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@theMarket: Politicians Play Cat & Mouse With Investors

By Bill SchmickiBerkshires columnist
It was a week of will they, or won't they. Both parties claimed to want another stimulus deal done before the election, but the proof is in the pudding and as of Friday, the plate is empty.
 
Investors may be coming to the conclusion that the latest negotiations between the Democrats, led by House Speaker Nancy Pelosi, and Republican U.S. Treasury Secretary Stephen Mnuchin, and White House Chief of Staff Mark Meadows, was simply an election ploy. A way to set up the other side for failure, while making their own position look both caring and, at the same time, blameless. Both sides already knew that the GOP-controlled Senate had no appetite for another bail-out that was any higher than $500 billion.
 
In any case, the markets have been living on "hopium" all week in anticipation that something might get done. I suspect that if there were to be a deal, most traders might "sell the news" at this point. The thinking is that in order to pass a pre-election fiscal package with only 11 days to go before the election, it would need to be so watered down that its impact on the economy would be minimal, and too late to deal with what will probably come next. Will it be a "dark winter," as Vice President Joe Biden warned in Thursday night's presidential debate?
 
Cooler temperatures are almost upon us, while the number of coronavirus cases continues to grow. Today we have been told that there are 77,000 new coronavirus cases in the U.S., which makes that the highest level since the beginning of this pandemic. That places the U.S. in an extremely perilous situation health-wise, according to just about every medical expert in the nation. Investors are worried that the doctors may be right, and that we are not "rounding the corner" as claimed by one of the presidential candidates.  In which case, we could be headed for a reversal in economic growth that could sink the markets and the economy
 
For clues, investors are watching COVID-19 events in Europe, as I wrote last week. Europe appears to be a few weeks ahead of us in its increase of coronavirus cases. I listed some of the economic disruptions that this new surge was creating in places such as France, Germany, and the UK.
 
This week, that wave of infections continued to rise with at least 10 nations reporting record COVID-19 case numbers. Poland just announced that they are planning to all but shut-down their economy once again. The number of those hospitalized has reached the point where authorities are worried that they are facing a shortage of trained medical staff. The same situation could happen here in the United States.
 
In the meantime, the markets are uber-focused on the elections and the stimulus. By the look of what sectors are doing best in this choppy market (infrastructure, materials, alternative energy, China, and other emerging markets), it seems that investors are still expecting a blue wave to sweep the country. As for stimulus hopes, I fear nothing will come of it. Even if an agreement is reached by some miracle, it would probably not be voted on before the elections. In which case, I question whether anything would pass afterward in a lame-duck session of Congress.
 
Bill's 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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@theMarket: Investors Reduce Risk as Stimulus Talks Fail

By Bill SchmickiBerkshires columnist
Hope springs eternal, but even the most strident bulls threw in the towel this week. American politics took precedence over the country's economic well-being once again, as both political parties refused to compromise on a stimulus deal.
 
But it wasn't only politics that spooked investors. Across the Atlantic, investors watched as COVID-19 outbreaks escalated across Europe. Germany, Austria, the Czech Republic, and Italy reported new records in infections, while France announced a curfew in order to stem their own skyrocketing cases. In the U.K., Londoners are now banned from mixing with other households indoors.
 
In this country, despite denials by a large portion of the population, as well as some in government, coronavirus cases are surging across the nation. In the fall, schools, despite warnings by medical authorities, opened anyway with predictable results. Students became super spreaders, infecting their classmates and extending the infection into the surrounding communities. Now, U.S. medical experts are warning that the onset of cold weather and increased inside activities could generate a second resurgence of the coronavirus.
 
What could this mean for the U.S. markets and national economy? If we follow in the footsteps of the European Community, the U.S. could see an avalanche of new restrictions forced on individual cities and states, not by the government, but by the coronavirus. That's just for starters. Businesses would likely close, but if past actions are any indications, that would have to wait until our already-weakened national hospital system ran out of beds and hallways to treat coronavirus victims. Let's hope this doesn't happen, but you should be prepared if it does.
 
Only now are investors beginning to realize that a "cure," or at least a vaccine (despite the many statements of our officials outside of the medical community) is taking far longer than promised. It appears that even if there is a breakthrough tomorrow on this front, it would be far too late to save the country, or the economy, from a potential winter COVID-19 surge. 
 
Despite the difference of opinion between who is right, or wrong, what is fake news, and what isn't, there are two truths that investors should understand. Number one: COVID-19 could care less about what you think, whether you wear a mask or not, or who you are going to vote for. It will do what pandemics do, so adjust accordingly. In my opinion, the best advice so far has been given by the medical community. Listen to it.
 
Number two: the stock market calls it as it sees it. It can be wrong at times, but only for a short while. In the end, the market ignores the hype, but not the facts, leaving investors who ignore its directions holding the bag.   Right now, the U.S. markets are not giving us clear guidance, which reflects the uncertainty of this health crisis, lack of more stimulus, and the noise of the political elections, so look elsewhere.
 
Europe appears to be 4-6 weeks ahead of the U. S. in their battle with the coronavirus. Investors should therefore be following the events in Europe closely. If additional restrictions begin to pile up and/or the virus cases continue to rise, watch and compare what happens to Europe's main stock indexes as a prelude to what might happen in the U.S. in November.
 
The markets will continue to move up and down next week, as they have this week. As for the future, what I can promise you is that over the next 18 days, markets will become even more volatile than they have been month-to-date. After that, it depends on COVID-19.
 

Bill Schmick is now the 'Retired Investor.' After working in the financial services business for more than 40 years, Bill is paring back and focusing exclusively on writing about the financial markets, the needs of retired investors like himself, and how to make your last 30 years of your life your absolute best. You can reach him at billiams1948@gmail.com or leave a message at 413-347-2401.

 

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The Retired Investor: China Leads Global Economic Recovery

By Bill SchmickiBerkshires columnist

There is a saying on Wall Street, "first in, first out," which aptly describes the experience of the world's second-largest economy this year. The coronavirus was spawned in Wuhan, China late last year, but thanks to the country's quick response, China has sprung back stronger than ever.

By almost any economic measure, China has not only managed to avoid a recession this year, but will actually see its GDP grow by 1.6 percent in 2020. To put that growth in perspective, the world's economy is expected to decline by 4.4 percent this year.
 
The startling Chinese recovery in the face of ongoing pandemic problems throughout the rest of the world, can be credited with the government's tough lockdown procedures, population tracking abilities, as well as a rapid testing program among billions of citizens. At the same time, governmental fiscal and monetary policy went into action immediately. Major infrastructure projects were launched. In the consumer sector, cash in exchange for more spending programs encouraged consumers to spend more in a variety of areas from tourism to dining out.
 
In September, the manufacturing sector hit a six-month high. Small businesses, which are struggling to stay alive in most other countries, have expanded as well. The service sector is growing in tandem with other areas of the economy, according to the Caixin Insight survey, a media group that follows and forecasts the Chinese economy.
 
Most Americans had expected that, during the last four years, our trade balance with China would improve, and it did, thanks to tariffs and other restrictions. The problem is the U.S.  simply imported more from other countries instead (like Vietnam), and as a result, our overall trade deficit remained the same. China's trade imbalance with the U.S. is once again widening. The U.S. trade deficit with China surged in July to $63.6 billion. That is the highest level in 12 years, as imports jumped by a record amount. Politicians won't admit it, and you may not want to hear it, but we need what they make, and they make it better, faster, and are far more reliable than most.
 
By the end of this year, China will account for 17.5 percent of global GDP, a rise of 1.1 percent, which values the entire economy at about $14.6 trillion. The difference in nominal GDP is expected to lessen between China and the U.S. over the next three years, by how much may depend on our future response to the pandemic. This performance has not been lost on investors.
 
China's stock market has climbed to a record high of $10 trillion. That level blew past the country's previous market peak, which occurred during the stock market bubble of five years ago in China.
 
During that time, the stock market hit $10.05 trillion in June of 2015, just before governmental authorities decided to crack down on leveraged trading. The Chinese market subsequently halved in value.
 
This time around, however, stock investors are simply looking for growth, and worldwide that has been hard to come by. While equities are up about 17 percent (versus 9 percent for the S&P 500 Index), the buying has taken on a more measured approach. Valuations, while rich, are not reflecting unrealistic values like they did in 2015.Valuations for the CSI 300 trades at less than 19 times trailing, 12-month earnings, compared to 40 times the Index's 2015 peak. Institutional investors now own more than 70 percent of the free float of all Chinese stocks, while foreign investors hold about 5 percent, according to China Renaissance, a financial investment bank.
 
Recently, the country's currency has also been strengthening and foreign direct investment continues to grow. U.S. investment, for example, has risen by 6 percent in the first half of the year, according to China's Ministry of Commerce, despite all the anti-China rhetoric coming out of Washington.
 
There are risks investing in China, which is still considered an emerging market economy, despite its size. The authoritarian political system and centralized economy present downside risks in investing, as 2015 aptly illustrated. Still, investors might want to eye some equity exposure to this country, especially if the markets were to experience a pullback in the weeks ahead.
 

Bill Schmick is now the 'Retired Investor.' After working in the financial services business for more than 40 years, Bill is paring back and focusing exclusively on writing about the financial markets, the needs of retired investors like himself, and how to make your last 30 years of your life your absolute best. You can reach him at billiams1948@gmail.com or leave a message at 413-347-2401.

 

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@theMarket: One way or Another, Markets Expect More Stimulus

By Bill SchmickiBerkshires columnist
As the U.S. presidential elections approach, politics are becoming a bigger factor in what is moving the stock market. Some investors are already betting on the winner, and positioning their portfolios for an expected outcome. It is a risky bet to make.
 
As of this week, many on Wall Street are positioning for what they expect will be a "Blue Wave" where both houses of Congress and the next presidency of the United States will be captured by the Democratic Party. What, you may ask, is their reasoning, aside from partisanship? 
 
Well, the number of polls that put Joe Biden in a widening lead, for one thing, as well as waning support for Republicans (once again, according to the polls) in general. Given the last election, and how badly the polls turned out, one might at least have waited until the numbers reflect a higher probability of success, but when has Wall Street ever shied away from risk?
 
This week, therefore, cyclical sectors came back into vogue. A big stimulus package plus talk of a huge infrastructure package under Biden sent basic materials and some industrials flying. Alternative energy plays, home builders, small cap stocks, and even some cannabis stocks were bid up. Technology did OK, but was not the focus of attention.
 
While the financial media is focused on the minute-by-minute political machinations of will there or won't there be a stimulus bail-out package before the elections, investors have come to the conclusion that when doesn't matter. Just as long as there is one. The thinking goes that a Blue Wave victory would up the ante on fiscal stimulus by several trillion dollars. In turn, that would certainly help the economy, and with it, the stock market.
 
But what about the tax increases that are almost certain to come with a Democratic sweep? 
 
In times past, higher taxes have hurt the markets and the economy. Evidently, more stimulus outweighs any tax increase, according to current thinking. Aside from investors, the Federal Reserve Bank is also cheerleading more fiscal stimulus. Fed Chair Jerome Powell spoke this week at the National Association for Business Economics. Powell, while commenting on the need for more — not less — fiscal stimulus, said, "By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste."
 
During the last few days, investors were blindsided when President Trump at first called off stimulus negotiations with the Democrats that had been going on for weeks. Nancy Pelosi, the speaker of the House, wanted $1 trillion more than the Republicans were willing to spend. After the president’s tweet, markets fell out of bed closing down on Tuesday by well over 1 percent. That night, Trump had a change of heart and now is offering a partial, case-by-case deal to the Democrats. That was followed by word that he had changed his mind again and was now looking for a comprehensive package. I expect this horse trading to continue, but any substantive deal will likely have to wait until after the elections.
 
Nonetheless, the drama is sure to continue swinging markets up and down on a day-to-day basis. Those should not surprise my readers, since it is the scenario that I predicted would occur throughout the month of October.  
 
But saying that, I am still bullish overall on the markets. My advice is to try and ignore the election noise, and instead focus on the future where I continue to see gains.
 

Bill Schmick is now the 'Retired Investor.' After working in the financial services business for more than 40 years, Bill is paring back and focusing exclusively on writing about the financial markets, the needs of retired investors like himself, and how to make your last 30 years of your life your absolute best. You can reach him at billiams1948@gmail.com or leave a message at 413-347-2401.

 

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The Retired Investor: U.S. Moves to Nail Down Strategic Metals

By Bill SchmickiBerkshires columnist
Rare-earth minerals, with names like cerium, dysprosium and gadolinium have become "must have" materials in the global race to win the technology battles of the future. The problem is that throughout the last 30 years China has built a near monopoly in these strategic metals.
 
Rare-earth elements (REEs), consisting of 17 different minerals, are used to make components in many high-technology devices, including smart phones, digital cameras, computer hard discs, fluorescent and light-emitting-diode (LED) lights, flatscreen televisions, computer monitors, and electronic displays. China commands 35 percent of the world's reserves of these minerals and produces more than 70 percent of all rare earth tonnage worldwide.
 
In our present trade wars with China, the possibility that China might respond to U.S. tariffs by embargoing our REE imports is a real threat, since last year China accounted for 80 percent of our total rare-earth compounds and metal imports.
 
After years of delay before recognizing this danger, President Trump signed an executive order aimed at expanding domestic production of REEs last week. He ordered the Interior Department to explore using the Defense Production Act to speed up the development of such mines. Trump used the same law to accelerate the production of medical supplies to help combat the coronavirus pandemic this year.
 
The hope is that the energy secretary can identify projects here in the U.S. that could help the country increase our own production and holdings of these minerals. Sadly, we have a long, long way to go before we catch up to China. Today, the U.S. has only one rare-earth mine, which is located at Mountain Pass, Calif. It is owned by a private company, MP Materials, which is 10 percent owned by a Chinese company, Shenghe Resources Holding Co. All of MP's materials are exported back to China.
 
Rare-earth isn't the only strategic metal that the U.S. needs, however. Lithium is another metal in great demand and is used to manufacture electric car batteries. Global lithium production is about 400,000 tons annually. That is enough to power 2-3 million electric vehicles (EVs), but only about one third of that production actually goes into EVs. The rest, like REEs, is used in computers, cellphones and rechargeable devices. If companies such as Tesla plan to increase production of EVs in the future, then the supply of lithium must increase dramatically. Once again, it is China that controls about 40 percent of world lithium production. The rest is divided among Australia and Chile. The "Big Three" producers — Albemarle, Sociedad Quimica y Minera de Chile, and FMC — hold practically an oligopoly in the lithium market.
 
In another U.S. initiative, our Department of Commerce has taken steps to protect America's uranium industry from foreign dumping. Both Russia and the U.S. have initialed a draft amendment to reduce U.S. reliance on uranium from Russia over the next 20 years. Russia has been dumping cheap uranium into U.S. markets for years, driving American miners and processors out of business. This practice leaves our country exposed to the same dangers we now face with other strategic metals. 
 
While all of the above actions are necessary, in my opinion, it will be years before the U.S. can gain a competitive advantage in any of these resource areas. Doing so is just as important as domestic recognition back in the 1972 that we needed energy independence in order to remain the nation we are. 
 

Bill Schmick is now the 'Retired Investor.' After working in the financial services business for more than 40 years, Bill is paring back and focusing exclusively on writing about the financial markets, the needs of retired investors like himself, and how to make your last 30 years of your life your absolute best. You can reach him at billiams1948@gmail.com or leave a message at 413-347-2401.

 

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