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@theMarket: Markets Are Too Frothy

By Bill SchmickiBerkshires columnist
Speculation is not quite rampant but it's getting there. Volume is tailing off and the short covering that has boosted this market higher is fizzling. These are signs that beg for a nice sharp pull back that is overdue.
 
As I have been suggesting (hoping) over the last two weeks, negotiators from Russia and Ukraine are making progress. Investors are beginning to hear more positive statements from both sides. A combination of factors are pressuring negotiators to cut a deal that would be acceptable to both heads of state. I expect that to happen soon.
 
Remember that we are now approaching planting season in the Ukraine. The spring thaw will also make mobility difficult for the invading forces. The Russian army seems to be pulling back in some areas but bolstering its forces in others. I suspect that has more to do with the Russians' strategic intent to capture and hold areas that contain Ukraine's most valuable energy resources.
 
The stock markets' "fear" trades have already begun to dissipate as evidenced by the slide in oil prices. The red-hot price rise in wheat and fertilize stocks are selling off, and gold is faltering as well. But notice that all this good news on the geopolitical front during the past week has not moved the overall averages up by much. That is a tell-tale sign to me that the good news may have already been discounted and it may be time to take some profits on some of the gains we have enjoyed recently.
 
Of course, the flattening of the yield curve, which inverted for a brief time on Tuesday and Thursday, March 29-31, had the bears jumping up and down. A flurry of bearish commentators lined up to solemnly predict the curve will invert further and a recession is right around the corner when it does. What is an inverted yield curve, you might ask, and why is it so important?
 
According to Investopedia, "An inverted yield curve occurs when short-term debt instruments have higher yields than long-term instruments of the same credit risk." An inversion is the first sign that the long-term growth prospects of the economy are in trouble and have preceded every U.S. recession in the past 50 years. Typically, a recession has followed in the two years after an inversion of this measure.
 
However, before you leap into the lifeboat, remember the same thing happened in August 2019. I warned readers at the time not to jump ship, because I believed the condition was temporary. It was, and I think this time around the same thing may happen. If, over time, all the short term, versus long-term, debt instruments — one month, three-month, one-year, two-year, five-year, versus 10-year, 20-and-30 year — were to invert, well then that would be a horse of a different color. We are not there yet.
 
But my optimism concerning the longer-term prospects of the economy doesn't necessarily translate into the short-term prospects for the stock market. I believe that the financial markets are still not out of the woods. This relief rally off the lows is a bear market bounce in my opinion. It has further to go, but a day or two of pullback next week would be helpful. Unless the S&P 500 Index closes between 4,400-4,500 today (Friday, April 1), I expect next week we will work off some more of this froth.
 
Sometime in late April or May, we may see a return to the bottom once again. Why do I believe that when the latest data show unemployment dropped to 3.6 percent? A combination of persistent inflation, a slowing economy, expected tepid corporate earnings, and an even more hawkish Fed will simply be too much for the markets to take on board.
 

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: Markets Needs to Consolidate

By Bill SchmickiBerkshires columnist
Commodities continue to run. Interest rates are hitting new highs, and stocks are holding their gains from last week. Nothing has changed on the geopolitical front and all eyes are once again focused on the Fed and its next meeting in May. What else is new?
 
Stocks have been surprisingly resilient this week in the face of dire predictions that a recession is just around the corner. Many investors, and those who preach to them, are convinced that the Federal Reserve Bank is intent on hiking interest rates to a level where the economy will collapse as inflation continues to spike. One Citibank research team is now predicting 50-basis point increase in the Fed funds rate in May, June, July and September with a 25-basis point hike to follow. I am not in that camp.
 
You might remember back in December 2021, when I warned readers that Wall Street analysts would begin predicting a stagflation scenario sometime in the first quarter of 2022. Their conclusions are understandable, given the macroeconomic data, but I suggest that you take their predictions with a grain of salt.
 
Today, it is fashionable to say that the Fed has lost its credibility. Granted, their stance on inflation which they described as "transitory" proved to be wrong. I believe that global supply side shortages due to the coronavirus pandemic contributed to that miscalculation. It seems to me that estimating the extent of those shortages was, and still is, impossible for anyone to predict.
 
But that does not mean that the Fed is no longer creditable. Fed Chairman Jerome Powell and his FOMC members must thread the needle between raising interest rates to quell inflation, but not enough to hurt the economy. I don't envy their position, but I remain confident that they can do it, if anyone can. What I don't want to do is listen to forecasts from analysts with little or no experience in the areas of inflation and/or rising interest rates.
 
The war in Ukraine is now more than one month old. What Vladimir Putin believed would be a three-day war has resulted in a disaster of alleged war crimes, high casualties, and few Russian victories. The sanctions imposed by the West are beginning to bite and NATO is fast at work shoring up their defenses in Eastern Europe. It is a tinderbox looking for a match.
 
As such, headlines are still the main market movers with percentage point gains and losses commonplace. As I have written, if the VIX, the so-called fear gauge, continues to stay above 20 these big moves will continue. The good news is that VIX is now below 22 — down from more than 30 — two weeks ago.
 
I am keeping my fingers crossed, praying that a cease-fire could be in the offing soon. It appears that negotiations are progressing, although not as fast as most would like. Weather may play a part in bringing the two sides together. It is almost time for the sowing of wheat in Russia and Ukraine and without it, the world's population in many developing areas will suffer.
 
In addition, the change in weather will also bring a thawing of the land in Ukraine. Rivers will rise, rain will fall, and the frozen earth will turn to mud. It will become a nightmare of logistical problems for the Russian invaders as it did for the Germans in World War II. 
 
As for the stock market, given a 6 percent spike in almost as many days a week ago, a brief period of consolidation is to be expected for a day or two next week. If the S&P 500 Index can't get above the 4,530 area in the next day or two, I would expect the three main averages could give back some of their recent gains. That would be a dip to buy, because I still see the S&P 500 Index closer to 4,600 by the third week in April 2022.
 

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: Markets Liked the Fed's message

By Bill SchmickiBerkshires columnist
The first interest rate rise in years was officially triggered in this week's Federal Open Market Committee meeting. Since then, stocks gained more than 5 percent on the news, which was contrary to many investors' expectations.
 
The reaction was even more confusing when you consider how hawkish Chair Jerome Powell and his FOMC members were both in the minute meetings and in Powell's Q&A session after the meeting. The Fed is officially planning for seven rate rises this year after the 25-basis point move on Wednesday.
 
The next hike could come as early as the central bank's next meeting in May. There is no guarantee that the next hike could be even higher than 25 basis points. That, said Powell, would depend on the data. The overall message, however, was clear enough: inflation is the Fed's No. 1 priority and will remain so for the months ahead.
 
You may remember that in my last column, I predicted that the markets would like the outcome of the meeting. The gains since then have been north of 5 percent. The positive reaction could have been fueled by Powell's contention that the economy remains strong and is in great shape to accommodate tighter interest rates now. His prediction that inflation could end the year below 5 percent could have also heartened investors. I question that number, but I think there was another reason for the gains, which was purely psychological.
 
As I have said countless times in the past, investors hate uncertainty. For months unanswered questions have bedeviled investors. "Will they, or won't they raise rates and by how much?" "How high will inflation rise, and what is the Fed really going to do about it?" "Will the Ukraine War temper the Fed's actions?" I could go on, but you catch my drift.
 
Uncertainty is what investors wake up to in the morning, worry about all day, and obsess over when we hit the sack at night. Clearing up even a little of the unknow has a beneficial effect on a market starving for stability.
 
But now that the Fed meeting is over, (until the next one) where will investors focus their attention? The obvious answer is the Ukraine-Russian crisis. Both sides of the conflict appear to be coming closer to a cease-fire. It would not surprise me to see a truce of some kind announced in the days ahead. You might ask, "Why?"
 
It is all about the calendar. Ukraine is running out of time, if their farmers hope to take advantage of the planting season for wheat and corn. if this war goes on, and the fields lay fallow, the world could face a life-threatening shortage of food. We are already facing massive shortages due to climate change and the coronavirus pandemic.
 
Unlike additional oil that can practically be pumped at the flick of a switch by Saudi Arabia or the UAE, additional food stuffs are governed by the calendar. If you miss the planting season, you can't do anything about it until the next season, which is months, if not a year, away.
 
So, if I am right, and the war winds down, we could see a few weeks of upside into April 20th or so. That could mean another 200 points or more tacked onto the S&P 500 Index from here. A cessation of hostilities would also recoup some of the losses in the beaten-up European markets. And let us not forget China, the world's second largest economy.
 
China's about face this week in promising to ensure stability in capital markets, support overseas stock listings, resolve risks around property developers and complete the crackdown on technology companies has removed another overhang weighing on the markets. If the Chinese government fulfills its promise to add more monetary and fiscal stimulus to their slowing economy, that may also eliminate some of the drag in the global economies brought on by the crisis in Eastern Europe.
 
U.S. stocks, under that scenario, would rise. I would imagine overseas markets would gain even more in the short term. But all these bullish actions would likely come to an end in late April as the next quarter's earnings season begins, the May Fed meeting and another rate hikes looms closer, and the inflation rate tops 10 percent.
 
A good chunk of the the move in equities this week has been simply short covering. It remains to be seen if real buyers decide to push markets higher. There needs to be a fundamental reason for that to happen. It could be a cessation of hostilities.
 
I still see a difficult first half of the year that will probably spill over into the summer. Sure, we can have relief rallies like we are in right now. But for me to become more bullish, I would need to see earnings bottom, inflation subside, and the Fed to stop tightening monetary policy. Don't hold your breath.
 

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: A Whiff of Stagflation

By Bill SchmickiBerkshires columnist
The economy is slowing. Inflation is climbing. Investors are worried that these trends appear to be a recipe for the "S" word.
 
The economic concept of stagflation where the witches' brew of a faltering economy, aided and abetted by skyrocketing inflation, harkens back to the malaise of the late 1970s. At that time, interest rates rose to nearly 20 percent. Inflation, as measured by the Consumer Price Index (CPI), reached an annual average of 13.5 percent by 1980. Oil prices (like today) surpassed $100 a barrel.
 
Blame for this period of stagflation fell squarely on OPEC, a newly formed energy cartel of oil producers, that decided to raise oil prices sharply after decades of artificially controlled suppressed prices by mostly Western nations and their energy producers.
 
Since energy is used in so many of the industrialized economies to produce just about everything, this oil shock reverberated throughout the economy. As costs rose, prices pushed higher causing more and more inflation (sound familiar). It didn't help that for the most part, monetary expansion was the name of the game throughout most of that decade.
 
Looking back, economic growth and unemployment in the 1970s was uneven at best with two recessions, one at the beginning of the decade, and another from 1973 through 1975.
 
It's not hard to point to the similarities between then and now.
 
Today, we are confronting similar supply shocks, which began during the pandemic and have since been amplified by the onset of the Ukrainian War. We have also been functioning under a highly expansionary monetary policy that has been in place since the financial crisis of 2008-2009. Where we differ today is in the areas of economic growth and employment. Neither qualify as coming even close to stagnation.
 
Proponents of stagflation would say that it is only a question of time before the economy slows and is in fact doing so as I write this. They would be right, at least in the short-term. Most economists expect this present quarter to register anemic growth. Yet, for the year 2022, the expected growth rate is still 3 percent and 2.3 percent for 2023.
 
However, the Russian invasion of Ukraine and the resulting sanctions may trigger recessions in both warring countries. Theses actions will also spill over to the European Community (EU) and directly impact its economies. It will also create even further supply chain obstacles and higher inflation.
 
One would expect that the U.S. economy will feel these impacts as well. The Conference Board estimates that these headwinds could cut as much as half a point or more from our growth rate.  On the unemployment front, we are nowhere near where we were in the 1970s. Right now, unemployment is at a low of 3.8 percent. And readers must remember that global economies are less energy intensive than they were back then. In a research report, UBS Wealth Management USA argued that "oil intensity of global GDP has dropped by 25 percent since 1990 (and by more than 50 percent since the early 1970s when oil price shocks caused recessions)."
 
However, what we don't know is what economic impact the Fed's intention to tighten monetary policy will have on the economy. Investors point to what happened when Federal Reserve Chair Paul Volcker addressed inflation back then. He raised interest rates to double-digit levels, drove inflation down, but also sent the economy into a deep recession. Could the Fed do that again?
 
I doubt that today's Fed will ignore the past and simply "do another Volcker." But make no mistake, the Fed is going to raise interest rates next Wednesday, March 16 by 25 basis points and likely raise rates again at the next two meetings. How will the markets handle that?
 
We are the lower end of the box on the S&P 500 Index (the lower end of that box is 4,310, give or take 20 points). I believe markets will continue to move on every headline between now and the FOMC meeting next Wednesday.  If I were a betting man, I would say markets like what Chair Jerome Powell has to say. In the meantime, stocks are managing to hold up and will continue to do so, barring a game changer in the Ukraine conflict.
 
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: Do Not Chase Stocks

By Bill SchmickiBerkshires columnist
Commodities are soaring. Interest rates are falling. Stocks can't get out of their own way. All of this is occurring, while the first war in decades continues to rage in Ukraine. Seems to me that any gains in the market averages next week will remain dead cat bounces in this bear market.
 
Yes, I hate to be a squeaky wheel, but I've got to call it like I see it. We have a much greater chance of sliding lower from here than higher. Here's why.
 
Investors received a new lease on life this week when Fed Chairman Jerome Powell, testifying before the Senate banking Committee, triggered a market rise in the averages.  All he did was relieve a little market angst by stating that a 25 rather than a 50-basis point move should be expected later this month at the FOMC meeting. In that context, I would label the resulting short market bounce as simply a relief rally.
 
Initially, the markets rallied because the Fed is not raising rates as high as expected. That usually means higher stock prices, so the bounce was understandable. But the reason the Fed plans to raise rates in the first place is due to soaring inflation. What did investors do?
 
Prices of basic and precious metals, like aluminum, nickel, copper, gold, silver, and food commodities like wheat, corn, fertilizer, and of course, oil and gas were bid up leading the market gains.  The combination of these Russian fear trades, plus inflation plays, continued to lead gains throughout the week. Technology and speculative areas were largely left in the dust.
 
This action has only pushed up commodity prices even higher. Now what will that do to the inflation rate?  Push it even higher, and possibly make the Fed reconsider its plans. Those bond traders who were betting on a "one and done" interest rate hike have changed their forecast. The betting is that there will be at least two more hikes coming before June.
 
On Thursday night, March 4, the Russians attacked Ukraine's largest nuclear facility, which provides 20 percent of European electricity. Fortunately, there did not appear to be any leakage of radioactivity but that could have occurred. The U.S. dollar jumped more than 1 percent, an extraordinary event, indicating a "run for the hills" mentality overwhelming investors.
 
 Unfortunately, this is the kind of market where most market participants are headline driven. Given the circumstances, that is understandable. Algo traders are careening from buys to sells as news pops up on the terminals. Whether it is testimony from Powell, Russian cease fire rumors, oil embargo news, or new atrocities in Ukraine, stock prices either crater or explode hour to hour.
 
Few of these traders know or care about things like price/earnings ratios, balance sheets, corporate earnings or even macro data like the positive gains in employment we saw last month. Remember, most market participants have little to no experience in a higher interest rate environment nor how to invest in equities when inflation is rising. As for maneuvering world markets on a war footing, few have any experience at all.
 
It is obvious that just about everyone is focused on the oil price. The higher oil climbs, the greater the probability that inflation will continue higher, and the greater the chance that global economic growth slows.  Analysts at Bank of America, for example, have raised their forecast for oil to $120 per barrel by the middle of 2022.
 
At the present price of oil, the U. K's National Institute for Economic and Social Research estimates that the Russian-Ukraine conflict could hack $1 trillion off the value of the world economy. It could also add another 3% to the world's overall inflation rate. Predictably, Eastern Europe would get hurt the most. Those numbers worsen as the oil price rises.
 
There are all sorts of worst-case estimates as to where oil prices could go depending on whether there is an embargo on Russian oil, a reduction in exports due to war damage, or if Russia curtails energy supplies to Europe in response to sanctions.
 
It appears to me that the markets have settled on a worst-case price of between $120-$130-barrel oil at this time. If that were to happen, and remain at that level over several months, the impact on the U.S. economy would be to slow growth and bring on the specter of stagflation. I believe it is way too early to predict that outcome.  I did forecast back in December 2021, however, that this scenario would begin to make the rounds on Wall Street about now. In my opinion, the onset of stagflation would be a stretch, given the present robust growth rate of U.S. GDP and the Fed's intention of tightening monetary policy beginning in mid-March.
 
As for the future of the markets, I am sticking to my guns. Stocks will remain in a box until after the March 2022 meeting of the FOMC. That means we could easily test the lows of January 2022 again, either before or after the Fed hikes interest rates. 
 
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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