The NASDAQ 100 index has carried the market for the first half of the year. Over the last few weeks, however, other areas of the markets have been coming back to life. Nimble traders might look at some of those sectors in the weeks ahead.

 

August into September is a fairly volatile period for markets historically. We could see markets suffer bouts of profit-taking, which could give investors a chance to buy stocks in certain sectors that have lagged the markets but have the potential to outperform in the months to come.

 

One area that is risky, but may promise higher rewards, could be the China trade. Most readers are aware of the many negative developments that have plagued the Chinese market over the last two years. Political issues between the U.S. and China including trade tariffs, microchip sanctions, national security blacklisting of certain companies, and limitations on U.S. investments in certain targeted areas have soured investor attitudes toward the Chinese stock market.

 

On the Chinese side, regulatory crackdowns on mega-cap companies by their central government devastated their stock market. The stock prices of many companies that had represented the best that China had to offer were decimated. All of this is well known.

 

At the same time, thanks to the Peoples' Republic of China's zero COVID-19 tolerance policies, the mainland economy was severely damaged and has still not recovered.

 

Chinese retail investors, who represent 60 percent of trading volume on China's stock market, are cautious if not downright bearish on their market. Domestic and foreign Investors have been waiting for months watching for signs that the government will begin to announce plans to jump-start this faltering economy.

 

Only recently has there been any indication that economic policy is beginning to change. And while officials promise to change, they are taking their sweet time in providing any concrete stimulus measures that could do the job. Nonetheless, anticipation that change is just around the corner has ignited what I call a catch-up trade in China and its beneficiaries.

 

Globally, commodities, material stocks, mines and metals, oil stocks, and agricultural equities are all beginning to show some life. Why? On the margin, a growing Chinese economy will create increased demand for all these raw materials. These products have traditionally fueled China's factories and their exports. In addition, a recovering Chinese economy becomes the locomotive for dozens of emerging and frontier markets throughout the world.  

 

All the above areas have been left in the dust this year as everyone's focus was squarely on the Magnificent Seven and lately AI stocks. As a contrarian, I am attracted to unloved areas like this. That is not to say that the technology sectors of the market will not participate. They will, just not at the same rate as those in a catch-up trade, in my opinion.

 

There is also a second player in the metals markets with billions in cash to spend. Saudi Arabia has decided to become a hub for the processing and trade of minerals which are vital for the energy transition. In an ongoing effort to diversify the country's oil-dependent economy, they plan to develop more than $1 trillion in copper, phosphates, zinc, uranium, and gold.

 

Progress in this effort thus far has been slow so to jump-start their processing facilities, a new entity controlled by its huge sovereign wealth fund and its national mining company has begun to buy up mineral resources around the world and ship them home for processing.

 

I believe the prospects are attractive in the second half of the year for further gains in China, emerging markets, mines, metals, materials, energy, and other commodities.

 

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.

Between the weather, shortage of planes, computer snafus, and pre-pandemic levels of customers, air travelers face a gauntlet of travel delays. A lack of pilots and air traffic controllers is adding to the high level of aggravation during this summer season.

 

The pilot shortage has been building in the aviation industry for several years. It is not confined to the U.S. Global air travel has surged in the post-pandemic era as emerging economies grow and more people can afford air travel. Airlines have expanded their fleets while extending and adding new routes to capture this spike in business.

 

This has led to increased demand for airline pilots just as a substantial portion of the pilot population here in the U.S. is reaching the mandatory retirement age. You can blame the Baby Boomers once again. Nearly 50 percent of the commercial airline workforce will retire in the next 15 years. Unless things change, prospects are dim that supply and demand for this vital workforce can come back into balance any time soon.

 

This year, the gap between demand and supply of pilots will be roughly 17,000 unfilled positions or 15 percent of the workforce. And while pilot shortages are the most visible area, the country also needs workers in several other airline categories such as air traffic controllers, flight attendants, and ground crew. 

 

The root cause of the scarcity of pilots comes down to two factors. The 1,500-Hour Rule, enacted in 2012 by the Federal Aviation Administration, requires first officers in the commercial airline industry, also known as co-pilots, to have a minimum of 1,500 hours of flight training time. Some say this rigorous requirement has made American skyways the safest in the world. Detractors argue that it is a major roadblock in putting more pilots in the air.

 

 The high cost of receiving an airline transport pilot certificate, accruing hours, and flight training are other obstacles an aspiring pilot must contend with.

 

It costs $99,000 to become a pilot, if you are starting with zero experience. If you already have your private pilot certificate, the price drops to $82,000. For many, this is a substantial financial commitment. The traditional view is that young pilots need to "pay their dues" before embarking on the road to riches and achieving a senior pilot position at a major airline.

 

Given the present state of pilot economics, this is a big nut to swallow for a fresh-out-of-school pilot who normally begins her career at a regional carrier. These pilots receive an extremely low hourly rate (as low as $18 an hour) while working long hours under grueling and stressful conditions. It makes paying back student loan debt at minimum wage practically impossible.

 

One could make more at a fast-food outlet, without incurring student debt, or become a truck driver at 2-3 times the income.

 

You may ask what happened to the assumption that airline pilots are among the highest-paid professionals in the world. It is still true, but it depends on a pilot's career path. A pilot may spend years working toward the cockpit of a major airline and might make the cut, but there is no guarantee. His success depends on his seniority and the major airline he works for.

 

The present landscape of pilot shortages in a global airline market of cutthroat competition has forced major airlines to pay up for senior pilots. Recently, both Delta Airlines and American Airlines, two of the largest airlines in the world, for example, ratified an unprecedented new multi-billion-dollar contract with their pilots.

 

Senior captains can make almost $600,000 annually at American. It is expected that most majors will follow suit with senior captains making $500,000 a year and senior first officers over $300,000 yearly. 

 

As for the regional airlines, the growing scarcity of pilots is forcing even the cheapest of the cheap companies to reconsider their pay scale if they want to maintain their existing flight schedules. More pilots, however, only compound the understaffing issues facing the FAA on the air traffic side.

 

The shortage of air traffic controllers nationwide has been around for several years. This year there is an estimated shortfall of 3,000 controllers, according to the FAA. There is no quick fix since, once hired, it requires months of training and three years of on-the-job experience before certification. Many drop out long before that happens. In addition, air traffic controllers are required to retire at 56 years of age. What's worse, the FAA hates to hire anyone over 31 since they want candidates to have at least a 25-year career path at the FAA.

 

This understaffing is both a negative for traffic as well as a danger to the public. This year, there have been several near misses between planes on U.S. runways in at least seven airports. In some airports, like those in the New York metropolitan area, the FAA has asked airlines to reduce summer traffic. A key radar facility there is only 54 percent staffed.

 

The shortage problem has now caught the attention of lawmakers and both the industry, and its workers are looking to Congress to come up with some solutions. There is somewhat of a time limit on legislative action since Washington will be required to pass legislation to reauthorize the FAA by the Fall.

 

Last week, the House of Representatives began work on an airline bill. Two ideas to relieve the pilot shortage would be to increase the retirement age from 65 to 67 years of age. Another idea would be to change the 1,500-hour rule to allow some of these hours to be done in flight simulators. There are also some plans to make the FAA more efficient, strengthen its workforce, and cut some regulatory red tape. Between the airlines, the unions, and the government one would hope that a solution is in the offing.

 

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.

Retail theft in general is a growing problem in the United States and organized crime has long considered that cargo is its most lucrative target. Crooks have used everything from road pirates to sophisticated computer hacking to rake in billions of dollars and that number is increasing each year.

 

Possibly the fastest-growing segment of theft in the U.S. is related to cargo. The commercial shipment of freight moving by railroad car, truck, and aircraft, as well as storage, warehouses, distribution, and consolidation facilities, is the red meat for cargo pirates.

 

It is a large industry that accounts for anywhere between $15 to $35 billion in thefts per year. Depending on what is inside a container truck, for example, thieves can walk away with thousands to millions of dollars in stolen goods. Common targets this year include food, beverages, auto parts, solar panels, vehicle batteries, tires, and pharmaceuticals.

 

You may think there are plenty of higher-value products that should have made the stolen goods hit list and you would be right. However, the resale of stolen products is just as important as the product itself. Consider the difficulty in identifying stolen avocados or sirloin steak. How would you know a solar panel was pilfered, or a tailpipe?

 

Thus far in 2023, cargo theft has experienced a 41 percent increase from 2022.  Tactics range from targeting refrigerated trucks to Mission Impossible scenarios where criminals are disguised as legitimate drivers, employees, or business representatives. They also use high-tech "sniffers" to detect GPS trackers manufacturers placed in or on high-tech cargos. Cyber robbers hack into dozens of companies exploiting transportation and shipping systems to forge invoices and delivery documentation. This allows bad actors to brazenly pick up cargo from warehouses and other distribution centers offering forged documents and steal containers full of goods in front of unknowing employees and or security guards.

 

Behind this crime wave are professionals with organizations that are capable of evading federal, state, and local police, as well as corporate security including insurance agents. As retail crime continues to rise, a handful of states have attempted to stiffen penalties on those that steal in groups. Other states may follow. However, much of what needs to be done to stop further spikes in retail crime lies in updating and focusing on American crime policies. For example, most police departments do not have a separate category to distinguish retail thefts from other kinds of robberies and larceny.

 

Many of the sophisticated people orchestrating retail crimes tailor their tactics to recent criminal justice reforms. In many cases, mobs employ hundreds of freelancers to steal goods. Changes in bail policies make it easier to entice people to steal because they won't spend time in jail should they get caught. The amount of money stolen to trigger a felony charge is another issue. You would think that upping the penalty for stealing would simply be a commonsense solution to retail theft of any kind, but not in this country.

 

Some argue the problem is too complex for such simplistic solutions. Others question whether increasing sanctions such as an automatic felony for retail crime, in which the thief spends more than a year in prison, is an effective deterrent. Since 2000, at least 39 states have increased the value of stolen goods required to trigger a felony charge.

 

Over two decades, researchers found no change in property crimes in states that increased penalties versus states that did not increase the amount required to warrant a felony charge. Go figure.

 

The retail industry is urging state governments and law enforcement to go after the mob bosses and masterminds behind the crime scene. To do so, organizations such as the National Retail Federation want lawmakers to enact statutes that would create a new category of crime — organized retail theft.

 

This new category would give law enforcement a tool to combat the crime surge. Exactly how the statutes are used is up to the discretion of police and prosecutors and therein lies the rub. Critics say discretion could lead to racial disparities in the justice system and probably has in several states.

 

As in everything else in America, retail crime and its solution are a politicized issue and will likely remain so, leaving the industry to fend for itself. One step that a few large retail chains are using is to simply close their doors in areas where they are experiencing high crime. Although that may be a highly visible act to counter smash and grab theft, it does nothing for the continued upticks in cargo crime, car theft, and so much more.

 

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 facts are that retail theft is a drag on the U.S. economy. Organized retail theft, smash-and-grab robberies, carjacking, and cargo pilferage are just some of the crimes committed hour by hour throughout the country. Estimates of costs vary but are well above $100 billion per year.

 

There is no definitive source that calculates the actual dollar cost of stealing, but several organizations such as the U.S. Chamber of Commerce and the National Retail Federation have provided guesstimates. The Chamber believes organized retail crime has cost the economy more than $125.7 billion. But there are add-on costs such as $39.2 billion in lost wages, 685,374 in job losses and $14.9 billion in lost federal, state, and local taxes.

 

We have all watched as images of criminals invading retail stores pop up on the evening news. In some cases, a dozen or more brazen criminals overwhelm local businesses carrying off tens of thousands of dollars' worth of merchandise while leaving a path of smashed glass, broken counters, and bruised customers. What we fail to realize is that these criminal acts are part of a highly organized effort conducted by anonymous professional crime players. 

 

Organized retail theft, according to most definitions, is the coordinated theft of merchandise by individuals and groups with the intent to resell these goods by passing them off as legitimate goods to unsuspecting buyers, typically online. The overall masterminds behind these crimes know and exploit local laws. They make sure to steal less than the dollar-amount threshold considered to be felony theft in most jurisdictions.

 

These bosses recruit and employ gangs of individuals to commit numerous thefts, making sure that total stolen remains below that felony threshold. And these are not victimless crimes. Consumers, employees, communities and business owners are caught in the crossfire of these crimes where eight out of 10 retailers report increased incidents of aggression and violence.

 

Car theft is also on the increase across the nation. The price tag for this form of theft totals around $25 billion. More than one million cars were stolen in 2022. This year that number is expected to increase yet again. For carjackers, hot wiring is passe and keyless theft is all the rage. Given the rising prices of both new and used cars, thanks to inflation and supply chain issues, thieves have a super-charged incentive to boost cars.

 

The number of stolen vehicles varies by where you live. Car thefts in 30 major cities have a 59 percent increase between 2019 and last year.

 

California tops the list of states with the most stolen vehicles followed by Texas, Washington, Florida, Colorado, Illinois, Ohio, Missouri, New York, and Georgia (in that order). Vermont has the distinction of least number of cars stolen to date.

 

Some of the more popular models to steal include the Chevrolet Silverado, Kia Soul, Hyundai Elantra, Subaru Legacy, and the Subaru Forester. Other brands include the Honda Civic, Honda Accord, and the Toyota Camry.

 

Next week, I will examine the fastest growing segment of theft in the U.S. — cargo theft. I will also examine what can be done to stop this epidemic of thievery. The answer is at best complex and as usual chock full of politics.

 

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.

Last month, a new term for those stocks that have led the stock market higher this year surfaced on Wall Street. Investors have anointed Apply, Alphabet, Amazon, Microsoft, Meta, Nvidia and Tesla as the new leaders in the equity market.

 

It isn't the first time a group of stocks have captured the imagination and money of the investing community and it won't be the last. FANG, for example, an acronym that represented Facebook (now called Meta), Apple, Netflix, and Google have been a favorite investment group that has rewarded investors for buying and holding over the last decade or so.

 

Through the decades, there have been many such groups that provided outperformance and led to the market. My first experience with this groupthink type of investment was the Nifty Fifty. These stocks represented 50 large-cap stocks that were viewed as stable over long periods. Solid earnings growth was the key indicator to qualify for inclusion in this group. All of them were recommended as buy-and-hold equities.

 

Investors assigned high price/earnings ratios to these favored stocks and, in some cases, they were trading at fifty times earnings or more compared to the long-term market average of 15-20 times earnings. Investors would find it hard to believe some of the names in this list of darlings during the 1960s and 1970s. Dow Chemical, Gillette, JC Penney, Polaroid, Sears Roebuck & Co., Xerox and Joseph Schlitz Brewing Co. were all in demand. The group propelled a bull market of the 1970s and was also credited with causing a decline in the markets, as most of these stocks crashed and burned in the early 1980s.

 

In the late 1990s, Oracle, Intel, Cisco, and Microsoft, dubbed the "Four Horsemen," were the favored group. In the mid-2000s, emerging markets were all the craze. The BRIC nations (Brazil, Russia, India, and China) could do no wrong and lead markets higher on a global basis. The performance of each of these groups outperformed the overall averages consistently before losing favor.

 

Over the last decade-plus, the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) rewarded investors and continue to do so today. Since the beginning of the year, the gains in the stock market have been largely credited to the Magnificent Seven that are almost all up 90 percent thus far. Driving these incredible gains is their ability to generate huge profits and reward investors with generous dividends and share buybacks.

 

Investor fascination with artificial intelligence has also provided another reason to invest in these companies, since most of them are considered leaders in generative AI. However, a word of caution is warranted. Technically, the Magnificent Seven stocks are fast approaching price exhaustion. For those who might want to buy into this group, I would wait until prices come back to earth before pulling the trigger. 

 

The good news for equity investors is that in the periods where short-hand acronyms or labels identified a winning set of stocks, bull markets occurred and continued for several years. It could be a coincidence. There is no data to suggest any group's performance can dictate where the markets overall are going next.

 

At best, I would say that the labeling of a new group of winners does reflect a change in mood among the market participants. Investor sentiment seems to have shifted to the bullish side, despite fears of recession, prolonged inflation, and geopolitical risk. I expect it will continue.

 

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.