Inflation, You Say? Lets Go Back to the Future

Back in the first half of 2008 we had a major inflation scare, too. During that time, recall we saw commodities spiking virtually across the board, with oil rising up to $150 per barrel, for example.

In fact, the inflation trade became so apparent we had ominous-looking covers on the front of famous financial publications decrying that the inflation genie was out of the bottle and could not be put back inside.

Anchors on financial news television were espousing slam-dunk pair trades, such as Short AAPL and Long POT (Potash, now under ticker NTR, the Canadian fertilizer play benefitting from higher inflation). 

The reason why the anchor touted a short AAPL trade was because the broad market had already, in fact, topped out in October 2007. 

And yet commodity-related stocks continued to roar well into the summer of 2008. 

Eventually, all of the inflation fears proved worthless, as the mere spike in inflation was too much for the global economy and markets to handle. In fact, with the financial crisis basically in full swing already, the deflationary pressure was the real danger, and the inflationary head-fake simply exacerbated a seemingly inevitable deflationary crash (See Also: Former ECB President Jean-Claude Trichet raising interest rates in July 2008 on the eve of the worst financial delevering since the Great Depression). 

With that background, let us also remember that Costco actually outperformed in the inflationary run-up during that first half of 2008. On the monthly chart, first below, for COST, going back in time we see Costco outperformed the major averages long after they had topped out. 

Indeed, COST seems like a good business model to benefit most while other similar retailers suffer due to margins getting squeezed from inflation. 

Fast-foward to the present, and I think Ollie's Bargain Outlet Holdings Inc., on its real-time daily chart, second below, can benefit if we see inflation fears tick up in the near-term. 

OLLI is a high growth bargain retailer (as the name implies) with a treasure-hunt style to its retail experience, complete with a growing membership program. Note the heavy buy volume over the last week as the stock tested its 50-day moving average multiple times. 

Learning from the COST outperformance in early-2008 is a lesson which is likely to go overlooked by most. So, the OLLI thesis becomes all the more appealing if today's CPI number is the just the start of a new inflation threat.