The Retired Investor: Streaming Comes of Age
There are roughly 817,000 unique and different programs available via streaming services in the U.S. The median streaming household pays for three to four such subscriptions costing between $20 and $30 per month. Most consumers claim the choices are overwhelming and cumulatively expensive, so why don't they plan to do anything about it?
Those were the findings of a Nielson report titled "State of Play" published in April 2022 that analyzed the state of streaming entertainment in America. The number of programs (movies, series, specials, etc.) has increased by 26.5 percent since the beginning of 2020.
The amount of content that we couch potatoes have consumed has also increased by 18 percent since 2021. To put that in perspective, in just one month (February 2022), Americans consumed 169.4 billion minutes of content. Obviously, there is a strong correlation between the amount of content available, and the amount we consumed.
Personally, there isn't a day that goes by that I am not bombarded with ads on television, radio, the internet, and emails from one streaming service or another. Most of them promise a week or so of free viewing and then automatically bill me each month via credit card for as long as forever. Honestly, when I examine the offerings, I discover that much of what they offer is old shows and series with one or more new series thrown in that were popular once upon a time.
Nielson says almost half of all users they surveyed felt overwhelmed by the quantity of programming available. I concur. My list of shows on the four services I subscribe to continues to build to the point that it would probably take me a year of constant binging to get through it all!
So, with all of this content, you would think that I would cut back, discontinue a service or two, and save some money. But true to form, no matter how much I complain, I have no plans to cut back, or reduce the amount of streaming content I consume each night. And that is exactly what most of those surveyed by Nielson said as well. A full 93 percent of respondents said they planned to either keep the streaming services they had or add more over the course of the next year.
If you asked me right now how much I pay a month and over the course of a year for my subscription services, I couldn't tell you. How about you, can you even guess? It turns out that almost a third of U.S. consumers underestimate how much they spend on subscriptions by $100 to $199 per month, according to a study by market research firm, C+R Research.
It is also true that many people (42 percent) have forgotten that they are paying for a streaming service that they no longer use. I am guilty once again. My wife and I enjoy foreign films, so about four months ago, we decided to fork over another $6.99 a month for a British service. We watched maybe one or two shows and that was it. Because we charged the fee to our credit card, the amount was automatically debited, making it easy to go unnoticed. Since 86 percent of consumers have at least some, if not all, of their subscriptions on autopay, I suspect many readers have similar experiences. TV and movie streaming came in third, after mobile phone and internet charges as the most forgotten types of subscriptions.
Way back when, if you recall, cable companies offered preset packages to subscribers that included several premium services in addition to network television for a bundled price. In a similar move back to the future, many of Nielson's surveyed consumers (64 percent) said they would be interested in bundling competing streaming services to save money if they could choose the streaming services they want. It seems to me that as winners and losers begin to become apparent among streamers some sort of bundling will make economic sense. In the meantime, I will probably continue to complain about, pay for, and accumulate additional services.
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@theMarket: Recession: 'Certainly a Possibility'
"Certainly a Possibility."
Those were the words of Federal Reserve Chairman Jerome Powell during testimony to the U.S. Senate banking Committee on Wednesday, June 22. Investors took his warning in stride, instead of plummeting. That may indicate markets are ready for another relief rally.
Powell thought the U.S. economy was strong enough to roll with the Fed's punches of higher interest rates, and a shrinking balance sheet without too much trouble. It was the outside factors — the Ukrainian war, China's COVID-19 policy, and supply chain problems — that complicate the outlook. Avoiding the "R" word was largely out of the Fed's control, he said, "it's not our intended outcome at all, but it's certainly a possibility."
Granted, it wasn't as if fears of a recession were a new concept among investors. For the past few weeks, as the Fed made clear they were pursuing an even more aggressive series of interest rate hikes to combat inflation, investors began to worry that the Fed's action might tip the economy into recession.
This fear has weighed heavily on stocks in various hot sectors like energy and materials, which have fallen considerably in price. Oil has dropped from $123 a barrel to almost $100 in the last two weeks with energy stocks falling faster and further. Natural gas prices have also dropped substantially, despite the actions of Russia to cut off natural gas to the European Community.
Defensive stocks in areas like utilities, health care, consumer durables, and telecom were bought instead. As were U.S. bonds, which are sending yields lower. That makes sense. If the U.S. does slip into recession, there will be far less demand for energy and other commodity inputs to fuel economies. In recessions, investors usually hide out in higher yielding areas where hefty dividends support stock prices in areas which people need, (not want) to purchase.
I pay attention when investors receive bad news (such as a potential recession forecast from the Fed), and the markets hold in there as they did this week. After all, Chair Powell had two days of testimony in front of Congress and plenty of opportunities during the Q&A sessions to tank the markets, but that didn't happen, even though he was no less hawkish in his forecast. That leads me to believe that the markets may have discounted the worst — for now.
Rest assured, I still believe we have a lower low in front of us sometime before the end of September. But that does not mean we can't see a face-ripping rally of 10 percent in the short-term. As a contrarian indicator, the AAII Sentiment survey, which measures bullish/bearish sentiment among institutional investors, just registered the 25th lowest bullish and its sixth highest bearish sentiment reading in its history.
Many traders are expecting just that kind of event to occur over the next week or two. There are several technical reasons that make bounce higher a high probability. There is the rebalancing of funds by large institutions (bonds into equities) that occurs at the end of a quarter after severe selloffs. Many hedge funds are ending the quarter net short and will also need to rebalance.
There will also be the usual flow of new funds into pension plans that will need to be invested. Finally, a huge number of put options will expire at the end of the month. They will need to be either liquidated or rolled over to a future month. This could set the markets up for another oversold bounce.
We have had several of these rallies thus far in 2022. The S&P 500 Index gained 6 percent in four trading days, 11 percent in 11 days, and 8.7 percent in 9 days, while losing 19 percent overall. Bear market rallies typically get back 70 percent of the losses of the prior move lower with over a quarter of the rallies gaining back over 100 percent.
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The Retired Investor: Stock Market & Midterm Elections
The stock market does not perform well in the year leading up to midterm elections. This year's election may just add to the overall woes besetting equities.
Historically, the average annual return of the benchmark S&P 500 Index in the 12 months before the Nov. 5 election is 0.3 percent, versus the historical average of 8.1 percent in non-midterm years. In 2022, of course, with the S&P 500 down more than 20 percent, those historical numbers look pretty good. Unfortunately, volatility also tends to rise before and after midterm elections.
But this year is different, you might say, since we are witnessing the first European war in decades, as well as the highest inflation rate in 40 years. And let's not forget the continued existence of the coronavirus, a pandemic the world has not seen in more than a hundred years.
While all of this is true, it does not contradict the data. For more than a century, the second year of the four-year presidential election cycle has always been the weakest in performance, so investors should brace for an even worse year than most.
Consumer sentiment is in the dumps and a growing list of issues — political, social and economic — are plaguing voters. The economy is giving off conflicting signals. It is still growing, although that growth is moderating. But right now, U.S. GDP remains strong enough to keep employers hiring and wages rising, but for how long?
Two big negatives are posing a growing threat to the economy; inflation and the Fed's determination to fight it through tighter monetary policy. Both elements are impacting the wealth effect of American voters. Higher interest rates are hurting the stock market, and with it the average Americans retirement portfolios. Housing prices, another bright spot for homeowners, are also leveling off as mortgage rates climb. The two combine to inflict a general feeling of diminishing wealth among many households. We are feeling poorer.
Inflation adds to that feeling. At the gas pump and in the supermarket, skyrocketing inflation has dramatically increased the cost of living for most voters. Workers are finding that recent pay raises are not covering the effects of inflation on the family budget.
What is worse, more and more economists are beginning to worry that the Fed's monetary tightening will ultimately lead to a recession sometime soon, whether this year or next. If so, the macroeconomic data will likely make that apparent just in time for the lead up into November's mid-term elections in 2022.
The makeup of the Congress and the Senate adds even more uncertainty to the midterm equation. If we look back at midterm elections since 1934, the president's party has lost at least 30 seats in the House and four seats in the Senate. There are only three years in history where the president's party gained seats. Democrats cannot afford to lose any seats in the Senate and few seats in the House if they hope to maintain their majority. At this point, history is against that happening.
Investors tend to dislike uncertainty and like the status quo within their governments. The stakes are high. If the Democrats hold firm in both houses of Congress, the chance of new legislation (and possibly new taxes) becomes a higher probability. If Republicans win one or both Houses, gridlock becomes the likely result within government. In that case, investors can expect little in the way of new legislation or downside surprises. Either way, we can be sure that the markets will be anything but calm leading up to Nov. 5.
Of course, there are a host of social issues, which may help determine the outcome. However, the economy usually takes precedence over all else in voters' minds. In any case, readers can expect that politicians on both sides of the aisle will be sure to add to the market's volatility in the months ahead. Starting now.
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@theMarket: Inflation Shock Pummels Markets
The Consumer Price Index (CPI) surged in May 2022 as gas prices continued to run higher. These results came as a downside surprise to a stock market that has been falling most of the week.
Friday's CPI number for May 2022 reflected an increase of 1 percent, compared to "hot" estimates of 0.3 percent in April 2022. On a year-over-year basis, the gain was 8.6 percent, which is a 40-year high in the CPI. Gasoline prices were a key driver of inflation last month, although Owners' Equivalent Rent (OER), which accounts for about a third of the CPI, also gained. The problem going forward is that analysts expect gasoline prices will continue to rise in this summer's driving season. If oil continues to rise, the stickier inflation will be.
This strong inflation result sets the stage for next week's June 15 FOMC meeting. It will be the first 50 basis point increase in the Fed funds rate in decades. Investors have been fully informed of the coming rate hike (and another one in July 2022), as well as the on-going reduction in the Fed's balance sheet.
Supposedly, the markets have fully discounted this event, but there is always a risk that during the Q&A session with Fed Chairman Jerome Powell after the meeting, he says something more hawkish than investors expect. I am betting that he will do nothing to add risk (more downside) to an already skittish market. If so, that could give markets a lift.
Throughout the week, central banks around the world continued to raise interest rates and telegraph their plans to tighten even more as global inflation climbs. Christine Lagarde, the president of the European Central Bank (ECB), joined the crowd on Thursday indicating that the ECB plans to raise interest rates above zero for the first time in a decade by September 2022.
The ECB will raise rates by half a percentage point, followed by a planned quarter-point rise in July 2022, which is a bigger increase than expected. ECB officials are becoming increasingly concerned that higher wages, higher oil prices, and supply chain issues could lead inflation to become entrenched. Sound familiar?
Most of Wall Street expected that inflation may have peaked (and it still may in the months ahead), but the CPI threw a monkey wrench into this theory. The U.S. dollar has reversed course as a result and climbed higher over the last few days. I have advised readers to keep an eye on the greenback as an indication of where stocks might go. Right now, the two have an inverse relationship, so dollar up, stocks down.
I was dead wrong in my expectations that we could see a substantial rally in the stock market. Instead, we have dropped throughout the week as a barrage of interest rate hikes by central bankers throughout the world pressured stocks lower and the U.S. dollar higher. And now we face the Fed next week.
As I write this (Friday morning, June 10), the S&P 500 Index has tested and held at 3,900. If we break this level by more than 20 points, we could see a re-test of the lows (3,810). I suspect that we will bounce today instead. From a technician's point of view, into next week, depending on how the market closes for the week, we may see a down Monday to re-test the lows we put in today and a rebound on Tuesday into Wednesday. At that point it is up to the Fed, which way the markets go. I am hoping the direction is up.
I wanted to give readers a heads-up that I am taking the latter part of next week off, so there will not be a column next week. I'll be back at my post the following week for sure.
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The Retired Investor: Natural Gas Prices Fall But For How Long?
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.
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