The US Stock market is in a material correction with the Dow down over 2,700 points since the early August high of 35,700, now at 32,940, and in negative territory for the year. The NASDAQ is down over 1,300 points from its high at 14,447 in mid-July, now at 13,135. Not yet the 10% for an official ‘correction’ but getting very close. Before this downside pressure is over during Q4/23, we expect the key US indices to fall >20%. Caveat Emptor!

Some of the positive and negative issues facing the US are:

• The debacle of firing the Republican Speaker of the House has now thrown the 45 day CR out the window and the budget battle will only restart once a new Speaker is chosen. When this process starts is unknown. To get elected, if the next Republican needs Democratic support, the issue of what they get in a power sharing deal will just add to the crisis of governing and getting legislation passed, and sent on to the even more glacially asleep Senate. Funds for the border and Ukraine are hostage to this political failure.
• The US needs to raise US$800B in Q4/23 of new funds to meet authorized spending (compared to US$400B in Q4/22). With higher rates now and nearing the 2007 levels across the maturity spectrum and with no expectation that China will buy US Treasury bonds (they had been the largest foreign buyer) with the current tensions, China has turned to be a seller. At its peak in 2013 China held over US$1.3T and now holds US$822B having sold US$493B of which US$300B has been sold in the last two years. Only Japan has been a buyer but of lower amounts, so the US needs natural domestic buyers and this is causing a crowding out effect. Where does the money come from to buy this paper? Companies that need debt financing will have to compete with the Treasury. Rates are rising quickly and this is lifting the US dollar which will impact earnings of companies with large international businesses. Mortgage rates are nearing 8% which has slowed housing transactions and is impacting the price of housing due to the lack of affordability at current rates. We expect a significant increase in foreclosures in the coming months. Is this 2008 once again?
• Banks that bought US Treasury bonds in the last few years, when interest rates were much lower, are sitting on horrendous losses. If they don’t trigger the losses and keep them to maturity then they will halt or slow lending, adding to pressure on the economy. The losses are reported at US$550B so far and with rates still rising this just gets worse. This is roughly 25% of total bank capital. 
• A Canadian example, RBC which owns City National Bank with a big presence in California was forced to inject more capital and take some of this bank’s debt onto their books because of the outflow of low cost deposits. Deposit outflows continue and those without a big brother may be in jeopardy. 
• Union action is spreading from the auto sector to now the health care sector. A coalition of unions representing 75,000 workers have started a three day walkout that may impact 13 million people. The union wants 6.5% raises in the first two years of a new contract. 
• Q3/23 earnings start flowing next week and if the numbers fail to meet targets or guidance is muted then the current decline in stocks could turn into a plunge. Our target of below 30,000 for the Dow this month remains. 
• Both the equity and bond markets are jittery but it appears that the bond area is seeing  more volatility and nervousness. Not a good sign for markets this month. 

For the rest of the world no new important economic data for this report.

The war in Ukraine is seeing more escalations as one side ups the ante on the other. This has spread to more accurate daily drone attacks on Moscow and Crimea by Ukraine and the Black Sea Ukrainian export ports attacked by Russia. 

Some recent events: 

• Many NATO countries’ militaries are bemoaning the fact that their munitions levels are bare and that replacing the stocks could take years once funding is approved. Many are leery of sending more when they need the goods for training and for minimally acceptable levels. Canada’s military has said their shelves are bare. The US is nervous about potential needs in Asia if China moves on Taiwan. 
• The fiscal pressure on NATO countries is also a pressure point. The US has given nearly US$100B and NATO US$88B of military and economic aid. 
• The recent election in Slovakia was a win for pro-Russian parties. Robert Fico and his anti-Ukrainian war party SMER is working to form a new government and plan to end providing military aid to Ukraine. This is a win for Putin and the first crack in NATO. 
• Ukraine used new equipment provided by NATO and destroyed Russia’s top end S-400 anti-air systems. They are now receiving nuclear tipped munitions. A nasty escalation.
• The UK did a reversal of the Secretary of Defense’s comments about sending UK troops to train Ukraine in Ukraine. This did not stop articles about UK special forces already fighting and dying in the country. West Germany appears to have lost tank troops training Ukrainians to use their Leopard tanks but no official confirmation has been made by Germany. Likely, they will say they were foreign volunteers just like the US does. 
• Russia yesterday completed their first nationwide nuclear attack exercise across 11 time zones. It may be a warning that Moscow wants restraint from NATO  and particularly the US from giving Ukraine longer reach weaponry. Russia has 16,000 nuclear shelters so this is a big deal. The US in comparison only has one in the Seattle area. 
• Russia is calling up 130,000 more conscripts and increasing the age from 27 to 30. They seem to be preparing for a long war. 

Market Movement:  We have warned about a breach of the 33,600 level for the Dow (today at 32,940), which completes a topping formation for the Dow. A close below 32,600 would set up the waterfall decline phase to below 30,000. Stay patient with cash reserves. We have harvested some of our currently held positions with very nice profits. We are however keeping core weightings in each name. Subscribers please check the SER Ownership releases to see what we have done via our partial harvesting. 

Once this correction has lowered stock prices and fear has returned to the markets over the coming weeks, be ready to buy the bargains that develop. As the general stock market declines we expect energy prices to back off and the Energy Bullish Percent Index to retreat back to below 10% and ring the bell for the next BUY window. The last BUY signal was in March and we added 14 new ideas to our Action BUY List. Many energy stocks are down from their 2022 highs, and many trade around Proved Developed Producing (PDP) Reserve valuations levels. If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports.