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.

The red-hot housing markets is cooling off. A combination of higher interest rates and supply chain shortages are squeezing homebuyers. If these trends continue, the spring selling season may find buyers between a rock and a hard place.

 

The total value of the private residential real estate in the U.S. increased by a record $6.9 trillion to $43.4 trillion in 2021. Since the lows of the post-recession market, the value of housing has more than doubled. By this time in 2023, Zillow expects the typical U.S. home will be worth more than $400,000.

 

This year, demand for housing will remain tight and continuing to outstrip supply. But there are headwinds for homebuyers as well. One of the larger casualties of the Fed's intention to raise interest rates is the mortgage market.

 

Home mortgage interest rates have spiked over the last few months. At the beginning of 2022, the rate for qualified buyers was around 3 percent for 30-year fixed rate mortgages. Today, that same mortgage would cost 4.95 percent, according to Mortgage News Daily. During the past three weeks alone, according to Freddie Mac, we have seen the largest rise in mortgage interest rates since 1987.

 

In practical terms, a family that could manage $2,000 a month in mortgage payments could have afforded the purchase of $424,000 at the beginning of the month. This week, thanks to the rise in interest rates, the home they can afford dropped to $375,000. You might ask how rates could have backed up so much when the central bank has only raised interest rates by 25 basis points in March.

 

The answer is that the Fed focuses on the short end of the interest rate curve. Mortgage interest rates, however, are determined by the long end of the curve. A 20- or 30-year mortgage rate is based on what investors believe the Fed, the economy and inflation will be in the future. Given that inflation is expected to continue higher in the months ahead, and that the economy is expected to slow, lenders see more risk ahead for home buyers. Add in the Fed's stated intention to continue to raise interest rates several times this year (and maybe next year), there is no wonder that long-term interest rates for home mortgages are spiking higher.

 

For the last several years, demand for homes have outpaced supply. As such, home builders are having a hard time providing enough homes to the market. The present supply side problems besetting the construction industry, which were caused by the coronavirus pandemic, have just added insult to injury.

 

A huge shortage of materials is plaguing companies' ability to complete new homes. Lumber shortages have been well-publicized, but everything from siding, glass windows, large appliances and even garage doors have stretched delivery times from week to months. Those product shortages are acute and seem to be getting worse.

 

As mortgage rates continue to climb, it becomes harder for existing homeowners with low mortgage rates under 3 percent to sell and take on higher mortgage rates in order to buy a new home, which continues to cost more and more. This hesitancy further reduces the existing supply of housing stock available.

 

Home prices in the U.S. increased by 18.8 percent in 2021. That is considered an unsustainable level, but given the reduced level of inventory, most experts expect prices on homes to grow 16.4 percent or more in 2022. For homebuyers looking to purchase homes, the call seems to be do it sooner than later rather than later.

 

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.

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.

Oil prices are up 70 percent since last year. Prices at the pump were well over $4.25 a gallon recently. Everyone from President Biden on down is scrambling to find a way to reduce energy prices. Why, therefore, aren't we looking at our own domestic oil producers?

 

Unlike Saudi Arabia or the United Arab Emirates, which can increase the global oil supply with a flick of a switch, the shale energy community would need to increase spending in areas such as exploration, drilling and production. That is something they are not willing to do for a variety of reasons.

 

For years, shale drillers have been plagued by regulatory and environmental obstacles. Despite the court cases and lawsuits, shale companies forged ahead. Their stock prices soared as they spent more and more on speculative drilling and expansion. That era ended badly when oil prices collapsed in the early days of the coronavirus pandemic. A wave of bankruptcies swept through the shale industry and left the survivors chastened and extremely cautious.

 

The cowboy of yesterday has become the pinstriped borrower that Wall Street prefers. Rather than wild catting, company managements are buying back stock and instituting dividends.

 

That is not to say that oil production is at a standstill. The U.S. Energy Information Administration expects 2022 production will average 12 million barrels per day and 13 million barrels per day by 2023, which would be a record production year for U.S. producers.

 

The problem is that the same problems that are besetting the rest of the economy are plaguing energy producers as well. Supply chain constraints as well as the scarcity of labor are slowing even those companies willing to produce more. One simple example is the cost and scarcity of sand.

 

A cocktail of chemicals, water and sand are used in the fracturing of shale formations. The price of fracking sand has risen 185 percent during 2021 and now costs $45 per ton — if you can find it. If you throw in other key inputs like diesel fuel and steel, which are also rising in price the costs of drilling have exploded higher. At the same time, labor shortages not only at the well head but also in every link in the labor chain, from truck drivers to drillers, slow down production immensely.

 

Even if there was some policy change or other event that could galvanize another shale oil drilling boom, it would require six to nine months before that oil could reach the market. As such, the U.S. is joining the mad scramble for additional oil supplies. The U.S. is at a disadvantage thanks to President Biden's cool relationship with the heir-apparent to the Saudi Kingdom, Prince Mohammed bin Salman. Biden pledged to make Saudi Arabia a "pariah" due to the killing of Washington Post journalist Jamal Khashoggi in 2018.

 

At the same time, Saudi Arabia has changed their approach towards the U.S., especially under Biden. Russia's membership and importance in the OPEC-plus cartel has resulted in a neutral Saudi stance toward Russia's aggression in Ukraine. Qatar has agreed to work with Germany in increasing their supplies of liquefied natural gas. Japan is also negotiating with the UAE to increase oil supplies as has the U.K., but so far, they have received little satisfaction.

 

About the best the world can hope for is a cease-fire and a reduction in hostilities between Russia and Ukraine to at least dampen the rise in oil prices. I will stick my neck out and predict that we should see such an agreement by the end of the month.

 

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 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.