Stocks forged ahead this week, making new highs with technology stocks continuing to take the lead. Financial flows into equity buoyed the overall market despite some disappointing results in the U.S. government's Treasury auctions. 

 

Credit for the continued move higher must go to the number one AI stock in the world, Nvidia.

 

It was touch and go on Wednesday night as all eyes waited for Nvidia's earnings results. The Street was divided on which way the markets would go. It depended on whether this leading semiconductor company could beat estimates once again and deliver higher forward guidance on the world's demand for its artificial intelligence chips.

 

Both the Mag 7 and the AI 5 stocks spent the beginning of the week falling in fear that Nvidia results could not possibly top the results of the last two quarters. Strategists were warning that the entire market was at risk since the AI boom has been the main driver of the market's advance for more than a year. 

 

 The company's corporate earnings and sales not only fulfilled the hopes of the biggest bulls but super charged the price of every stock that was even remotely involved in the AI boom.   Nvidia hit a new high for the year on Thursday and Friday while triggering an almost 3 percent gain on the NASDAQ. The S&P 500 Index added close to 2 percent, although the Dow and the Russell 2000 small cap index did add far less.

 

And while stocks rallied, bonds did the opposite. The U.S. Treasury's 10-year bond yield has been climbing higher, reaching 4.319 percent. Bond buyers are insisting on higher returns, and they should, given the billions of dollars in bonds the Treasury is auctioning this quarter and next. In the recent past, this reaction in the fixed-income market would have put downward pressure on stocks, but not this week.

 

The need of the U.S. Treasury to sell more longer-dated bonds and fewer short-term notes is forcing the Fed into a quandary. While the Fed stands pat on raising interest rates any further, the Treasury auction sales are forcing yields higher anyway. If this continues, (and it will) at some point equity investors will start to pay attention. That would not be good news for the stock market. In an election year, this could spell trouble for the incumbent.

 

The Fed may be forced to somehow ease the situation, but how? They have already said that cutting Interest rates too soon might spark an upsurge in inflation. The obvious answer, therefore, would be to ease up on the pedal of quantitative tightening, which would inject more liquidity into the financial markets. That would be good for markets and presumably the President.  

 

But right now, momentum traders don't care about bond yields, the dollar, or even corporate earnings for the most part. As I explained to readers last week, we have entered a riskier period of the market that can deliver great gains and great losses in quick succession. The first half of the week saw stocks plummet in fear that one company's results would take the entire market down. Thursday and Friday delivered the opposite results.

 

The momentum in the U.S. stock market is beginning to catch on in global markets as well. Japan's benchmark Nikkei Index hit a record high this week beating the previous record set 34 years ago. Shares in Frankfurt, Paris, and Milan gained more than 1 percent while Europe's Stoxx 600 Index also hit an all-time high. Even China considered a basket case and the worst market around, has seen stocks gain over the last week or two.

 

This stock market rally is getting a bit long in the tooth. The last two rallies that occurred (between 2022 and 2023) lasted between 16 and 19 weeks, gaining 20 percent and 21 percent respectively. This present one is in its 17th week with a gain of 23 percent thus far. Could it run further?

 

Yes, technical charts say we can, even though we could see some short-term weakness ahead. It appears that financial flows into equity markets are still strong, so there is enough buying power available to fuel further upside. And so far, stocks have not fallen on good news, if this week is any indication. My first target remains 5,140 on the S&P 500 Index, and we are getting close to that level. A short-term pullback could be in the offing. 

 

But after that, a rally that extends into mid-March, or even April could see a few percentage points tacked on to this year's gains. Let's target 5,220 on the S&P 500 Index as a good guess.

 

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.

Valentine's Day has come and gone. About 92 percent of American consumers were planning to share chocolate and other candies for Valentine's Day this year, according to the National Confectioners Association, but the price tag for that heart-shaped box of chocolates may have left a bad taste in many a mouth this year.

 

Last year, chocolate sales exceeded more than $4 billion. It feels like I paid my fair share of that total. You see my wife, Barbara, loves chocolate, so giving a gift on Valentine's Day was easy. Along with flowers and a card, a generous amount of dark chocolate (but not milk chocolate) in any form — hearts, cups, dipped pretzels, bonbons, truffles — is sure to win the day. Her craving, however, transcends that one day, so chocolate is my go-to source for gift-giving on birthdays, and most holidays. As such, in this era of inflation, I have kept track of how much these sweet dark delights are costing me.

 

This year, I was not surprised to see candy prices continue higher. Retail chocolate prices have risen about 17 percent over the last two years, according to a report by CoBank, and I expect they will continue to do so. Why?

 

Cocoa, a main ingredient in chocolate, is responsible for much of the price rise. The price of cocoa hit record highs last week, just in time for Valentine's Day. Prices have doubled over the past year and are up 40 percent since January. This week cocoa futures prices continued higher to $6,030 per ton, another record high. The outlook for the 2024 growing season is worsening, which is leading to fears of a larger global deficit.

 

Cocoa, you see, is another victim of climate change. Poor weather and crop disease have afflicted the world's main cocoa-growing region, which is in West Africa. Massive rains followed by severe drought, coupled with wind, devastated the cocoa crop. Insects and disease followed shortly thereafter. This has led to the third year in a row where cocoa harvests have been coming up short.

 

But don't think that higher prices in the futures markets are making growers in Ghana and the Ivory Coast rich. Ghanaian farmers are receiving between $1,800 and $1,900 per ton and Ivorian growers even less ($1,600/ton), according to the Ghana Cocoa Marketing Co. In both countries, the government controls prices that farmers receive, which are based on prices that were current anywhere from 12 to 18 months ago. That is an unworkable system but that is another story.

 

It is the world's hedge funds that have reaped most of the benefits of this surge in prices. At the end of 2023, speculative traders began massing billion-dollar bets on cocoa futures contracts, gambling that this year's harvests would be poor as well. At this point, the hedge fund community has the largest risk exposure ever, according to the Commodity Futures Trading Commission, with more than $8 billion in futures positions.

 

Of course, with all these new traders jumping into the market, prices have soared, but so has volatility, making it even more difficult for processors to hedge their purchases. They need cocoa beans to make cocoa butter to supply chocolate makers. As a chocolate buyer throughout this period, I have noticed that big companies like Nestle and Cadbury have been raising prices consistently for the last two years.

 

Hershey, one of America's most loved chocolate makers, said product prices rose 6.5 percent in the fourth quarter, and 9 percent in all of 2023. The company is planning on cutting 5 percent of its workforce because price inflation is forcing consumers to pull back on purchases.

 

The bad news is that not only are cocoa prices continuing to rise, but so too are the price of sugar and wages. Both are key components in just about every chocolate factory including Willi Wonka's, where even Oompa-Loompas demand raises. I would expect that by Easter we will see yet another hike in chocolate prices and by Halloween, well, who knows? So, unless you discover a golden ticket inside your chocolate bar, I would buy it early.

 

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.

Forget fuel and food, auto insurance leads the way in areas where inflation is ramping higher. The rise in premiums has far outpaced the overall inflation rate and we could see further gains in 2024. 

 

Auto premiums are up 43 percent in the past three years and there is no sign the rate increases are over. In 2023 alone, auto insurance prices rose 19.2 percent, as registered by the Consumer Price Index (CPI). The January 2024 CPI data just released this week shows a 20.6 percent increase from last year. It is one of the greatest contributors to the inflation rate and exceeded the price gains in almost every other spending category.

 

Industry analysts' best guess is that we could see another 10 percent increase this year before prices plateau. As it stands, consumers are paying an average of $1,785 per year for full-coverage insurance, according to AAA. That is a big jump from the 2019 pre-COVID costs of $1,194. What is behind this spike in premiums?

 

Back in the pandemic lockdown period, insurance premiums fell. Many cars (mine included) sat for weeks in parking lots. For me, I used our second leased car so infrequently that I gave it back to the dealer. Accidents declined and the roads were empty.

 

For whatever reason, when people got back on the roads in 2020-2021, the accident rate skyrocketed, according to the National Highway Traffic Safety Administration. Nearly 43,000 people died on U.S. roadways in 2022 which was 6,000 higher than in 2019. Accidents, injuries, and fatalities continue to climb as drivers embrace riskier behavior behind the wheel. That behavior costs insurance companies a boatload of money.

 

And let's not forget car thieves. Motor vehicle thefts jumped 29 percent last year compared to 2022. Given the price of replacing a new or used car, insurance companies are paying out more than ever before. It has gotten so bad that some insurance companies have refused to cover certain coveted Kia and Hyundai models in select locations that have become hot-wire targets for droves of criminals. 

 

The profitability of the insurance industry has suffered. The Insurance Information Institute reports that auto insurers paid $1.12 in claims last year for every dollar they collected in premiums. In 2024, that should drop a little (to $1.09) thanks to premium price hikes, but it is still going in the wrong direction. There are even more reasons premiums are rising.

 

Thanks to supply chain disruptions, rising wages, and parts shortages, the costs of repairing or replacing a car damaged in an accident are much higher than it was in 2020. The good news is that the trend in auto body repair prices is reversing. From 12 percent gains in 2022, costs slowed to "only" 3.3 percent in 2023.

 

Add in the higher cost of paying out for car rentals. Throw in the additional costs of higher legal services, and medical care for injuries when required, and you are starting to get the big picture facing your insurance provider.

 

I'm not done. Natural disasters, many of which have been the result of climate change, are fueling higher premiums as well not just in states prone to hurricanes and wildfires. Rainstorms, hail, floods, blizzards — all manner of weather conditions — are causing more and more damage to our automobiles throughout the country. Insurers are resorting to more than price hikes to deal with these trends.

 

Many carriers are pushing customers to move from standalone auto policies to bundled coverage, while at the same time raising deductions in both homeowners and auto policies from $500-$1,000 to $2,500-$10,000. Underwriters are also getting pickier in vetting potential clients.

 

If you have had a claim over the last several years for water damage, for example, they may ask what you have done to mitigate future damage. Other companies are excluding family members from your auto policy who may have had more than one car accident in the past.

 

Insurance regulators are caught between a rock and a hard place. They are finding it difficult to keep insurance premiums low enough for drivers to afford them while keeping insurance companies solvent. And there are repercussions when regulators balk at granting premium increases.

 

There have been several instances where some large property insurance companies have simply stopped writing business in states such as California, Texas, and Florida. In some cases, this has affected the availability of auto insurance as well. Is there anything you can do to lower your bill?

 

You can shop around. Browse the internet. Talk to your friends to see what discounts are possible. Check out at least three companies, and maybe more, if you have blemishes on your record. Companies tend to penalize tickets and accidents differently, so you may get a wider range of price quotes.

 

Bundling your auto and property insurance is another way to go. Accepting higher deductibles can also lower your premiums but have a care if you go that route. Too little insurance defeats the purpose. Another idea is to opt-in to a usage-based program where an app monitors your driving and tracks things like distracted driving, harsh braking, or speeding. Switch auto insurance companies if it turns out you are overpaying, no matter how friendly you may be with your agent. 

 

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.

Stocks are climbing, scaling new heights while euphoria abounds. Momentum is pushing the technology sector, and AI stocks in particular. How long can it last and how high can it go?

 

It is the question on the minds of many on Wall Street. At this point, the consensus opinion is that we are due for a pullback. Even the bulls are getting worried as valuations become stretched.

 

However, valuations are in the eye of the beholder. While the price-earnings ratio of the market is about 21 percent, if you remove a handful of mega-cap stocks the average is only 17 times earnings. That handful of stocks has accounted for more than 50 percent of the gains this year in the S&P 500 Index. The Magnificent 7 (Meta, Apple, Amazon, Alphabet, Microsoft, Nvidia, and Tesla) have long held leadership positions within the equity market. Recently, however, a few additional stocks have joined this pack of champions.

 

The "AI 5" (Nvidia, Microsoft, Advanced Micro Devices, Taiwan Semi-Conductor Manufacturing, and Broadcom) are companies that Wall Street analysts believe are leaders in the development of artificial intelligence. All but one (Microsoft) are semiconductor stocks. Momentum in these stocks as well as most of the Mag 7 stocks is through the roof. The last time we saw momentum at this level was in November 2021.

 

Market momentum, for those who are not aware, is the capacity for a price trend in a stock, stocks, or markets to continue and sustain itself (either higher or lower). As the AI movement picked up steam this year, for example, prices rose, traders jumped on the bandwagon, volume increased, prices climbed even higher, and more and more buyers piled into this group of stocks. A herding mentality has taken over and the chase is on!

 

There are plenty of money managers and traders who make a living buying and selling momentum. The idea is to buy the asset when it is rising and then sell after it has peaked in price. Don't be fooled; this is a dicey business. It is a trading maneuver that relies on a greater fool theory and has nothing to do with the fundamental value of the underlying security. 

 

In today's market, many investors are marveling at how high prices Microsoft Nvidia or any of the other Mag 7 and AI 5 stocks have reached. The same momentum trend helps explain why the stock markets, and particularly the technology sector, are pushing higher and higher. There is nothing new in this behavior. It has happened many times in the history of the stock market.

 

What happens next? At some point, the trend of chasing these stocks peters out. Momentum traders will usually be alerted by technical and computer programs that it is time to reverse positions. The highflyers will be sold and/or shorted. Those unfortunates that purchased at the peak will be left holding the bag.

 

Unfortunately, given that the market capitalization of these stocks is in the vicinity of several trillion dollars, the impact on the overall market will be quite large. It is one of the reasons that I believe the coming pullback in stocks could be between 7-10 percent. That may sound like a lot, but it would only be a normal correction in the history of the S&P 500 Index.

 

But before you rush out to sell everything, let me caution that no one knows how far the momentum game can carry stocks. This week we hit 5,000 and beyond on the S&P 500. That is a nice round number but has little significance otherwise. Given the right circumstances, we could see 5,150 or even higher in the weeks ahead. What I wouldn't do is add more money to the Mag 7 or AI 5.

 

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.

Electric vehicles are piling up in dealer lots. Consumers are by-passing EVs for gas-powered autos and hybrids while unwanted EVs sit at the dealerships for months. Production is being cut at the Big Three auto companies. What happened to the EV boom?

 

The green revolution promised that electric vehicles were the wave of the future. Government incentives were offered to boost purchases in the name of clean energy as a way to fight climate change. Over the last few years, wealthy American consumers waited in long queues for their chance to plunk $75,000 or more down for their vehicular status symbol.

 

Auto producers worldwide scrambled to build their version of EVs. Companies that mined lithium, a critical ingredient in the manufacture of batteries, predicted endless demand for the material. Tesla and its billionaire founder, Elan Musk, could do no wrong. Investors flocked into Tesla stock and other equities in that space. What could go wrong?

 

It turns out that despite the tax breaks and Wall Street hype, electric vehicles are just too expensive for the average American consumer. Automobiles overall have climbed in price since the pandemic supply chain disruptions. Add in that inflation and the average price of a new gas-powered car skyrocketed to $46,077 in 2023.

 

In comparison, a new EV averaged $63,878 in the U.S. The total cost of ownership during the first five years must also be added to the price tag. It costs $2,000 to install an at-home charger. Insurance also costs more for EVs in a world where auto insurance continues to rise dramatically.

 

But price isn't the only pitfall. Consumers continue to have concerns over the EV's battery range. Compared to fossil fuel autos, the EV's range is typically less. And once the battery charge is depleted, it takes longer to recharge a battery than it does to fill up a gas tank. The availability and dependability of charging stations are also an issue. Nearly 21 percent of consumers have reported that they have shown up at a charging station only to find it broken, according to a J.D. Power survey.

 

For many consumers, an EV needs to fit their circumstances. Demand for electric vehicles is concentrated in just a few states. Last year, the best markets for EVs were West Coast cities and metropolitan areas. City living, where typical driving trips are shorter, and chargers are readily available makes more sense than a rural environment where drivers encounter long drives, scarce charging stations, rough terrain, and cold weather. 

 

But even in some metropolitan areas, such as Chicago, sub-zero temperatures can decimate battery life. Media coverage of stranded Tesla's in Windy City parking lots has not encouraged electric vehicles and fence-sitters. Reports that charging stations were also not working and those that took much longer than usual to charge didn't help either. 

 

In the used-car market, EV prices have seen big price drops of as much as 30 percent. Last month, rental firm, Hertz Global Holdings announced they are selling 20,000 electric vehicles from its U.S. fleet. That is just two years after inking a deal with Tesla to offer vehicles for rent. They are reversing their plans to convert 25 percent of their fleet to electric vehicles by the end of this year citing higher expenses related to collusion and damage for EVs.

 

As more and more competitors come to market, competition has heated up. A pricing war of sorts has started. Tesla models were on a pricing roller-coaster ride for most of last year as GM and Ford made a big push into the market. Ford's new vehicle, the F-150 Lightening Pro, for example, was sold out early last year. But by the last three months of 2023, the pace of sales slowed.

 

The Pro was marketed as a rugged entry-level electric truck but when cooler weather hit, so did the buyer's anxiety over range. The expected range dropped significantly in cold climes and so did sales. This year both Ford and General Motors have announced they are curtailing electric vehicle investments. Ford has just announced it will cut its plans for production of the pickup, while GM is delaying some new EV model introductions. It is also switching gears to produce more hybrids instead. 

 

Hybrids seem to have benefited from the slowdown in sales of EVs. Hybrid sales jumped 65 percent versus 46 percent for EVs last year. Ford, Kia and Toyota are offering more hybrid new-car options, while in the used car market the gas-electric versions of BMW, Toyota, and Hyundai are selling well.

 

It appears that while consumers have embraced the concept of electric-powered autos, they are not quite ready to bet the farm on them. Given the price differentials, the hybrid offers the best of both worlds. For now, it seems that is where the consumer is most comfortable. I believe that could change and will when buyers see further price declines in the future. That still does not answer the need for more and better charging stations or improved technology in the battery space. I am sure that day is coming but just not now.

 

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.