2028.
This new Saver’s Match would replace the existing Saver’s Credit program, which will still be in place beginning next year. The match would apply to four types of retirement vehicles. Elective deferrals, like those made to a section 401(k) plan. Contributions to traditional IRAs and Roth IRAs. Those made to a section 501(c)plan and certain voluntary, after-tax employee contributions of a qualified retirement plan.
To qualify, an individual must be 18 years old during the taxable year with a modified adjusted gross income of less than $35,500 per year. A similar limit applies to married couples who file separately. For couples who file jointly, the threshold is $71,000, and for head of household, the maximum limit is $53,250.
You do not qualify if you enrolled as a full-time student at a school or took a full-time, on-farm training course given by a school or government agency. How much of the match you receive depends on your adjusted gross income.
This effort is aimed at the roughly 41 million American workers aged 18-65 who lack access to employer-provided retirement plans, according to the TrumpIRA.gov website. That’s a lower number than the 56 million the Pew Charitable Trust came up with in a recent research paper. The government site claims that "A 25-year-old worker who saves $165 per month and qualifies for a $1,000 annual Saver’s Match could retire with roughly $465,000 at age 65."
The math assumes a 6% annual return, and almost $155,000 of that total would come directly from the government’s contributions. For taxable years after 2027, income thresholds will be adjusted for inflation. Applicants can apply for the Saver’s Match through a separate government form (Form 8880-A).
This differs from the existing Saver’s Credit program because the government amount is paid directly into a person’s retirement account. In contrast, the existing credit program offers a tax credit as an incentive. The credit is nonrefundable, meaning it can reduce your federal tax liability to zero but cannot generate a refund by itself.
In my last article, I predicted that Trump would up the income level for those qualifying for the match to $35,500. That is exactly what the proposed regulations now do. Now it is up to Congress to pass the legislation.
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: Bonds, Stocks Moving Together
Investors turned their attention to the bond market this week as yields on long-dated U.S. Treasury bonds hit multi-year highs. The government needed to step in to curb what looked like a rout in both stocks and bonds.
Mid-week, the 30-year Treasury bond, as well as the benchmark 10-year, fell in price as yields hit 5.24 percent and 4.74 percent. To stem the fall in bond prices, U.S. Secretary Scott Bessent announced Wednesday morning before the open that he would double Treasury bond purchases beginning in September.
Both bonds and stocks rallied on the news, but by Thursday, bond yields rose again, and stocks fell as traders doubted the impact of Bessent's new measures. Aside from reducing the pace of higher yields (which it did), they figured that buying back some bonds would not do much to stem the fundamental reasons for the climb in interest rate yields.
Higher oil prices, higher inflation, higher deficits, higher debt (now $40 trillion), and no end to government spending made the move's impact no more than a pimple on an elephant's derriere. But the announcement did force the dollar lower (as intended). So far this quarter, the dollar has declined 2.5 percent; that's a large move in the currency world.
What it did do was convince investors that with this attempt to force interest rates down, inflation could be here to stay at least for the foreseeable future. That caused a spike in the prices of inflation hedges like gold, bitcoin, and most other commodities. Right now, the negative correlation (one goes up, the other goes down) between the U.S. greenback and gold is above 90 percent, while bitcoin's correlation is roughly 83 percent.
Gold gained more than 4 percent on the dollar move, while gold mining stocks posted high single- and double-digit gains. Bitcoin climbed much more than that, although some of the gains were attributed to the president's attempt to jawbone Congress to pass the much-delayed crypto Clarity Act legislation. What Trump didn't say was that the delay is largely due to concern that passing the legislation (as is) would allow politicians to benefit from their existing crypto investments. Read the president and his family and friends.
In another TACO moment, the president's tariff tantrums against Canada have come to naught (surprise, surprise). As for the Middle East, markets have tuned out the meaningless stream of assurances on Truth Social just like they have on the tariff diatribes. Oil moved higher this week as investors realized that there will be no grand Hormuz openings. That adds to the inflation story, which fuels the rise in long-term bond yields and is a large reason why we are seeing gold, other precious metals, and commodities in general come back to life.
Gold has broken out of its range and is now above $4,500. Energy has quietly become the strongest performing sector so far this year, substantially beating technology with far less attention. Keep your eye on those soft commodities as well. The combination of less fertilizer flowing out of the Middle East, climate change, and my prediction of a Super El Niño beginning next month ( see my column "El Niño Is Flashing Red Light for the World") is boosting prices in wheat, corn, sugar, etc.
As for equity markets overall, August is off to a positive start, but stocks are beginning to wobble. This week the S&P 500 lost 1.5 percent while Nasdaq fell almost 2.35 percent. In the coming week, we have Nvidia's earnings, and the Jackson Hole boondoggle — the Economic Policy Symposium of central bankers on Aug. 28. Investors are hoping the keynote speaker, Fed Chairman Kevin Warsch, will share his view on long-term bond yields and the move by his fellow former hedge fund manager, Scott Bessent.
A big reason I have been cautious on the markets in August and September is the upcoming midterm elections. Consider this: in the last three midterm election years, the stock market has declined by at least 10 percent beginning on Sept. 19, 2014, Sept. 20, 2018, and Aug. 16, 2022. Coincidence? Possibly, but three in a row does make a trend. History is only a guide, but in this case, I'm listening to how it rhymes with the past.
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.
