What if? The two least used words in today's stock market. What if this morning's absolutely awful non-farm payrolls report (the BLS' report of 235,000 jobs added in August was a full half a million jobs below the 725k-750k consensus estimate) was not just a blip, as the stock market seems to be telling us from its initial non-reaction to the news.
Yesterday, I responded to a question from a former DLJ colleague about the price of natural gas, an important ingredient used in the production of fertilizers. That is a margin pressure for CF Industries (CF) , Mosaic (MOS) , and the other names I mentioned in my RM column yesterday. But at look at the nat gas futures curve shows that versus the Oct 2021 futures price of $4.69/mmbtu, October 2022's futures contract is quoted at $3.69 and October 2023's contract is quoted at $2.94.
That's what futures traders call backwardation, and is an extreme example of this, especially since natural gas has storage costs. But futures prices are more important in the actual purchasing of gas than spot prices, so it was easy to answer the question as "high natgas prices are a temporary phenomenon."
But what if the futures markets have it wrong? What if today's natgas prices become the rule rather than the exception? That's stagflation. Abysmal jobs report, elevated hydrocarbon prices... if you want to see what stagflation looks like, look at your computer screen today.
So what if inflation really is not transitory? Well, I believe I have made my exception to Fed Chair Powell's policies clear in prior RM columns, but "what if?" is a question of opinion, and what we are seeing here is real life.
What happens if what appears to be strong growth is just inflation, and as growth estimates are revised downward, there is simply no justification for elevated multiples on future earnings. Does that sound like the Nasdaq today? It sure does. We are seeing financial growth, not real economic growth, and as things cost more, consumers purchase smaller numbers, which hurts producers. That is as true for washing machines as it is for Teslas (TSLA) . You cannot escape basic economics.
As I have mentioned before, you just have to embrace stagflation in your portfolio. Get some hydrocarbon exposure. Stat! I tend to talk about oil and gas majors as if they were the only game in town, but make sure you have some pure-play natgas players like EQT (EQT) , Cabot (COG) , Southwestern Energy (SWN) , Range Resources (RRC) and Antero Resources (AR) (whose pipeline spinoff, Antero Midstream (AM) remains the apple of my investing eye, as I have mentioned in many RM columns.) According to the U.S Natural Gas Association's most recent data, those were the five largest independent players in the Marcellus Utica shale play.
Don't forget the big boys, too, especially Exxon (XOM) , which has huge dry natural gas exposure through the acquisition of XTO in 2010. That was a much-maligned deal by Wall Street, and was imitated by former CEO Rex Tillerson, who was much-maligned by pretty much everyone in Washington during his brief stint as Secretary of State. But at $4.69/mmbtu gas, XTO is a huge arrow in Exxon's quiver.
What to avoid? Watch out for companies that cannot pass their price increases onto the end consumer. That's more difficult for consumer products companies than, say, fertilizer companies. I am looking at you, Elon Musk! This is not a great time to be selling high-ticket consumer goods that are manufactured in-house, so I would avoid the auto sector here, not just Tesla.
Sticker shock is a real thing, so watch out for appliances and other durable goods, and the semiconductor shortage is here to stay, so as cars and other goods use more electronics, those manufacturers are walking right into the stagflation trap.
From a top-down perspective, this would be the perfect time to hide out in high-quality bonds, but, except for Brazil, they yield virtually nothing. Message me through RM if you want to find out how I am investing in Brazil's bond market and capturing inflation. Otherwise get some exposure to hydrocarbons, industrial metals, and, yes, even crypto (anything that hurts fiat currencies is good for crypto, and inflation is the mortal enemy of the greenback) in your portfolio today.
