Only recently have investors' focus shifted from $120 a barrel of oil to the soaring price of natural gas. Given the many uses of natural gas, from heating and cooling and generating electricity to the production of plastics and petrochemicals, the direction of prices could be critical to our economic well-being.

 

On Wednesday, June 8, 2022, natural gas prices fell over 10 percent after a fire at a Texas liquified natural gas (LNG) export terminal shut down the Freeport LNG facility for at least three weeks.  The terminal accounts for 16 percent of U.S. export capacity. Gas prices fell because for a brief time, that gas will flow into the domestic market depressing prices in the short term.

 

Thus far in 2022, Henry Hub natural gas futures are trading at $8.23 Metric Million British Thermal Unit (MMBtu) down from $9.44 MMBTU but still up 10 percent, which is a fourteen-year high.  Many analysts believe the present price rise is unsustainable, but summer heat, export demand, and a robust hurricane season may continue to pressure prices higher. 

 

The Federal Energy Regulatory Commission (FERC) estimated that U.S. demand for natural gas would outpace supply this summer. FERC expects that U.S. demand for natural gas production will increase by 3.4 percent over the summer, compared to a projected 4.8 percent increase in consumption during that same period.

 

Overall, a drop in the U.S. supply of natural gas in storage is driving the price gains and the prospect for storage gains is dismal at best. How did the U.S. end up in this predicament? Blame the pandemic or regulation or both. There was a large decline in production in 2020, when extraction of gas, oil and most fossil fuels fell off a cliff. Many small gas producers went out of business during that period, while larger companies trailed off production to protect profit margins. Government regulations did their part as well. Wall Street bankers also wanted more dividends and stock buybacks and less production from the gas companies that survived the downturn. 

 

As supply dwindled, demand for U.S. exports of liquefied natural gas (LNG) continued to increase to record levels. This year (2022), the U.S. has become the world's largest exporter of LNG. However, the majority of the world's LNG supply is sold under contract. Many of these contracts are decades long. As a result, most of the U.S. LNG supply is already spoken for. No one counted on the Ukraine War.

 

As Russia invaded Ukraine, the price of natural gas in Europe exploded higher. Traders initially thought Europe's price hikes would have an impact on this side of the pond. But over time, higher European prices had only a minor impact on the price of natural gas here in North America. As gas markets go, the U.S. is an isolated market. The U.S. natural gas market produces 97 billion cubic feet per day (BCFD) of natural gas, which is just enough for domestic consumption with another 12 BCFD available for LNG exports.

 

However, President Joe Biden has since promised to supply more natural gas to Europe to replace Russian fossil fuels. The problem with this pledge is that no one knows where the additional supplies are going to come from. There is little LNG available and even if there were it is extremely difficult to re-route LNG from one region to another.

 

One might think that with rising prices, why not simply increase production? That is easier said than done. Labor and material shortages, in addition to a more cautious approach to drilling (as a result of finance and regulation), have conspired to bring on some production, but at a much slower rate. In February 2022, monthly production hit 115.2 BCFD, but that was down from 118.7 BCFD in December 2021. Since then we have seen a steady decline. Average gas production output in the lower 48 states fell to 94.7 BCFD in June 2022 from 95.1 BCFD in May 2022.

 

As a result, storage levels are 18 percent lower than last year, and 16 percent lower than the five-year average. The way gas storage works, some storage historically is left unused in preparation for the winter when more gas is normally consumed. That is not happening this year. And all the above supply constraints could be exasperated by climate change.

 

The National Weather Service is already warning of another summer season of record-breaking heat waves in the Southern states. That wave has already commenced in places like Texas, Oklahoma and Louisiana. The nation's utilities, which are charged with supplying the electricity necessary to run all those air conditioners, have switched in times past to coal for power, but coal is now even more expensive than gas.

 

We have not even spoken about this year's hurricane season (June 1 to November 30, 2022). Historically, major hurricanes have disrupted both oil and gas production, refining, and delivery in many areas of the U.S. NOAA's Climate Prediction Center (a division of the National Weather Service), is predicting above-average activity this year with between 14 to 21 named storms on the horizon.

 

At the very least, I would suspect that down the road we will all be paying higher utility bills. As utilities grapple with higher natural gas costs, it will take some time to pass the costs through to the consumers. Depending on how tropical the summer gets, those higher monthly bills could persist well into the winter.

 

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.

Despite the carnage caused by firearms, the business of manufacturing, marketing, and selling guns to Americans is thriving. What is worse, it appears that efforts to control and regulate the industry may only increase sales.

 

During the start of the COVID-19 pandemic (2020-2021), gun purchases accelerated. More than 5 million adults becoming first-time gun owners compared to 2.4 million in 2019, according to a survey published by the Annals of Internal Medicine. Approximately half of all new gun owners were female, and nearly half were people of color. Month after month, sales of guns have surpassed 1 million units for 33 months in a row.

 

This year (so far), monthly sales of guns have been off slightly. In April 2022, 1.5 million firearms were sold, which was a year-over-year decrease of 20.7 percent, while long guns or rifles fell by 18.8 percent. However, if past behavior is any indication gun sales will likely surge in the months ahead. It is one reason why publicly traded gun stock prices are flat-to-up despite the horrible news of the last two weeks.

 

The facts are that mass shootings like the ones in Uvalde, Texas, or Buffalo, N.Y., motivate more Americans to buy guns rather than to give them up. Throughout the last several years, the three highest months for gun sales occurred in December 2012, after the Sandy Hook Elementary School shooting in December 2015, after the mass shooting in San Bernardino, CA. in March 2020 as a result of the Covid pandemic. There were also gun sale spikes in June 2020 as Black Lives Matter protests erupted after George Floyd's murder.

 

The most-cited reason for owning a firearm in the wake of high-profile shootings and massacres is personal security. "Self-defense" seems to be an overriding motivator for most Americans. Opponents of this behavior argue that more guns at home only increase the potential risk to the 11 million household members that are newly exposed to lethal firearms, including an estimated 5 million children.

 

As a Vietnam veteran, I am convinced that guns as a form of self-defense is a fallacy. Unlike hunter safety courses, which teach new gun owners how to safely use rifles or bows in hunting wildlife, Americans (except veterans and law enforcement) have little to no training in the far more deadly skill of killing or wounding another human being.

 

Learning that skill required, in my case, more than 18 months of sophisticated training using live fire. Even then, repeated firefights were vital in learning how to survive, reduce instances of friendly fire, and accomplish the objective of self-defense or offense.

 

In my life, I have only met a handful of men and women, who have received and have maintained those skills. My brother, for example, who lives in Delaware, has an arsenal of guns, and has never hunted, and yet enjoys shooting up old cars with his state trooper buddies. I remind him abandoned autos don't shoot back, but he ignores my arguments.

 

However, there is also another important factor in generating increased gun sales — regulation. As I write this, Congress is once again demanding something be done to reduce gun violence. And as usual, most Republican congressmen and senators display few signs that they will vote for any new gun regulation. Gun control has become a partisan issue, just as important as abortion in many circles.

 

The more vocal politicians become over limiting or hindering the purchase of firearms, the more gun advocates feel threatened that their second amendment rights might be reduced or taken away entirely. The result is usually a rush to buy and stockpile even more guns "just in case."

 

Frustrated with the stalemate in Washington, many individual states are attempting to take action where they can to reduce gun violence. Other states are pushing to reverse or strengthen voters' gun rights in response. Roughly three in five state legislatures are Republican-controlled and are determined to make guns even more accessible to their citizens.

 

 For example, one of the country's largest banks. attempted to distance itself from the firearm industry after a mass shooting in Parkland, Fla., which left 17 dead. Texas, in response, passed a new law that bars state agencies from working with any firm that decimates against companies or individuals in the gun industry.

 

The law requires banks and other professional service firms to provide the state written affirmations that they are complying with the law. Banks could be subject to criminal prosecution if they don't comply. In addition, banks worry about their bottom line, since Texas is one of the nation's largest bond issuers, with $50 million in annual borrowing, generating $315 million in fees last year for financial firms.

 

The facts are that in a country where one third of Americans own guns, don't blame the politicians for their lack of new regulations on guns and gun violence. They are simply following the wishes of their voters. Just recognize that three out of ten of your neighbors, regardless of whether you live in a blue state or red state, may disagree with additional gun controls.

 

And don't dismiss gun owners as a bunch of red-neck, no-nothings. There are countless, male and female professionals — doctors, lawyers, financial planners, etc. — that own and collect guns. As such, while my heart breaks for the slaughter that we see perpetrated by Americans with guns on an almost on a daily basis the solution eludes us. One suggestion might be to require insurance when purchasing a gun, like the existing practice of requiring insurance along with the purchase of an automobile.  It would avoid the Second Amendment controversary and probably reduce those willing to pay yearly insurance for each firearm they own.

 

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.

Economists know that consumers spend more when their wealth increases, even if their income remains the same. However, if wealth decreases, the opposite occurs.  

 

The concept, known as the wealth effect, has spurred the economy for well more than a decade as savers' 401(k) and other retirement accounts increased year after year. At the same time, real estate values have also risen. Of course, most of the time these gains are only paper profits unless you sell your house or withdraw money from your portfolios.

 

Nonetheless, there is a behavioral element to this concept. People tend to spend more when stocks and housing prices continue to climb because they feel wealthier and become more optimistic. It is one of the reasons why, in the U.S., consumer spending continues to remain robust — until recently.

 

The Federal Reserve Bank, in past efforts to control inflation, focused on removing the supply of credit to the financial markets. They did so through hiking interest rates and slowing bond purchases. However, this time around, the Fed is targeting the demand side of the economic equation as well. Reducing demand in this case would require reversing some of the wealth accumulated over the last 10 years or more.

 

During the COVID-19 pandemic, stock portfolios and home prices soared, thanks to the huge governmental monetary and fiscal stimulus that occurred. America's top income earners, who were working from home, splurged on home remodeling, new autos, durable goods and all sorts of electronics. Trillions of dollars in stimulus checks and unemployment benefits supercharged consumer spending for those who made less.

 

As a result, all income groups increased spending at rates far faster than before the pandemic. The most recent government survey of retail sales for April 2022, indicated that retail sales outpaced inflation for a fourth straight month. And while inflation climbs, higher earners, who already account for a large share of overall consumption, seem willing to keep spending, at least for now.

 

That retail sales data doesn't tell the whole story. Low-and even middle-income households are already cutting back. Demand is falling as the wealth effect appears to be working in reverse. Almost 60 percent of U.S. consumers, according to a survey by brokerage firm Jeffries conducted in April 2022, said they have reduced the number of items they typically buy. In every category, low- and middle-income consumers were cutting back far more than those in higher income groups.

 

In addition, the National Retail Federation identified that 47 percent of consumers they surveyed last month (April 2022) were switching to cheaper products and alternatives as well. I have already pointed out this trend in past columns. Consumers are reducing meat consumption, or choosing cheaper alternatives such as chicken, pork, or fish. Supermarket sales of private label brands are booming as well.

 

But inflation is not the only variable that is impacting consumers. Interest rates are also playing their part. Mortgage rates are the most obvious victim of a rising interest rate environment. Borrowing costs have jumped for 30-year mortgages from a sub 3 percent level last year to 5.25 percent today. New home sales in April 2022 fell 16.6 percent from March and well below forecasts, which was the slowest pace since April 2020. Existing home sales were also falling for the last three months according to the National Association of Realtors.

 

Auto leases and loans and credit cards are also big areas where higher rates hit the consumer. Most credit cards and car loans are priced off the prime rate, which is in turn closely tied to the Fed funds rate. Consumers can expect those rates to climb higher, since the Federal Reserve Bank is planning to raise the Fed funds rate at least two more times in the next two months.

 

The big question most economists are asking is when will the combination of higher inflation, declining stock markets, and a possible downturn in the housing market start to reverse engineer the wealth effect at the higher income levels.

 

So far this year, many investors have suffered anywhere from a 20-30 percent decline in their portfolios and retirement savings. People are already having to rethink their retirement date as a result. Inflation and supply shortages are crimping remodeling and housing plans even as higher interest rates are expected to put a dent in housing prices soon. As a result, many Americans are starting to feel less wealthy than they did last year.

 

The Fed is counting on all of the above to change the psychology of consumers from spending like drunken sailors to something a bit more moderate (but not enough to have them swear off entirely). Tinkering with the wealth effect can have unpredictable reactions. How far is too far when you are trying to dampen down demand? It is a fine line, and the Fed's tools to accomplish this feat are far from perfect.  If they get it wrong, the economy will likely suffer. Let's hope they get it right.

 

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.

Over the past decade, as interest rates declined, some home buyers gravitated towards interest-only loans. However, times are changing, and borrowers should be careful in considering this kind of mortgage loan.

 

During the past two years, many financial lenders have tightened credit standards across most loan types. The combination of the coronavirus pandemic, supply shortages, inflation and the impact of the Ukraine war has created a drag on the U.S. economy. A slowing economy increases the risks of lending, thus tighter standards emerge.

 

Fannie Mae and Freddie Mac, the two government-sponsored enterprises that back most mortgages exclude interest-only mortgages. And while standards have been raised since the 2007 subprime collapse for these kinds of loans, there is a perception that standards may be more relaxed than conventional loans. Lenders, for the most part, keep these mortgages in their own portfolio or sell them to institutional investors.

 

An interest-only mortgage is one in which you initially only pay the interest on the loan for an allotted period, usually five, seven or ten years. As a result, your monthly payments are cheaper, since you are not repaying principal (the total amount borrowed). However, once that initial period concludes, you will still owe the same amount on the mortgages as you originally borrowed. Typically, these loans charge higher interest rates than conventional mortgages.

 

Interest-only loans are popular right now in this booming real estate market. One mistake would be to take out such a loan simply to qualify for a home you otherwise couldn't afford. Others believe they can afford larger homes with steeper asking prices because their monthly payments could be lower by several hundred dollars a month. 

 

Another mistake is to dismiss future risk by arguing that by the time the interest-only period expires, interest rates will have fallen further, or they will be making enough income to afford future payments, whatever they may be. It would be better to take a worst-case scenario and see if you can live with it.

 

Let's say you had a 30-year, fixed interest-only mortgage that you entered in 2012. Your initial interest-only period was ten years. That time is now up. What happens? You still have the entire principal to repay, only now you have only 20 years to do so. That means your monthly payments will rise simply because of the math. By exactly how much should also be of concern.  

 

Payment terms for the remainder of the loan may vary, but your new interest rate is usually determined by whatever the prevailing rate is at the time. Some loans are capped, so that the new interest rate you will be charged can be increased by no more than 2 percent. Other loans may not have a cap. In a rising rate environment that can spell disaster for borrowers.

 

In addition, remember your monthly payments now include principal repayments, plus a higher rate of interest and a shorter time period to repay the entire mortgage. This can mean your new monthly payment could cost you 2-3 times what you had been paying during the first ten years of your loan, according to the Federal Deposit Insurance Corp.

 

Ask yourself what would happen if mortgage interest rates, which hit a 30-year low last year, continue to rise over the next decade? There is a real risk that rates could rise to a point that the added costs to borrowers could present a default risk.

 

Granted, if payments become that expensive, there is always a chance that the loan could be refinanced, or the length of the loan might be extended, but at what cost? My advice is taking the necessary time and effort to analyze whether an interest-only mortgage is right for you or just a tempting alternative that fails to make economic sense in the long term.  

 

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 impending Supreme Court decision to strike down Roe v. Wade will have enormous ramifications for American corporations. Legal issues, user data privacy practices, and workforce challenges will prove impossible to ignore.

 

Businesses of all kinds face the following facts: most Americans (53 percent), according to a recent Washington Post-ABC News poll, believe the Supreme Court is wrong and that the court should uphold the landmark ruling that established a constitutional right to abortion. Only 28 percent believe it should be overturned.

 

Nonetheless, if the Supreme Court hands down its expected decision to overturn Roe v. Wade, 13 states have trigger laws banning abortion that immediately go into effect. Another 14 states have more restrictive abortion laws that will kick in at the same time. Since about half of the U.S. workforce is comprised of women and given that one in four U.S. women will likely have an abortion by the age of 45, this will have legal ramifications for a vast number of companies.

 

How, for example, will companies domiciled or headquartered in one of those anti-abortion states contend with a female workforce who may disagree with the courts and their resident states' decision? What if a portion of a company's female workforce want to transfer out of these states?

 

And while some states will limit or make abortion illegal, other states such as Massachusetts, New York, and California will be moving in the opposite direction. They are planning on becoming sanctuary states for women who desire abortions but can't obtain them without travelling out of state. That could leave businesses in a political tug of war between various states. Companies such as Yelp, Amazon, and Citibank (among others) have already promised to reimburse employees who travel for abortions. Legally, that may fall into a gray area depending on a state's interpretation of their anti-abortion legislation.

 

Conservatives in Congress have already begun to retaliate against those companies that they perceive as pro-abortion companies. Citigroup, one of the largest banks in the U.S., has been targeted by conservatives who want the House and Sente to cancel the company's contracts to issue credit cards to lawmakers. 

 

In Texas, a state lawmaker introduced a bill that would prevent companies who provide their employees with abortion-related benefits from doing business with local governments. In Florida, Disney has already felt the economic backlash of Gov. Ron DeSantis' campaign against the LGBTQ+ community. U.S. Sen. Mark Rubio introduced a bill, the "No Tax Breaks for Radical Corporate Activism Act," which would prevent employers from deducting travel expenses for their workers' abortions. This is in direct response to Citigroup, Apple, Yelp, Levi's, Match Group and Amazon, who have already announced they plan to reimburse travel costs to access abortion if their employees live in a state where it becomes illegal.   

 

Technology companies have even more difficult issues to deal with. Dozens of large tech companies are headquartered in the states preparing to ban or restrict abortions. In the anti-abortion states, legal enforcement of the new laws may mean that user data could be a tool to enforce and pursue those who break those laws.

 

User data is often bought and sold by third parties who then use that information to effectively target advertising. This data normally includes the location of a person's phone, the applications they use, (for instance, ride-hailing), and the user's search history. There is also an array of health tech, femtech and other medical-based applications that track and target women, their menstrual cycles, medications, and sexual activity. All of these apps, while promising privacy, are not immune from law enforcement and a court's subpoena power.

 

Could a local sheriff's department subpoena the IP address of someone or some organization they suspect are violating or have violated the statutes of new anti-abortion laws? Could state authorities demand tracking data from a tech company like Facebook, Apple, or Google that may or may not show visits to an abortion clinic out of state?

 

I know this is beginning to sound like the workings of a police state such as one would find in China or Russia, but given the background, it is reasonable to at least plan for the worst. Companies may try to downplay the significance of this issue, but the end of Roe v. Wade will open up the question of protection of health-care access for their workforce.

 

As has been shown in the past, consumers identify with companies and their brands that support their causes, while an employees' identity can be tied to ethical positions of the companies they work for. About the only good thing one can say is that companies still have a little time to plan and decide their response. The clock is ticking.

 

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.