We are for ‘flation!

“If I had time, I could pick out dozens of Herb Stein’s famous bon mots, which he sprinkled throughout his writings and in the days when he was chairman of Nixon's Council of Economic Advisors, 1972 to 1974. I have a few favorites that spring to mind. When asked by a reporter to explain why inflation was getting so high, when he had not predicted it, Herb put on a straight face and said: ‘If you take out all the things in the Consumer Price Index that have gone up, the index would actually go down.’ At another press conference, when he got irked with persistent questions on the same topic, he announced that ‘The Nixon Administration is against inflation and it is against deflation. We are for 'flation.’”

. . . Jude Wanniski, Polyconomics (1999)

I had the pleasure of listening to Pippa Malmgren speak last week at the Raymond James Financial Services National Conference. Philippa "Pippa" Malmgren, according to Wikipedia, is “an American policy analyst. She served as Special Assistant to the President of the United States, Barack Obama, for Economic Policy on the National Economic Council and is a former member of the U.S. President’s Working Group on Financial Markets. She is the founder of the DRPM Group and co-founder of H Robotics.”

As she spoke, I recalled the famous ‘flation quote from the effulgent Herb Stein begging the question, “Where are the Herb Steins of today when we really need them?!” The reason for that ‘flation recollection was Pippa’s belief that inflation is back. She is expecting inflation to pick up to 2.5% and maybe more. It was noted that China, too, is experiencing inflation with wages up five fold over the past three years. Pippa also spoke of “shrink inflation”, whereby manufactures put less product in a box rather than raising prices. Interestingly, she observed that the nozzle of a toothpaste tube keeps getting bigger so that users will use up the toothpaste faster, implying more purchases. Her investment recommendation was to buy assets that benefit from inflation (farmland, Select REITs, and MLPs).

Indeed, midstream Master Limited Partnerships (MLPs) clearly play to the inflation theme and stand to benefit if President Trump’s tax plan is adopted. As Reuter’s Rodrigo Campos and Liz Hampton write (as paraphrased):

The proposed changes include a cut to the top tax rate on pass-through businesses to 15 percent from the current rate of up to 36.9 percent. The change would largely benefit owners of private businesses, but investors holding shares of master limited partnerships, or MLPs, would receive the same treatment. MLPs build the pipelines and storage tanks and are a common corporate structure in the oil and gas infrastructure sector (read the article here: MLPs).

Looking at our fundamental analysts’ MLP research coverage list shows four midstream MLPs that all have Strong Buy ratings from our analysts and screen positive using our proprietary algorithms. They are: Enterprise Products Partners (EPD/$27.32); Tesoro Logistics (TLLP/$54.86); Western Refining (WNRL/$25.40); and Williams Partners (WPZ/$40.93). Using the same metrics to screen our Real Estate Investment Trust (REIT) research universe yields three names, all of which have Strong Buy ratings from our fundamental analysts. They are: Physicians Realty (DOC/$19.64); American Homes 4 Rent (AMH/$23.05); and Weyerhaeuser (WY/$33.87). As in the past, we feature these stocks for your “potential” buy lists.