🎙️ Burning Up

The heat is relentless this summer. Iran recently hit 152 degrees, Europe and North America are amid punishing heat waves, and China just recorded its highest-ever temperature of 126 degrees 🥵

Market implications range from reduced worker productivity to surging demand for more energy-efficient solutions. Problems breed opportunities, and something tells us many great businesses will emerge as average annual temperatures keep rising.

💭 Meanwhile, we’re over here scratching our heads, questioning why we didn’t just go into the air conditioning business.

— Shawn & Matthew

Here’s the rundown:

Today, we'll discuss the three biggest stories in markets:

• Why extreme heat hasn’t budged natural gas prices

• Investor favorites Netflix & Tesla post rough earnings

• High-profile politicians might soon be unable to own stocks

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

⛽️ Extreme Heat Hasn’t Budged Natural Gas Prices (WSJ)

Despite the extreme heat, some Americans are relieved.

Huh? This summer, Americans are relying on natural gas more than ever to beat the heat. Despite the burning temperatures, which usually drive up natural gas prices to power AC units, the ongoing heat wave has had little impact on power costs.

• An unusually warm winter left a lot of natural gas unburned (less need for heating homes), keeping inventories elevated heading into summer.

• Increasingly robust renewable electricity generation also has helped reduce the reliance on gas-fired power plants in areas experiencing the most intense heat.

As a result: Prices for natural gas in major cities like Chicago and New York have dipped below the national benchmark.

• Natural-gas prices have remained stable within a narrow range, currently around 60% lower than the previous year's highs and 30% lower than in July 2021.

• While prices usually jump during the summer, natural-gas futures prices have experienced a 7% decline this month.

Why it matters:

The major difference between now and the past few summers is that there’s a lot more gas available. According to the Energy Information Administration, natural gas volumes in U.S. storage caverns last week exceeded the five-year average by 14%.

• Such high inventories in July haven't been seen since 2016, when a warm winter linked to the El Niño climate pattern created surpluses.

This time around, the surpluses come as more of a surprise for a few reasons:

• In 2021, freezing weather in Texas famously caused grid blackouts, draining gas stockpiles.
  

• Russia's invasion of Ukraine last year rippled through global energy markets, leading European buyers to seek alternative natural gas sources beyond Russia. This surge in demand for liquefied natural gas (LNG) exports drove huge outflows from the U.S. to Europe, initially pushing prices up domestically.

Since then, U.S. LNG exports faced a setback when a major export facility in Texas was shut down after a fire, not reopening until earlier this year. With decreased shipment volumes going to Europe from the shutdown, inventories in the U.S. were able to restock.

• A variety of energy-conservation efforts in Europe has also contributed to the slowdown in U.S. exports, as Europeans scaled back their purchases compared to last year.

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😨 Two Investor Favorites Have a Rough Day after Earnings (Marketwatch)

You know you’re in a tough business when adding 5.9 million new paying customers isn’t enough to make Wall Street happy. Such is life for Netflix — its stock plummeted 8% after reporting earnings yesterday evening.

• Net profits even rose 6% to $1.5 billion for the second quarter while revenue rose 3%. It wasn’t enough to meet expectations.

What happened: The company’s crackdown on password-sharing has pushed millions to pay for their own accounts, and the Hollywood writers and actors strike has paused deals to purchase yet-to-be-finished content, actually boosting cash flows for Netflix from the reduced spending.

• Less spending on streaming content helps Netflix’s profits in the short term. Still, as the strike drags on, investors wonder whether it can continue offering enough interesting content to retain subscribers.

While Netflix’s deep backlog of content and international footprint helps it weather the strike, other streaming platforms like Discovery+, Peacock, and Hulu are far less reliant on scripted shows, reports Forbes.

• Unscripted content like reality TV shows is expected to increasingly fill the void left by the strike.

Streaming wars: The quarter itself wasn’t too bad. However, in the cut-throat streaming wars, any shortcomings can spur a dramatic response from investors.

• Underwhelming projections for next quarter didn’t inspire confidence, particularly for its cheaper ad-supported subscription tier, which the company expected to generate more subscribers after cracking down on the estimated 100 million households sharing Netflix accounts.

Why it matters:

But weighing down the stock market indexes today has been a joint effort with Tesla, where months of price markdowns crushed profit margins. Gross margins dropped to a four-year low, contributing to the stock’s almost 10% fall.

Like streaming for Netflix, the electric vehicle (EV) space is an increasingly competitive one. Despite being an early leader, Tesla is feeling the costs of competition.

• The automaker expects to cut prices further to undercut rivals and has poured money into new projects like its behind-schedule Cybertruck and an in-house supercomputer, Dojo, which will cost at least $1 billion.

Investors have watched Tesla’s place in the business lifecycle shift dramatically. More companies producing EVs have pushed Tesla to rely less on premium prices and more on volume, reducing profits per vehicle sold to ramp up production and sell more total cars.

That plan may work if the company can ramp up sales without a falloff in customer demand. But Tesla’s mounting inventory is raising eyebrows from investors, prompting concerns the company needs to rely on price cuts to drive further sales.

• One analyst commented, “Tesla is clearly transitioning from being supply constrained (where delivery volumes grow in line with production capacity and prices increase) to being demand constrained (where prices fall to stimulate demand and production outpaces delivery).”

MORE HEADLINES

🏠 June home sales drop to the slowest pace since the recession of 2009

⏳ Taiwan Semiconductor delays the launch of its major new factory in Arizona

🦸‍♀️ Is Kim Kardashian the hero the IPO market needs?

🌾 Russian attacks on Ukrainian ports rattle global grain markets

⛔ Senators Propose Ban On Politicians Owning Stock (WSJ) 

The days of U.S. lawmakers earning millions on well-timed stock trades might be numbered. The Wall Street Journal (WSJ) reported Thursday that senators have proposed a ban on lawmakers and executive branch members owning stocks after a poll released this week showed that 80% of voters support a ban on stock ownership by members of Congress and their families.

• The proposal comes from Senators Kristen Gillibrand (D - NY) and Josh Hawley (R - Mo.). It would permit the president, vice president, lawmakers, Capitol Hill aides, and employees of the executive branch to own broad mutual funds and index funds. But it would prohibit them from owning stocks in individual companies altogether.

• The news is roughly a year after the WSJ found many top executive-branch employees owned stocks in companies that their agencies helped to regulate — an extreme conflict of interest.

Public first: Gillibrand said in a statement: “It is critical that the American people know that their elected leaders are putting the public first, not looking for ways to line their own pockets.”

Penalties: Caught employees would have to forfeit any profits from stock trading and face fines of $10,000 or more. Currently, lawmakers can own and trade individual stocks as long as they don’t make investment decisions based on nonpublic information they learn from their jobs. It’s growing increasingly likely that that will soon change.

• “While the prospect of a stock-trading ban is controversial within Congress, public support approaches unanimity,” noted one of the people behind the public study.

Why it matters:

There are dozens of examples, including Florida representative John Rutherford, who has traded aerospace and defense companies while on the House Appropriations Committee’s Subcommittee on Homeland Security, a clear conflict. His office reported trades in 60 companies, ranging in value between $652,000 and $3.5 million.

About 10 bills have been introduced in Congress this year to overhaul rules for stock trading in Congress and the executive branch. Last year’s New York Times investigation found 97 members of Congress reported trades in companies influenced by their committees. They found potential conflict after conflict with lawmakers, ranging from pharmaceutical stocks like Merck and Johnson & Johnson to banking and technology companies.

Many onlookers say it’s about time.

• Noted one senator: “We continue to see story after story hit the headlines of members of Congress who bought and sold stock related to the Silicon Valley Bank Collapse. Before that, it was the invasion of Ukraine. Before that, it was Covid.”
  

• An online and searchable database of corporate stocks, mutual funds and other funds owned by senior officials could soon become available.

The senator added: “Frankly speaking, whether there was any ill intention or not, the American people think it’s outrageous.”

See you next time!

That's it for today on We Study Markets!

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