For the first time since this portfolio was launched 18 months ago, our group of Inflation Hedges holdings posted positive returns over a three-month period. From February 29 through May 31, the Inflation Hedges Portfolio posted an average gain of 9.7% versus 9.2% for the S&P 500. Leading the way was the portfolio’s most recent addition, the PowerShares DB Oil Fund (NYSE: DBO), with an increase of 22.8%. Also posting double-digit returns were Australian miner BHP Billiton (NYSE: BHP) +19.3%, Goldcorp (NYSE: GG) +17.5%, Norfolk Southern Corp. (NYSE: NSC) +14.9% and the iShares S&P Global Materials ETF +14%. Only one of our holdings suffered a negative return: retail jeweler Tiffany & Co. (NYSE: TIF), with a mild loss of -4.6%.

Three months ago, when I last updated this portfolio and explained my justification for adding PowerShares DB Oil Fund, I wrote, “Oil prices could appreciate another 10% to 20% this year, and I want this portfolio to benefit from this increase.” As it turns out, I grossly underestimated oil’s price appreciation potential and overestimated how long it might take to get there. Since bottoming out near $30 in early February, the price of a barrel of oil recently crested above $50, gaining more than 60% in less than four months despite OPEC’s inability to agree on petroleum production limits.

In turn, the prices of most commodities also rose, suggesting that an uptick in inflation may be in the cards later this year. Federal Reserve Chairwoman Janet Yellen has made no secret of her desire to wean the U.S. economy off artificially low interest rates, which should trigger a commiserate bump in bond yields. That will increase borrowing costs for commodity producers and force them to raise prices on the basic materials that go into virtually everything we consume. That’s how inflation gets started, and even though it is not necessarily right around the corner, I believe this portfolio’s behavior over the past three months indicates that day is drawing nearer. —Jim Pearce

Out of Control & Over the Line

The Securities and Exchange Commission is cracking down on financial statements that stray from generally accepted accounting principles (GAAP) when those numbers have the potential to confuse and mislead investors. In May, the SEC released accounting guidelines to curb the abuses.

The use of these adjusted numbers by S&P 500 companies is at an all-time high, up 35% since 2009, according to a March 2016 academic paper, “Non-GAAP Reporting: A Comparability Crisis,” from Dartmouth College and the University of Georgia. About 60% of all S&P 500 companies currently use non-standard accounting metrics, the paper found, with higher percentages for firms in healthcare, technology, materials and utilities. As long as GAAP figures are featured prominently, the SEC allows companies to also include non-standard metrics, which can reflect financial operations more accurately if, for instance, acquisitions or other one-time expenses would distort the picture unfairly.

But companies often use adjusted figures to make performance look better than it is. One 2014 study by the investing research service Analyst’s Accounting Observer found that S&P 500 companies engaging in non-GAAP accounting showed earnings that were 22% higher than the GAAP figures, and in some cases converted losses into gains. Besides masking a company’s true performance, the different accounting standards make it harder for investors to compare a company with its peers, so that an overvalued stock may still seem reasonably priced.

That has prompted the SEC to rein in non-standard accounting, particularly when it crosses the line from legitimate adjustments to doctoring data. According to SEC guidelines, companies cross that line when they adjust figures inconsistently from one period to the next, or show only non-recurring gains while conveniently omitting non-recurring charges from the equation. Adjusted figures that exclude routine expenses also draw the SEC’s ire. Amortization-related costs and stock compensation are among the most common routine expenses excluded from a company’s non-GAAP earnings, the Dartmouth College and University of Georgia paper found. —Catherine Siskos