MY MARKETS

MY MARKETS

YEAR-END, 2022/DECEMBER 2022

INTEREST RATES

With inflation running wild at 9.1%, the FED, without admitting any fault, begins to attempt to fight inflation. The FED caused the vast majority of the inflation with years of “free money”, keeping Fed Funds at or near 0.00%, yes ZERO PER CENT. With the advent of “free money”, every imaginable, crazy idea that could be created (finance for free) was set into motion. Speculation through SPACs (special purpose acquisition corporations), Coins of every nature, and just plain over-leveraging in almost any field were created. Solid growth businesses borrowed, simply to borrow (after all it was free). The Government sent free checks to those who really had no need for them. The incentive to work went bye, bye.
Finally, the FED woke up and Jay Powell, suddenly wants to become Paul Volcker of the 2020’s. Of course, remember, he attempted this in 2018-2019, but became a weak sister and reversed back to free money after a “blip” in the stock market: no guts, no glory.
This time around he is taking a hard-core stance and says he will not back down until inflation falls back to his target of 2.00%. Have you ever computed what 2.00% inflation does to a dollar? At 2.00% a dollar decreases in value approximately 18.00% over a ten-year period: why not shoot for 0.00% inflation and let Interest Rates be determined by supply and demand. Of course, a lot of Phd. Economist at the Fed and elsewhere would probably be out of a job: good riddance, I say.
Be that as it is, 2022, has been on a steady course of increasing interest rates and inflation remaining high. Fed Funds has moved from 0.00%-0.25% to the current rate of 4.25%-4.50% and moving higher. Fed Chairman Powell continues to stand on moving rates higher for longer until inflation decreases significantly: time will tell.
With all the bubbles bursting (Cyrpto, SPACs, Tech, & others) inflation continuing to hold at high levels, and Interest Rates increasing, the equity markets have taken a heavy hit, and poor earnings are beginning to come to the forefront. Will Powell hold his stand or weaken as he did in 2019? My best bet is that he folds at some point. Paul Volcker, he is NOT!

Beginning in late summer/early fall, MSA CAPITAL began raising cash (Treasury Bills) in equity accounts. We continue to utilize Treasury Bills (very short maturities) as interest rates continue to rise. Where do we see Rates moving to? It is my opinion that Fed Funds should be somewhere between 6.00% and 7.00%; will we get there, only Mr. Powell knows. At somewhere between the 6.00% and 7.00% level, the Five-Year Treasury should approach 7.50% to 8.00% which would force us to commit a certain percentage at or near those maturities. For now, we continue to stay one to three months in maturity as higher rates bring lower dollar prices, particularly as one moves further out the curve.

Of course, the Federal Deficit remains a constant concern as it has crossed through $31 Trillion. Higher Interest Rates increase the Deficit with higher Interest Payments. The Government will not even attempt to cut the deficit, regardless of all the hype one hears. The Interest Payments continue to be a greater per centage of GDP (Gross Domestic Product) annually placing more and more strain on the annual budget and taxpayers. Interest Rates will continue to dominate the scene in 2023. Watch for a pivot by the FED and Free Money returning.

EQUITIES

2022: The Year that started great and ended poorly. The S&P 500 peaked on January 4, 2022, at 4,818, only to end the year at 3,861, a loss of 957 points or -19.86%. During the course of 2022, there were five major moves down in the S&P with each down- move resulting in five rally-backs, but short of the previous high. Late in July, early in August the S&P appeared to be ready to move ahead with a move from 3,610 (the current low at the time) to approximately 4,324; but, only to a new low of 3,491, before reversing and ultimately closing the year at 3,861. A very ”whip-sawed” year to say the least, and certainly not a pretty picture.

The year was filled with “bubbles” bursting and the FED increasing interest rates. Tech and growth stocks do not do well with increasing interest rates. As I have discussed in the Interest Rate section of this commentary, Fed Funds have moved from 0.00% - 0.25% at the beginning of the year to a year-end level of 4.25% - 4.50%. Of course, the SPACs (special purpose acquisition corporation) have taken a major HIT, with many collapsing 50, 60, &100%. Issuance of SPACs was the hot deal in 2021 and early 2022, only to almost total diminish from the middle of the year to year-end. It is estimated that approximately $2.00Trillion have been lost by Billionaires during 2022, with approximately $30Trillion in losses for the entire market. Close to 30% of equity money has left the stock market during the year; much of that has gone to Treasuries which now have a decent yield.

P.E. Ratios have come in dramatically from the mid-to-high twenties (and higher) to the mid-teens, and much lower in specific sectors. The pandemic years (particularly in China) along-side the Ukraine-Russia war have also placed many industries totally off- track. Here in the U.S. “Domestically Made” appears to be coming back in favor, but that type of change takes time, sometimes years, not months. Add to this the Biden Administration attempting virtually destroy the Petro-Chemical Industry in the U.S. and you have a huge problem. To make this situation worse, Biden then begins depleting the Strategic Oil Reserves; to replenish oil deficits, Biden begins buying oil from foreign socialist countries: makes no sense to me.

So, where do we go in 2023? Only a liar will tell you he knows the answer to that question. Of course, after about six months there will be some who took a shot in the dark and will declare that they called the bottom, or the top. All I can admit to is that the high of 4,818, set on January 4th of 2022, will be very difficult to return to in the coming year. I have included a screenshot of the S&P 500 below which shows the 2022, price action. I do not see the current trend reversing anytime soon. Over the course of 2022, MSA CAPITAL has raised cash (Treasury Bills) in the majority of accounts that we manage. The level of cash varies in each account depending upon the risk factors and objectives of each individual account. As mentioned above in the Treasury section, we continue to keep our Treasury positions very short while the FED remains in an Interest Rate raising mode.

If you have any questions or would like to discuss the markets, please feel free to contact me.

Sam Altimore

Principal/Owner

MSA CAPITAL MANAGEMENT, PLLC

REGISTERED INVESTMENT ADVISOR

Sam Altimore
Principal/Owner
7215 Chartwell Circle
Fair Oaks Ranch, Texas 78015-4745

PH.) 713-628-7550 830-357-8280

MSACAPITALMANAGEMENT@icloud.com

www.msacapitalmanagement.com

DISCLAIMER: This message (including any attachments) is confidential and/or privileged. It is to be used by the intended recipients only. Any unauthorized use or dissemination of this message, in whole or part is strictly prohibited. I may at any time be Long, Short, or Arbitraged in any of the securities mentioned above. In addition, I may close out any position, at any time, that is mentioned above. This information is private and intended for use only by those who receive it directly from the author. These are not recommendations and the information should be used at the risk of the reader.

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MY MARKETS

NOVEMBER 2022

U.S. TREASURY YIELD CURVE

Interest rates and the FED have been the name of the game this year. With inflation running at or near 8.00% for the majority of the year, the FED is finally attempting to correct their errors of the past ten years or so. As can be seen in the table above, rates are up across the board since the first of the year as well as for the month of November. The FED forced rates to zero to prevent a recession as well as hoping to save the economy from the pandemic and government shutdown. Basically, free money (at 0.00%) allowed excesses in virtually every sector of the economy. Zombie businesses were created, excessive leverage was available to one and all. People and businesses borrowed money that they really didn’t need. Along with this the FED created a $6 Trillion balance sheet by buying up virtually every Treasury Issued, and quite a few Mortgage Backed Securities. These actions flooded the monetary system with excess money which was spent lavishly and created pressure for goods and services which were not in abundance; creating inflation.

The FED has never learned that Interest Rates, are inflationary as they are rising. Most businesses and services will simply pass on the higher rates as a cost of doing business until they approach pricing their product or service out of reach for their buyers. But that does not happen in the early stages of raising rates. Also consider that when rates are being raised from a zero percent level, the first several rate increases remain well below what is considered a hinderance or excessive.

Consider that the average mortgage rate prior to 2022, was 3.00% + or – a bit. Those rates, which are typically priced off the ten-year Treasury allowed many to speculate in the housing market as well as allowing many marginally qualified buyers to actually buy. Unfortunately for those who bought adjustable-rate mortgages, higher rates will not be pleasant when time too adjust rolls around. Typical 30-year mortgages that went for 3.00% or so at the beginning of the year are now somewhere in the 6.75% to 7.00% range; yes, double.

The FED is now saying that they may well slow the pace of raising the rates, but they will hold strong with the higher rates longer that originally thought. This will not bode well for the economy which remains questionable at best. And even though the FED continues to “HOPE” for a soft landing and mild, if any, recession, they need to wake up from their Dream World; we are already in a recession and inflation remains close to 8.00%, by their measure.

I continue to look for Interest Rates to move higher over the next three to six months, then we will see what the damage is. MSA CAPITAL MANAGEMENT continues to hold a relatively high per centage of cash (ie. Short Treasury Bills) all of which matures within three months.

EQUITIES

The equity markets have actually fared well during the month of November. The Dow Jones increased approximately 5 ½% for the month while the S&P was up 5.30% and the NASDAQ increased by 4.03%. These numbers are welcomed by all, but it must be pointed out that many individual securities actually bit the dust during this same period. Numerous bubbles have been burst; the SPACs, the NFT’s, the Coins, and even many of the Tech standbys. The number of individual stocks that remain down 20%, 30% and some 60 or 70% continue to struggle. The Dow Jones which led the pack during November remains down -4.81% from 12/31/2021. At the low point of 2022 the Dow was down to 28,660; the high of the year was on January 4, 2022, when the Dow topped out at 36,952. The month of November was an excellent month when one considers that from the low of 28,660 on October 13th to the November month-end of 34,589, an increase of 5,929 points or 20.68%.

Now, all that said, The S&P and NASDAQ did not fare quite as well; they did good, just not that good. The S&P had a low of 3,491 on October 13th and closed the month of November at 4,080, an increase of 591 points or 16.87%, which is certainly not shabby. The NASDAQ also hit its low of 10,440 on October 13th while closing the month of November at 11,468; a gain of 1,028 points or 9.84%.

This has all been very positive, but does it take us out of Bear Market Territory? That is obviously the Million Dollar Question. I believe these moves are obviously very positive, but one must keep in mind that we continue to face higher interest rates which could indeed throw the U.S. economy into a deeper recession. Recessions do not generally do any favors to company sales and earnings, particularly if accompanied with unemployment. Although employment remains fairly strong, there are cracks beginning to appear with rather large lay-offs. If people aren’t working and earning, they generally are not spending….that does not help sales and earnings of companies and service providers. On a side note: why do we never hear of Government layoffs and unemployment?

We continue to hold several equities which have held up quite well and we are always looking for new, or old names that are priced with value and are trending to the upside. As we have stated in previous issues of MY MARKETS, we would prefer to see the general markets move sideways for a period of time allowing the weak holders an opportunity to leave and a base built by the price action. The price action of November has not gone un-noticed and may well be the beginning of better days ahead. But as stated earlier we will continue to monitor the FED and the Interest Rate Markets and the effect on the equity markets.

If you have any questions or comments, please contact me; I welcome all comments.

Sam Altimore

Principal/Owner

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MY MARKETS

OCTOBER 2023

The markets are all being controlled by Interest Rates. As can be seen in the chart above, Interest Rates accelerated during the month of October, moving to highs going back 10-12 years and longer. The Yield Curve remains inverted (2-year Treasuries higher than 10-year Treasuries) which indicates that we are in a recession, regardless of what the governments says. Virtually every recession in the past has been preceded by an inverted Yield Curve. The FED meets again on November 1-3 and will announce another .75 Basis Point increase in the Fed Funds Rate to 3.75% - 4.25%. This move is one of the most rapid increases in the Funds Rate in history. The Fed Funds Rate was .25% (1/4 of 1.00%) in March of this year. Obviously, the Funds Rate has been higher, actually much higher, but it took longer to get there in the past. A Funds Rate of 4.00% is not that big a deal, as the Funds Rate has normally been in the 5- 6% range in the 70’s, 80’s and part of the 90’s, but the rapid change from .25% to 4.00% has created a bit of a shock in the economy as well as the markets.

Why are interest rates such a big deal? Most businesses borrow money for a myriad of reasons, the largest being to buy goods and supplies for their end-product. As one might expect, as rates move up, the cost to produce goods and services rise, forcing business to raise prices to make a profit (sounds like more inflation to me).
The Fed felt compelled to drive Interest Rates to zero and create Billions of excess Money Supply in tandem with the advent of a “pandemic” and government shutdown of business. The Government, not to be outdone by the Fed, decided to pass out free checks to the public and businesses (most of which did not need them) creating more excess. With all the excess money in the system and business attempting to re-start, Demand simply out-paced Supply; basic economics 101. Thus, in marched Inflation with a vengeance. Now the Fed is attempting to cure their errors of excess with excessive interest rates. Just as supply is getting closer to meeting demand, the Fed forces increased pricing with that supply by raising interest rates; they will never learn.
Rates may begin to top out as the recession sets in during the first quarter of 2023, but don’t hold your breath, no one knows what the Fed will do next. Interest rates are what keeps the markets and economy alive or dead.

During the first two to three weeks of October the equity markets struggled to find a comfortable level as many companies set new 52-week lows. Higher interest rates have not been good to tech stocks as many have recently set new lows, some as much as 40 to 50% declines. During the latter part of the month a number of the tech leaders began to move sideways and form small bases. As earnings reports began to trickle out it has become apparent that many companies have reduced their forward guidance to make their earnings look a bit better and possibly allow them to beat expectations of their current reports.....it basically didn’t work as many stocks reacted negatively after brief upward moves.
The S&P has registered an increase of approximately 7.97% during October versus approximately a 19% loss for the year. The S&P had registered a loss of approximately 27% from year-end 2021, to the low of 3,491 on 10/13/2022; a loss of 1,275 points. With the economy on the edge and equities showing declines, there has been talk of the Fed slowing their Interest Rate increases toward the end of the year, this has created a relatively positive move in equities during the last 10 or so days of October. Whether this comes to fruition or not is yet to be determined, time will tell.

We remain cautious with higher-than-normal cash (Treasury Bills) positions. We continue to wait for consolidation to work through the markets as well as waiting on the outcome of the elections and the impact that may have on the markets.
If you have any comments or questions, please do not hesitate to contact me.

Sam Altimore

Principal/Owner

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MY MARKETS

SEPTEMBER 2022

First, let’s look at Interest Rates. Interest Rates for the last decade have been driven by the FED; and basically, driven into the ground at or near zero on the short end of the yield curve. With Interest Rates at or near zero, virtually anyone could borrow money at very little cost. Cheap, or free money encouraged all sorts of careless investing and spending. Money supply ran rampant as the FED bought Treasury Bills and Bonds creating a Balance Sheet of $9 Trillion. Many needless companies were created with virtually little or no earnings and in some cases not even any revenue. All of these actions, with the addition of Billions of Free Dollars from “Covid” giveaways caused numerous “bubbles” in the marketplace, driving prices higher than logical valuations would merit.

Approximately a year-and-a-half or so ago, the FED woke up and determined that Inflation was becoming a problem, but only in a Transitory fashion. Quite honestly, I agreed to a great degree. Coming out of the Covid “lockdowns”, with a great deal of “Free Money” in hand, demand on all fronts, was outstripping supply which had been cut back severely due to the lockdowns mandated by the Government and the CDC. Very quickly it became obvious that this was going to be much more than Transitory. Money Supply, low-to-no Interest Rates, and a sizzling hot stock market; what could possibly go wrong? Jerome Powell and the FED finally woke up and decided to do something; but they were, and are, so far behind the curve that it is truly questionable that they have a chance at all.

Interest Rates, in an Inflationary environment are, in themselves, even more Inflationary, at least as long as rates follow inflation rather than being higher than the Inflation Rate. Interest rates are a “cost of doing business”, and as long as business sees the ability to sell their product, they will simply pay the rate and, when possible, pass that increase on to the customer…….at least as long as they can without the customer balking. Obviously, this method will eventually play out as the cost becomes too much, thus the beginning of a recession. The FED, with all their PhD.’s and total lack of practical business, continue their efforts by allowing their $9 Trillion Balance Sheet to run off (or mature) creating a liquidity problem just as a recession is being cranked up and valid companies are beginning to need liquidity.

Add to this a Federal Deficit of approximately $31 Trillion due to the lack of discipline by Congress (Yes, Republicans and Democrats alike), with interest rates moving higher; at some point the cost of higher interest rates will be intolerable in servicing the deficit. Therefore, the FED will either have to back-track and begin lowering rates or simply continue to fight inflation with higher rates and less liquidity, causing the recession we are already in, to become even deeper and more severe.

The equity markets have taken a toll, particularly over the last quarter. At last count, over 60% of the S&P 500 were trading below the 250-day moving average. Most of the “Coins”, SPACs, and tech stocks are down anywhere from 40% to 60% with many of the “no-revenue” stocks either in bankruptcy or trading at or near zero. The rage of the era, SPACs, have all but gone away; hopefully, rationality is finally coming back to the equity markets. Most of the “coin” stocks and ETF’s are down 60% to 90%; as far as I am concerned: GOOD RIDANCE!

At MSA CAPITAL MANAGEMENT we have raised our cash allocation in most accounts to between 20% and 35%, depending on the individual account and the Risk Tolerance of each account. The equities we continue to hold are, for the most part, longer term holdings and in all cases, basic industries which are essential to the overall economy. The cash allocation of these equity accounts may well rise even further, depending on the overall action of the equity markets.

As for Fixed Income, our holdings are all in U.S. Treasuries and have maturities of 1 to 1 1/2 Year or less. Any and all new acquisitions in Fixed Income will be U.S. Treasury Bills of three months or shorter (mostly shorter) until we see the trend in Interest Rates reverse or stall. At some point Interest Rates may well become worthy of longer maturities, at much higher Rates.

This is a lot to digest, and we are at a very crucial point in the markets. We do not claim to have all the answers, but over the last 55 years we have seen a lot of the same errors that are being repeated, over and over. And this time around, there are many new twists and turns. If you have any questions are comments, please, do not hesitate to contact me. I am always open to new, and even old ideas.

Sam Altimore

Principal/Owner

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MY MARKETS

AUGUST 2022

Interest Rates are the dominate factor with the markets today. With inflation running over 9.00% (or higher in real life) the Fed has taken the task to “kill inflation” by raising interest rates. As is shown in the above table, the One Month Treasury has moved from 6/10 of 1.00% to 2.40% from the beginning of the year through August 31, 2022 (the largest move ever in U.S. history of interest rates on a percentage basis). Of course, keep in mind that it was the Fed that created the majority of this inflation by manipulating rates to zero percent while hoarding a balance sheet of $9 Trillion Dollars, all created out of thin air. This same time frame saw money supply go through the roof as our Government sent free checks to virtually everyone, again, created out of thin air. Thanks to our Federal Government and the Federal Reserve we are now faced with a Federal deficit of over $31 Trillion Dollars. And who will pay for this? Yes, you and I and our kids and grandkids.

The biggest risk of all this is that the Fed will overshoot what is needed to calm inflation and will continue to raise rates after inflation subsides. Additionally, the Fed has begun to reduce their balance sheet by allowing maturities to expire without replacing those securities; this action will reduce liquidity in the monetary system causing rates to increase further. For the most part, inflation has peaked. Take a look at commodities, corn, wheat, lumber, copper, oil, gold and silver; they have all rolled over and are heading south. Will these prices drop off the face of the earth, absolutely no, and they may have a few adjustments to come just as they did on the way up.

The Fed has a habit of being late to the party and then staying too long. Do not be surprised if interest rates are driven higher as inflation slows and even drops due to recession. The government may not officially declare our economy in a recession but it is very difficult to challenge two back to back quarters of negative CPI, as well as an inverted yield curve. The impact of employment is very difficult to weigh on this situation right now as there are abundant jobs available and tons of people not seeking those jobs. But keep in mind as many other factors begin to deteriorate, such as housing, used car sales and the price of oil, how many of those job openings will remain.

The lack of supply of goods and services that the economy faced over the last couple of years due to the pandemic and lockdowns appears to be fading, with a few exceptions. The largest supply deficit that exists now is able-body workers. As the free checks from the government are spent and credit cards are maxed out, workers may be more willing to accept the jobs that are available; let’s just hope that the economy stays strong enough to support those potential jobs. All in all, look for interest rate to move higher, my estimation is that the Fed will raise the Fed Funds rate at their September meeting by another 75 Basis Points.

Mr. Powell keeps speaking of a “soft landing” but consider that we have inflation of over 9.00% and interest rates at all-time lows; a soft landing will be difficult, probably impossible. The day before Mr. Powell’s Jackson Hole speech on August 26, the S&P closed at 4056. By August 31, the S&P was down approximately 244 points or 5.81%, in only four
trading days. The true test will now come as the S&P approaches the 3850 level where there appears to be modest support.

Earnings have been relatively good with more than 3⁄4 of the S&P reporting. That-said, a number of companies did reduce their expectations, allowing them to beat the consensus. A great deal of the “garbage stocks” have already been corrected in the market; spacs (special purpose acquisition companies), zombie companies (companies with little or no earnings and sometimes very small revenue), and several crypto companies. Many of these off-the-run companies are down 50%, 60%, 75%, and even more.

One of the final shoes to drop in forming a market bottom is housing; and that has begun. Listings are being reduced by significant amounts as buyers are backing away. Higher interest rates accompanied by higher prices have finally caused buyers to shy away. There are rumors, emphasis on rumors, that a number of mortgage companies are either laying off employees or shutting down. Of course Bank of America is different, they are beginning to offer some folks no down payment loans.....can’t wait to see how that works.

This coming week, 9/6/2022, will be a very important week; price action will be closely watched and, could well determine the next major move in the equity markets. We have raised a small amount of cash in most accounts and will be paying very close attention to this week’s movement.

Please do not hesitate to call if you have any questions.

Sam Altimore
Principal/Owner

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MY MARKETS

JULY 2022

With the exception of a couple of days in mid-month, the month of July was positive most days.
three major indices had very healthy moves to the upside. The Dow Jones was up 2,070 points, or 6.70%; The S&P 500 ended the month up 345 points, or 9.10%; and the NASDAQ was up 1,362 points or 12.35%. Even with these very healthy moves by all three major indices, there was a large number of individual stocks that took major hits. Most of the SPACS (Special purpose Acquisition Companies) of the past few years had major declines, some as much as 60-70%. A number of large capital stocks were also victims of major selling; Facebook, Roku, and even IBM.
The big question is: have we hit the bottom of the sell-off? All three indices have moved up above their 50-day moving average which is a positive sign and would indicate that the markets have room to move higher.

As the charts above clearly show, all

The Dow Jones was down 16.00%, the S&P was down 20% and the NASDAQ was down almost 30% all from the close on December 31, 2021, through June 30, 2022. Those declines were very severe and weather we are now in a major positive trend is yet to be determined. The volume in the first 2/3 of the month of July was a bit on the low side but seemed to really pick up in the last week or so.
Our personal view would be to remain cautious until we see more follow through. The next week or two will produce a number of earnings reports which will include several companies which MSA CAPITAL MANAGEMENT owns. Additionally, MSA CAPITAL continues to hold larger than normal balances of cash. For now, we will hold our cash and wait for the base to build .

The two-year to ten-year Treasury yield continues to be Inverted with the two-year at 2.89% vs the ten-year at 2.67%; the inversion

(using official U.S. Treasury Closing prices) began on July 6th and has peaked at -22 basis points thus far. The inversion along with

the second quarter GDP coming in at -.90% would normally indicate that the economy is in a recession. Of course, Joe Biden seems to differ with history (imagine that) and he has declared that we are not in a recession. Of course, the official decision of recession or no recession lies with the National Bureau of Economic Research and their decision is yet to be announced.
I think with inflation running at 9.00% +/-, two back-to-back quarters of negative GDP, and an inverted Yield Curve, we will go with we are in a recession.

With all this bad news, one should keep in mind that commodities have topped and are heading down in price, unemployment is at all time lows, inventories are catching up to demand, and a number of industries are beginning to see slowdown. Crude Oil has stabilized to some extent between $95 and $99, with gasoline below $5.00, unless you live in California. Inflation should begin to slow, and I expect the CPI (Consumer Price Index) to decline to the neighborhood of 8.00% or so by the end of September; the seasonally adjusted rate for the last 12 months ending in June was 9.1% Time will tell.

The Fed has now raised interest rates (The Fed Funds Rate) 75 Basis Points for the second time; will they raise the rate 75 Basis Points a third time? My guess is Yes, they are far behind the curve (no pun intended) with inflation running at 10+ percent. The Fed caused the majority of this inflation with their super-low interest rates and creation of Trillions of dollars of free money, created out of thin air. Now, we the people are paying the price for their cluelessness. It always amazes me that the FED (as an organization) is

staffed with hundreds of PhD. Economist attempting to manage and regulate the economy, and none of them have ever held a job outside of government or academia. I would bet good money, that few if any have ever even held a position in the real world of business, made a payroll, or managed a product or service. Yes, our FED is totally unqualified, but that is what we have to live with.....for now.

Short term Interest Rates should continue to rise over the near term and Longer Term Interest Rates should also increase, but in a lesser degree as the economy continues to slow.

Sam Altimore

Principal/Owne

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MY MARKETS

JUNE 2022

The first half of 2022 saw the markets set new highs very early in the year, only to finish the first six months down approximately -16.00% via the S&P 500, -11.00% for the Dow Jones Industrials and the NASDAQ off 22.00%. Volatility was the norm of the day. The markets have had no mercy on the “memes”, the coins, and the “spacs” (special purpose acquisition company). Many of these issues are down over 50.00% and some are now trading pennies on the dollar. A number of the new “coins” are trading at a fraction of the price of a month or two ago; Bitcoin is off over 50%.

Today’s markets are in a very rare form. The equity markets are struggling to stay afloat as the bond market continues to look for a ceiling in yield. These happenings are taking place with inflation running in excess of 8.50%;. one would think that Gold and Silver would be on the rise with this type of inflation, but they are both in a downtrend….these are very strange times. Tech stocks have been hit hard, very hard, and are looking for a bottom. There are shortages of certain types of semi-conductors and chips that effect the auto industry, as well as virtually everything else that is automated.

We find ourselves on bended knee, begging Saudi Arabia for oil; yet there is enough oil in West and Northwest Texas to supply the U.S. for the next 200 years by some estimates. But our government is dead set on Killing the Carbon Industry. As Joe Biden has said, if you don’t like $5.00 gas, go buy an electric car (which usually cost about double a gasoline powered car). Yes, we are in a world that is converting everything to re-newable without an infrastructure that is decades away. Have you ever looked around and tried to figure out what things are made of? More than likely, 80% to 90% of everything we utilize on a day-by-day basis is derived by carbon of some sort or the energy used to make it is carbon fueled; and our government wants to shut down the carbon industry. In the midst of all of the bad news, there is a bit of light; commodities, across the board, have been topping out and have become a bit cheaper. A lot still depends on the weather, supply chains and the Russia/Ukraine war before these prices get back to reasonable levels.

The second quarter by itself was a disaster; the S&P was down 16.44% from March 31 to June 30 of 2022. The Dow was off 11.25% and the Nasdaq was down 22.44% for the same period. Over half of the NASDAQ is trading below their respective 200 day moving averages. New lows outnumber new highs by a huge number, depending on the day. So, have we reached a bottom? That remains the sixty-four-thousand-dollar questions. There are signs that certain value stocks which are now trading below normal P.E. Ratios are forming a bottom. The high P.E. Ratio growth stocks are getting there but may still have a way to go. If we go into a recession all of this may be for naught as many core companies may begin to lay off people as the see their revenue beginning to decline as the consumer begins to spend his savings for every-day living expenses.

After over two years of shutdowns virtually mandated by the government, businesses are diligently attempting to build supplies back to normal levels. The demand for goods and services has outpaced the supply for almost the entire past two years. Now that the economy is attempting to get back on track, the government shuts down a major Pipeline and restricts drilling on many Federal Oil and Gas leases. Short supplies of gasoline and diesel along with huge demand across the board for other goods and services and guess what…INFLATION of 8.60%. Add to that Zero rate FED FUNDS and a FED that is creating money out of thin air and the situation gets worse as the U.S. Treasury accumulates a $31Billion deficit that must be serviced. So, now the economy begins to retract as many businesses simply can’t make a profit. Packages of goods are now smaller but cost the same or more. The consumer is now becoming cautious. Business is now being cautious and delays hiring back employees or even cutting back. Many former employees take early retirement or look for better jobs. There also doesn’t seem to be a rush for many to get back to work and labor shortages remain everywhere. Much of this current environment seems to be contradictory, and IT IS! We live in a very strange world; I have been in the financial business for 55 years and I have never seen things as confused as they are right now.

The ~~CPI (Consumer Price Index)~~ GDP (Gross Domestic Product)measured a -1.60% decline for the first quarter of the year. The second quarter (2022) numbers are yet to be announced, but certain sources are indicating a -1.00% decline. If this second quarter number were to actually be a negative number, a recession would officially be in-tact. The FED, in all of its wisdom, after creating most of the inflation with “free money” is now trying to halt it by raising interest rates. As you may know, I contend that Interest Rates are Inflationary themselves. In the early stages of rising Interest Rates, businesses simply add the additional financing cost to their product causing an inflated price. There is a “Tipping Point” where prices can’t be raised without pricing yourself out of business, but that is after rates have been raised several times to much higher levels. The FED should have cut the spigot off “FREE MONEY” more than a year ago and allowed interest rates to float to “Market Levels”. But, NO WAY, they must be in control of screwing up the economy, and here we are.

As can be seen in the U.S. Treasury Yield Curve table, one-month rates tripled from 12/31/21 to 3/31/22 and then went up a multiple of six times from 3/31/22 to 6/30/22. The five-year was up almost a multiple of three times from 12/31/22 to 6/30/22; the ten-year doubled for the six months as the thirty-year was up over 30%. And one wants to know why everything at the grocery store is out-of-sight??

With the above-mentioned disasters in mind, we do believe that a recession will be mild, forgoing any additional Black Swan events. Even with the inflation rate at 8.60% we do not see interest rates advancing to a level equal or higher than the inflation rate. The predominant reason that rates will not jump that high is the Federal Deficit which must be serviced. Almost a third of the Federal Debt will mature within the next two to three years and significantly higher rates would be disastrous. Additionally, Wall Street would melt and regardless weather we like it or not “MONEY TALKS”.

As usual, please do not hesitate to call or e-mail me if you have any questions.

Sam Altimore

Principal/Owner

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MY MARKETS

MAY 2022

The month of May ended basically flat from the end of April. All three indices made remarkable recoveries in the last week to week and a half of the month. The early part of May was a continuation of the volatile decline from late March and all of April. Toward the end of May, the retail sector of the equity market literally got killed with Walmart off near -20% and Target off nearly -30%. Both retailers cited higher transportation and labor costs as the primary culprits to major setbacks in their profitability.

Energy stocks continued to move higher with crude supplies being constrained by the government and the Ukraine/Russia war. The U.S. Government is limiting drilling on Federal leases and shutting down key pipelines that would transport Canadian supplies to the States. These actions along with seasonal refinery constraints is pressuring gasoline and diesel prices to move toward all-time highs. These higher prices and constraints are forcing consumers to begin to ration their spending. Obviously, higher fuel costs have had an increased cost to food and crops in general, including the transportation factor. With the summer driving season beginning, the challenge will be how to allocate spendable dollars.
Job openings continue to exceed 11 million, forcing business to increase wages. Even the higher wages are not attracting near enough takers which has kept many businesses from expanding back to pre-pandemic levels.
Consumers are digging deeper into savings and increasing credit card debt to keep their spending at higher levels; but how long can that continue? There are no more stimulus checks and interest rates are on the rise. Sooner or later debt will be much more difficult to service. A day of reconning is coming; particularly with the beginning of June, the beginning of the FED tightening by allowing their Balance Sheet to roll off or mature. This process will tighten money supply along with the increasing of interest rates.

Is a recession around the corner? The FED hopes not, but it may be beyond their control. As I have stated before, interest rates do not affect inflation, at least not in the initial stages. Actually, business will only pass on higher interest costs as a price of doing business until rates get excessively high; at that point they do affect inflation, but unfortunately at that point recession upon us. On the contra side of things, housing has now had four months of declines; higher prices and higher interest rates are beginning to possibly burst the “housing bubble”.

Will all of these happenings harm the stock market; that is the $64,000- dollar question. The S&P 500 is down from the high of 4,818 to 4,132 or -14.25%. It is our thought that forgoing any catastrophic moves by he FED, the equity markets are in the process of forming a bottom. We believe that a “true recession” can be avoided. But the FED has a history of doing the wrong thing at the wrong time. So, we are in a wait and see mode, for now. As far as interest rates are concerned look for short-term rates to move higher, hopefully back to reasonable levels (0.00% is not reasonable and causes excessive debt). Again, the FED is the key and they do not have a good track record........keep your eye on the FED. Additionally, as businesses continue to open from two years of being shut down, inventories should begin to take some pressure off of the pent-up demand created by the shutdowns.
MSA CAPITAL continues to hold cash in equity accounts as we look for common sense companies that are at reasonable prices and values. As far as Fixed Income is concerned, we continue to have very short maturities with Treasuries. As interest rates move higher longer- term bond prices will decline.
As always, if you have questions, please do not hesitate to contact me.
Sam Altimore
Principal/Owner

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MY MARKETS

APRIL 2022

“April showers did not bring spring flowers”. The equity markets experienced one of the most severe sell offs in quite some time. As the table above clearly shows the Dow Jones was off 1,414 points or 4.016%; the S&P 500 sold off 346 points or 7.523%; and the NASDAQ sold off 1,734 points equal to 12.04%. One of the key driving forces behind this miserable month was the realization that there is no more free money coming from the FED. In fact, the FED is expected to begin reducing their Balance Sheet (approximately $9 Trillion) in May. The reduction of the Balance Sheet will reduce the money supply; in other words, the process of tightening the monetary system will begin.

Additionally, the FED has already begun to raise interest rates with a 25 Basis Point increase in the FED FUNDS RATE. It is highly anticipated that in May the FED will raise the FED FUNDS RATE an additional 50 Basis Point. As I have stated many times before, the FED should leave interest rates alone and allow the marketplace and supply/demand dictate rates. In the early stages of interest rate increases, the increase will only add to inflation as interest rates are a cost of doing business and the increase is simply passed on to the end buyers. Of course, when rates finally become prohibitive to pass on, they do tend to halt inflation as businesses begin to suffer a reduction in sales and profitability and a recession