As the markets fall on Friday, and -- as of midmorning, anyway -- the S&P 500 looks like it has no chance of closing above 4,000 this week. So, I decided to actually look into the data that has caused the declines in the market. Today's "hot" inflation reading was the personal consumption expenditures data from the Bureau of Economic Analysis. This is supposedly the Fed's "favorite inflation indicator" ... or something like that.
PCE, both core and non-core, came in ahead of expectations on January's readings. The "inflation is over" narrative is set to be relegated to the Pantheon of Crap-tastic Wall Street Calls along with "Netflix! Buy!" and so many others.
But the existential problem is obvious from the fact that the BEA chooses to release both "core" and "non-core" measures of PCE. Core PCE excludes food and energy prices, because those commodities are supposedly volatile. To make that distinction has been a common practice in my 30-plus years of following economic data professionally, and to do so is so stupid it makes me want to scratch my eyeballs out every time some nitwit makes that distinction on financial TV.
Food prices have not been volatile, at all. At all!. With January's year-over-year reading of a around 11% year-on-year increase in the "food" pricing component of overall PCE, a quick look at the data shows a reverse ski slope. There is no volatility in the data series. It is just up, up and up.
Energy obviously is more nuanced. Gasoline prices have stabilized, but there is very little change at the margin on a year-over-year basis, as can be seen in the AAA data. Prices for crude oil, of course the feedstock for gasoline, have also stabilized, with Brent crude holding $80/barrel mark. Really the only volatility in hydrocarbon pricing has been that in natural gas. My beloved "natty" futures contracts are rising in today's trading, keeping me off the ledge for now, although the move from $9/metric million British Thermal Unitin August 2022 to $2/mmBTU earlier this week still defies all logic.
But natty (a.k.a. natural gas) does drive overall inflation figures -- not core. So watch out for some monthly surprises (to the upside) in CPI readings, as natural gas markets rerate with the reopening of the Freeport LNG export facility in Texas well underway, and some brutal weather slamming the Northern U.S. this week.
The great thing about food and energy is that they are rarely bought with credit. You might use your credit card at Kroger (KR) or your local Exxon (XOM) station to get the rewards points, but you are most likely not financing those purchases over time. Contrast that with purchases of durable goods and shelter -- your car, your house, etc. -- which in the vast majority of cases are financed via interest-bearing agreements
With interest rates rising (the yield in the 10-Year U.S. Treasury note seems to be heading to 4% with a bullet after today's terrible inflation data) things like houses and cars become that much more expensive. Meanwhile, to turn the D.C. logic on its head, purchases of "volatile" commodities like food and energy don't have that interest component. So food and energy prices really are fully dependent on the costs to deliver the commodities. These costs are rising like crazy, and the producers benefit. It's almost as if you should ignore the Fed and compile portfolios that are entirely made up of food and energy stocks, not bereft of them. Well, I do that.
My baby is my model portfolio named HOAX. HOAX, with its corresponding income reinvestments, has produced a 46.69% gain since inception on Dec. 23 2021. Meanwhile, its benchmark, Cathie Wood's ARK fund (ARKK) -- which has never paid a dividend, nor, to the best of my knowledge, owned shares in a company that does -- has declined 61.46% in that time period.
Another subscriber-only model portfolio that I have created is FOOD, which is composed of food producers and farmland owners. That one has outperformed its benchmark, the Invesco QQQ exchange-traded fund (QQQ) , by more than 350-basis points since I initiated it in August.
The star performer in FOOD has been Lamb Weston (LW) , with 25% gain since the portfolio's initiation in August. Lamb Weston produces potatoes and potato products and is based, not surprisingly, in Idaho.
HOAX has a constellation of star performers, but one you may not have heard of is Flex LNG (FLNG) ,which has risen 49% since HOAX's inception on Dec. 23, 2021. As I have mentioned many times about Tellurian (TELL) , Cheniere LNG, Sempra Energy (SRE) and New Fortress Energy (NFE) , the economics of liquefaction of natural gas and shipping it to countries where is not in abundance (India has recently been aggressive on the LNG front, for instance) are staggeringly attractive. Flex LNG ships the LNG from where it is produced to the far-flung locals where it is consumed. Absolutely a rock-solid business.
If you want to pretend that food and energy inflation doesn't exist ... just don't go to Walmart (WMT) . But you should avoid WMT stock un the wake of its dreadful earnings release Tuesday.
If you want to actually benefit from inflation, buy names like LW and FLNG.