The first quarter 2022 earnings season kicked off this week with mixed results. Thus far, the standouts were Netflix and Tesla. The two companies' results could not have been more different, but in the end it didn't matter.

 

Netflix disappointed, reporting its first loss in subscribers in recent memory, while investors were expecting a gain in subscriber growth. There were many reasons for this including the loss of 700,000 Russian customers as a result of the Ukraine War. At last count, the stock lost 37 percent of its worth in three days and took the NASDAQ index down along with it.

 

Tesla, the eclectic vehicle darling, hit a homerun after the close on Wednesday, April 20, when it beat earnings, sales, and forward guidance results. Thursday it soared 9 percent on the opening and took the NASDAQ back up by more than 1 percent, but not for long. By the end of the day, the markets reversed dramatically (thanks to statements from Fed Chair Jerome Powell).

 

All of that reveals the nature of the markets today. In this example, two mega-stocks had the power to move entire markets dramatically based on one quarter's earnings results. But it also illustrates what could happen to the global equity markets if the top five or six U.S. stocks happen to fall out of favor. That could happen if the Federal Reserve Bank decides to deliver a hawkish surprise to investors at their May 3-4 Federal Open Market Committee (FOMC) meeting.

 

I keep harping on the importance of this coming meeting, because, depending upon the results, stocks could easily retest, or break the lows we hit in March 2022. If, on the other hand, the FOMC members, led by Chair Jerome Powell, decided to be less hawkish (meaning less quantitative tightening and fewer interest rate hikes), we could see markets soar in a relief rally. Of course, such a rally wouldn't last too long because investors would quickly realize a dovish stance would likely mean higher inflation.

 

Suffice it to say, the risk ahead could be substantial. The stock market turned down on a dime on elevated volume when Fed Chair Powell said on Thursday, "I would say 50 basis points will be on the table for the May meeting." 

 

Markets are expecting such a move but still lost over 1 percent-2 percent on his simple statement which illustrates how the Fed trumps everything else. Anxious investors are waiting to see what else may be coming in the monetary arena in the weeks ahead.

 

On April 6, William Dudley, the former president of the New York Fed, in a Bloomberg guest column on inflation and Fed policy said, "It's hard to know how much the U.S. Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, it'll have to inflict more losses on stock and bond investors than it has so far."

 

That statement has reverberated throughout the financial markets ever since. Of course, it is only one man's opinion, and Dudley is no longer a member of the central bank. Yet, I find it interesting that there were no comments from Fed members dismissing his conclusions after they were published.

 

As Berkshire Money Management's Allen Harris said a week ago, writing in the Berkshire Edge, "Dudley may no longer be a member of the Fed, but I believe he is communicating a message from them." Harris believes "the Federal Reserve is OK slowing down the economy to fight inflation, even if it crushes the stock market."

 

As readers are aware, I have been cautious throughout most of this year. I remain cautious. As I wrote several weeks ago, we could see a substantial decline in the stock markets in late April, early May based on Fed tightening.

 

One caveat to my May call could be that the markets sell down before the May FOMC meeting. If so, we could see a "sell the rumor, buy the news" event, just like we witnessed after the last FOMC meeting in March, when the Fed first raised the Fed funds rate by 25 basis points.

 

Now that I have you all spooked, however, let me give you the good news. I would be using any decline to buy stocks. I believe we could see a healthy rebound after that selloff that lasts through the better part of the summer. So, rather than "sell in May and go away" this year, I plan to "stay in May and play."

 

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 Federal Reserve Bank's tightening of monetary policy has driven up interest rates, while causing investors to sell stocks. It has had another impact — a steep rise in the U. S. dollar.

 

The U.S. bond market has already priced in a 96 percent chance of a 50 basis-point rise in the Federal funds rate at the next FOMC meeting in May 2022. The fixed income markets are expecting a cumulative 2.15 percent rise in interest rates by the end of 2022. In the meantime, the U.S. 10-year Treasury yield hit 2.90 percent this week on its way to 3 percent.

 

As interest rates continue to rise, so does the U.S. dollar. It climbed to a new, 20-year high of 126.98 against the Japanese yen. As the U.S. Fed becomes ever more hawkish, the Japanese central bank remains uber-dovish, keeping interest rates low. Against six major currencies, the greenback surged to its highest level since April 2020 at 101. Suffice it to say that both bond and currency traders are in the middle of panic buying the U.S. dollar, while dumping U.S. bonds.

 

Historically, a stronger dollar is considered a plus, at least politically, and a mark of American economic prowess. Politicians often pointed to a strengthening greenback as a symbol of the nation's might and pride. After all, it is the world's de facto reserve currency. As such, a stronger dollar only heightens its reserve status. Foreigner currency traders, according to the textbooks, want to buy more of an appreciating asset like the dollar.

 

A strong dollar can also help consumers when purchasing imported goods. Products manufactured abroad and imported to the U.S. are cheaper under this scenario. The greenback can buy more imported goods at the same, or lesser price, from exporters. Given the rise in prices in almost everything we buy (thanks to inflation), our stronger currency is keeping a lid on import prices. That helps alleviate some of the pain we feel at the checkout counter, while leaving more disposable income in the pockets of American consumers.

 

If you are travelling overseas, your buying power is enhanced as well. Hotel stays, restaurants, and even curio shop prices are suddenly cheaper for American tourists. Now your dollar can buy more goods in a variety of countries when converted into the local currency.

 

From a business point of view, those multinational companies that have plants, or have other businesses domiciled in the U.S. (think Germany, Japan, and South Korea) will benefit. That foreign-owned auto plant in Alabama, for example, can still sell its vehicles in the local market and maintain its profit margins at competitive prices. The overseas parent company will experience balance sheet gains when they translate their subsidiary's' dollar-income back into their local currencies.

 

Unfortunately, a stronger dollar cuts both ways. American exporters and companies conducting business abroad are hurt by a strengthening dollar.

 

Many S&P 500-listed companies, for example, receive at least half, if not more, of their sales from overseas. Cigarette and fast-food companies are high on that list. The income they earn from foreign sales will fall in value on their balance sheets. Profits could disappoint and investors might want to sell their stock.

 

For equity investors, a stronger dollar will hurt their investments in foreign markets, especially in emerging markets where negative currency translations will hurt overall returns. From a macroeconomic point of view, many emerging markets that require U.S. dollar reserves will end up paying more to obtain dollars.

 

At this stage of the game, investors are wondering how high the U.S. dollar can go before coming back down to earth. To a large extent that depends on the Federal Reserve and its tightening cycle. The more hawkish they become, the higher the dollar can go. Over the long term I believe the dollar will climb higher. In the short-term, however, I expect some profit-taking will set in against the greenback since it is really extended in price.  

 

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.

Inflation is climbing at the highest rate in 40 years. Gas prices at the pump are giving consumers a bad case of sticker shock and food, well we all know about that. So why are economists talking about peak inflation?

 

U.S. consumer inflation, as measured by the Consumer Price Index (CPI), reached 8.5 percent in March 2022. The producer Price Index, which measures the cost of inputs for companies, jumped to 11.2 percent in March. On the surface, both numbers are dreadful, but economists look behind the headline numbers for hints of what areas when up and what went down.

 

The month-to-month rate of core price increases slowed in March and declined for core goods. Core goods are an aggregate of prices paid by urban consumers for a typical basket of goods, excluding food and energy. Used car and truck prices, for example, which are a large part of core goods fell by 3.8 percent. Used car prices, as most readers know, have skyrocketed in the past year and have been a major contributor to higher inflation.

 

Traders decided the data leaned toward a cup half full and bid stock prices up. At the very least, they decided, inflation expectations were at least contained. That is important since inflation expectations play an important role in how we set prices and wages. Investors are hoping that the pace of core price increases slowed down last month could be an indication that a peak could be in the offing.

 

However, one swallow does not make a summer, nor does one data point make a trend. My own opinion is that we should see a peak in inflation sometime before the second half of the year. That has been my expectation since the beginning of the year. It is based on a loosening of some of the supply chain shortages that we have been battling since the onset of the coronavirus pandemic. We may be seeing an early signal of this expected pivot.

 

U.S. jobless claims held close to multi-decade lows this week. Initial jobless claims last week were 185,00 which are still near a 54-year low set earlier this month. Think back to April 2020 at the height of the pandemic when in a single week in April jobless claims hit 6.1 million. U.S. Gross Domestic Product (GDP) is still growing but slowing. The Conference Board is expecting a 3 percent growth rate for 2022, which is still above trend.

 

From a macro point of view, the economy despite the inflation rate, still looks in pretty good shape. The fly in the ointment, for both Wall Street and Main Street, is the high inflation rate. The worry from investor’s standpoint is can the Fed manage a soft landing and at the same time stop inflation in its tracks. Any indication that inflation is slowing could mean the Fed may not need to be as hawkish in the months ahead.

 

Last week, I was expecting a bounce in the market once stocks re-tested the 4,400-4,500 level on the S&P 500 Index. This week both sides of that level have been broken with no clear winner. We are still testing that range and closed on Friday at 4,392, slightly below my range.

 

True to form, I am expecting the volatility in the equity and bond markets to continue into next week. Earnings season is again upon us, and while I am expecting some decent results, the forward guidance is crucial. My best guess is that we are up in the beginning of the week and then down once again to end it. As we get closer to May, I am still expecting another dramatic decline, but I would be a buyer of that sell off.

 

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.

 

More than a decade ago, the Arab Spring roiled the Middle East from Tunisia to Egypt to Yemen. Massive protests demanding freedom, equality and bread were met with repression and conflict. Could today's growing scarcity of food spark another spring of discontentment?

 

The origins of the name "Spring," whether Arab or otherwise, was a term historians used to describe the Revolutions of 1848, known as the "People's Spring." It was a series of upheavals that swept through Europe at that time. Republican revolts took place first in Sicily, spreading to France, Germany, Italy, and the Austrian Empire. They all ended in failure and repression and were followed by widespread disillusionment among liberals.

 

The movement in the Middle East has had slightly better results, at least temporarily, in places like Libya, Tunisia, and Egypt where regime changes did occur. But for the most part, the same oppression, civil wars and tyranny exists today. Are we ripe for a reoccurrence either within the Arab world or elsewhere?       

 

In the past, I explained how climate change, including the growing scarcity of water, has created a crisis in global food production.  The coronavirus pandemic and the Ukraine war have made an already precarious situation worse. Sickness, supply chain shortages, inflation, and now war have decimated food production in every step of the agricultural process.

 

The farming labor force has been decimated by the coronavirus. Inflation and supply chain issues have forced cutbacks in everything from transportation to agricultural materials and equipment. Fertilizer has skyrocketed in price and supplies of it have become increasingly scarce. A variety of infections from swine to bird flu has assaulted herds and flocks throughout the world, while drought, flooding, and ice storms continue to batter crops worldwide.

 

The United Nations recently released a table that showed that food prices in January 2022 reached their highest level since 2011. The prices of meat, dairy and cereals climbed, while edible oils reached their highest level since tracking began in 1990. Consumers only need to compare prices today for coffee, pasta, butter, all kinds of grains, and protein to know that food prices have catapulted far past those January 2022 price levels.

 

Making a bad situation worse, the fighting in Ukraine and unrest in Russia threatens to reduce the world's availability of important food staples which the two countries export. They account for a large market share of the world's sunflower oil (64 percent), wheat (23 percent), barley (19 percent) and corn (18 percent).

 

Ukraine has already lost $1.5 billion in grain exports since the war began, according to Ukraine's agricultural ministry. Shortages of fuel and fertilizer, Russia's blockade of the Black Sea (Ukraine's main export route), the drain of labor as farmers enlist in the military, and the enemies mining of farmland in the north have conspired to make it all but impossible to farm in certain areas of Ukraine.

 

Planting season starts at the end of April. Ukraine's Agriculture Minister Roman Leshchenko, believes the country's spring crop sowing area may more than halve this year from 2021 levels (of some seven million hectares). If the war continues, and all indications are that it will, even less will be planted. The result appears to be a continued rise in food, fuel, and possible famine. The impact of rising food price increases affects different countries. Until recently, Asia, for example, has been spared the worst in food price rises due to a bumper rice crop. But that may change.

 

China, a nation that needs to feed 1.44 billion people, is facing deepening challenges in its production of rice, soybeans and corn. Exploding prices in fuel, combined with the price rise and scarcity of fertilizer have hamstrung farmers in the Northeast regions. In addition, China's Covid lock down policies have impacted the plowing of fields and sowing seeds. This area produces more than a fifth of China's national grain output. The only alternative is to increase imports, which only compounds the existing worldwide food crisis as demand outstrips supply.

 

The shortfall in expected exports from Ukraine and Russia would primarily impact the Middle East and North Africa as it did back in 2011. Egypt, Libya, and Lebanon import more than two-thirds of these food staples from Ukraine and Russia. Some assume that governments in this region will resort to price controls on food, rather than face the possibility of another Arab Spring. However, most governments are already cash-strapped from fighting the coronavirus pandemic.

 

In Africa, conflicts in Sudan, Nigeria, Ethiopia, and the Democratic Republic of Congo, combined with long-standing drought, the coronavirus, and the high price of oil have disrupted transportation and food production.

 

In Latin America, many people spend as much as 50-60 percent of their income on food. Inflation is higher as is the price for food and fuel. An ongoing wave of violent protests in Peru last week could be a sign of the future. The demonstrations were originally triggered by rising fuel costs, but quickly morphed into large, anti-government demonstrations and highway blockades.

 

Peru President Pedro Castillo was forced to declare a state of emergency, while placing Lima, the capital, under a curfew. Inflation in March 2022 was the highest in 26 years. Prices of food and fuel spiked almost 10 percent since last year. And Peru is not alone. Discontent is spreading. Leaders in Sri Lanka, Afghanistan, and Pakistan, among other developing countries, are facing increasing public pressure over the same issues. My bet is that we see more of the same as the year progresses.

 

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.

 

"Quantitative Easing" or QE, may be a more familiar concept to readers, since we have been experiencing some form of QE (monetary stimulus) since the Financial Crisis of 2008. QT is the opposite. The Fed first tried to reduce its balance sheet back in 2018-2019. The stock market had such a hissy fit that the double-digit melt down that ensued convinced the central bankers to back down in their attempt to normalize their balance sheet. By the end of 2018, the Fed was allowing $50 billion/month to run off its balance sheet. Market turbulence erupted almost immediately and by March 8, 2019, the Fed under Jerome Powell, turned the money spigots back on and reversed the easing that "no longer seemed necessary." The crisis was over, and so was QT.

 

The problem, however, is that investors have become accustomed to the low interest rate environment that the Fed engineered through asset purchases and low interest rates. It has become an essential prop holding up equity values, which have climbed higher and higher.

 

Every time the Fed has sought to drain liquidity from the banking system, the stock market has reacted by staging a Taper Tantrum. There was one in 2013, another in 2019 and we are in one now.

 

Fast forward to the coronavirus pandemic when the Federal Reserve Bank bought a massive $3.3 trillion in U.S. Treasuries, and $1.3 trillion in mortgage-backed securities to support the markets. Those Fed purchases have not only contributed to the massive gains in the stock market in 2021, but also contributed to the present explosion in the inflation rate.

 

On April 6, the FOMC minutes of the Fed's March 15-16, 2022, meeting became available. The notes showed deepening concern among members that inflation had broadened throughout the economy. Most policymaker were prepared to raise interest rates in May by 50 basis points and continue these half-percentage-points hikes in coining policy meetings.

 

They also supported a second try at reducing the Fed's holdings of Treasury bonds. Up to $60 billion per month of U.S. Treasury bonds will be sold as well as reducing $35 billion per month in mortgage-backed bond holdings. That is nearly double the Fed's QT program from 2017 to 2019. By reducing the balance sheet, while moving the short-term, Fed funds rate higher in 50-basis-point increments. The Fed is again taking away the punch bowl for equity investors.

 

The news may have shocked most investors, but unfortunately it was part and parcel of why I have remained relatively bearish throughout the year thus far. Will investors double down on dumping equities or will they calmly go to the slaughter ahead?

 

I fear that an even worse sell-off may be ahead of us sometime in May 2022 when the Fed begins implementing QT.  The stock market has been practically straight down most of the week on news of this plan. I advised readers last week that the stock market had become too "frothy" after the bear market rally of last month. I wrote that we could see a pullback to "between 4,400-4,500 level on the S&P500 Index." We have accomplished that, and I am now looking for a relief rally that should continue for a week or two. After that, we face earnings season and the next Fed meeting. Strap in.