For months, wealthy U.S. taxpayers and corporations have been living with the specter of higher taxes under the Biden administration. It is a pretty good bet that taxes will go up, but not as much as you might expect.

 

Throughout the week, Democrats in the House and the Senate have been horse-trading over the amount of spending versus the amount of taxes necessary to pay for President Biden's $2.3 trillion budget plan. Republicans are already on record that they will oppose any new tax hikes at all.

 

Since the Democrats hold such a slim majority in both the House and the Senate, any legislation will need to accommodate both moderates and progressives within the party in order to pass. The battle between the progressives and the moderates has already started.

 

It appears that Senate progressives, like Bernie Sanders and Elizabeth Warren, along with House liberals, such as Alexandria Ocasio-Cortez, will need to temper their expectations on how high the corporate tax rate (and other taxes) should be raised. Draft legislation, released this week, indicated that the corporate tax rate, which is at 21 percent, may rise to 26.5 percent (on anything over $5 million in income) and not the 29 percent that was first suggested in the president's initial proposals.

 

As for individual tax rates, there is some on-going discussion among moderates who might want to raise the top bracket for wealthy individuals and married couples by $50,000 or so.

 

The original idea was that those individuals earning over $400,000 per year (and married couples earning over $450,000) would be taxed at 39.6 percent, up from 37 percent starting in 2022.

 

However, the key battle will still-to- be waged is over changes to the capital gains tax.

 

Under current law, people who die with unrealized gains don't pay capital gains taxes. Their beneficiaries do pay, but only on gains dated after the prior owner's death, and only when they actually sell those assets. The Biden plan would treat a death in the same way the IRS treats a sale, that is, a capital gains tax would automatically be applied.

 

The initial proposal would also increase the capital gains tax from 23.8 percent to 43.4 percent. The House Ways and Means Committee has suggested limiting the capital gains tax to just 25 percent, which does not sit well with progressives.

 

Capital gains taxes are a sore point for many (but not all Democrats), who have complained for years that the present tax laws unfairly benefit the wealthiest Americans. Not so, say others. Moderates argue that there are plenty of small family businesses and farms that would be devastated by these changes.

 

The Biden proposal would offer a $1 million exemption to everyone and would allow farm and business owners to defer taxes as long as their businesses remain family-owned. A new

 

Senate Finance Committee proposal would ease the capital gains hit by raising the per-person exemption to $5 million, and up to $25 million for family farms.

 

Then there is a group of senators and congresspeople (regardless of whether they are progressives or moderates) from New Jersey, New York, and other high-tax states that are insisting that they won't back a budget deal without a relaxation of the limits on the state and local tax deduction, the so-called SALT tax passed in 2018 by Republicans. Progressives are just as insistent that the lion's share of these benefits would accrue to the rich and not the middle class. A compromise might be found in capping any SALT tax breaks to a specific middle-class income bracket.

 

As you can imagine, this debate is not over. I expect it will take at least two more months before a compromise will be hammered out between the opposing wings of the Democrat Party.

 

Investors can be almost certain that taxes will rise for some, but the sting will be lessened to some degree.

 

Fortunately, the chances of compromise are quite high, especially when one considers the stakes. The expansion of the U.S. social safety net, the critical need for a new climate policy, and the fact that mid-term elections are not that far away, indicate a deal will get done.

 

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.

 

For four days in a row, the markets closed down. That is in itself unusual. It has only happened four other times since the March 2020 low. Does this portend further downside in September?

 

On Friday, the markets tried to bounce back. The damage to the averages has been minimal thus far. But given how far we have come, more and more brokerage houses (Goldman Sachs, Deutsche Bank, and Morgan Stanley, among others) are warning that the September-through-October time frame could see a 10 percent correction. How much weight should you give these gloomy predictions?

 

If you are a short-term day, or swing trader heed their call, since we are probably overdue for such a downdraft. This has been one of the 15th longest stretches in market history where the S&P 500 Index has gone without even a 5 percent correction. Consider that the average time between 5 percent corrections since 1950 has been only 97 days. As of Friday, Sept. 10, we are pushing 316 days without such a decline.

 

As I have pointed out in the past, there are plenty of issues that investors are facing over the next two months. Any one of which could justify some profit-taking. We have the looming battle over the debt ceiling, and the beginning of the Fed's announced tapering of bond purchases, to name just two.

 

On Thursday, the European Central Bank (ECB) gave us a taste of what that might look like. Christine Legarde, President of the ECB, announced their own tapering of bond purchases under its pandemic emergency purchase program. The Governing Council kept interest rates the same, but noted that inflation was running at a 3 percent rate in August 2021, the highest in a decade. Markets in Europe took it well, but closed mixed, while U.S. markets fell on the news.

 

Other investor concerns center on the potential slowing of the U.S. economy during this third quarter, as well as the probability that corporations have already hit peak earnings for this cycle.

 

Of course, the pandemic is still with us and continues to cause dislocations. Supply chain issues, which were thought to be temporary, seem to be lengthening in durations in areas such as semi-conductors and consumer durable goods and parts. And economists are still arguing over what is transitory inflation and the other stickier kind. The U.S. Producer Price Index rose 0.7 percent in August bringing the year over year increase to 8.3 percent, the largest on record.

 

Now, none of the above information is new. It has been with us for quite some time, but it's that time of the year when investors for some reason start to focus on what could go wrong (rather than go right). Call it behavioral science, investor psychology, or simply "cup half empty." If this September/October turns out to be down months, then I am pretty sure that November through the end of the year will be up months for stocks. That is the rhythm of the markets.

 

The moral of this tale is that if you are a long-term investor the next two months are simply a tiny blip, or bump in the road that should be ignored. If you attempt to sell everything and then buy at the lows, you haven't learned anything from reading my columns. The best advice I can give is to ride it out, and if markets drop, just don't look at your portfolio (if you are the nervous type).  

 

Another possibility is that we have a shallower pullback than the pundits are predicting, or none at all. Who says they have it right?  As I wrote last week, history has been a poor guide in predicting the future of markets undergoing extraordinary circumstances.

 

As regular readers know, my target for the S&P 500 Index in the intermediate term was 4,550.  On September 2, 2021, we hit an intraday high of 4,545.85, which is close enough for government work.

 

Right now, I see some downside, possibly to 4,448 on the S&P 500 Index, and then I will reassess. Make no mistake, I expect the markets to be volatile in both directions over the next few weeks.  If we do see that 5-10 percent correction, I believe it will happen over the next two months, rather than a few days.

 

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.

It has been 30 years since the Nikkei 225 last touched the 30,000 level. However, many investors look beyond this island nation and focus instead on its Chinese neighbor. That may prove to be a mistake.

 

To some investors, it is the epitome of value investing. Warren Buffet's Berkshire Hathaway made some sizable bets on several Japanese trading companies last year. Japan's stock market is cheap compared to many other markets. But deservedly so, say the bears, since investors have had to put up with years of sluggish growth and perennial deflation.

 

Japan is home to many well-known companies, (think Sony and Toyota) that have balance sheets flush with cash. More than half of Japanese companies have net cash positions on their books, compared to just 10-20 percent of most companies in the Western developed world.

 

Over the past few years, an increasing number of activist's equity funds and private equity firms have lobbied these cash-rich firms to begin to share the wealth with shareholders. Japanese corporations are listening. As a result, dividend income is increasing. The dividend yield now tops that of the U.S. stock market. The average Japanese company is still paying out only a third of profits as dividends. there is a lot of room for growth in the years ahead.

 

Those trends tend to fall on deaf ears, however. That is understandable given the nation's aging population, insular business culture, and overwhelming national debt.

 

Japan is the developed world's most indebted nation with a debt to GDP ratio this year of 256.49 percent. It has been so for decades. What most investors fail to understand is that Japan, unlike many other nations, has little to no risk of ever going bankrupt. That is because it also happens to be the greatest creditor ration in the world. The Japanese are among the world's best savers. Their savings rate is about 20 percent, compared to just 5 percent in the U.S.

 

The fact is that its debt is entirely denominated in Japan's own currency, the yen. And about half that debt is owned by the Japanese Central Bank. In other words, the government is lending money to itself. It has no fear of default as a result. Of course, by creating too much money, the nation runs the risk of generating inflation. That would be ideal in the case of Japan. since inflation is currently stuck around zero. For years, Japan has been battling deflation, noy inflation.

 

Like all nations, the Japanese have been wrestling with the COVID-19 pandemic with varying success. After postponing the 2020 Tokyo Olympics, Prime Minister Yoshihide Suga, of the Liberal Democratic Party (LDP), despite opinion polls to the contrary, decided to risk holding the games in July 2021. At the same time, the Delta variant pushed COVID cases to a record high. On the economic front, massive fiscal and monetary spending has had only a modest impact on growth. Japan's economy is expected to grow by 2.8 percent in 2021. Public support for the ruling, market-friendly, Liberal Democratic Party has been waning as a result.

 

 In response, Prime Minster Suga abruptly announced last week that he would not be seeking reelection after only a one-year tenure. His resignation likely improves the chances that the next leader will come from the LDP, which removes a major concern for equity investors. The clear winner of Suga's announcement has been the Japanese stock market. It has risen by more than 4 percent since the announcement.

 

There is a short list of prospective candidates from the LDP, but investors are expecting that whoever wins, improving the rate of vaccinations, and additional fiscal spending program of "tens of trillions of yen" will be in the cards. If so, investors should keep their eyes peeled for any downside in the Japanese stock market in September 2021and October 2021. It would be an ideal time to commit some capital to Japan.

 

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 proverbial Wall of Worry provided plenty of foot holds for investors this week. The major averages continued to make new highs (or hovered just below them), despite bad news and focused instead on anything that could justified higher prices.

 

The belief that the Delta variant of the coronavirus may be peaking in the worst-hit states was enough to cheer investors. Not that the extremely contagious infection ever had much of an impact on the markets anyway. Still, the hope that Delta has peaked gave added umph to large cap growth stocks.

 

Helping this summer's move higher was almost $30 billion in fresh money that has come into the market since July. It appears that many retail investors with money on the sidelines caught FOMO fever. This "in at any price" behavior might explain why valuations continue to be stretched upward, despite the belief that we have already seen "peak" earnings in the stock market.

 

As I cautioned investors, last week's Jackson Hole symposium was a non-event with Fed Chairman Jerome Powell sticking to his story line that tapering would come, just not yet. That relieved some of the markets' anxiety around when the taper would begin, at least until the Sept. 22 FOMC meeting.  Weaker employment data for last month, I expect, will postpone any tapering until more data is forth coming. That could mean no action from the Fed until November 2021. Readers should hear a lot of jaw boning by Fed officials leading up to the Sept. 22 meeting. Their frequent speeches, insights, and opinions are meant to give the markets plenty of time to adjust to a taper without (hopefully) causing a tantrum.

 

In the meantime, equity strategists are split between calling for even higher prices ahead or warning of an imminent correction during September, which historically has not been kind to the markets. But that is not necessarily going to be the case this year. In years where the stock market has had strong upside gains, like they have had this year, two-thirds of the time, stocks have had a pretty good month.

 

However, history, especially in a time of extraordinary events, such as the present pandemic, along with huge monetary and fiscal stimulus, has not been an accurate predictor of financial markets. Technical analysis is also less effective in determining market movements when stocks continue to make new historical highs week after week. Markets can perform like rubber bands that are stretched and stretched until they snap. The problem is that no one can gauge the strength of the rubber bands.

 

For instance, for months I have targeted 4,550 on the S&P 500 Index as a likely spot where we may see some consolidation, at least in the major averages. Traders have pushed stocks up close to this level several times this week only to back off by the end of the day.

 

At this time, the S&P 500 Index overall is extremely overbought, as is the NASDAQ, if less so. Momentum in many stocks is also bleeding off. Yet, the small cap, Russell 2000 Index, which has been in a holding pattern for most of the year, seems ready to catch-up to the main averages in the weeks ahead.

 

Precious metals also look to have room to run. Gold has broken out of an eight-year range, but there has been no follow through as of yet. The price just chops around in a tight range. The dollar, I suspect, will determine when and if gold moves higher. The greenback has been in a trading range for months. It is presently weakening against a basket of currencies. The weaker it gets, assuming interest rates remain low, the higher the price of gold, or at least that is the theory.

 

Bitcoin and Ethereum, two of the major crypto currencies, have responded to the weaker dollar. Bitcoin, after spending the last few months digesting its decline from more than $64,000 to $28,000, has been inching its way higher week after week. I said "inch" instead of leap, or spike, because the volatility around Bitcoin has quieted down.  

 

Some analysts believe that the entry of a large number of institutions into the crypto currency market (as opposed to just retail money), has had a calming effect on price movements. Ethereum, on the other hand, has been outperforming Bitcoin, which may mean that crypto is no longer a one-horse Bitcoin show. That could be another sign that the crypto marketplace is maturing.

 

If Bitcoin can break through the $51,000 level (no easy task), says the chartists, then the chances of a move higher rise substantially. Some crypto bulls expect to see $100,000/coin by year end. On the downside, Bitcoin below $46,000, and Ethereum under $3,500 would indicate to me that this up move has failed.

 

As for the economy, supply chain disruptions, the end of stimulus payments, and higher unemployment checks are expected to have slowed growth in the economy this quarter, which could also be a headwind for the stock market. Unemployment claims continue to decline, but the number of unemployed workers is still quite high, despite the enormous number of unfilled jobs nationwide. Non-farm payrolls for August 2021 were a disappointment with the economy only gaining back 235,000 jobs — half the consensus forecast.

 

Let's stay the course on the investment front, even though we may experience a little turbulence this month. And have a great Labor Day weekend, everyone.

 

Non-fungible tokens (NFTs) have been around since 2014, but I'll bet you haven't heard of them until this year. As part of the crypto craze, these NFTs are commanding millions of dollars in spending and expanding into everything from original art to tacos.

 

NFTs are digital assets. For those like me, who are old enough to be grandparents, and may still read the newspapers, the concept of a digital asset may not be all that intuitive. "Non-fungible" means that it is a unique asset that can't be replaced with something else.

 

NFTs are bought and sold online (usually with a cryptocurrency), and stored and encoded in the same way. The difference is that cryptocurrencies, such as Bitcoin, are fungible and can be traded, or replaced, with another bitcoin. These digital assets can include everything from original art, videos, and music, as well as collectables like electronic sports cards, in-game articles, and whatever else sellers believe will have value to the spending public.

 

Most NFTs are bought, sold and supported by the Ethereum blockchain. Ethereum, for those who don't know, is both a cryptocurrency, like Bitcoin or Dogecoin, but also offers a sophisticated, state-of-the-art blockchain that stores extra information needed for all sorts of digital transactions including the processing and handling of NFTs.  

 

Ethereum is not the only game in town, however. There is a growing list of competitors that have also entered the market. They function as a marketplace where NFTs can be stored, displayed, traded, and in some cases, created. These marketplaces are to NFTs what Amazon or eBay are to goods. So how do you access them?

 

You need to have a crypto wallet. If you already buy or sell cryptocurrencies, you probably already have one. But it must be compatible (and prefunded) with a blockchain that supports the NFT you want to buy. NFTs are usually purchased for a fixed price, or through an auction like on eBay.

 

The purchase includes a built-in authentication, which serves as proof of ownership. Each original object has its own digital signature that makes it impossible to be traded or exchanged for something that may look similar, but isn't. Therefore, the buyer can never be stuck with a fake copy of something like a digital Mona Lisa.

 

Today, although there are many types of marketplaces, universal and art-oriented platforms are the most popular. There are also nice niche players that specialize in things like collectible cards, virtual real estate, and in-game articles.

 

Some items have sold for substantial sums like a tweet from Jack Dorsey, the founder of Twitter, that sold for almost $3 million. Big business is also starting to dabble in this market. A number of Fortune 500 companies are jumping into NFTs as part of their marketing strategies. Visa, for example, paid $150,000 for "CryptoPunk," which is just one of thousands of NFT digital avatars up for sale. Nike has patented a method to verify sneakers' authenticity using an NFT system called CryptoKicks. Marvel, the home of so many superheroes, launched its own NFTs, as did Wayne Gretsky.

 

Then there is "Beeple," a digital artist, whose real name is Mike Winkleman, who rocketed to fame when Christie's, the art auction house, announced it was selling a digital work by him. The auction attracted 125 bidders and sold for $69 million. That was $15 million more than Monet's painting "Nympheas," which sold for $14 million in 2014. A video by the same artist brought in $6.6 million.

 

The clip art of a rock just sold for 400 ether, that's about $1.3 million. The transaction marks the latest sale of EtherRock, a brand of crypto collectables. EtherRock is a JPEG of a cartoon rock, built and sold on the Ethereum blockchain. There are only a hundred available, which I'm guessing is part of the attraction.

 

 What makes a cartoon rock (not even a real rock) valuable? Its scarcity value. In a world where there is an infinite supply of most digital creations, NFTs stand out because they are generally, one-of-a-kind, original artwork.  Of course, like any product there is an implied assumption that there is a demand for the object on sale.

 

Owners of NFTs are taking the chance that no matter how many times you might be able to download a copy of their original, it isn't the same as owning the Real McCoy. Frankly, you won't see me lining up to buy a virtual rock anytime soon. To me, it serves no purpose I can see beyond its ability to be bought and sold. I guess it could give you a sense of pride and maybe bragging rights in being the owner of one of only 100 such rocks, although I doubt I would want to brag about that. 

 

Don't be too quick to dismiss NFTs as just another craze, however. For the starving artist, for example, it is an avenue (without middlemen) where they can sell their works direct to the public and make a living. I believe that in the years ahead, crypto and other electronic currencies, blockchains and the like will replace existing exchange systems as well as transaction settlements.

 

As the world continues its journey into a digital reality, NFTs could grow and become an accepted part of that brave new world. As we have replaced the ubiquitous oversized travel photo books on our coffee tables, the slide show of our vacations, and even our family photo albums with digital memories, is it so hard to believe that there will be a market for NFTs?

 

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.