A Watchlist to Survive Inflation and a Growing Energy Crisis

by | Sep 14, 2021 | Watchlist

As we wrote Monday, the quartet of economic data releases this week — the Consumer Price Index, import prices, retail sales and consumer sentiment — are set to drive the big media headlines.

The release of the CPI data on Tuesday hasn’t disappointed in that regard. CPI showed a year-on-year increase of 5.3% — in line with broader expectations.

But as usual, the hot takes are all over the map…

So we’ve prepared for every scenario in your Fortune Research Weekly Watchlist.

Bloomberg is correctly pointing out that CPI data is still cresting, as supply chain issues indicate it will remain elevated.

Source: Bloomberg

But they’re likely behind the curve on the U.S. economic slowdown — which we have covered at great length since June — discussed above.

Delta variant cases have peaked and are turning lower, indicating that the slowdown could pause or even temporarily reverse.

Source: Johns Hopkins, NYT, Google

If that indeed turns out to be the case, we could see a mini version of March’s market manifest again, where the S&P 500, Nasdaq 100 and Russell 2000 all rise together.

We’ll get an initial read Monday but we’re still in “buy the dip” mode through Friday’s options expiration.

Fortune Research Weekly Watchlist: Sept. 14, 2021

While the Bloomberg bears came out to play, CNBC appears to be taking the opposite approach. Instead, it’s pushing a positive message by saying the August CPI was smaller than expected. 

Source: CNBC

While sort of true, the data it’s focusing on to justify that message strips out two key parts of everyone’s monthly cash flow: food and energy.

Source: CNBC

No big deal, just two things that we have to buy in order to stay alive and make money.

Moreover, the lack of price inflation ex-food and energy implies that retail sales numbers, which come out on Thursday, may very well disappoint. Should that happen, this “whopping market sell-off” of 1.58% could intensify slightly.

Source: Bloomberg

In that case, we may get a chance to pick up that last quarter tranche of the Direxion Daily S&P 500 3X Bull ETF (NYSEArca: SPXL) in the $116 to 118 range as previously planned. 

But the issue I really want to touch on is inflation in the energy sector… 

It’s out of hand already, and fundamentals point to it potentially becoming much, much worse.

Source: Bloomberg, Fortune Research

These year-on-year inflation numbers are insane — 22% for propane, 33% for fuel oil and 42% for gasoline.

Although comparisons to last year’s selloff continue to prompt huge numbers, that was more relevant in March and April than it is in August. 

Moreover, propane and gasoline continue to increase even as those comparisons get harder, telling us prices are rising at a faster pace.

We have one additional Hurricane Ida-affected EIA report coming out tomorrow, which should be good for our position in the U.S. Gasoline Fund (NYSEArca: UGA). Provided that’s the case, we will look to exit that position before next week’s data comes out.

But there’s one other part of the Energy CPI that is set to explode this winter…

Electricity prices.

Although gasoline currently has the reins for energy-related CPI components at 3.8% of the total index, electricity is right behind at 2.5%.

Source: Bloomberg

Remember, the vast majority of our electricity is generated by natural gas. And those prices have risen an incredible (and concerning) 118% over the summer.

Source: Bloomberg

Many utilities are hedged at 2020’s low gas prices at the moment. But when they come back into the market in Q4 to contract natural gas in 2022, they will find resiliently high prices and little additional supply coming on to help.

Worse, the backup fuels for baseload natural gas — coal and uranium — are up roughly the same amount over the summer, and in even shorter supply.

Source: Bloomberg

That will result in an over-reliance on natural gas in the winter, which has the potential to cause a full-blown energy crisis similar to what happened in Texas back in February.

Except this time around, it may affect the entire country.

And power prices — which lag large fluctuations in commodity prices — will explode to the upside.

Source: Fortune Research

So in this week’s watchlist, we’re going long inflation by targeting the entire energy spectrum… from gasoline to natural gas to coal to uranium to utilities.

*price at Tuesday’s open

First off, we’re ditching the iShares U.S. Home Construction ETF (NYSEArca: ITB). It’s down almost 2% and one-month momentum is getting worse. Time to cut bait.

BUT, we’re keeping our existing plays on the S&P 500 (SPXL), the U.S. Gasoline Fund (NYSEArca: UGA) and natural gas producer Southwestern Energy Co. (NYSE: SWN). Each one is set up for at least one solid week of gains.

In addition, we’re adding back in the U.S. Natural Gas Fund (NYSEArca: UNG) as well as bringing on a few newcomers in the SPDR Utilities Select Sector ETF (NYSEArca: XLU), coal producer CONSOL Energy (NYSEArca: CEIX), the Global X Uranium ETF (NYSEArca: URA) and tech bull ETF Proshares Ultrapro QQQ (NYSEArca: TQQQ).

We’re buying any weakness across the board here, so keep an eye on your inboxes for trade alerts this week.

If headlines keep it up, we’re almost certain to get a shot on one of these.

All the best,

Matt Warder

WRITTEN BY<br>Matt Warder

WRITTEN BY
Matt Warder

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