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@theMarket: Conflict, Higher Yields, Flailing Momentum in Tech Heighten Market Risk
The above risks can be a lethal brew for investors. And yet, markets barely budged by the end of the week. Quarterly earnings expectations are buoying the averages, with 23 percent earnings growth expected to vindicate the bulls.
Markets have moved beyond Trump's War despite this week's conflict. They are focusing instead on the upcoming inflation data, the start of quarterly earnings next week, and another Fed meeting. In the meantime, technology still struggles.
Volatile moves have sent the Nasdaq and the semiconductor index plummeting only to see them spike higher on a day-by-day basis. Traders call it a calm session if these stocks close with less than a 1 percent move each day. Last month's mega IPO is a case in point.
Readers recall all the hype over the SpaceX IPO. Priced at $135 a share, opened at $150 and skyrocketed to $212. Friday it traded at $147-$148. Not pretty, if you chased it. Today, we have another one.
This time, it's the listing of a South Korean memory chip leader, SK Hynix (SKHYV). It is the largest American Depository Receipt (ADR) offering ever ($26.5 billion) and one of the largest equity offerings in history. It is the global leader in High-Bandwidth Memory (HBM). Why is their product so important? Because without HBM, there would be no AI.
At $149 per ADR, it will be equal to 1/10th of a South Korean share. With a market value of more than $1 trillion, it is the second-most valuable company in South Korea. The media claims the offering is seven times oversubscribed (versus SpaceX's five times). And like SpaceX before them, chasers ‘gotta get some.'
No, never mind that the memory stock has garnered a sevenfold increase in its stock price over the past year. If it performs the way Elon Musk's SpaceX ("to the moon and beyond") did, we could see another price spike before traders cash in. At around midday, the ADR was up $17 percent from its listing price. And while the financial media focuses on this offering, it wasn't the only event of the week.
The president and his forever war kept investors on their toes. He now says the ceasefire that never was is over, but the talks will continue. How bombing more Iranian military targets is going to do anything to change the status quo is beyond me. As this week's NATO conference has shown, despite Trump's bravado, most nations still need to flatter, or at least humor him, if they want to remain under the U.S. military umbrella. Strategically, they need to maintain that relationship, at least in the short term.
Fortunately, the markets have moved on. The rotational trends in the markets have helped keep the main averages steady most of the time, despite Trump's social media posts and comments. The oil price has risen slightly (over $71.80 a barrel) from $67, but the technical trend still points to further downside.
Bond yields have risen to the top of their range with the U.S. 10-year Treasury bond hitting a high of 4.57 percent this week. As you might imagine, Trump's military strikes and the subsequent short-term rise in oil prices immediately had traders rushing for the exits in some areas and chasing stocks on what had been the ‘war trade'.
Here's how it works. The narrative is quite simple, really: missiles fly, oil prices spike, inflation expectations rise, and so the story changes to the Fed having to raise rates. That's it in a nutshell. The opposite occurs whenever the narrative shifts toward peace, the opening of the Straits of Hormuz, etc.
Next week will be critical for the bulls. We get another Consumer Price Index reading. The Street is expecting cooler inflation numbers for June. I agree. I expect weaker numbers in July as well. That should be good for the markets.
Stock prices have already been bid up in anticipation of good earnings. If management's ‘beat' and talk up future guidance on sales and earnings, then all is well with the world. The rally continues as the indexes grind higher. We all know what happens if companies fail to live up to expectations. We may see investors become a little more selective. The AI trade may shift from buying "everything AI-related" to buying stocks worth holding, rather than those that are not.
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: Lessons Learned From Brexit
It has been 10 years since Brexit took center stage in the politics of the Western world. The populist furor of an unhappy electorate triggered Great Britain's exit from the European Union. How has that worked out for the Brits?
The populist rhetoric of a "Global Britain," their answer to MAGA, was supposed to secure their borders by reducing immigration. Bureaucracy would be jettisoned; regulations and the budget would finally be restored after 14 years of Conservative Party mismanagement.
It would be the first populism-led attempt to overhaul one of the world's oldest and wealthiest democracies. A decade later, it appears the nation is up to its ears in chaos. Prime Minister Keir Starmer resigned this month after serving less than two years despite a landslide Labor Party victory. He was supposed to save the country from years of successive Conservative Party prime ministers.
Instead, the country is struggling with low growth, higher inflation, faltering public services and an electorate that is every bit as angry and partisan as our own. Over the past decade, the country has had six prime ministers. David Cameron, Theresa May, Boris Johnson, Liz Truss, Rishi Sunak and now Keir Starmer are some of the names you may recognize. Brexit itself, scandal, market panic, immigration, and electoral rejection are just some of the factors that have sunk Britain's leaders.
Back when, many economists were predicting an immediate recession if the country left the EU. It didn't happen. What happened was that, over time, the British economy grew far less than it might have if it had stayed in the trade bloc. At the same time, business investment and productivity slumped as trade suffered. The typical family is worse off by thousands of pounds per year.
The pound dripped sharply after the Brexit vote, collapsing by 10 percent, the largest one-day drop in its history. That triggered a sharp increase in import prices, leading to an inflation shock that affected everyone across the board. The exit from the EU also involved erecting trade barriers that hit goods exports, since the EU was still the UK's largest trading partner until last year.
The problem deepened since no one in government had a clear plan on what to do once the votes were counted. This led to years of political infighting and indecision. A weaker currency should have led to a surge in exports, but the uncertainty around Britain's future clouded business judgment and investment. Investment is estimated to be almost 18 percent lower and productivity 4 percent lower than it would have been if a plan had been forthcoming.
The currency has never recovered.
The Office for Budget Responsibility, the independent watchdog of the UK Treasury, predicts that the UK is on track to suffer a 4 percent hit to national income over a 15-year period. A U.S. National Bureau of Economic Research report claims that the country's GDP per head is between 6 percent and 8 percent lower than it would have been without Brexit.
As for unemployment, that fell dramatically in the initial Brexit days to the lowest rates since the 1970s. However, COVID took its toll on the labor market. The employment rate has never really recovered and remains between 3 percent and 4 percent below what it would be under a "remain" decision.
Can I extrapolate from the UK's experiences to the present immigration, trade, and tariff policies of the Trump administration? Not really, at least in the short-term. Equity markets in both countries recovered quickly after the referendum and Trump's Liberation Day. Both countries' economists initially predicted a steep decline in economic activity, and both were wrong. However, over the long term (a decade in the UK), large trade policy shocks seem to lead to lower investment, productivity, and employment growth as supply chains and trade patterns unravel.
Not surprisingly, public support for Brexit has fallen since the 52 percent versus 48 percent leave vote. Today a majority of voters (56 percent) would back rejoining the EU, according to YouGov, and 70 percent of Britons support a closer relationship with the EU. Support is strongest among Labour and Green Party voters and weakest among Nigel Farage's right-wing, Reform UK party. Reform UK members oppose rejoining the bloc by 83 percent. That party has gained support as immigration and affordability have become major issues for voters.
The next candidate for PM, at least among the Labour Party, is Andy Burnham, a Manchester mayor with authentic populist appeal. In a special election, Burnham beat the Reform Party, which pundits believe will clear the way for him to head his party and win the PM title in Britain. The question is how long he can last, given the issues and the populism in his country and around the world.
Readers may recall several of my past columns in which I have explained the populist wave of discontent in the U.S. and worldwide. I wrote that, here at home, over a 20-plus-year period, no single president survived to serve a second term, except Richard Nixon (who was impeached without completing his second term).
Populist voters have a very short fuse. Promises are made, but unless real progress is made within four years, the electorate has no patience for incumbents who can't or won't deliver. Overseas, beyond the UK, France, Germany, and Hungary, several other countries are facing populist challenges to incumbent parties.
We are seeing this here in the U.S. as we head into the midterms. Promises made but not kept have sent President Trump's approval ratings into the 30s. Within the Democrat Party primaries, a war is already brewing between a growing populist wing of the party and the more conservative incumbents. Established Democrats, their critics say, offer failed 40-year-old policy solutions that have been rejected out of hand by younger generations of disenfranchised voters.
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: Stocks Have Best Quarter in Six Years
The benchmark S&P 500 Index had its best quarter since 2020. It did so with help from the Magnificent 7 and the technology sector, but other areas also participated. That was a good thing.
For the last few years, the handful of stocks that make up the MAG 7 have done most of the heavy lifting in keeping markets positive. In the last six months, the story has changed. A lot more stocks participated in the gains, and some believe that this broadening out of upside participation will continue in the second half of the year.
Here are some of the numbers: Dow +13 percent, Nasdaq +21.4 percent, S&P 500 +14.9 percent, Russell 2000 +21 percent, and the equal-weight S&P +11 percent. The Mag 7 gained 18 percent. And while technology was the clear winner, helped by strong gains in the AI-fueled semiconductor index, industrials, consumer discretionary, financials, healthcare, and communications also posted significant gains.
This performance becomes even more significant considering what investors have had to face since January. Topping the list of worries was the Trump War and subsequent explosion in oil prices. Inflation accelerated, expectations of Fed interest rate cuts reversed, and rate hikes became a possibility. Rounding out the list was the new Fed chief, who took over and sounded more hawkish than most expected.
Supply chain disruptions caused by the closure of the Straits of Hormuz sent oil, fertilizer, natural gas, and other essential products higher. The worst performers were among last year's best. Gold, silver, and most other precious metals and basic materials lagged the markets. Bitcoin, Ethereum, and just about all other cryptocurrencies also ended in the red, by substantial amounts. If a market ever had to scale a wall of worry, this was it!
As readers know, artificial intelligence plays fueled much of the technology sector's gains. However, stellar earnings results across the board in equities consistently beat analysts' expectations. The quarter has ended and with it the last few days of window-dressing by institutions. Every quarter, money managers want to show their clients that they hold the latest winners while few of the losers.
At the same time, the beginning of July (before and after the Fourth) is normally positive for the markets. This year, with the nation's celebration of its 250th birthday, the bulls may want to push prices a bit higher. So be it.
The economy is still growing, and employment, while plateauing, is holding up. Now that oil prices are declining, inflation should begin to decelerate over the next few months. The non-farm payroll data helped the markets along on Thursday, the last trading day of the week. The U.S. labor market added just 57,000 jobs in June while the unemployment rate dipped to 4.2 percent. That was well below estimates. If you consider that, on average, payroll data inflates job gains by about 60,000 jobs per month, the real number after revisions may have been a job loss.
Why that would be good for financial markets lies in the Fed's equations for full employment and reduced inflation. Kevin Warsh, the new Fed head, said Wednesday ,while speaking on a European economic panel, that the inflation data was a little better than expected recently. That is largely due to the swift decline in oil prices.
Now, we have a weaker jobs number. The calculus of investor expectations on whether the Warsh-led central bank will raise interest rates suddenly looks less likely. That's all the markets needed to see on a slow day where most of the Street has already taken off for the beach, mountains, or backyard BBQs.
The S&P 500 Index is holding up despite a wobble in tech. That is because of the rotation trade. Healthcare, financials, industrials, consumer staples, even real estate and utilities are getting a bid. I noticed that some of the bloom is coming off the technology sector. AI memory stocks are getting clobbered. The semiconductor trade is faltering as well. Technology overall is in its ninth or tenth day of volatility, with more lower highs than higher highs. That is a worrisome sign.
As for the three-day holiday celebrating America's 250th birthday, enjoy it where you can. Hopefully, a pond, lake, or ocean is close by. Otherwise, be grateful for air conditioning!
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: Sovereign Wealth Fund Could Help Solve America's Financial Issues
Critics dismiss a federal sovereign wealth fund as a "solution looking for a problem." We can't afford one, they say, we are already in too much debt. The real solution is to cut spending and raise taxes.
How has that solution been working for you? My argument is that buying stakes in our companies, especially in strategic areas, by a U.S. government fund will only improve our financial position. Not only within our own country, but also in our ability to compete globally.
Investments in areas like artificial intelligence could generate far more cash and profits in the future than we could imagine. Those profits could be used to pay down our debt, reduce deficits, and fund the country's needs in areas like healthcare, alternative energy, clean energy initiatives, and social programs.
Unlike some advocates who argue that the government should hold a large stake (20 percent or more) in companies, I believe this would be excessive and would impede companies' ability to operate efficiently in competitive markets. Japan, for example, limits its holdings in that country's equity markets to no more than 7-8 percent.
What will it take to convince Congress and the public to establish such a fund? Unfortunately, I suspect it will most likely occur during a financial crisis. Crisis, what crisis, you are probably thinking. The markets have shown they are just too resilient for that to occur. That was my attitude until last month.
That is when I heard Former Treasury Secretary Henry Paulson, who navigated us through the Great Financial Crisis of 2008, warn of a potential "doom loop" in the bond market. He worries that demand for U.S. government debt could collapse soon.
This, he said, could trigger a cycle of lower bond prices, higher yields, and rising inflation. There is more than an element of truth to that since our government's Treasury market underpins everything from mortgage rates to corporate borrowing to equity prices. He urged policymakers to prepare an emergency plan and have it ready when demand for U.S. government debt falters.
While his comments did not elicit much comment from the media, his warning, by no means, should be taken as just 'off the cuff' remarks. In my experience, Paulson, like any ex-Treasury chief, doesn't just start spouting off about a debt crisis unless it's vetted. To me, it was a clear trial balloon well-crafted by the Fed and the U.S. Treasury. The "when" of such an event is difficult. If his doom loop is correct, sometime next year might be a good guess.
In the meantime, I believe legislation to establish a federal sovereign wealth fund will be passed with bipartisan support. It will be part of this "on the shelf" emergency response plan that Paulson urged the administration to work out now.
A crisis, as he suggested, would leave the Federal Reserve as the lone buyer of our treasuries. Realistically, that would mean the government could be forced to "print" money in one form or another. That would trigger a fresh round of inflation, eroding valuations across most asset classes, including equity.
This could cause a large (30 percent-plus) decline in the stock market. That most certainly creates a crisis. If so, it would be an ideal time for a newly established federal U.S. sovereign wealth fund to enter the market. The fund could establish substantial positions in a wide range of companies at bargain-basement prices. Not only would that be ideal from a price perspective, but it would also establish a floor under the stock market. That would shift investor psychology from 'the Fed has our back' to 'the fund has our back.'
Readers may dismiss my observations as little more than a pie-in-the-sky daydream (or nightmare), especially given a stock market at record highs. However, this administration has taken great pains to offer added incentives to more Americans to enter the equity and bond markets via tax-deferred retirement accounts. Some argue this may only be a prelude to dismantling Social Security. They may be right.
However, if that were true, as the number of Americans involved in the financial markets broadens through retirement accounts, there is an added incentive by the government to ensure that, in the event of another financial crisis, retirement savers do not lose their shirts. What better way than through the support of a sovereign wealth fund that has our back?
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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