Pent up demand, stimulus and a historic production cutback is unleashing economic optimism and real ...
Energy Stocks Getting Ready to Explode
05/14/2019 12:32 pm EST
Signs of an uptick in inflation will be bullish for energy stocks, says Landon Whaley.
In July 2018, after 24 months of acceleration, we made the call that U.S. inflation would begin to slow. We were right, and the June-July period marked the cyclical high in all three primary inflation gauges.
We initiated the Rockin’ Reflation macro theme one month ago, making yet another non-consensus inflation call: “U.S. inflation is bottoming, will begin accelerating, and will exert its influence on U.S. asset classes in the months ahead.” Right on cue, within one week of that April 1 publication, we received March’s inflation numbers, which confirmed this macro theme was ready to rock and roll.
The Data Shall Set You Free
After slowing for four consecutive months and six of the last seven months, March’s consumer inflation rate ramped to 1.9% from February’s 1.5% pace. We saw a similar move on the producer side of the inflation equation. After slowing in five of the last seven months, producer prices accelerated to 2.2% from February’s rate of 1.9%. The March ISM Manufacturing PMI also confirmed this inflationary impulse; its Prices Paid sub-index accelerated to a 2019 high after four consecutive months in a downtrend. The only dissenting vote came from core inflation, which dipped slightly from February’s reading of 2.1% down to 2.0% (try going a month without food or fuel).
Last Friday, we received the April readings for all three inflation gauges, core and consumer inflation both accelerated and PPI held tight at a four-month high. The trend is becoming more and more clear with each passing month.
Fade the Masses
In July 2018, the Old Institution and its followers were calling for inflation to ramp even higher for the remainder of 2018 and well into 2019. They looked at what inflation had been doing for the last two years and extrapolated that trend forward.
Fast forward almost a year, and the Old Institution is making this same linear extrapolation mistake, and after eight months of slowing inflation, they’re asking “Is Inflation Dead?”
As we covered in a recent post, by the time any magazine is willing to devote an entire cover to a market-based story, that theme has been popular for a while and is most likely running out of gas. And more importantly the Behavioral Gravity for that market theme is most likely in extreme territory, so the behavioral risk of a reversal is off the charts.
Seeing sentiment so skewed towards the belief that inflation can only remain dormant, or head south, enhances our conviction that inflation will ramp and catch people off guard in the process.
Beyond magazine covers, two critical catalysts are confirming we should fade the masses: Energy and wages.
First, crude oil’s move higher is just beginning (despite a +40% gain year-to-date), and if it clears its Alpine line at $66.64, there is nothing but clear skies to $80 per barrel. Keep in mind that black gold has been in a prolonged bear market since peaking at $107.68 in June 2014. For the last five years, we’ve experienced a couple of crude rallies, but nothing sustainable. Even as I’m typing this, WTI hasn’t even regained half of its 76% peak-to-trough drawdown from June 2014 to February 2016. My point is that people are so blinded by recency bias that they no longer think higher oil prices are possible, much less the likely course from here.
Second, wage inflation, which always makes its appearance late in the cycle (exactly where we are today), is sitting at a nine-year high and trending higher.
Those catalysts continue to tilt the probabilities in favor of further inflation acceleration from here.
The Bottom Line
The bottom line is that black gold and energy stocks will be two of the best-performing asset classes in the world over the next four to six months. We’ll demonstrate this belief in the Gravitational 15 portfolio as the market provides us with attractive opportunities and the Mongoose gives us the go ahead.
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