Trouble on the Tracks

A true story... Trouble on the tracks... Insane or evil? Just the world we live in... From 'just in time' to 'just anytime'... Netflix is down 60% this year... Retiring one of the members of FAANG... More of your thoughts on inflation...

We begin today with another great piece of reader feedback...

Paid-up subscriber Mark W. wrote in with a question this morning based on yesterday's Digest – about inflation, broken supply chains, and the setup for a new commodity "supercycle" in the years ahead...

He wrote...

Read yesterday that Union Pacific Railroad has contacted about 30 of its largest fertilizer companies, announced steep reductions in the number of railroad cars of product it would allow them to ship to farmers.

This seems either insane or evil to me.

If true, guaranteed to steeply increase food and meat prices. Have you heard anything about this? Not seeing anything in our contemptibly ignorant media.

We did a little research and some digging today... and this is indeed a true and troubling story.

What you heard likely stems from a public complaint made last week by Illinois-based CF Industries (CF), a leading global manufacturer of fertilizer.

To put it mildly, the company is not happy that Union Pacific (UNP) recently told it to reduce fertilizer shipments by nearly 20% – in an effort to help the railroad company deal with congested lines... tied to labor and locomotive shortages.

That tells you a lot about the world in 2022 on its own. But we'll get into some more detail about how this story continues from here... and how it represents bigger issues facing the railroad industry and the "real" U.S. economy today...

Do less business, please...

According to a story from industry website and magazine Trains, CF Industries said it is one of 30 shippers facing restrictions, without warning, designed to "unclog" the Union Pacific network, which covers 23 states in the western two-thirds of the U.S.

CF Industries is North America's largest producer of urea – a type of fertilizer used to grow crops (for the food we eat!)... as well as the key ingredient in a federally mandated water-based solution required to be used in all diesel trucks to limit air pollution.

The company typically ships product to big agriculture states like Iowa, Illinois, Kansas, Nebraska, Texas, and California... providing a critical service without making headlines – most of the time.

Earlier this month, Union Pacific sent an e-mail to customers outlining plans to ease the congestion on the tracks... and explained it stems from trouble finding workers in a "tight labor market"... and a shortage of locomotives to pull cars. As Trains explains...

Shippers typically add cars to their fleets as rail service slows, which tends to exacerbate congestion and delays. The big four U.S. railroads – BNSF Railway, CSX Transportation, Norfolk Southern, and UP – are experiencing service problems to various degrees.

To ease the congestion in its network, Union Pacific recently decided to remove 15,000 cars from its inventory... or about 3% of railroad-owned cards from the system "across multiple commodity groups."

That notice came after the company previously asked customers to voluntarily reduce freight-car shipments or face metered limits... CF Industries says it faces an "embargo" from Union Pacific if it doesn't comply with the shipment reduction.

So this isn't just an 'insane or evil' story...

It's the unfortunate reality of the world we live in...

We can see the motivations of the parties directly involved – the shippers trying to do business, the suppliers trying to do the same and provide in-demand goods. But, yes, the troubling bigger-picture point probably leans toward insanity... or at least inefficiency...

This is a major transportation company telling producers of a scarce commodity to do less business at a time when doubts about its supply, stemming from an overseas war, have never been higher... and at a time when strong demand is in place. We need food.

I can't find the exact word for this story, but it's probably some combination of "insane" and "evil"... If I were talking about it at a bar, I'd probably shake my head and order a shot.

And we'd be foolish to think that the same problems aren't at work in other industries...

You can see in this real-time example how "everything is connected" – tight labor market, lack of investment in transportation (with the shortage of locomotives), demand, war in Eastern Europe, and the pandemic breaking up supply chains.

In any case, CF Industries CEO Tony Will is having none of it...

Other shippers have complained about the restrictions, but none have shared their views so publicly. Will warned last week of the brewing trouble for farmers and inevitable rising food costs, saying in a statement last Thursday...

The timing of this action by Union Pacific could not come at a worse time for farmers. Not only will fertilizer be delayed by these shipping restrictions, but additional fertilizer needed to complete spring applications may be unable to reach farmers at all. By placing this arbitrary restriction on just a handful of shippers, Union Pacific is jeopardizing farmers' harvests and increasing the cost of food for consumers.

Federal regulators plan to hold a hearing later this month about the problems in the Union Pacific network and other major U.S. railroads, but Will says the government should just step in and take action to remove the restrictions now.

He points out crop yields will be lower this year if farmers are unable to secure all the nitrogen fertilizer they'll need... and that would mean it would take longer to replenish global grain supply.

It remains to be seen how much "lower" crop yields would be... But if they are widespread and significant enough, they could be a major drag on the production of food supply in general... At the very, very least, this scenario doesn't encourage lower prices.

Not to mention the lack of common sense involved with limiting the availability of the federally mandated product – the urea solution used in diesel trucks – that is designed to limit air pollution. If they don't have that, the trucks really shouldn't be driving under law... and environmental activists should also be angry.

The point is, as we said yesterday, several catalysts for higher commodity prices are in place...

Among other things, we're seeing a psychological shift in the real economy, from "just in time" to "just get here anytime"... This story about Union Pacific telling fertilizer producers to ship less of their products is just another example...

With all the supply-chain issues and companies unable to hire the needed workers, people and businesses are paying high premiums to simply ensure that they have the products they need... and those costs are being passed on to everyone.

That's a case study in inflation... from the railroad tracks to your table. How this all shows up in "official" data or hinders economic growth for the year, I can't tell you for sure. But it's not indicative of an economy firing on all cylinders.

Fortunately, if you want to make some money from this reality, there are smart ways to do so – like owning shares of good companies that produce the raw materials we all need... Fertilizer is just one example.

As I wrote yesterday, the second module of our new Stansberry's Financial Survival Program in part features a "buy" recommendation on one of these companies and much more detail on the tailwinds for commodities today.

If you don't have access to our Financial Survival Program already, click here for more information on how you can get started... You'll also find more detail about everything that is included in this new, seven-part program at the link.

Switching gears almost completely, the jig could be up...

It might be "game over" for anyone sharing a Netflix (NFLX) password with a friend or family member... That's what the streaming giant suggested on a conference call with Wall Street analysts yesterday.

In its latest quarterly earnings report, the streaming giant reported losing 200,000 subscribers in one quarter and, probably worse, said it expects to lose 2 million more this spring...

Stunningly, the company also said possibly 100 million households access its platform through others' accounts, meaning illegally sharing passwords.

People have been sharing Netflix passwords for a long time, but tens of millions of people doing it becomes a bigger deal when revenue is getting harder for Netflix to come by, which is the reality today.

Netflix founder and CEO Reed Hastings said yesterday... "We've just got to get paid for them to some degree." But he also noted that a password-sharing solution might be a year away.

The challenges Netflix is facing...

After enjoying a decade of getting into millions of homes in the U.S., Canada, and Europe and greatly benefiting from a stay-at-home pandemic boom, Netflix is facing very real growth challenges in a streaming market that's more crowded than it was even just a few years ago.

The company lost 200,000 subscribers when it expected to gain 2.5 million. As misses go, it doesn't get much bigger than that... Shares of Netflix plummeted 35% today and are down more than 60% for the year.

It's a fall so sharp that people in the financial media are quickly retiring Netflix from its place in the acronym "FAANG" for good... Stansberry NewsWire analyst Daniel Smoot has more on the story here, as does our colleague Whitney Tilson in his free daily letter today.

And we also can't help but think of our colleague Bill McGilton's bearish case for Netflix that we've shared in these pages before – maybe most notably in November 2019, when the company's subscriber count dropped for the first time in 10 years.

At the time, Bill noted Netflix was burning through huge amounts of cash to produce content, hurting its bottom line, and taking on more debt while facing more competition from cheaper platforms like Disney+ and an onslaught of others...

He also shared a pair of surveys that showed most people were only willing to pay for one streaming service... 40% would pay for two or three... and only 10% would pay for four or more... and that Netflix faced the possibility of a "mass exodus" of subscribers as it lost content rights to new services.

As we wrote in November 2019...

For example, you can see that about 30% of the surveyed Netflix subscribers ages 18 to 29 said they would cancel their subscriptions when The Office goes to NBCUniversal's Peacock...

In other words, what's going on with Netflix is not a complete shock to us, though maybe the scale of the subscriber loss is.

All in all, Bill recommended shorting the stock in our former Big Trade newsletter... and we said we'd continue to watch the "streaming wars," which were just getting started. So far, Netflix is an early loser in them.

Coming tomorrow...

Lastly today, I want to leave you with a heads up about tomorrow's Digest...

You'll be treated to a guest essay from our colleague Jeff Havenstein, an analyst on Dr. David "Doc" Eifrig's research team... and an expert on the investment vehicle known as "options."

We say it that way because we know many people shun anything that comes after hearing the word "options," but I encourage you to give Jeff's essay tomorrow a good read... I suspect you will come away with a surprising new outlook on options.

He will tell you why most people use options the wrong way... and a bit more about the proper strategy that Doc shared in last Thursday's Digest, which he says is the reason he has never worried about a market crash...

You can't put a price on that peace of mind... Stay tuned tomorrow for more details from Jeff.

Trading Your Personality

In this week's episode of the Stansberry Investor Hour podcast, Dan Ferris is joined by the chief investment officer of Logica Capital Advisers, Wayne Himelsein, who has valuable advice for novice and veteran investors alike.

When asked to define himself as an investor, Wayne explains the value in thinking of investing as "trading your personality." In other words, you should invest in a way that aligns with how you see and understand the world...

Click here to listen to this episode right now. And to catch all of our shows and more videos and podcasts from the Stansberry Research team, be sure to visit the "Media" page of the new StansberryResearch.com anytime.

New 52-week highs (as of 4/19/22): AutoZone (AZO), Dollar General (DG), Enterprise Products Partners (EPD), FMC Corporation (FMC), General Mills (GIS), Huntington Ingalls Industries (HII), Hershey (HSY), Johnson & Johnson (JNJ), Kinder Morgan (KMI), Coca-Cola (KO), Leidos (LDOS), Altria (MO), Nucor (NUE), Invesco High Yield Equity Dividend Achievers Fund (PEY), Raytheon Technologies (RTX), Rayonier (RYN), Shell (SHEL), Sprott (SII), Telekomunikasi Indonesia (TLK), Westlake Chemical Partners (WLKP), Walmart (WMT), and Consumer Staples Select Sector SPDR Fund (XLP).

In today's mailbag, feedback on yesterday's Digest... and more of your thoughts about inflation... Thank you all... and keep your notes – praise, rage, or otherwise – coming. As always, e-mail us at feedback@stansberryresearch.com.

"I was struck by a comment in your essay that the government can just tell producers to keep their price down. In California, they have done worse. They have additionally told tenants not to pay rent during the pandemic. Now landlords are squeezed by inflation, loss of income over the last several years, and universal rent control preventing catch up.

"They are also screaming about the homeless and the housing crisis! Just saying." – Paid-up subscriber Miko M.

"Washington numbers on inflation in February were +7.9% and 8.5% in March.

"Uh-uh.

"I have been working at Trader Joe's for seven years and I have a good perspective on what a typical shopping cart of groceries costs. How does 18% to 20% grab you?

"Prices for dairy, bread, and beer, wine & liquor have remained stable (thank God). But I'm seeing price increases in every other department. Double-digit increases for meat, frozen and our prepared items like salads, sandwiches, and entrees.

"Trader Joe's has significant pricing power so I hate to think what the price increases at other major grocers are like.

"Thank you all for your great work!" – Paid-up subscriber Scott W.

"I have worked in agriculture for 30 years and have seen many price spikes in several ag super-cycles over that time frame. The company I work for in the ag-chemical business has raised prices on all product segments for the last two years, but it seems to be intensifying as of late.

"We raised prices at year end from 6% to 10% (depending on the product) and are now looking at an additional price increase of 5% to 6% mid-season. This is small potatoes compared to fertilizer pricing; year over year nitrogen/phosphorus/potash prices are up 100% to 200% with the underlying grain prices up 200% plus at this point.

"This will look ugly once the trend turns, but we should have plenty of sun to make hay for a couple growing seasons. Thanks for all the great advice over the years and keep telling us what you need to know as investors!" – Stansberry Alliance member Andy S.

"I started farming in 1970 after serving six years in the Air Force as a pilot during the Vietnam War. I had saved some money, but it takes a lot of money to get started farming.

"In 1973, I bought a new tractor. In two years, the price doubled for that tractor. Fortunately, I was able to use my father's machinery for most of field operations until I acquired my own...

"In 1971 I purchased a combine [harvester] with my father. He retired in 1979 so I traded it in for a new one of the same size. The dealer allowed us the same amount on trade as we paid for it new. The new one cost three to four times as much as the one from eight years earlier.

"I got a loan from the bank and by the time I paid it off, the interest rate was 19%. Interest rates peaked around 22%. We lost about a generation of young farmers in the 80s." – Paid-up subscriber Max P.

"I look for long-term inflation this high, or probably higher. The Fed is going to bump rates and step up negative QE – for a while without much result on inflation numbers. When the stock market/housing/bond markets take the long drop and the anguished screaming starts in earnest, the Fed will follow their non-Volcker precedents along with a high probability of more 'free money' handouts (precedents having been made).

"This will allow the Fed/Treasury/administration to be seen as 'coming to the rescue,' shifting the pain to the continued or increasingly uncontrolled inflation impacts. Of course, the inflation will be blamed on whatever is the Putin of the moment. There will likely be a suppression of reported inflation numbers extending what has already occurred since the 80s.

"In no event will the long-term economic health or safety of the country/citizens/Main Street be a significant consideration. We appear to be well past that point.

"End points to this situation vary, but none are very good, nor without extreme pain. I'm sad that today's situation means that one increasingly has to be a raging optimist just to levitate one's outlook enough to be considered merely a pessimist. Longer term, after the riots and revolutions, I am indeed an optimist. Hope we make it till then.

"Note: Being an Alliance Member has been one of the greatest investments in myself. During these times, I'm not sure how I'd make out without all of the incredible information presented, coming from so many viewpoints. Invaluable! Even if often disconcerting. Every time I turn around there seems to be new content to absorb. Good luck to us all." – Stansberry Alliance member Robert H.

All the best,

Corey McLaughlin
Baltimore, Maryland
April 20, 2022