This week's decline in two key inflation indicators gave investors an excuse to buy stocks. At this point, we have retraced 50 percent of the losses from the beginning of the year. The thinking behind this recent move higher is that inflation is coming down, and the Fed no longer needs to maintain its super tight monetary policy stance. Is that a good bet?

 

That is not the case, according to several talking Fed heads that were trotted out by the U.S. central bank to address the markets on almost a daily basis this week. Even the most dovish of members continued to stress that nothing has changed in their thinking. To a person, each Federal Reserve member stressed that the market should expect another interest rate hike in their September 2022 FOMC meeting. In addition, the reduction in their balance sheet will continue unabated.

 

Clearly, investors do not believe these warnings. The bulls are confident that inflation will continue to decline to the point that the Fed will change its mind. As such, that belief is enough to support if not justify further purchases. It certainly is an enticing story considering the data.

 

Everyone should have been pleased with the inflation data. It points to a peak in inflation. Both the Consumer Price Index CPI), and the Producer Price Index (PPI) came in lower than expected. However, both the CPI rate of plus-8.5 percent, and the PPI gain of 9.8 percent are still a long, long way from the Fed's official target of 2 percent inflation. Even if we had zero additional inflation for the remainder of the year we would not reach the Fed's 2 percent target.

 

Some bullish investors may also be betting that since we won't know what the Fed is going to do until September, markets can continue to rock and roll at least for another week or two. As it is, the bond vigilantes have already reduced their expectations of how much the Fed will raise rates from 75 to 50 basis points at that meeting.

 

Most of the decline in both the CPI and PPI can be credited to the price decline in energy. Nationwide, we are seeing gasoline prices below $4 a gallon, while oil has dropped recently to below $90 a barrel. But here's the rub.

 

The Fed has little influence over the future price of oil. Geopolitical events, currencies, and global supply and demand are much weightier factors in determining where the price of oil goes next. What if oil climbs above $100 a barrel next week? What will that do to the future CPI report, and how would markets handle that?

 

As I have been advising readers for weeks my target for the S&P 500 Index on this bounce was 4,100 to 4,200, give or take a few points. This week we hit 4,257. Now what?

 

I warned readers back in June 2022 that after this relief rally, "somewhere in middle to late August," we would start a decline that could take us back down to 3,800 to retest or slightly break the year's lows. That remains my forecast.

 

However, this decline will be accomplished in fits and starts. Investors are caught in the throes of greed and FOMO.  So, for example, next week we could see a series of shallow pullbacks, only to have those who have missed this rally buy the dip. These Johnny-come-latelies will expect even higher highs. They may even push us back toward 4,250 on the S&P 500. However, by the end of next week we should be declining.

 

This kind of market action could continue for the next few weeks. As it does, I would expect the markets to be making lower lows, and lower highs. By September 2022, we will likely see the lows I am forecasting. What is my thinking behind this rather gloomy prediction?

 

I expect oil prices have bottomed for now and will rise over the next few weeks. Geopolitical tensions could heat up as well adding tension to global markets. The Fed will continue to tighten, despite the atmosphere of hopefication that has infected investors right now. Corporate earnings will continue to fall and profit warnings will become more commonplace as the economy continues to slow.

 

None of my thoughts are original. I am simply echoing the bear case. The only difference is that I have been predicting this since December 2021.

 

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.

Your elderly dog has arthritis. His breathing is difficult. He needs assistance to get up, and his bladder is failing. The vet bills are far higher than your own, and it is getting more difficult to pay them. "How much is too much?"

 

Some say there is a limit, others would be willing to go into enormous debt to prolong the life of their pet. The veterinarian technological and medical innovations of today make preserving your pet's life achievable. Vets offer plenty of ways to prolong life, even in cases of terminal illness.

 

Specialists abound who can offer chemotherapy, radiation, kidney transplants, drug trials, and much more. Given all these options, it is no wonder that the emotion that wells up in most of us is "save my dog (or cat), no matter the cost."

 

Pet insurance, given the expense of pet health care, should be the obvious answer, but it isn't.

 

The American Pet Products Association (APPA) says that 67 percent of American families own a pet. Roughly 70 percent of those families own a dog, 45 percent have a cat, and roughly one third have another sort of animal. However, less than 3 percent of all dogs in the U.S. are insured, according to the North American Pet Health Insurance Association (NAPHIA).

 

The most common assumption is that pet insurance is just not worth it. And if you only consider annual routine veterinary care that's probably true, since the average cost is between $200 and $400 for a dog, and roughly half that for a cat. In comparison, the average annual wellness insurance policy can cost $300 per year.

 

Pet insurance becomes "worth it," however, when illness and accidents come into play. Consider that diabetes in a cat once diagnosed and treated will cost between $240 and $360 per year. Heartworm in your pet can cost upwards of $1,000 to treat. Emergency room care, $1,000 or more. If your German shepherd tears an ACL, you are facing $3,300 to treat and repair it, a herniated disc in a Labrador retriever (my personal experience) will cost you more than $15,000.

 

The older your pet, the more health issues it will likely have. As your dog ages, they become susceptible to a variety of illness, injuries, and health conditions. Many of these can be life-threatening, painful, and extremely costly to treat. For example, the American Medical Veterinarian Association reports that almost 50 percent of all dogs over the age of 10 will develop cancer. The minimum cost to treat this condition can be $5,000.

 

You might wonder when your dog becomes a "senior." Smaller dogs live longer than larger dogs. As such, they qualify as seniors at 11 years of age. Medium dogs at 10, and larger dogs at 7. Some of the physical signs of aging are greying snouts, reduced energy, lumps and bumps that begin to appear, and periodontal disease (bad breath is telltale sign).

 

The average monthly cost of pet insurance premiums in the U.S. for elderly dogs is just under $120 a month with an annual limit of $5,000 and a $500 deductible. If you decide to sign up, make sure you study the pre-existing conditions clause. Many elderly dogs will have developed one, if not more, health conditions like arthritis that many insurers will not cover.

 

The older your animal, the less likely it will qualify for many coverage options and the more expensive the premiums will be. Some insurance companies won't cover hereditary conditions, which often manifest later in a pup's life or cover periodontal disease. Fortunately, there are various insurance policies tailored for older dogs, although you can expect the premiums to be steeper than those that aren't.

 

As for my own experience, it is true confessions time. Our dog, Titus, a loving, energetic chocolate Labrador retriever, passed a little over four months ago at 13 1/2 years old. My wife and I failed to purchase insurance for Titus. Over the years, we spent large sums of money on his health care. Arthritis, and a herniated disc, were his main symptoms. We tried everything including water therapy, massage, and acupuncture plus dozens of medications. In his last year, laryngeal paralysis, a condition common to elderly labs, foretold the beginning of the end.

 

The decision to continue to pay his mounting expenses, his almost weekly visits to the vet, and the growing cupboard-full of medications that had little to no effect on his condition was never in question. We knew there were surgical options that may have worked, but at what cost? He loved the water and surgery on his larynx would make it impossible for him to swim, or even dip his paw in the water. His arthritis became so crippling and painful that he needed to lay down every 15 feet on his walks.

 

Fortunately for us, our vet had a talk with us in April 2022. I say "fortunately" because many veterinarians are not trained to have frank conversations about terminal conditions of pets with clients. She advised us that it was time to end the increasing pain and discomfort that Titus was going through. She gave us permission to do what suddenly became obvious to us. We were so focused on keeping him alive and with us that we failed to consider his well-being.

 

What I learned was that "how much is too much" should not begin with your pocketbook, but with what is best for your dog, cat, or other animal. How badly will your pet's lifestyle be impacted by its medical condition or its treatment? Is your pet in pain and is it increasing? Remember, animals live in the now. They have no projects to complete, nor do they fear death like we do, as far as we can tell.

 

End-of-life decisions are traumatic and intense and there is no right or simple answer. In our case, Titus had to come first, and his passing was the best way we could express our love for him.  As for the economics side of this equation, if we could do it all over again, (or if we adopt another dog), we will definitely purchase pet insurance. I advise you to do that as well.

 

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 markets embraced another 75-basis point interest rate hike by the Fed, even as the U.S. economy contracted for the second quarter in a row. Bad news became good news in today's markets.

 

It was not so much the hike in the Fed funds rate announced as part of the Federal Open Market Committee's (FOMC) meeting on July 27, 2022, as it was the words of Chairperson Jerome Powell in the Q&A session afterward. Although he really did not say anything new, the markets and the media interpreted his stance as more dovish, if not pivotal.

 

The bulls' argument is that the economy is slowing, inflation is peaking, and therefore the Fed is likely to slow, if not stop, its interest rate hikes altogether in the months ahead. This argument carries more weight now that the nation's economy fell by 0.9 percent in the second quarter, while economists expected a gain of 0.4 percent.

 

But the Personal Consumption Expenditures Price Index (PCE) announced for June 2022 came in hotter than expected (6.8 percent versus the 6.7 percent expected). It is a key variable the Fed watches closely, which would indicate inflation is still climbing.

 

Now depending on your politics, we are technically in a recession, defined by two negatives quarters in a row of declining growth. The Biden administration denies that is the official definition. Economists, according to their argument, evaluate the state of the business cycle based on a slew of variables such as the labor market, consumer and business spending, industrial production, and incomes. None of those items conclusively prove we are in a recession.

 

My take is if it looks like a duck, and feels like a duck, then mostly likely, it is a duck. If we are not in a recession, then the alternative would be stagflation.

 

Corporate earnings seem to indicate a slowing of the economy. Social media stocks, which depend on advertising for a great deal of their revenues, are seeing a strong decline in spending. Those companies that have been able to pass on higher cost through price rises are doing okay, but few companies are hitting results out of the park.

 

Apple, Amazon, Google and Microsoft earnings, while not great, were at least less bad than many expected. Their share prices gained (some substantially), which buoyed the market and has allowed the relief rally to continue to climb.

 

A surprise breakthrough between Senate Democratic leader Chuck Schumer, and Senator Joe Manchin on a whittled-down $430 billion spending program cheered the markets.  The agreement would increase corporate taxes, lower the cost of prescription drugs, reduce the national debt, and invest in energy technologies that will focus on reducing climate change.

 

The bill is touted to reduce the deficit by $300 billion over 10 years, and lower carbon emissions by about 40 percent by 2030. It has been dubbed the "Inflation Reduction Act of 2022," although nothing in the bill except its title would have any impact on inflation this year or even next. For individuals, it would provide a $7,500 tax credit to buy new electric vehicles. It would also provide a $410 billion tax credit to manufacturing facilities for things like electric vehicles, wind turbines, and solar panels.

 

The cost of the compromise bill is much lower than the multi-trillion, "Build Back Better" plan originally proposed by the Biden administration. The thinking is that no Republicans in either the House or Senate will vote for the bill, so the reconciliation process is the direction Democrats will use to pass the bill. If Democrats are to be believed, the bill should pass as early as next week

 

It was no surprise that the sectors that would benefit most from this spending plan rose on the announcement. The alternative energy sectors gained on the news, as did oil and gas stocks.  By Friday, the S&P 500 Index broke the 4,100 level and some think 4,200 will be the next level that the bulls are targeting. Could we get there, given the belief that the Fed may pause in its tightening program? Sure, but we are already over extended. We are running on empty as far as buying juice is concerned, so if we are going to get there, we need to pullback first. That may happen early next week but for now things look good at least into mid-August, and then down 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.

Missing bags, canceled flights, stranded passengers, and interminable check-in times have made this summers' travel a nightmare. What's worse, the cost of travelling has exploded.

 

Consumers are paying an average 34 percent higher air fares this year versus last. The reasons why range from higher jet fuel costs, increased labor costs and sky rocketing demand among others. As the summer season progresses, it seems that the worse the experience gets, the more consumers are willing to pay. 

 

If you watch the horror shows on the news, chaos abounds not only here in the U.S. but in the international airline system overall. Short comings in one location, whether it be from the weather, labor shortages, lost baggage or some other cause, has an increasing domino effect that impacts airports and airline schedules throughout the country.

 

As the system continues to break down, airports and airlines are besieged from all sides from irate passengers to an increasingly concerned government. Readers who have firsthand experience or may be even now caught in this web of travel turmoil might ask a simple question. "How did we get here?"

 

The origin of this disaster has its roots in the COVID-19 pandemic. As we all know, the coronavirus devastated air travel worldwide. By 2020, airline travel was down a whopping 70 percent. To put that in perspective, the 9/11 attacks reduced travel by a mere 7 percent. For the airline industry overall, how to survive was the chief topic of conversation within corporate boardrooms.

 

The industry answer -- reduce employees, slash pilot headcount, sell aircraft, and retire older planes. Top airline managements were ruthless in their headcount. Delta and American Airlines, for example, laid off 30 percent of their staff, offering buyouts, early retirements or simply letting people go.

 

The common assumption among airline executives was that it would take five or six years to recover their former traffic. As such, managements continued to reduce their operating expenses to the bone. But the coronavirus did not occur in a vacuum. The government, together with the pharmaceutical sector, managed to develop several effective, COVID-19 vaccinations. That breakthrough reversed the six-year timetable.

 

The consumer suddenly became willing to fly. Travel demand turned around far faster than anyone expected, thanks to the government's vaccination efforts. The industry was caught completely off guard. But that was more than a year ago. Why is the industry still woefully unable to accommodate the surge in demand?

 

The scarcity of labor, which is plaguing the nation in general, is hurting airlines far more. Let's start with pilots. An army of experienced, older, industry pilots decided to retire, (or were asked to retire) and are gone forever. Hiring and bringing on entry-level pilots requires years of training.

 

 In addition, there are myriad regulatory requirements such as clocking at least 1,500 hours of airtime before being allowed to pilot a commercial airplane. Oh, and by the way, those who train these newcomers (instructors and flight simulators) are also in scarce supply.

 

Hundreds of thousands of workers from cabin crews, to ground staff, to baggage handlers were also let go. Many of those ex-employees have either found new jobs or have no wish to rejoin an industry that kicked them out during the worst crisis this nation has seen in a hundred-plus years. Many of these former employees don't see the upside in a job that once again exposes them to the mutations of new COVID strains. They also have no wish to face armies of angry passengers in an industry where job security is no longer guaranteed, if it ever was.

 

Traditionally, airlines have depended on redundancy in their system to handle unpredictable disruptions. Think of it as insurance that if anything goes wrong, a back-up staff is there to handle it. Without the staff, airlines are at the mercy of every sudden storm, pilot absence or COVID-related sick day. Today, a sudden cancellation can cascade throughout not only one airline, but throughout the entire system.

 

Compounding the industry's labor shortages, are shortages of TSA and customs personnel, as well as air traffic controllers. This results in long lines that delay check-ins, which delay departures and arrivals, which keep planes waiting, and incoming passengers on planes, sometimes for hours.

 

I wish I could say that the chaos in air travel will pass with the summer travel season. The problem is that the labor shortages the industry faces cannot be solved overnight. Competition for workers will persist in the months ahead. Industry experts say the problems besetting the airline industry will continue into 2023.

 

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.

Given the price jump in gasoline, you would think owners of the corner gas station are raking in the money. Unfortunately, the opposite is occurring, especially now that pump prices have been declining for more than a month.

 

"The national average price of a gallon of gasoline has dropped below $4.50 per gallon after touching $5 as recently as mid-June," according to Berkshire Money Management's Allen Harris. He goes on to say that despite the 10 percent decline, gas is still up 9.3 percent over the last three months. That brings the year's gain thus far to 36.8 percent 

 

In an environment of higher gasoline prices, consumers are hurting. Drivers naturally tend to blame the most visible object of their distress, which is their local gas station. At the same time, gas station owners are also the target of President Joe Biden, who is accusing them of profiting from higher gas prices. Four California cities are so angry with gas stations that they have banned the opening of new gas stations.

 

The truth is that most gas stations tend to drag their feet in raising prices. They know that most consumers have no loyalty when it comes to filling up. The lowest advertised price usually wins the day and higher prices mean lost customers. A look at the typical owner's business model explains what is going on behind this energy crisis.

 

The way it works most often is that when a gas station refills its tanks, it purchases many weeks' (if not months, in the case of diesel) worth of fuel at a single high price. And let's say they did so in mid-June when gasoline was over $5 a gallon. If prices begin to fall (as they have this month), the gas station is forced to sell the product at below its' own cost.

 

Most gas stations barely turn a profit on their core product at the best of times, and when oil spikes, they may even take a loss on it. Gas stations, according to IBISWorld, an industry market research firm, make an average net margin of 1.4 percent on their fuel. A lot of operators set their profit margins as a fixed rate, which only amounts to a few cents at best. Remember too, that when gas prices climb, so do the fees the owner must pay out to credit card companies, since their fees are set on a percentage basis. Rising gas prices after credit card fees can easily erase the stations' profit margins altogether.

 

The facts are that station owners make most of their profits on sales of food, drinks, and alcohol (where sales are legal). In this scenario, think of gas as a loss leader. The National Association of Convenience Stores believe that 44 percent of gas station customers go inside the store. One in three customers ends up purchasing something. Gross margins on certain items such as candy, health and beauty items can be as much as 50 percent. The trend toward selling more prepared foods, which have higher margins than the usual fare of chips, Lotto tickets, coffee, etc., helps as well.

 

Many readers believe that big oil companies own most gas stations, so why feel sorry for them? All those Shell, ExxonMobil, and Chevron signs we pass on the freeway are proof positive, right? Wrong. Most major oil companies have long-since backed out of the retail business because selling gas isn't profitable. The reality is that 80 percent of the gas bought in the U.S. is purchased from a franchised convenience store that is individually owned, no matter what brand of oil they may sell.

 

It may surprise you to know that the number of gas stations has been in a decline for decades. Higher oil prices are one of the chief causes of their demise. The spike in energy prices in 2008, for example, forced hundreds of gas stations out of business. Further competition in the form of big box stores that can purchase fuel in bulk at lower prices has also eaten into the mom-and-pop stores' market share.

 

Finally, the rising number of electric vehicles in use now and their growing popularity into the future will also reduce the number of stations. Despite the EV threat, few stations have made the costly decision to install EV charging units, which can cost more than $100,000 each.

 

So, the next time you fill up, while clenching your teeth as the dollars mount up, just remember that it is not always the gas station owner who is gouging you. In truth, the object of your anger is misplaced. Look half a world away, where war rages, and cartel quotas dictate the price we pay for oil.

 

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.