Published on March 27 2018

How to Profit From This Silent Killer

By Justin Spittler, editor, Casey Daily Dispatch

General Mills (GIS) plunged 9% last Wednesday.

It was the stock’s worst single-day drop since October 2008. And it all started after the cereal maker shared bad news.

That day, General Mills drastically cut its profit guidance for the year. It warned that its profits will likely grow just 0–1%—down from its previous forecast of 3–4%.

Shareholders didn’t like hearing this. So, they dumped General Mills by the truckload.

The stock is now trading at its lowest level in five years.

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• Of course, sell-offs like this happen all the time…

They usually aren’t worth commenting on. So, why am I telling you this?

Simple. General Mills just sounded the alarm on inflation. Look at what its CEO said on last week’s earnings call:

Like the broader industry, we're seeing sharp increases in input costs, including inflation in freight and commodities. Because of our improved volume performance, we're also incurring higher operational costs… We are moving urgently to address this increasingly dynamic cost inflation environment.

Now, there are a few things to address here. But let me start by defining what they mean by “inflation,” since the term has taken on many meanings.

In this case, they’re referring to how quickly prices for raw materials, goods, and services rise.

So, General Mills is basically saying that its raw material (grain, nuts, dairy) and transportation costs are rising faster than expected. And that’s eating away at its profits.

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• General Mills is now scrambling to lower its costs…

And it’s not the only company dealing with this problem. Right now, many major U.S. companies are being eaten alive by inflation. Take Tyson Foods (TSN), another major packaged food company.

Its most recent earnings call also addressed dealing with rising inflation. Not only that, it warned that it could pass on its higher costs to customers:

Labor has been going up the last few years, and we have been increasing wages—it started three years ago, but the last two years has been nearly double-digit percentage increases, so that is a cost that we are passing through.

Procter & Gamble (PG) has also been caught off guard by inflation. Here’s what its chief financial officer said on a recent call:

Commodity prices have continued to move higher as the year has progressed approaching a $350 million after-tax impact versus year ago for the fiscal year. We knew we'd see higher pulp costs going into the year. These costs have continued to increase beyond initial forecast ranges with strong demand and some recent supply disruption. Ethylene, propylene, kerosene, and polyethylene and polypropylene resins have increased recently primarily as a result of the fall hurricanes in the Gulf, but also due to recent increases in crude pricing.

Kimberly-Clark (KMB), one of PG’s biggest competitors, has the same problem. In fact, it took a $355 million hit on its profits last year due to higher commodity prices.

• In short, inflation is starting to pummel some of America’s biggest companies…

But I didn’t write this essay so you’d feel sorry for Corporate America.

I wrote it because inflation could soon become your problem.

Think about it. Companies like General Mills can only cut costs so much. Eventually, they run out of places to trim fat. And that means that they’ll eventually push inflation on to their customers. They’ll jack up prices.

And that could happen sooner than most people realize…

• That’s because commodity prices have taken off…

Oil is up 37% over the past year. Lumber is up 32%. Rice is up 27%. Soybeans are up 18%. Copper is up 14%. Palladium is up 19%.

I could go on and on. My point is that commodity prices are much higher than they were a year ago. If this trend doesn’t reverse, prices of everyday goods and services will start creeping higher… which means your paycheck won’t go as far.

The good news is that you can protect yourself from rising inflation by betting on higher commodity prices.

You can easily do this by buying the PowerShares DB Commodity Index Tracking Fund (DBC). This fund invests in a basket of commodities. It’s diversified. That makes it a relatively safe way to bet on inflation.

Regards,

Justin Spittler
Tulum, Mexico
March 27, 2018


Reader Mailbag

Today, more feedback on our recent essay “A ‘Chain Reaction’ Will Begin Soon… Here’s How to Prepare”:

We, the American consumers, ultimately pay those tariffs, not the countries they are aimed at. They just inflate prices more. At the same time, the countries attacked institute their own policies against us, harming our exports. If China is smart they will just encourage their importers to seek other suppliers locally or outside the US, rather than retaliating directly, though anti-US tariffs could be part of that, making our exports less competitive. Trump seems to be following the script of his predecessor, Herbert Hoover. We all know what that means.

—Chuck

Thanks for the information, as I am following the discussion on tariffs. I believe also that there are only losers in war. However, it is never mentioned what this trade deficit is going to do to us. My thinking is that it’ll be worse over the long term, as China will buy everything in the USA over time. Now we can still say “hands-off,” but once they own enough of our money, that will not be possible unless we devalue our money and start a new dollar system. And even that will not work. Any solutions?

—Henk

If you agree that China does indeed have unfair trade practices, but do not like Trump’s response as it will hurt American businesses… I would be interested in your input on what he should do, as those practices have also been negative for our companies.

—Jeff

As always, if you have any questions or suggestions for the Dispatch, send them to us right here.