If you’ve been following along with us at Fortune Research, then you know how dedicated we are to diving deep on data.
The reason is simple… If you really want to understand the whole machine, you have to be able to articulate how important each of the parts are. This week, our target is the Consumer Price Index — specifically, CPI and housing inflation.
With regard to the key inflation metric tracked by the Federal Reserve, the most important part is probably the same household expense you find most important…
Shelter.
Source: Bloomberg
I’m not going to lie, shelter/rent/mortgage/housing is what takes up the bulk of my monthly budget too.
Whether you’ve been tracking prices or not, you’re all aware that home prices went up last year.
I wrote way back in May that with housing inventories at an all-time low, inflation data in this key category was eventually going to stick higher.
The “eventually” part is because it takes a good long while for housing prices to show up in owner’s equivalent rent or “OER”
But when it finally does, hoo boy…
Source: Daily Shot, BLS, Haver Analytics, Nomura
Month-on-month OER rose from 0.3% to 0.4%. While that’s not a huge absolute number, it is an absolute paradigm shift on a percentage basis.
Similarly, it takes even longer for actual rent to rise, because most of us only sign a lease once a year at most.
Because of that, so-called “rent of shelter” can take up to a year to show up as housing inflation in the CPI data.
Not this time around…
Source: Daily Shot, BLS, Haver Analytics, Nomura
Potential Trades From CPI and Housing Inflation
At the moment, the rate of change in rent is leading the change in housing — presumably because of folks getting out in front of last week’s end to the eviction moratorium.
But this is a trend that’s going to continue for the foreseeable future. Housing prices may relax as more inventory comes to the market, but rents generally hold steady.
Our favorite plays on this particular part of the sector are Minnesota-focused multi-family REIT Centerspace (NYSE: CSR) and TX/NC/GA-focused single family REIT American Homes 4 Rent (NYSE: AMH).
Both bottomed out following a month-long correction, and are righting the ship at the moment.
Source: Bloomberg
I’m waiting for the broader sector to right the ship before we jump in officially, but it’s getting close. Stay tuned for more on this next week, as this is a sector that could really pop in Q4.
Source: Bloomberg
Of course, if you’re reading traditional financial media, they have no clue this is even going on.
They’re still catching up on the energy crisis to pay attention to actual data like CPI and inflated housing.
Source: Bloomberg
To that end, you had another chance today to pick up shares of our two coal shortage plays, CONSOL Energy Inc. (NYSE: CEIX) and Peabody Energy Corp. (NYSE: BTU), at a discount.
And if you were really paying attention, you were also selling a little of the United States Natural Gas Fund (NYSEArca: UNG).
We also have a chance to sell TQQQ, SPXL, XLY and IWM at a profit after Thursday’s moves.
But I’m hanging on for just a bit. Once we get past options expiry and all the bad news is behind us, markets could rip through earnings season.
But we’ll know more Friday… Catch you then.
All the best,
Matt Warder
Fortune Research
