What if? The two least used words on the stock market today. What if that morning’s absolutely terrible non-farm payroll report (the BLS’s 235,000 job hires report in August was a full half a million below the consensus estimate of 725,000 to 750,000) wasn’t just a slip-up like the one Seems to be stock market? tell us about his initial non-response to the news.
Yesterday I answered a question from a former DLJ colleague about the price of natural gas, an important part of fertilizer production. That’s a margin squeeze on CF Industries (CF), Mosaic (MOS) and the other names I mentioned in my RM column yesterday. A look at the Nat Gas futures curve shows, however, that compared to the futures price from October 2021 of 4.69 USD / mmbtu, the futures contract from October 2022 at 3.69 USD and the contract from October 2023 at 2 .94 USD is quoted.
This is what futures traders call backwardation and is an extreme example of this, especially since natural gas has storage costs. But forward prices are more important than spot prices when actually buying gas, so the question was easy to answer, since “high natural gas prices are a temporary phenomenon”.
But what if the futures markets are wrong? What if today’s Natgas prices become the rule rather than the exception? This is stagflation. Abyssal job report, increased hydrocarbon prices … If you want to see what stagflation looks like, check out your computer screen today.
So what if inflation is really not temporary? Well, I think I made my exception to Fed Chairman Powell’s policy clear in previous RM columns, but “what if?” is a matter of opinion, and what we see here is real life.
What if the seemingly strong growth is just inflation, and with growth estimates being revised downwards, there is simply no justification for increased multiples on future earnings. Does that sound like Nasdaq today? It sure does. We see financial growth, not real economic growth, and as things cost more, consumers buy smaller quantities, which harms producers. This applies to washing machines as well as to Teslas (TSLA). You cannot escape basic economics.
As I mentioned earlier, all you need to do is add stagflation to your portfolio. Get some hydrocarbon exposure. Statistics! I tend to talk about oil and gas majors like they’re the only game in town, but make sure you get some all-natgas players like EQT (EQT), Cabot (COG), Southwestern Energy (SWN), Range Resources (RRC), and Antero Resources (AR) (whose pipeline spin-off Antero Midstream (AM) is still my investment goal, as I’ve mentioned in many RM columns.) According to the latest data from US Natural Gas Association these were the five largest independent players in the Marcellus Utica slate game.
Don’t forget about the big guys too, particularly Exxon (XOM) which has huge dry gas exposure from acquiring XTO in 2010. That was a much maligned deal from Wall Street and was emulated by former CEO Rex Tillerson, who was heavily defamed by just about everyone in Washington during his brief tenure as Secretary of State. But at $ 4.69 / mmbtu gas, XTO is a huge arrow in Exxon’s quiver.
What to Avoid Look out for companies that cannot pass their price increases on to the end user. This is more difficult for consumer goods companies than, for example, for fertilizer companies. I’m looking at you Elon Musk! This is not a good time to start selling high-priced consumer products made in-house, so I’d be avoiding the auto sector here, not just Tesla.
Sticker shocks are a real thing, so watch out for equipment and other durable goods, and the semiconductor shortage will remain. As cars and other goods use more electronics, these manufacturers are falling straight into the stagflation trap.
From a top-down perspective, this would be the perfect time to hide in high quality bonds, but outside of Brazil, they are doing next to nothing. Write to me through RM if you want to know how I invest in the Brazilian bond market and track inflation. Otherwise, add some exposure to hydrocarbons, industrial metals, and, yes, even crypto (anything that harms fiat currencies is good for crypto, and inflation is the greenback’s mortal enemy) in your portfolio today.
Receive an email notification every time I write an article for real money. Click on “+ Follow” next to my byline for this article.