Data Points Endorsing Our Case for Buying What You Need?

We do not make macro forecasts. The evidence is overwhelming….they are difficult to make.

We do know there is a gasoline shortage. People will say it is because of hacking and not a real shortage. Right. The last time it was because of OPEC and that wasn’t a real shortage either. Here’s a simple question: if there’s a shortage of the most basic input to US trade and commerce, is the issue real? What did the people sitting in gas lines think in the 1970s? Could this be a sign we need to spend even more on infrastructure?

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I see macro people debating endlessly about CPI and a declining dollar as if they were two totally different topics. My macro textbooks are old and dusty. Let me define “inflation” according to my family: when the prices of the stuff we buy rises in leaps and bounds, for whatever reason, that is inflation to us.

Below is the CRB Commodity Index. I don’t care if it is hackers, a shortage of chips, shortage of labor, shortage of lumber due to closed sawmills, shortage of shipping, “excess” demand due to central bank buying and legislative hand-outs, a shortage of housing, pay gapping higher at little employers like Amazon and Walmart, a massive infrastructure bill driving up input prices, a shortage of water driving up food prices etc. My family doesn’t care. Stuff is more expensive today.

Inflation Assets are Not Always Exciting:

A friend owns an auto repair business. He has an endless demand for his services. But it has been difficult to generate a profit. To do a brake job he has to go to a minimum of two parts stores to get what he needs.

He had a business spraying in the super-tough bed liners for pickup trucks. That business is closed. He ran through his last barrel of spray yesterday and the supplier is saying months till another barrel is coming. Total assets and asset turnover in that line of business has fallen to zero. For the moment.

My buddy said he has to put prices way up on auto repair. Again. I don’t have a clue if brakes, transmissions, serpentine belts, cam-chains and spray-in-bed liners are going to show up in CPI or a weaker dollar. But I do know we need all those things and the price of getting them is going higher.

What struck me is that while he may lack purchasing power, his services require real assets, they are tangible and necessary. His ability to generate profits is relatively certain due to his long term ability to increase prices. Auto repair is one of those services you need. His suppliers therefore also have pricing power. The necessity of those goods and services means they are, if imperfectly, inflation hedged as well.

Firms that Benefit From Inflation

As documented in our research pieces on Inflation of the 1970s & Equity Duration: Buy what you know and need. Here are the Staples Stocks that have announced price increases to date: Coca Cola, Hershey’s, Hormel, JM Smucker, P&G, Kimberley Clark, Colgate. For more research on buying simple, proven and profitable makers of the stuff we all must have at discounts to the market last seen at the peak of the internet bubble click here and here.

To view our Consumer Staples Sector Rankings, please click the following links: SP500, R1000 & R2500. For non-Enterprise subscribers, please reach out to start you 30 Day Trial here.

If you are reading this, you are probably much like us: folks who prefer to buy what has been proven and profitable at reasonable prices. There are many asset classes out there that might benefit from inflation. Real estate investments and treasury inflation protected securities TIPS might be great as well. Our missives are not investment advice. They are designed to help use history to bring context to markets that, lately, seem ever more surreal.

We are big fans of old-fashioned financial ratios. Our models “study” a company’s balance sheet, typically trying to avoid those with excessive financial leverage. Our screens prefer more modest and sustainable growth rates. While considered tedious at the moment, our models are also going to prefer a stock with positive net profit margin and the ability to calculate a return on equity.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.



The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

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May 12, 2021 |

Categories: Quick Takes

May 12, 2021

Categories: Quick Takes

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