American capitalism has long applauded and rewarded economic efficiency. Faster turnaround times, producing the same results with fewer workers, and doing more with less are the name of the game. Most times it works but sometimes it doesn't.

 

Over the past few years, that mantra of efficiency and profit growth has worked well for big freight operators in the railroad business. Wall Street has rewarded their efforts with higher stock prices and rail companies have returned the favor with generous dividends and stock buybacks.

 

Truth be told, America has had a long-lasting love affair with railroads that dates back almost 200 years. For most of that time, railroads and those that owned them were a symbol of the "can do" spirit of the nation. For decades, railroads flourished as their steel highways penetrated more and more of the nation carrying passengers and freight throughout the land.

 

In the 1950s, that began to change. The expansion of the U.S. highway system triggered a resurgence in the trucking industry. Inroads by long-haul truckers posed a threat to an industry that had grown fat and happy for way too long. That ushered in a long period of consolidation with fewer and fewer competitors.

 

As rail operators entered the 21st century, company management began to pay much more attention to productivity and efficiency. The number of employees was reduced, costs came down and profits began to rise and so did their stock prices. Over the last six years, railroads outdid themselves vying to become the most efficient, lowest-cost operator in the business. Today, only a handful of major companies remain and most of them are publicly traded companies in North America. They remain darlings of Wall Street for the most part and have spent as much in stock buybacks and dividends as they have invested in their businesses.

 

One obvious way to improve efficiency was simply to make freight trains longer since the railroad industry makes its money by the weight and distance of the cargo it hauls. You would think that workers could just string together a couple miles of cars together and off we go from point A to point B. After all, a long train makes in one trip what a short train would make in several, but it is not as easy as that. Trains must be assembled to distribute weight and cargo risk. Another issue is the length of railroad sidings. Many were never built to accommodate longer trains.

 

In any case, none of this was an issue for me until Feb. 3. It was on that date that 38 cars of a Norfolk Southern freight train carrying hazardous materials derailed in East Palestine, Ohio. It is now three months later, since the fiery derailment, which caused about half the 5,000 residents of the town to be evacuated. At the time, officials decided to burn vinyl chloride from five tanker cars in the accident to prevent a catastrophic explosion.

 

Tens of thousands of tons of contaminated soil must now be excavated as well as the removal of toxic chemicals from two creeks. This will take months, leaving the inhabitants in limbo. The only thing positive that can be said about the disaster is that it has kicked off a national debate on rail safety.

 

In 2022, there were more than 1,164 train derailments in the U.S., according to the Federal Railroad Administration. That equates to roughly three derailments per day. That may sound like a lot, but most of these derailments occur within the confines of rail yards.

 

 If you listen to the railroad industry, it is the safest period in the history of train transportation. The numbers appear to be on their side. Only 16 people, for example, were injured by derailments last year. Compare that to how many people are injured in car accidents each year. Since the late 1970s, derailments have dropped by 75 percent. Consider that in 1978 alone, there were 8,763 derailments, which killed 41 people.

 

Where do long trains fit into this equation? To be sure, there have been plenty of long train derailments, some serious. Are long trains riskier than short ones? The industry claims that long trains have improved rail safety. The Association of American Railroads, the industry lobby, also notes that regulators have never cited length as the direct cause of an accident.

 

The Federal Railroad Administration (FRA) does say it lacks evidence that long trains pose a particular risk. They do fail to mention that the FRA does not require companies to provide certain information after accidents and derailments such as the length of the train. I would guess that does make it difficult to assess the extent of the danger.

 

As for me, I walk our dog every night along a major railroad track. It is close enough to our condo that the trials and tribulations of the people of East Palestine are with me every night. It devils my footsteps as I witness the long procession of car after car groaning and squealing its way into the city. The line of faint lights floating by sometimes requires half an hour or more to pass by in the night.

 

I confess that I worry that a derailment could spew toxic gas or chemicals throughout my neighborhood with no warning. I am sure I am not alone. Long freight trains traverse the nation. They are bearing God knows what through our communities. Long trains block traffic crossings for long periods. They are delaying everything from fire trucks to first responders, school buses, foot traffic, and daily commutes.

 

It is bad enough when the train is moving, but a resting line of cars can be an enormous temptation. In this country where "do not cross" does not apply to one too busy or important, the risk of sneaking under or between cars is an accident waiting to happen.  

 

On the other hand, moving goods by rail is probably the safest way of moving cargo and people across the country. A single train with 100 cars of coal or grain would require hundreds of trucks to do the same job. It is much more fuel efficient and is therefore reducing our country's carbon emissions as more freight shifts from the trucking industry to rail.

 

I believe that somewhere there should be a balanced solution between the industry's need for 2-3-mile-long trains and the need for life-saving solutions for our communities. All we must do is find them.

 

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.

All eyes will be focused on May's Federal Open Market Committee meeting (FOMC) this week. Most investors are expecting another quarter-point interest rate increase, and there is an ongoing debate over the possibility of another one in June.

 

Some strategists believe that may be overkill. The fear is that the Fed could break something else if they do. Many already blame the Fed's rapid hiking of interest rates for the troubles within the regional bank area. The value of Silicon Valley Bank's U.S. Treasury bond holdings, for example, fell by billions of dollars as the Fed tightened monetary policy over the last year.

 

And the banking worries continue. This week, a large San Francisco-based bank, First Republic Bank, saw its stock lose 95 percent of its value. In announcing first-quarter earnings results, First Republic admitted that it had lost more than $100 billion in deposits in the first quarter.

 

The collapse of SVP and Signature Bank had prompted a run on its deposits as well. Last month, in a bid to stabilize the bank, a group of 11 big banks deposited $30 billion with the beleaguered institution hoping it would solve the problem. Those hopes have been dashed.

 

First Republic's main business is making large mortgages at low rates to well-heeled borrowers. As such, the bank is buried under a mountain of mispriced loans as interest rates have spiked higher over the last 12 months. To raise cash, they would have to sell off those loans to others at substantial losses, which would only hasten its collapse. U.S. officials are coordinating urgent talks with private-sector banks to come to the rescue. If a deal isn't struck soon the fate of First Republic seems dire at best.

 

In any case, it is not hard to understand why the fear of breaking something else is quite real right now. This week, the Fed will likely raise rates again. As interest rates continue to rise, no one knows how exposed other entities in the financial sector might be. It has put the Fed in between a rock and a hard place.

 

Inflation has not come down far enough to convince the Fed to ease its monetary stance. The most recent Personal Consumption Expenditures Index (PCE), which is the Fed's favorite inflation measure, came in as expected, just a bit cooler. In the past, the Fed has made the mistake of easing prematurely, only to raise rates again as inflation reversed and climbed higher. Better be sure, than sorry would about sum up the Fed's policy right now. 

 

But being sure raises the risks of breaking something, which could have a severe impact on the economy or parts of it like the financial sector. The U.S. economy grew at only a 1.1 percent rate in the first quarter. That was far below the consensus forecasts of 1.9 percent. In the previous two quarters, the economy grew at 2.9 percent and 3.2 percent respectively. It seems clear that the Fed's actions are having the desired effect but is it enough to even pause their rate hikes? That is the question investors are asking.

 

So far, the Fed has assured us that they have the tools to handle both the problems in the regional bank area, as well as the inflation threat. Some think that kind of thinking smacks of overconfidence. One additional issue that is raising its ugly head is the potential summer debt crisis in Washington.

 

The Republican-ruled House has passed a debt reduction package that, if passed, would make deep inroads into the Biden Administration's spending programs. That is their price for increasing the debt limit. The proposal is deemed dead on arrival by the Democrat-held Senate, however. As I have written in the past, in my opinion, the entire issue is simply political theater, with the fate of the nation's credit at risk.

 

If history is any guide, the closer we come to the cliff of default, the more both the bond and equity markets will come unglued. It might require actions by the Fed to calm markets and ensure orderly markets. That could disrupt the central bank’s tightening plans in the months ahead.

 

Marketwise, the volatility I expected last week has kept the indexes in a trading range. We ended the week a little above where we started. First quarter earnings results so far were better than expected. A handful of large-cap companies (Microsoft, Meta, Google, and Amazon) delivered more positive results than negative. The coming week will be all about the FOMC meeting on Wednesday and Apple results on Thursday. The chop should continue, but I am still looking for higher in the short term.

 

The bankruptcies and financial contagion among regional banks have spotlighted a question point among many consumers. Why is it that banks are getting away with paying zero interest on billions of dollars in checking accounts?

 

The interest on savings accounts isn't much better. In a recent survey by Bankrate, a consumer financial services company, nearly 80 percent of U. S. savers say they earn less than 3 percent in their savings accounts. Today, with interest rates yielding between 4-5 percent (and inflation topping 7 percent), a mere 7 percent of Americans are getting the prevailing rates. What is worse, only a relative few are taking advantage of the opportunity to earn money on their money.  

 

The origin of this financial disconnect hearkens back to 1980. Before that date, banks were not allowed to pay interest on checking accounts. Non-bank institutions, such as thrifts and savings and loans, could not even offer checking accounts. The amount of interest banks were allowed to pay on deposits was limited by laws that were in effect since the Great Depression. These regulations were thought to preserve the health of the banking system at a time when interest rates were set by the Federal Reserve Bank.

 

The late 1970s revealed how detrimental this arrangement was for the consumer. It was a period of both double-digit inflation and double-digit interest rates. Savers were getting zero on their checking accounts, and only a regulated 5.25 percent on savings accounts. To lock in higher interest, beleaguered consumers bailed out of banks and moved their savings into unregulated entities such as mutual funds that were offering twice the rate of interest.

 

This all changed when Congress, during the Carter administration, passed the Depository Institutions Deregulation and Monetary Control Act in 1980. The legislation deregulated institutions that accepted deposits and phased out restrictions (over six years) on how much interest they could offer on deposits.

 

This kicked off a period where banks competed aggressively to increase customer deposits by paying interest on checking accounts. The overall result was disastrous for banking's bottom line. Net interest margins (NET) are a major indicator of a bank's profitability and growth. NET is the amount of money that a bank is earning in interest loans, compared to the amount it is paying in interest on deposits. That margin shrank year after year, but banks continued to offer high-interest checking accounts to attract new customers.

 

The Financial Crisis of 2009 put an end to most interest-bearing checking in the U.S. In an atmosphere of the "too big to fail" banking bailouts, paying interest on checking accounts seemed almost irresponsible. In addition, to support the economy, the Federal Reserve Bank pushed interest rates to historic lows where they remained for years.

 

It wasn't until the pandemic that the financial landscape began to change. Inflation, higher interest rates, and ultimately the Silicon Valley Bank (SVB) blowup, have conspired to refocus people’s attitudes toward money.

 

Why, therefore, haven't savers at least kept their cash in interest-bearing savings accounts? Theoretically, in a digital world, it is not difficult to move funds back and forth between savings and checking when needed. The simple answer is that up until a year ago interest rates were still too low to make much of a difference. In addition, few of us have been willing to take the time and effort to continually transfer funds, even if we are computer savvy. The banking sector has been counting on that.

 

The news that depositors of SVB were able to move funds electronically with a press of a button has encouraged commercial enterprises and institutions to do the same. In an economy where interest rates are climbing higher, moving cash deposits is now a priority among many corporate financial departments. As they do that, the retail public may start to realize that banks should be paying them interest on their money as well. It has already touched off a larger movement of deposits within the banking system than we have not seen in years.

 

Given the drain on deposits from less capitalized banks to larger banks, especially money center banks, the battle for retail customers has once again come to the forefront. You may have noticed a proliferation of checking account ads in the media lately. Banks are competing to pay you more for your deposits, but buyers should be aware of bait-and-switch tactics.

 

For decades, banks have used eye-popping interest rate offers to suck in new customers.  Shoppers should be attentive to just how long these great rates are in effect. Six months from now, you don't want to be told those deals no longer apply. Remember too that most banks try and avoid paying these same higher rates to existing customers.

 

In many cases, deals on interest rates by banks are marketed in areas where they have few customers but are not available to those in areas where they have a loyal customer base. What to do? A call to your bank might convince them to give you the advertised higher rate but don't count on it. Bottom line: to earn more on your money, you may need to open a new account and transfer money into it. That takes time and effort, but when interest rates are between 4-5 percent, it may be worth it.

 

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.

First-quarter corporate earnings are pouring in, and the results have been mixed. So far, the numbers have been good enough to keep the market from falling significantly, but not good enough to warrant further gains.

 

It is still early days, with only 15 percent of companies reported, but so far, the best I can say is mixed. The multicenter banks continued to surprise to the upside this week, while the regionals have been so-so but not as bad as some expected. Of course, the Silicon Valley Bank debacle did not occur until toward the end of the quarter, so much of the impact won't be known until the second quarter results are announced.

 

Tesla, one of the cult favorites of many in the markets, was disappointed. That threw the markets into a funk, at least on Thursday and Friday. The electric vehicle market is in the throes of a price-cutting war globally, which Tesla started. The EV leader has cut prices 5 times on its vehicles since the beginning of the year. They did so as the global economy slowed. The company wants to not only maintain its worldwide market share but expand it as well.

 

In China, the price war is particularly ferocious where competitors such as Nio Inc, XPeng Inc. and BYD Co. Ltd. are selling some EV models at a 50 percent discount to prices in the U.S. and Europe. This, as you may imagine, is having an impact on Tesla's profit margins and thus the disappointing earnings results.

 

The prevailing sentiment right now is that while the economy may be slowing, the Fed is still hell-bent on raising rates another 25 basis points at their May meeting. After that, some expect a pause, while others disagree. It will depend on the data, in my opinion.

 

We will be getting another reading on inflation in the coming week (April 28) when the Personal Consumption Expenditures Price Index (PCE) is reported. The PCE measures the prices paid for goods and services and it is a data point that the Fed watches carefully.

 

Economists and the Fed will be paying special attention to the services side of the report where inflation has been sticky. A hotter number may convince the Fed that a pause in their tightening program may be premature. As such, investors will likely assign great importance to the PCE print. 

 

What many investors fail to realize is that even as the Fed continues to tighten, liquidity in the financial markets is rising. The contradiction can be explained by the U.S. Treasury's actions in the face of the nation's fast-approaching debt limit. The government can no longer sell Treasury bonds as it has in the past without triggering that limit prematurely.

 

Instead, the Treasury has been spending down its checking account, called the Treasury General Account. That adds money to the system in two ways. With fewer bonds able to be purchased there is more cash looking around for a home. Second, the cash disbursements from the Treasury General account also inject additional liquidity directly into the system.

 

In addition, the recent regional bank issues (Silicon Valley Bank, etc.) have forced the Fed to also increase liquidity to the banking system. Taken together, there is now more money sloshing around the system than many realize.

 

A lot of that money flows into other assets in the financial markets (like the stock markets), at least in the short term. At some point this summer, when the new debt limit is finally passed in Congress, that situation will reverse but, in the meantime, it helps explain why the stock market has been resilient in the face of rising interest rates, a slowing economy, and inflation. I look for the stock market to continue to fluctuate in the week ahead.

 

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.

Pickleball is the fastest-growing sport in the U.S. for the third year in a row. It has taken the country by storm, thanks to its popularity among all ages. Industry experts expect to grow at an annual rate of 9 percent between 2023 and 2033.

 

The game was invented by three middle-aged fathers on vacation on Bainbridge Island in 1995 and named after the family dog, Pickles. Recently, my wife Barbara suggested we might find out what makes the game so popular. For those, like me, who have not played yet, the game is a cross between tennis, badminton, and ping pong. It is not difficult to learn and can be played almost anywhere. All you need is a paddle and a whiffle-like ball and someone to play with. What's more, it is a social game, usually played as doubles, with two players on each side volleying back and forth in close quarters.

 

Most of the game's core players (eight times a year or more) were over age 65. Retirees love it because it is easy on the body. But the demographics are changing. The fastest growing segment by age is now under 24. Players, 55 and older, are still in the majority, but that growth rate is slowing. Men are still the majority of players, but women represent 40 percent of those playing.

 

There are now more than 8.9 million players in the U.S. That is nearly double the number of players in 2021 and a 158 percent increase over 2020, according to the Sports and Fitness Industry Association.

 

As of 2023, there are two national professional tournaments. The sports organizers are now approaching corporate sponsors in earnest. They aim to grow the sport not only in this country but abroad as part of an effort to include it in future Olympics.

 

Pickleball is also growing in popularity in Europe, and enthusiasts believe the Asia Pacific market is ripe for the taking. The global pickleball equipment market was valued at $65.64 billion last year and is expected to grow to $155.4 billion over the next decade. Paddles account for nearly two-thirds of the equipment market, with wooden paddles running between $15 and $35. Composite varieties are more expensive ($40 and $100), while graphite paddles can cost upwards of $200.

 

Normally, you will want to buy six to 12 pickleballs at a time. Like paddles, some are more expensive than others. There are indoor and outdoor balls with the lifespan of outdoor balls shorter than those of indoor balls, as you might imagine. Outdoor balls, depending on the brand and price, last upward of 10 games. 

 

The demand for places to play, however, is outstripping supply. California, Florida and Texas lead the nation in the number of courts. There are roughly 44,000 pickleball courts in the U.S. as of 2022. Cost estimates for building courts can range from $300 for a temporary net, equipment, and tape to mark lines, to $30,000 for a permanent court.

 

In many cities, it is already difficult to find places to play. Municipalities are only now beginning to realize the popularity of the sport, so it is left to private developers to fill the gap. Former warehouses, vacant big-box stores, and even existing tennis, handball, and basketball courts are being utilized to satisfy demand. So far, this trend has had checkered results.

 

One bottom-line problem is that because a court can have only two or four players active at a time, the profitability per square foot is quite low in pickleball. As a result, entrepreneurs are adding entertainment, food, and drink to new facilities in hopes of expanding the business potential of the sport.

 

In any case, it appears the sport is here to stay. As for me, I agreed to give it a try at 74. and so, our next date night will be centered around a ball, paddle, and some physical exercise (but no dog). Wish me luck.

 

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.