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.

Rising inflation, weaker earnings expectations, or the rocketing U.S. dollar, it is just a question of which of these negatives are hurting the markets most. Investors are frightened, but not yet panicked. It is time to pay attention.

 

Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) for June 2022 came in hotter than economists expected. They are backward-looking indicators, but markets fell on the reports, nonetheless. Rising energy prices was the biggest culprits in both reports hamstringing consumers and producers as prices soared. Since then, the price of oil has dropped, although natural gas prices have risen, so we will have to wait and see how much energy impacts this July's data.

 

However, with the higher year-over year CPI gain of 9.1 percent, coupled with the PPI's gain of 11.3 percent, the bond market is now betting on a one-in-two chance of a super-sized move in July's FOMC meeting of as much as a 100-basis point. Another 75 basis points is now also in play for the Fed's September meeting.

 

Corporate earnings for the second quarter kicked off this week. The money center banks announced poor earnings and even gloomier guidance. Investors have been expecting disappointments across the board, although some argued that poorer earnings were already reflected in the price of the stocks. Tell that to JP Morgan, the premier U.S. banking company, that saw its stock fall by more than 4 percent.

 

But the most troubling event is the continued climb in the U.S. dollar. I have advised readers over the last month to watch the level of the greenback. It is now trading at parity with the Euro. The last time this happened was in 2002, but it is not just the Euro. The dollar has been hitting 20-year highs against the currencies of its major trading partners as well.

 

As I have written before, a currency's exchange rate is a reflection on a country's economic prospects. In the case of Europe, higher energy prices, the Ukraine war, and record inflation have damaged the prospects for economic growth. As the European Unions' energy supplies dwindle, inflation has climbed by more than 8 percent and talk of rationing national gas supplies to industries is now on the table.

 

The European Central Bank (ECB) is between a rock and a hard place. If they raise interest rates to combat inflation, it could have a disastrous impact on the EU economy, which is already teetering on the edge, thanks to the war and energy embargos. But going slow on tightening monetary policy will only fuel higher inflation.

 

The U.S. may be facing its own bout of recession for some of the same reasons. The difference is that our Federal Reserve Bank has been more aggressive in tightening monetary policy than the ECB. And while energy prices are high in the U.S., they are still lower than in Europe. Natural gas prices, for example, are ninefold higher than in the U.S.

 

As far as currency markets today, it comes down to who has the cleanest shirt in the dirty laundry basket. The U.S. dollar wins that contest hands down. However, the downside for many American companies is that revenues and earnings generated overseas, and then repatriate are worth less. If instead, managements decide to keep their Euro earnings in Europe to cover costs there, the exchange rate becomes less of an issue. Another downside is that a stronger dollar makes American exports more expensive, which reduces U.S. economic output and widens the trade deficit.

 

Over the last week or so, Wall Street analysts have been scurrying to reduce their earnings estimates for more than 500 companies for this second quarter. It would not surprise me if equity strategists began to reduce their year-end estimates downward for the market averages. Talk of a more aggressive need to raise interest rates sooner than later to combat inflation, coupled with recession fears, is the motivating factor behind these moves.

 

The next FOMC meeting is drawing closer (July 26-27), which won't be good news for the markets, and in the meantime, we have an earnings season to contend with. At best, I expect to see a volatile market as earnings surprises, both positive and negative, send markets careening up and down through the rest of the month.

State and local government employees are essential in delivering everyday services to the American public, but the government's labor force is understaffed and has yet to recover from its pandemic lows. The reasons range from lower pay and less advancement to little flexibility in areas such as remote working.

 

Private-sector jobs have already surpassed pre-pandemic levels, while in the public sector, government employers are still looking for more than 664,000 workers with little success. This may sound like one of those "so what" kind of issues but consider this.

 

Public employees operate the nation's trains, subways and buses in addition to delivering essential services like health and unemployment insurance. Also on the list; safety-net services such as housing and cash assistance, protecting the nation's water, food, and air as well as combating infectious diseases. And let's not forget the increasingly difficult duty of teaching and caring for our kids in state universities, community colleges, and K-12 education.

 

I focus on teachers especially since jobs in education account for most of state and local employment, according to the U.S. Census Bureau. Teaching salaries have the reputation of being notoriously low in the best of times, which these are not.

 

The ongoing pandemic, now in its third year, provides a clear and present infection danger for all teachers. Throw in the increasing number of school shootings, and the tension that goes along with it daily and you can understand why teachers have been retiring in droves with few replacements.

 

The increasing political pressure from outside the classroom on everything from facemasks, to books, to what lessons plans will be least likely to cause turmoil and/or outrage among parents adds to the teacher's list of grievances. No wonder, that, with a laundry list like that, it becomes even more difficult to woo young teachers for $50,000 a year when the same graduate can earn twice that and more in the tech industry.

 

Workers considering employment in areas like education, the postal service, etc. are being wooed away in this tight labor market by hefty signing bonuses and faster wage growth in the private sector, which becomes especially important in an inflationary environment.

 

You would think the simplest solution would be to raise wages for government employees just like the private sector has been doing. That turns out to be a rather difficult proposition. In the past, state and local governments struggled with a combination of cutbacks in federal spending (depending on who was in office), as well as low tax receipts from time to time. This made budgeting difficult and somewhat unpredictable.

 

Which brings us to government budgets. For the most part, it is the budget that determine salaries for public workers. Budgets, as we know, are ponderous things that take a long time to pass, and almost always involve political horse-trading. Raising wages for government workers, therefore, is a hot potato that few politicians are willing to tackle unless they must.

 

Another disadvantage in finding workers is that government work is not as flexible. Working from home doesn't cut it for a bus driver, police office, or letter carrier. Therefore, hybrid and remote work options just aren't in the lexicon of most state and local governments. So, who suffers the most from these lower wage jobs?

 

In the overall economy, state and local governments account for about 12 percent of employed people. Most of these workers are women. Workers of color, particularly Black and American Indian employees, are also heavily represented in these industries. As such, public sector employment has provided economic security for women and minorities.

 

Is there a solution to this employment problem? Probably, but not in the short term. However, as the wait time between your bus or subway stop lengthen, the lines at your unemployment office, or at the tax assessor's office trail out to the sidewalk, and your mail is two weeks late, we will notice and complain. At some point, if we yell loud enough, things will change, but I suspect not before they get much worse.

 

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 bounced again this week. Recession fears raised hopes that the Federal Reserve Bank might a relent a bit on their tightening program. That could be a false hope but was enough to provide a relief rally.

 

There is a higher probability that we could continue to rally in fits and starts. Exactly what does and does not gain will likely have more to do with what has lost the most in the last month. Energy comes to mind since we have seen more than a 25 percent decline in energy stocks triggered by a sharp decline in oil and gas. Commodity stocks have also swooned with some stocks experiencing double digit declines in the last month or so.   

 

The expectations that global demand would decline in a recession was the motivating factor behind these hefty falls. These plummeting prices sparked hope among investors that inflation could level off, or even come down faster than expected — in which case, the Fed might ease its foot off the tightening pedal.

 

Readers might scratch their heads at all this, since none of these "could be" scenarios have much data to back them up. Last week, however, I did mention that the Atlanta Fed was expecting 2022 second quarter GDP to come in at minus-2.1 percent, following the first quarter's decline of 1.6 percent. Technically, two down quarters in a row counts as a recession, but the National Bureau of Economic Research (NBER) will be the final arbiter of what is and what is not a recession.

 

Large cap technology shares as well as the most beaten-up sector stocks saw gains this week. Did that make sense?

 

Not really. In a recession, large cap, well capitalized companies (think FANG stocks, for example) should be able to withstand the negative impact of a slowing economy on earnings and sales far better than weaker companies. And yet, these companies, many with no earnings at all, rallied just as much. But who said bear market rallies have any basis in facts anyway?

 

Later in the week, China's Ministry of Finance was said to be "considering" a $220 billion program to fund additional infrastructure in order to boost their economy. The official target for GDP growth for this year is 5.5 percent. This goal is in jeopardy due to the economic hit caused by COVID-19 lockdowns and a housing slump this year. Infrastructure spending is the "go-to" policy the Chinese government has historically used to goose the economy.

 

That rumored announcement was enough to send oil, gas, and all sorts of commodities soaring higher, sparking a rebound in these depressed areas. The thought is that commodities and energy would be key inputs in building infrastructure. It doesn't appear that traders care about the obvious contradictions in chasing commodity, high growth tech and the weakest stocks in the universe all at the same time.

 

Remember too that in this atmosphere of recessionary fears, coupled with higher inflation, and tight monetary policy expectations, bad news can be good news for the stock market, and vice versa. As I see it, negative data that shows a weaker economy, slowing employment growth, and/or lower commodity prices is "good" for the markets because it means the Fed might not tighten further. A stronger labor market, increasing GDP, and higher commodity prices would constitute bad news for the markets, at least for now.   

 

Friday's non-farm payrolls data is a case in point. The U.S. economy added 372,000 jobs in June, which was slightly above expectations, while the unemployment rate remained unchanged at 3.6 percent. Stocks dropped immediately, since stronger job growth equates to a Fed that has no reason to relent on its aggressive tightening mode in monetary policy.

 

Given this background, I see this bounce as just another bear market bounce. My target on this one could see the S&P 500 Index reach 4,000. If traders get enthusiastic, we could see the 4,100 level. The only question is how long it will take to achieve my target.

 

Next week, the second quarter earnings season begins. Given all the issues plaguing U.S. corporations — falling consumer demand, a rising dollar, inflation, and supply chain issues — analysts are expecting weaker earnings and even weaker guidance. This could mark an end to any rally, so traders should be making hay while the sun shines.

 

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 Biden administration is wrestling with whether to ease some of the Chinese import tariffs on billions of dollars of Chinese goods. If they do, it would mark the first step in reconciling the trade differences between the world's two largest economies and could even nudge down the inflation rate.

 

The trade war is now over four years old and substantial tariffs remain. "To what end," some may ask, as certain deadlines approach. The first tranche of the Section 301, China imports tariffs on $34 billions of goods, is set to expire this week. Another $16 billion worth of tariffs will expire on Aug. 23 followed by $100 billion of tariffs on Sept. 4.  

 

 You may recall that back in 2018, former President Donald Trump imposed a series of tariffs on a host of Chinese products totaling more than $450 billion. In response, China imposed their own tariffs on American goods. From there, as the rhetoric reached new heights, each side escalated the tariffs, encompassing more and more goods at higher and higher penalties.

 

Since China represented the United States' largest agricultural export market, China focused their retaliatory tariffs in that area. The U.S. Department of Agriculture found that the tariffs reduced U.S. exports of agricultural products by $27 billion from 2018 to 2019.

 

The damage ultimately was so bad that the federal government was forced to give farmers nearly $30 billion in taxpayer money just to compensate for lost sales to China. Overall, the tariff war caused U.S. exports to fall by 9.9 percent, while reducing GDP by 0.04 percent, according to the National Bureau of Economic Research.

 

The tit-for-tat escalation ultimately led to a "Phase One" trade deal between the two countries, signed with great fanfare by Trump in January 2020. The agreement required China to sharply increase its purchases of U.S. goods as a precondition for the president to remove the new tariffs. The agreement was a total flop. China, during the first two years of the deal (2020-2021), purchased only 57 percent of its commitments. China purchased $289 billion of U.S. goods, instead of the $502 billion promised.  

 

A partial explanation for such a big miss was the COVID-19 pandemic, which affected trade between almost all nations. In addition, supply chain disruptions had a meaningful impact on other U.S. products such as automobiles and aircraft exports. Weakening demand for imports overall, as China's economy declined, has also been a contributing factor.  

 

Bottom line: if one looks at trade between the two nations overall, China's purchases are below the level they were before the trade wars began.

 

The United Nations Conference on Trade and Development found that the trade war was simply a lose-lose for both countries. The tariffs were supposed to protect American industries, but they have hurt the U.S. economy instead. If there had been no trade war, U.S. exports between 2018 and April 2022 would have been $129 billion more, according to a Washington-based research group, Americans for Free Trade.

 

Unfortunately, the Phase One agreement did not end the tariffs, but only prevented them from going higher. The average tariffs on goods affected is still about 20 percent on each side.  Not only did the tariffs on Chinese parts, components, and materials not make our manufacturing sectors stronger and more competitive, it also did the opposite.

 

Our companies needed those Chinese intermediate products (now on the tariff lists) to manufacture finished goods here. Companies found that without them, competing with companies in Japan and Europe, which continued to have access to those cheaper Chinese inputs, made our products more expensive in the open market. Our companies continued to lose market share globally as a result. Those losses continue today.

 

Some may question why President Biden has continued Trump's misguided policies, despite the damage it has caused the U.S. economy, while doing little to hurt China's economy. The simple answer is politics.

 

Being "tough on China" is a popular stance among Americans, even if it means a weaker economy. If you throw in China's growing authoritarianism, suppression of human rights, oppression of minorities, and military ambitions in Asia, the Biden administration would need some strong counter arguments to justify an easing of tariffs.

 

Given the rising inflation rate and cooling economy in the U.S., President Biden may now have the political cover to roll back some of those tariffs. President Biden is hoping that reducing tariffs would lower the costs of everyday merchandise to consumers. Unfortunately, economists are expecting that tariff reductions will only have a modest impact on inflation, but in my opinion, every little bit helps when inflation is topping 8 percent.

 

This week, the U.S. Treasury Secretary Janet Yellen, and China's Vice Premier Liu He, held talks focusing on economic policy and relieving global supply chains. Words such as "pragmatic," "constructive," and "substantive" seemed to indicate that some movement on tariffs is in the offing. Let's see what develops throughout the week.

 

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.