There are two shortcuts to moving goods around the world, the Suez Canal and the Panama Canal. Drought has more than halved the traffic able to sail through the Panama Canal that connects the Atlantic and Pacific Oceans. That was bad enough, but the alternative shortcut around the world has all but shut down.

 

This is a serious matter since maritime transport accounts for 80 percent of global trade. Under normal circumstances, the Panama Canal would account for about 3 percent of that global trade and 46 percent of container traffic moving from northeast Asia to the East Coast of the U.S. On average, more than 13,000 vessels passed through the Panama Canal per year — until last year.

 

Climate change, and now the El Nino climate pattern, has sabotaged Panama's ability to keep the system of water locks and infrastructure functioning properly. What is worse, Panama's dry season began last month and will run into April 2024. That is draining even more water from the locks. As such, the prolonged waiting times and capacity limitations that have plagued the man-made 40-mile canal will not be alleviated anytime soon.

 

This has already delayed American exports of grains bound for East Asia. In the case of Japan, U.S. corn exports account for more than 65 percent of that country's needs and 71 percent of its soybean imports. It is only a matter of time before these delays begin impacting the Japanese consumer. The Panama bottlenecks have also increased costs. Shippers have bid up the price for a transport slot through the canal as waiting times lengthen. A slot can now cost anywhere from $1.4 million to $2 million. That effectively raises the price of transporting grain to Japan from the U.S. by 50 percent. Charter rates have also increased by about 30 percent as well.

 

Given this background, is it any wonder that shippers had decided to opt for the Suez Canal, instead, even though it adds about 18 days to the trip? And that is where the shippers found themselves between a rock and a hard place.

 

The Israeli/Hamas war started in October 2023. It did not take long for those aligned with Hamas to begin retaliating against Israel and its allies. Over the border, missiles and drones failed to avoid Israel's air defense system. In late November 2023, the Houthi rebels found an easier target. Armed attacks against defenseless container ships in the Red Sea were launched by the Houthi Militia. To date, the Iran-backed militia that controls northern Yemen is targeting all shipping, some with not even a remote connection to Israel. 

 

For those who are unaware, the Red Sea is a narrow strip of water, west of Sudan and Saudi Arabia and Yemen to the east. At the northern end of the sea sits the Suez Canal. At the southern end lies a strait, called the Gate of Tears, which borders Yemen. It is where the Houthis have been targeting many of the tankers and container ships with increasing ferocity.

 

This waterway is a crucial piece of the world's supply chain. Up to 15 percent of the world's shipping sails through the Suez Canal. It is the most direct ocean route between Asia and Europe. And now it has become part of what appears to be the tip of a widening conflict in the Middle East.

 

In the maritime industry, shipping companies can buy war risk insurance. Almost overnight, the premium on this kind of insurance went from 0.02 percent to 0.7 percent of the total value of the ship and its cargo. Container ships can easily carry hundreds of millions of dollars' worth of cargo, so insurance fees alone are now in the millions. Shippers are now passing on those extra costs by charging higher fees for transporting cargo in that area. Average costs to ship containers have doubled in the last two months.

 

As more and more attacks occurred, shipping companies began rerouting vessels to avoid the area altogether. For those vessels who were already on a detour from using the Panama Canal, costs are continuing to mount. The new alternative route has ships going around the Horn of Africa, and then back into the Mediterranean. That route can tack on an extra 14-15 days to a trip already delayed by avoiding the Panama Canal. 

 

The costs of extra fuel, labor, and penalties for late deliveries must now be added to already sky-high shipping fees. Europe and Asia are feeling the brunt of this extra cost. But in the end, I suspect that given the interconnectedness of global supply lines, it should be only a question of time before the U.S. is also whacked from this new threat to global supply chains.

 

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.

Investors were greeted with a brutal bout of selling as 2024 unfolded this week. The stocks that had gained the most last year were obvious targets. Is this the end of the rally or is this simply a minor bump in the road?

 

The Santa Rally reversed, and the Grinch stomped on investors' hopes for further gains. The NASDAQ led stocks lower with the Magnificent Seven taking it on the chin. For those who believe in the idea that the first five trading days of January forecast the direction of the market for January and for the year overall, the market’s performance does not fill one with confidence.

 

It is nail-biting time for the bulls. The first three trading days of the year were negative. That has happened 12 times since 1950. Only three times has the market managed to turn positive by day 5. To me, the jury is out until the market closes on Jan. 8.    

 

As for the disappointment that Santa did not come to Wall Street this year, let's look at history. Over the last 80 years, there have been 15 times where we have had negative results over the last five days of December and the first two days of the following January. Out of those 15 times, the market managed to deliver positive returns 10 times with a median return of 3 percent.

 

From a technical point of view, the sell-off did not even dent the bullish cast of the markets. As I have written over the last few weeks, the markets were overheated and each day we gained that condition worsened. The good news is that the selling has relieved that overbought condition without seriously impacting the upward momentum of the markets.

 

Even as the markets declined, some of the areas that lagged the markets during 2023 moved higher. The health-care sector, for example, saw some great gains, as did energy stocks and utilities. Those areas underperformed the markets drastically last year.

 

While most readers are focused on stocks, the main drivers of the last two months' gains have been the steep decline in bond yields and the declining dollar. Both areas have reversed this week with the benchmark Ten-Year U.S. Treasury bond seeing its yield break above 4 percent this week on the upside. And as we know, bond yields up usually mean stocks are down. Assets that are on the other side of the dollar (precious metals, materials, crypto, emerging markets) were hurt as well.

 

I am sure one of the reasons this occurred was a reverse in sentiment by bond traders. The betting on future interest rate cuts in 2024 had gotten out of hand, in my opinion. Some were betting up to six rate cuts in the year beginning in March. That to me was a case of irrational exuberance. Just because the Fed may have finished raising interest rates does not automatically mean the central bank will start cutting rates. In other words, the Fed's "higher for longer" is still the name of the game.

 

The economic news certainly did not support the need for the Fed to cut interest rates anytime soon. The economy is growing. Unemployment is not rising. Instead, the jobs market, per Friday's non-farm payrolls, surprised economists on the upside. The economy added 216,000 jobs, which was a big beat compared to the forecasts of 175,000 jobs.

 

On a different subject, the U.S. government was also responsible for some big price movements in two sectors this week:  crypto and pot stocks. The Securities and Exchange Commission (SEC) has until Jan. 10 to rule on a proposal by Ark Invest and 21Shares. Both firms are applying to issue a bitcoin spot currency exchange-traded fund.  Many other big brokers and asset managers such as Fidelity, Invesco, BlackRock, Van Eck, Wisdomtree, and more have done the same.

 

The SEC could reject the proposed application outright, delay it, or approve it. It looks to be a binary event that should send Bitcoin substantially higher (or lower) depending on the outcome. The betting ranges from 90 percent approval to zero chance.

 

On Wednesday, an October 2023 letter from the Drug Enforcement Administration (DEA) to a member of Congress, was revealed. It made clear that the agency had "the final authority to schedule, reschedule, or deschedule" drugs under the Controlled Substances Act (CSA). The DEA also told lawmakers it is "now conducting its review" of whether to soften federal regulation of marijuana under the CSA. The news instantly sent marijuana stocks higher.

 

Last year, I wrote that the Department of Health and Human Services had asked the DEA to review marijuana's Schedule 1 status and to reduce it to a Schedule III substance. That request triggered a huge run in the sector. This was largely due to the differential in federal taxes that would occur if the DEA granted marijuana Schedule III status. The industry would immediately experience a large decline in taxes leading to a big jump in profitability.

 

At the time, Industry experts believed that the DEA review would only happen in the second half of the year and closer to the elections. I advised readers not to chase the stocks, but rather wait until investor attentions were focused elsewhere. That happened. Hopefully, you were able to pick up some stocks or an ETF on the cheap.  

 

Fortunately, some of that fluff has now come out of the markets, which to me is a positive development. I think we now have a chance to see new highs over the next week or two. However, that does not mean that we are up, up, and away into the rest of the first quarter. I am still expecting a more savage decline sometime soon that could begin as early as late January, or early February.

 

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 proliferation of streaming services over the past few years appears to have reversed course. Price increases, the introduction of advertising, and fewer hit shows have consumers finally looking at the number of streaming services they are paying for.

 

Wall Street has also lost its love affair with streaming companies, except for Netflix. That company continues to benefit from its competitors' woes. During COVID, when Americans were trapped at home, they spent hours watching television. Streaming services could do no wrong.

 

However, times change, and the couch potato behavior is disappearing. As it does, the willingness to pay higher prices for something few are watching is also declining. Throw in the fact that due to the writers and actors strikes last year, there will be fewer streaming products available, and you have a ready-made excuse to pare back on streaming services.

 

From Wall Street's perspective, there are simply too many services competing for your dollars. The major players led by Netflix include Disney+, Hulu, Paramount+, Max, Starz, Peacock, Discovery+ and Apple TV+ are facing lower profitability or no profits at all. Few of these streamers have developed the scale necessary to achieve profitability.

 

There are two main options to turn around profitability — increase prices, add advertising, or merge with other streamers. Over the past several months, most of these services announced price increases. In addition, levels of pricing were offered, if you want to put up with advertising. Those who do can pay a lower price.

 

Starting at the end of this month, for example, Amazon Prime Video will be charging viewers another $2.99 per month. If you don't pay the extra fee, you will be forced to watch advertising interspersed within all your shows. Disney, Netflix, Max, Apple+, and others have raised prices, and some have introduced advertising as well.

 

These moves have had a predictable knee-jerk reaction from their audience. Consumers who didn't care suddenly became interested in discovering exactly how much they were paying and for what services.

 

Back in June 2022, I pointed out in a column "Streaming Come of Age," that almost a third of U.S. consumers underestimated how much they spend on subscriptions by $100 to $199 per month, according to a study by market research firm, C+R Research. It was also true that many people (42 percent) have forgotten that they are paying for a streaming service that they no longer use. That appears to be changing. In the past two years according to Antenna, which studies subscription services, about 25 percent of consumers who had subscribed to the major streaming services have dropped three or more of these services.

 

Some consumers, like my brother-in-law, who is an avid sports fan, are debating whether cutting cable or cutting streamers is the cheapest way to go. This is surprising since streaming services have been the beneficiary of the recent trend of cutting cable services. By the end of 2023, over half of U.S. consumers (54.4 percent) have dropped cable TV and traditional Pay-TV services, according to Insider Intelligence.

 

For some streamers that lack the scale needed to achieve profitability, the only course that makes sense is merger or acquisition. Paramount, for example, is in discussions with Warner Brothers Discovery to combine forces. Rumors abound that other streamers are going down the same path. Disney+ is acquiring the remaining 33 percent stake in Hulu it does not already own from Comcast.

 

Merging two unprofitable streaming services into a single service might improve scale, but probably not enough to guarantee profitability. Subscribers of both services could save money, but beyond that, I can't see how the costs of producing content would change. 

 

It may be that we are on the verge of a "back to the future" moment where bundles of streaming services are offered at a discounted price as they were on cable. What bothers me more is that the trend toward reinstating advertising in streaming services takes us back to a time when audiences were forced to watch hours of mindless drivel on cable. I was saved with the advent of DVR which allowed fast-forwarding through ads. It is not available on streaming. That puts most of us between a rock and a hard place. Who knows, it may make cable a better option for many once again.  

 

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.

 

As we close out 2023, stocks continue to inch higher. The traditional rally encompassing the last five days after Christmas into the first two days of the New Year is on track. Next week, trading should resume and with it a possible new high in the markets. 

 

Low volume, empty desks, and a focus on buying up the laggards of 2023 describe the week's trading action. Macroeconomic news was scarce. In that vacuum, stocks were at the mercy of proprietary traders and the ODTE speculators. The financial media kept investors busy by publishing a forest full of 2024 forecasts by brokers and money managers.

 

Overall, the 2024 S&P 500 Index targets range from 4,200 to 5,500. Given that over a long period, the S&P 500 has delivered around 10.13 percent yearly returns since 1957, and 9.19 percent over the last 150 years. As such, forecasts that mimic those returns should be ignored.

 

Those forecasts say to me that the authors have no idea where the market is going. As such, they have just taken the historical average gain as their forecast. Very few are bearish for 2024.

 

The current consensus is that the Fed will cut interest rates at least three times next year. Inflation is not coming back, and the U.S. will escape a recession. Interest rates will remain lower, but yields may bounce back up for a short time. The U.S. dollar will also continue to decline.

 

I am usually not one that agrees with consensus forecasts. I am also going to refrain from forecasting where the S&P 500 will end up 12 months from now. There are just too many factors that can change my outlook along the way. So instead, I will focus on the risks and rewards I see for the markets.

 

While I do think the markets will be higher than they are now by the end of next year, there will be some substantial pullbacks along the way. In January, for example, we could see a blow-off top that could see the S&P 500 index reach 4,900-5,000. That is the good news.

 

However, I am looking for a pullback after that. We could see a big bout of profit-taking beginning in the second half of January or early in February.

 

This consolidation should continue into April. Worries of slowing macroeconomic growth and falling employment will dampen investors' enthusiasm for stocks. This will be punctuated by doubts and uncertainty about whether the Fed will cut rates or simply continue to pause. In summary, the first half of 2024 will be volatile and trend to the downside.

 

There may be some areas that could withstand this malaise. I think that precious metals may be one of them. Europe may turn the economic corner providing some global growth. China could come back as well, in which case, materials might also do well. Overall, however, the first half is going to be bumpy.

 

In the second half, we face the 2024 elections. I expect the present administration, like every other administration, will pull out all the stops to goose the markets and the economy before the November elections.

 

Between the U.S. Treasury and the Federal Reserve Bank, I would expect to see a loosening of monetary policy and lower interest rates by April. This should ease financial conditions. If so, economic growth should rise, as will corporate profits and productivity. Inflation might remain sticky as a result but still trend downward below 3 percent, but still not reach the Fed's 2 percent target.

 

I do not expect another year of stellar performance by the Magnificent Seven. They will gain in price for sure, but I would expect the other 493 stocks of the S&P 500 to do better as will small-cap stocks, industrials, financials, and biotech.

 

That's it in a nutshell. I caution that my forecasts can change (and probably will) based on unforeseen circumstances. I wish you a wonderful 2024. Happy New Year.

 

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.

Numerous studies have predicted that climate change will be the death knoll of skiing. That may be true, but year after year, ski resorts large and small seem to eke out one difficult season after another. And not every year has been a disaster.

 

No one is denying that the weather is changing, and winters are getting warmer. This week, which kicks off the 2023-2024 ski season, for example, most of the country is experiencing warm weather, disappointing skiers and resorts alike in the Midwest and New England.  And yet, during the 2022-2023 ski season, there had been mammoth snowfalls in some areas of the country. Climate change can do that, dumping extraordinary amounts of precipitation in some places while causing drought in others.

 

Record snowfall totals at western ski areas, for example, contributed to the number of skier visits, while overall average snowfall at ski areas across the country totaled 224 inches. That was a 30 percent increase above the 10-year average, which contributed to an increase of six days for the season, above the average of 116 days. 

 

New England winters, where I live, have been warming faster than the national average. Over the past 50 years, the temperatures have increased by 4.5 degrees and as the weather gets warmer, nature is producing less snow. For the entirety of New England, January 2023 was the warmest it has been since record-keeping began in 1895. New Hampshire had its third warmest winter on record.

 

As such, snowmaking has become the saving grace for the ski industry. Ski resorts have become increasingly reliant on snowmaking to combat climate change. Today, more than 90 percent of resorts depend on some system of artificial snow production.

 

Some may be surprised to know that investment by the ski industry hit a record high last year at $812.4 million and is expected to be even higher this season. The lion's share of spending was on upgrading lifts, but snowmaking has also taken an increasing share of expenditures. Climate change has made that a vital area for continued improvement. Overall, resorts reinvested $26 per skier visit back into their operations last year.

 

As the winter temperatures get warmer, companies are coming up with technology to counter the temperature changes. Back in the day, making snow required temperatures around 14 to 10 degrees below freezing. Today, new snow-making machines can make snow with temperatures as high as 80 degrees — if you are willing to spend the money to do so. Improvements in snow guns, for example, can make copious amounts of snow much faster, and at higher temperatures. Unfortunately, snowmaking is an energy-expensive process, especially in compressing the air needed to spread the artificial snow.

 

Most local utilities limit the amount of energy resorts can consume. However, both hardware and software breakthroughs have allowed energy cost-savings and efficiencies in the snowmaking systems that encompass everything from hydrants to fan snowmakers, and computer systems that can automate and analyze the entire process. 

 

One of the challenges many resorts face is drought in many regions. The amount of water needed to make snow doesn't change. Areas that are experiencing decreases in their water supplies due to climate change or resort expansion are scrambling to come up with ways to conserve and/or increase their water supply. 

 

Last season (2022-2023), the $50 billion U.S. ski industry saw an estimated 65.4 million skiers and snowboard riders hit the slopes. That was a jump of almost 5 million skier visits from the previous season, according to the National Ski Areas Association.  Factors that boosted industry performance were heavy snowfall in ski areas on the Pacific Southwest and the Rockies. The number of working ski areas also increased a bit from 473 to 481.

 

In 2024, the arrival of the El Nino cycle is set to bring a warm dry winter to this part of the world. The impact of climate change colliding with the El Nino event has a 54 percent chance of being one of the top five events since 1950, according to the U.S. National Oceanic and Atmospheric Administration. Mild and wet with a cooler drier end to winter, is the NOAA prediction. However, The Old Farmer's Almanac is predicting a banner ski season for 2024. 

 

No matter what forecast proves accurate, snowmaking will continue to be the difference between a good and a bad year for the ski industry overall.

 

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.