First-quarter corporate earnings are pouring in, and the results have been mixed. So far, the numbers have been good enough to keep the market from falling significantly, but not good enough to warrant further gains.

 

It is still early days, with only 15 percent of companies reported, but so far, the best I can say is mixed. The multicenter banks continued to surprise to the upside this week, while the regionals have been so-so but not as bad as some expected. Of course, the Silicon Valley Bank debacle did not occur until toward the end of the quarter, so much of the impact won't be known until the second quarter results are announced.

 

Tesla, one of the cult favorites of many in the markets, was disappointed. That threw the markets into a funk, at least on Thursday and Friday. The electric vehicle market is in the throes of a price-cutting war globally, which Tesla started. The EV leader has cut prices 5 times on its vehicles since the beginning of the year. They did so as the global economy slowed. The company wants to not only maintain its worldwide market share but expand it as well.

 

In China, the price war is particularly ferocious where competitors such as Nio Inc, XPeng Inc. and BYD Co. Ltd. are selling some EV models at a 50 percent discount to prices in the U.S. and Europe. This, as you may imagine, is having an impact on Tesla's profit margins and thus the disappointing earnings results.

 

The prevailing sentiment right now is that while the economy may be slowing, the Fed is still hell-bent on raising rates another 25 basis points at their May meeting. After that, some expect a pause, while others disagree. It will depend on the data, in my opinion.

 

We will be getting another reading on inflation in the coming week (April 28) when the Personal Consumption Expenditures Price Index (PCE) is reported. The PCE measures the prices paid for goods and services and it is a data point that the Fed watches carefully.

 

Economists and the Fed will be paying special attention to the services side of the report where inflation has been sticky. A hotter number may convince the Fed that a pause in their tightening program may be premature. As such, investors will likely assign great importance to the PCE print. 

 

What many investors fail to realize is that even as the Fed continues to tighten, liquidity in the financial markets is rising. The contradiction can be explained by the U.S. Treasury's actions in the face of the nation's fast-approaching debt limit. The government can no longer sell Treasury bonds as it has in the past without triggering that limit prematurely.

 

Instead, the Treasury has been spending down its checking account, called the Treasury General Account. That adds money to the system in two ways. With fewer bonds able to be purchased there is more cash looking around for a home. Second, the cash disbursements from the Treasury General account also inject additional liquidity directly into the system.

 

In addition, the recent regional bank issues (Silicon Valley Bank, etc.) have forced the Fed to also increase liquidity to the banking system. Taken together, there is now more money sloshing around the system than many realize.

 

A lot of that money flows into other assets in the financial markets (like the stock markets), at least in the short term. At some point this summer, when the new debt limit is finally passed in Congress, that situation will reverse but, in the meantime, it helps explain why the stock market has been resilient in the face of rising interest rates, a slowing economy, and inflation. I look for the stock market to continue to fluctuate in the week ahead.

 

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.

Pickleball is the fastest-growing sport in the U.S. for the third year in a row. It has taken the country by storm, thanks to its popularity among all ages. Industry experts expect to grow at an annual rate of 9 percent between 2023 and 2033.

 

The game was invented by three middle-aged fathers on vacation on Bainbridge Island in 1995 and named after the family dog, Pickles. Recently, my wife Barbara suggested we might find out what makes the game so popular. For those, like me, who have not played yet, the game is a cross between tennis, badminton, and ping pong. It is not difficult to learn and can be played almost anywhere. All you need is a paddle and a whiffle-like ball and someone to play with. What's more, it is a social game, usually played as doubles, with two players on each side volleying back and forth in close quarters.

 

Most of the game's core players (eight times a year or more) were over age 65. Retirees love it because it is easy on the body. But the demographics are changing. The fastest growing segment by age is now under 24. Players, 55 and older, are still in the majority, but that growth rate is slowing. Men are still the majority of players, but women represent 40 percent of those playing.

 

There are now more than 8.9 million players in the U.S. That is nearly double the number of players in 2021 and a 158 percent increase over 2020, according to the Sports and Fitness Industry Association.

 

As of 2023, there are two national professional tournaments. The sports organizers are now approaching corporate sponsors in earnest. They aim to grow the sport not only in this country but abroad as part of an effort to include it in future Olympics.

 

Pickleball is also growing in popularity in Europe, and enthusiasts believe the Asia Pacific market is ripe for the taking. The global pickleball equipment market was valued at $65.64 billion last year and is expected to grow to $155.4 billion over the next decade. Paddles account for nearly two-thirds of the equipment market, with wooden paddles running between $15 and $35. Composite varieties are more expensive ($40 and $100), while graphite paddles can cost upwards of $200.

 

Normally, you will want to buy six to 12 pickleballs at a time. Like paddles, some are more expensive than others. There are indoor and outdoor balls with the lifespan of outdoor balls shorter than those of indoor balls, as you might imagine. Outdoor balls, depending on the brand and price, last upward of 10 games. 

 

The demand for places to play, however, is outstripping supply. California, Florida and Texas lead the nation in the number of courts. There are roughly 44,000 pickleball courts in the U.S. as of 2022. Cost estimates for building courts can range from $300 for a temporary net, equipment, and tape to mark lines, to $30,000 for a permanent court.

 

In many cities, it is already difficult to find places to play. Municipalities are only now beginning to realize the popularity of the sport, so it is left to private developers to fill the gap. Former warehouses, vacant big-box stores, and even existing tennis, handball, and basketball courts are being utilized to satisfy demand. So far, this trend has had checkered results.

 

One bottom-line problem is that because a court can have only two or four players active at a time, the profitability per square foot is quite low in pickleball. As a result, entrepreneurs are adding entertainment, food, and drink to new facilities in hopes of expanding the business potential of the sport.

 

In any case, it appears the sport is here to stay. As for me, I agreed to give it a try at 74. and so, our next date night will be centered around a ball, paddle, and some physical exercise (but no dog). Wish me luck.

 

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.

Last month's inflation data came in the cooler. The dollar continued to decline, while stocks eked out some gains. Next up, first-quarter earnings results.

 

The money-center banks kicked off results on Friday. The first four banks to report — JP Morgan Chase, Citigroup, PNC, and Wells Fargo — were surprised by the upside. Next week, we will see how hard the beleaguered regional banks were impacted by the rush to move deposits to the bigger banks. Investors will be watching two key factors (deposits and loan demand) to determine if these banks are investible going forward. 

 

On the macroeconomic front, the Consumer Price Index (CPI) came in line. Prices rose just 5 percent in the year through March. That is down from 6 percent in February. Inflation showed the slowest pickup in prices in almost two years. The Producer Price Index (PPI) came in lower than expected as well. The top line number month over month was -0.5 percent versus an expected 0 percent. Year over year, the PPI was up 2.7 percent (3.0 percent expected), which was down from February's 4.9 percent (revised).

 

Those numbers heartened investors, but the bottom line is that it doesn't change the central bank's stance on monetary policy. They know their policies are working, but we are a long way off from their stated target of a 2 percent inflation rate. Therein lies the rub.

 

The disconnect I see is between what the market expects and what the Fed will do. Just about everyone is expecting a 25-basis point hike in the Fed funds rate when the FOMC meets again in May. It is what happens from there that could get us in trouble. The bulls are certain that the Fed will pause its hiking cycle after that. Many believe that the Fed will then turn around and start cutting interest rates (3 rate cuts by the Fall) almost immediately after that.

 

The impetus for that event would be that the economic data suddenly falls off the cliff. Others say it will be a combination of weak data, and continued contagion risk coming out of the financial sector. That will convince the Fed to abandon their stated 2 percent inflation target (and their credibility) before they break something else in the economy. If you believe that scenario, I have a bridge I would like to sell you as well.

 

My take is that we will see a moderate recession. The chance of experiencing a harsher economic decline depends on whether the Fed pauses its' interest rate hikes. But even if they do, a pause does not mean the Fed is through hiking, and it certainly does not mean they will be cutting interest rates. Inflation is falling, however, and while the labor market is hanging tough, there are signs that around the edges employment is cooling a little. U.S. jobless claims applications are at the highest level in more than a year, but the Fed still needs to see a reversal in the employment data.

 

In the meantime, gold continued to climb, hitting $2,063,40 an ounce, which is just a smidge below its all-time high of $2,074.88. Silver gained as well ($26.11 an ounce), but it is a long way from its high of $48.70 at the end of the 1970s. And then there is Bitcoin, which rose above $30,000, and has doubled in price since the beginning of the year. All three have benefited from the decline and the U.S. dollar and the contagion concerns of the banking industry. You can read my thoughts on cryptocurrencies in this week's column "The Bitcoin Bounce." 

 

I am guessing that next week we have a dip and bounce scenario where the S&P 500 Index could pull back 70 points or so and then bounce to the 4,230 area. At that point, I get a lot more cautious.

 

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.

This week, Bitcoin broke the $30,000 level. The cryptocurrency has doubled since its low in November 2022. Does this mean the crypto winter has finally passed and it is now safe to jump back in?

 

The short answer depends on how much risk you want to take. Cryptocurrencies, in general, suffered through a difficult 2022. The digital currency world lost much more than the stock market. Late in the year, most digital currencies were in freefall. Company after company in the sector collapsed. In the end, only those who were crypto die-hards remained faithful to the concept and Bitcoin in particular.

 

Bitcoin is the granddaddy of crypto currencies. It accounts for 45 percent of the total market capitalization of cryptocurrencies, which now hovers at around $1.29 trillion. That is down by more than half from its peak back in November of last year. The venture capital industry has also pulled the plug on investing in the area as well.

 

Some of the same combinations of events that sank the stock market spilled over into the crypto markets. The war in Ukraine, inflation, and higher interest rates drove crypto prices lower, which in turn, crippled many of the young company start-ups in the space. The Luna crypto network, for example, collapsed in May 2022, wiping out $60 billion in customer investments. This was followed by the TerraUSD stable coin failure. Both calamities caused a liquidity crunch throughout the industry.

 

 From a high of $69,000 in 2021, Bitcoin fell to below $20,000 by June 2022. That is when Celsius network, a major U.S. cryptocurrency lending company, froze withdrawals and transfers, citing extreme conditions. In subsequent months, several other exchanges and crypto lenders either filed for bankruptcy or paused customer withdrawals.

 

That created an atmosphere of fear, which fueled a further slump in the digital markets. Major cryptocurrencies experienced severe selloffs. That in turn decimated consumer confidence in the area and propelled the downward spiral further.

 

The industry's coup de grace occurred when a relatively new crypto exchange, FTX, founded by Sam Bankman-Fried, the so-called "Crypto Robin Hood" and CEO, filed for bankruptcy. The FTX collapse brought down even more crypto lenders along with it. At its peak, Wall Street valued the firm at $32 billion. Today, it is worthless. His arrest by the U.S. Justice Department on charges of wire fraud, securities fraud, and money laundering (among other civil and criminal charges) triggered calls throughout the nation for accelerated regulation of the industry.

 

And the fallout continues. The largest crypto exchange to survive, Binance, and its CEO Changpeng Zhao, was sued last month by the U.S. Commodity Futures Trading Commission (CFTC). The CFTC alleges Binance offered derivatives to U.S. customers without a license. The lawsuit follows another enforcement action against the company as well as Paxos, a blockchain platform entity. Observers believe this may mean that government regulators are finally going after unregulated crypto service providers.

 

With all this financial carnage, you may wonder how the top 100 digital assets climbed 48 percent beating gold, stocks, high-yield bonds, and oil so far this year.

 

Two answers — the decline in the dollar, and the fear of financial contagion in the banking sector. The uncertainty generated by the collapse of several banks, and the bailout of others, has convinced some investors that digital assets might be a safer haven than their neighborhood banking institutions. That is a huge leap of faith, in my opinion, and extremely risky.

 

In addition, the decline in the U.S. dollar has also caused some to hedge their bets in the cryptocurrency markets. Cryptocurrencies, such as Bitcoin seem to have an inverse correlation with the dollar as well as with interest rates — at least in the short term. However, those correlations could easily change.

 

Thus far, the bounce in Bitcoin seems to be the result of traders chasing price momentum. It may also be a function of diversification away from the dollar into other risk assets. As readers should know by now, cryptocurrencies are extremely volatile. It is a speculative asset that thrives best in bull markets, and we are not in a bull market. Regulatory risk is real, and it is debatable whether additional government regulations will help or hinder the future of Bitcoin.

 

On the positive side, the death of Bitcoin and cryptocurrencies has been predicted more times than I can remember, but it is still alive and kicking.    

 

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.

The long-awaited downturn in the U.S. economy may be nigh. A litany of weakening macroeconomic data this week is pointing to a slowdown in growth over the next few quarters.

 

Many in the financial markets, including me, have been anticipating this decline. I have predicted a moderate recession beginning sometime this year for many months now.  I am not alone. Many expect a much harder landing.

 

That will depend on the Fed. If the U.S. central bank continues to raise interest rates and is willing to forge ahead with further quantitative tightening, then Gross Domestic Product will fall further. The decline will only stop when the Fed stops. 

 

This week, the economic data has been uninformedly negative. The Manufacturing Purchasing Management Index PMI), the Institute for Supply Management (ISM) manufacturing data, February factory orders, the JOLT data (job openings), jobless claims, ADP employment, etc. — all indicated a downturn is coming.

 

The only data point that did not decline was Friday's non-farm payroll report jobs for March, which came in at 236,000 job gains (versus expectations of 238,000). That was basically in line, although the headline unemployment rate declined from 3.6 percent to 3.5 percent. The Fed will likely interpret that number to mean that their work is not done yet. They are hoping to see unemployment rise, although they dare not say so. Can you just imagine the response in Congress to a Fed statement stating they want more Americans to lose their jobs? 

 

The typical recession indicators are performing as they should. The dollar continued its decline, and yields on interest rates fell across the board.  Many growth sectors in the stock market sold off, while defensive areas such as health care and utilities climbed.

 

And then there was the performance of precious metals. Gold broke above $2,000 or ounce and June futures in gold reached $2,037. The all-time high in gold is $2,070, which was reached back in August 2020. I believe it is simply a question of time before that barrier is breached. Silver gained as well but has a long way to go before reaching its historical high.

 

Readers may want to revisit my explanation for gold's recent performance in my March 23, 2023, column "Gold as a haven." I wrote "…unlike bonds and stocks, gold has one redeeming factor in times of economic slowdown, financial instability, and geopolitical tension. It does not carry the risk of an issuing entity collapsing, such as a bank or a government."

 

In my experience, most investors focus exclusively on gold as an inflation hedge. They fail to understand that the price of gold is influenced by several factors such as inflation, interest rates, the direction of the dollar, demand from central banks and commercial jewelry, as well as safety. While I continue to be bullish on gold this year, I do not subscribe to the "up, up, and away" optimism of many gold bugs.

 

I could easily see gold, falling back to $1,950/ounce in the short term if the dollar were to bounce higher. That said, the momentum that drove it higher this week should continue but it will be a wild ride and not for the faint of heart. The point is that a 2-3 percent position in gold for aggressive investors makes sense, but don't bet the farm on it.

 

As for the overall markets, expect the trading range that we have been experiencing for months to continue. We hit 4,100 on the S&P 500 Index, a big resistance level, and chopped up and down without making any real progress. This coming week, I expect more of the same until Wednesday's Consumer Price Index for March is released. A cooler number will bolster markets, a hotter print will not be taken kindly. A Happy Easter and Passover to all.   

 

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