Tuesday, December 30, 2008
Wednesday, December 24, 2008
Thursday, December 18, 2008
McDonald (MCD) may be as well positioned as any company I can think of to prosper during these difficult times. The reason is the effects of three forces that all appear to be driving business to their stores.
- Trading down effect: It is clear that Wal-Mart (WMT) is winning over a bigger segment of the populace in these tough times with their low prices. I believe the same thing is going on at McDs. Eating out is the American way, but I’m betting that more and more Americans will be eating a little lower on the hog at their local McDs.
- Brand battle: The McCafe concept, which is being rolled out nationwide, will do battle head-on with Starbucks in specially brewed coffee. This thought might take a while to accept, but judging from the locations where I have seen it introduced, it is a big success. It is driving a different kind of consumer to McDs – more upscale, a little higher income demographic. By all accounts I have heard from my coffee-drinking friends and family, the coffee is top notch and it is less expensive than at Starbucks. Could be a big win.
- Competitive atrophy: The other big burger companies have almost all moved their target audiences out of direct competition with McDonalds. Burger King is appealing now almost exclusively to men and Wendy’s appears to be aiming at attracting women. Both appear to have given up much of the kid’s market to McDs.
Mike Hull, our consumer strategist, believes that MCD can post 6% higher earnings in 2009 over 2008, and that the dividend will grow close to 9%. That kind of relative performance will draw buyers to the stock, especially when the average stock will have lower earnings in the coming year.
Mike believes that MCD’s business model is putting increasing pressure on their competitors, which could add up to big market share gains in the year ahead for McDonalds.
As always, this blog is for information only. Do not make buy or sell decisions based on what has be written here. The authors and clients of the authors own the stock. Although we have no plans to sell the stock, we will not comment here when we do so.
Wednesday, December 17, 2008
The news that Bernard Madoff may have stolen $50 billion from his clients puts an exclamation point on a tragic year for the finance industry. It’s one thing to make stupid subprime investmentments, as much of Wall Street and some of the banks have done, but it's another ball game when an individual outright steals people’s money. That is bottom of the barrel stuff, especially when so much of the money belonged to foundations whose aim it is to help those less fortunate.
There are many parts of the Madoff story that just defy credulity. He seemed to operate in the cracks of all of the various regulatory bodies.
One part of his operating procedures that we faced some years ago is that of being both a money manager, and the custodian of the assets. As a custodial investment manager, Madoff not only managed his client’s assets, but he also had direct access to the assets. To us that seemed like a lot of added risk and expense. Thus we chose to be a non-custodial manager. As most of you know, TD Ameritrade is our custodian. They hold the assets and make the trades. Our clients sign what is known as a limited trading authority that allows us to manage their accounts and collect our fees.
While being a custodial investment manager has some advantages for clients, such as more flexibility in moving money, the added risks, regulations, and capital costs that we would have had to incur to become a custodian manager outweighed the conveniences.
The only real encumbrance that we have to deal with as a non-custodial manager is that, since we have no direct access to our clients’ funds, TD Ameritrade requires a little more paperwork to authorize moving money around.
As the years have gone by, however, with faxes and email, this has gotten a lot easier, and knowing that we have a very capable custodian partner like TD Ameritrade gives us confidence that no money ever leaves an account that does not have the consent of the client and corroborating paperwork. I can tell you that having TD Ameritrade on board is a comfort to me, and I hope after the Madoff scandal, it is a comfort to our hundreds of clients spread across 29 states.
Friday, December 12, 2008
Tuesday, December 02, 2008
Wednesday, November 26, 2008
Tuesday, November 25, 2008
Friday, November 21, 2008
Thursday, November 20, 2008
Tuesday, November 18, 2008
Monday, November 10, 2008
Friday, November 07, 2008
Wednesday, November 05, 2008
Monday, November 03, 2008
Friday, October 24, 2008
Wednesday, October 22, 2008
Thursday, October 16, 2008
Friday, October 10, 2008
Tuesday, October 07, 2008
- We have a real problem of liquidity and bad loans in our economy and the rescue plan will take weeks if not months to get moving, so there is still bad news almost everyday to which the markets must react. The volatility will continue until the bank rescue plan and other measures taken by the government begin to work and unfreeze liquidity.
- Bank bailouts have hit Europe, with banks in Holland, Germany, and England being bailed out in one form or another.
- The most important issue, however, is that stock traders realize that the bank rescue plan being on the front pages for nearly a week has raised the awareness of the American people to the problems in the banking system and will lead to a pullback in consumer spending. Consumers are angry and frightened, and since they represent roughly two-thirds of US GDP, the economy, which has been muddling along, will likely slow; perhaps even dip into negative territory in the coming quarters.
Consumers were already on alert before the banking crisis was on the front pages. Recently released Federal Reserve data show that for the first time since 1998, consumer debt fell in August by 3.7%.
My friend said he agreed the economy would slow but that the stock market was down over 25%, which was dramatically more than the economy would fall. He said, “How does a market get over these kinds of irrational fears.” I said that I thought the market would get over its fears, the same way it got over its greed.
Three years ago everyone thought that home prices would go up forever and everyone got in line to buy a house. The banks, particularly in the hot real estate areas, bought into the forever-rising real estate story along with their customers and they started cutting corners on assuring the creditworthiness of their home buyers. So greed took over. Prices went up everyday. Buyers started offering more for houses than the sellers were asking -- and on and on. What killed greed is that in the end you run out of foolish buyers. The higher you go, the more value-oriented people, shall we say “rational” people, drop out, so at the end it is just the greedy doing business with the greedy. Then some of the value-minded people realize that prices have gotten too high and they start selling. Pretty soon, prices start leveling off and then start down because value-minded people keep putting more real estate on the market. As prices begin to fall, the people who were still buying at the end are quickly underwater. In stocks it’s the same way. Right now some people are selling because they believe that earnings and dividends will be significantly hit by a slowing economy, which would make their stocks worth less in the short run. But the great majority of selling is being done by people who aren’t thinking about earnings or dividends at all; they are selling because the market is going down and they are afraid. Fear has seized the day and it will run its course the same way that greed did: until value-minded people step up.
So far it has not made much sense for value-minded people to get in a hurry to start buying. The markets have been getting rocked everyday, but value-minded people realize that there will come a day very soon when the sellers will run out of steam. At that point, the value-oriented buyers will begin buying and the markets will at first calm down and then begin to move higher.
Here’s a very simple reason why: the sell-off in stocks has created great values. The Dow Jones Industrials now yield over 3%. That is a higher yield than a 5 year Treasury bond. That means that investors who buy the Dow today will at least match the income from Treasury bonds and get all the growth in dividends and prices over the next 5 years for free. It is that kind of value that brings the value-minded people off the sidelines.
Another thing that would help a lot would be if the Fed and other world central banks did a coordinated rate cut.
Friday, October 03, 2008
Tuesday, September 30, 2008
Friday, September 26, 2008
Wednesday, September 24, 2008
Monday, September 22, 2008
Thursday, September 18, 2008
- Wells Fargo (WFC) has dodged all the sludge so far, and they have made it clear that they are not in the turn-around business. I want to remind them; however that it was the ideas and leadership of a bunch of people from the old Norwest Bank out of Minnesota, who turned around the country-club banking types in California and enriched them in the process. John Stumpf, America needs your business acumen and banking genius to reach down into this mess and pick up something that you can correct. Many banks are selling for a fraction of their book values. What STAGE are you waiting for to get in the business of helping solve the banking crisis, and ultimately to enrich your company even more. You know its the truth. You just need to move. I think Washington Mutual is your best bet. They have a sales culture similar to yours. Unfortunately they have been selling the wrong products. If you give them the right products and risk management systems, they will rise.
- JP Morgan (JPM) and Mr. Diamond, you cut a heckuva deal on Bear Stearns. However, you need to get a little more skin in the game this time. National City Bank (NCC) has lost its rudder. They are a natural fit to your old Bank One territory. National City has always been a good meat and potatoes bank. They fell into the sewer when they tried to join the caviar crowd in the subprime world. National City would offer incredible consolidation possibilities because of its overlap in your Bank One territories.
- Wal-Mart (WMT), you have been trying to get into banking for years. In exchange for allowing you to get into the banking business, you should seriously look at Wachovia(WB). It's big. It's got the Sunbelt covered. It can provide you with the expertise to cross sell hundreds of investment products to your your millions of loyal customers both in the US and around the world. The government should change the rules to allow you to do it. You have capital coming out of your ears, and you have a bond with Mr. and Mrs. America that is among the strongest of any company on earth. You can help your fellow Americans the way you did in Hurricane Katrina and recently with Hurricane Ike.
- Warren Buffett, what are you waiting for. You are worth$70 billion, your company is worth over $100 billion(BRK/A). You also need legislation to allow you to get into the banking business. Your party is in power currently in Washington. It ought to take you about 36 hours to be in business. J Pierpont Morgan is said to have saved the US from financial calamity at least twice by loaning money to the country. Here's your opportunity to join Mr. Morgan as a man whose legacy will live through the ages. Buy somebody smart in the banking business like you did with MidAmerican Energy and turn them loose amalgamating the banking system like MidAmerican has done in energy and power. It may not be shooting fish in a barrel, which is your preferred method of operation, but America is calling on you like it once did on J. Pierpont Morgan. I know you own bank stocks, but it not the same as owning the companies outright. You know that.
- General Electric (GE): I know the Kidder Peabody purchase did not work, but the hubris on Wall Street is at an end for awhile and the complexity of your company would benefit from the expertise and business connections of an investment banking firm. JP Morgan is swinging in the breeze looking for a buyer. You have a AAA rating; you do business in every corner of the world; you are at the forefront of all the alternative energy solutions that have a chance of working. Your biggest problem is going to be helping your customers finance your technology. Morgan Stanley can do that. That is their business. They can also help guide you to important acquisitions in the areas of the world you want to be in and to the companies with bona fide products and capable management teams.
Ken Lewis, of Bank of America (BAC). I shudder every time there is a financial crisis because I know you will be there with your checkbook, even if nobody else is. Thank you for your bravery; thank you for your belief in America. I pray that your courage and strength of character will be blessed with strong profits for many years as a result of the moves you have made during this crisis.
I criticized your Lasalle Bank and Countrywide Financial purchases; I cringed with the Merrill Lynch purchase, but you appear to have paid pennies on the dollar in all cases and something seems to be speaking to you about the future that none of the rest of us are hearing. Call Warren Buffett. See if he'll fight this battle with you.
Moves like these will ultimately occur. I don't know if these people and companies will come forth, or if it will be other brave souls. This short list, however, if they put their shoulders to it, could solve our current problems.