Wednesday, December 19, 2007

Investors Steamed

Investors Are Steamed at Darden
Shares in the restaurant opeartor tumbled Wednesday after weakness at newly acquired chains led to a profit shortfall

What the heck is a restaurant opeartor? Did spell checking get outsourced overseas? I fall victim to that myself from time to time, but I am not part of the well established media with a reputation to protect. Sloppy, sloppy, sloppy!

Raymond James & Co. downgraded the stock to outperform from a strong buy rating, with analyst Brian Elliott saying that Darden's sales at stores open at least one year are no longer strong enough to offset its cost inflation, which seems to have risen significantly in the past three months. Investors who buy the shares at around $33 will be well rewarded over the next one to three years, Elliott predicted in a research note.

So tell me Mr. Elliott, what is it about the restaurant business that excited you in this environment and continues to excite you? I'd really like to know how the next three years are going to be so wonderful. If inflation pushes up the price of houses, what will it do to the price of food and oil? If deflation brings down the price of food and oil, what will it do to the price of houses and the employment situation? No thanks. I'm having a hard time seeing the upside. Darden lost 21% today. Had I been a brave man, I would have shorted the heck out of your "strong buy" yesterday (when I shared my thoughts that we've got too many restaurants per capita based on where I think this economy is headed).

This brings me to the idea of shorting stocks in general. Even if we are right we could be wrong. If a company gradually slides into the abyss we would gradually make money, right? What if that gradual amount doesn't keep up with inflation? There's a timing aspect here that concerns me. In the 1970s the average company stagnated. The best thing to do in hindsight was to simply find something that could keep up with inflation as inflation rose.

Real threat is uncertainty, not stagflation:James Saft
LONDON (Reuters) - The problem isn't stagflation, scary as the specter of an ugly mix of poor or negative growth and high inflation is for investors. The problem is knowing which of the two to fear and fight.

That's EXACTLY why stagflation is here though. There are two things to fear and fight. The Fed will choose, if it must, to walk the line between the two. Will it not? Further, why would we want to choose, as individual investors, which one to fear and fight? Are we going to ignore the other and hope we are right? To me, the safest "bet" IS the one on an "ugly mix of poor or negative growth and high inflation." If we are wrong, at least we are only half wrong.

A sustained period of both the fire of inflation and the ice of a credit crunch-induced slowdown is highly unlikely.

You mean like the 1970s? When we kept toggling back and forth between serious inflations and serious recessions? Dare I remind you what eventually pulled us out of it? In my opinion, we embraced debt. How are we going to embrace even more debt this time around? What if we stay stuck in the 1970s? In the 1970s the rising price of oil was political. What if it is geological this time?

But while the combination of inflation and poor growth is daunting, currency strategist Stephen Jen of Morgan Stanley points out that the inflation data reflects the immediate past, rather than the future.

I refer Stephen Jen of Morgan Stanley (whose company was not well positioned for this environment if its stock price is any indicator, down 45% from its 52-week high) to the 5-year inflation chart as seen here. The CPI has risen at an average rate of 3% per year for the last five years and the trend has been rising.

Perhaps I am wrong to be a stagflationist. It is quite possible. However, I would argue that we've been stagflationary for a long time. The investments that worked best in the 1970s have worked best in this current environment. It didn't just start in the "immediate past" either. Look at the rising price of oil. It preceded the dotcom bust and was quite possibly a factor in popping that bubble.

Just opinions of course!

10 comments:

Anonymous said...

Mark I'm like you and I retired a little earlier then most folks despite rising food and fuel prices the one that is really eating me up is insurance, insurance for medical, dental, life, vehicle, residential, umbrella, and a farm policy represent well over 25% of my annual expenses and they just keep going up. I grow a lot of my own food and I don't use all that much fuel so those while rising don't have nearly the effect as the insurance does on my living standard.

On the deflationary front we do have this.

http://www.hno.harvard.edu/gazette/2007/12.13/99-finaid.html

Kevin

Stagflationary Mark said...

Kevin,

I hear that. Insurance has been very nasty for us since my girlfriend lost her job. We're no longer employer subsidized and are bearing the full brunt of COBRA payments ($900+ a month for the two of us).

Anonymous said...

Kevin,

You're retired too! WTF! Am I the only sucker who buys bonds instead of Hansen Natural?

Stag, you've just been downgraded to a three sigma event. And the outlook is negative.

BTW, my last homerun occurred during a tee-ball game. An infield hit no less.

Maybe I took that tortoise & hare story to seriously.

Stagflationary Mark said...

MAB,

BTW, my last homerun occurred during a tee-ball game. An infield hit no less.

Hahaha! You've put me in a jovial mood.

Stag, you've just been downgraded to a three sigma event. And the outlook is negative.

That's okay. I'm fully hedged. I've been betting on my own demise for years! So far so good. The worse I have done the better I have done! Woohoo!!

In all seriousness, I intend on spending my savings as I grow older. The outlook is therefore VERY negative. I intend on dying broke! If I die earlier than that I'm going to be seriously bummed (but won't know it thank goodness). If I die later than that I'm going to be even more seriously bummed! In fact, I'll be a serious bum! *Ba-dum ching*

Thank you. Thank you very much. Hope you enjoyed the show.

Anonymous said...

I intend on dying broke! If I die earlier than that I'm going to be seriously bummed (but won't know it thank goodness). If I die later than that I'm going to be even more seriously bummed! In fact, I'll be a serious bum! *Ba-dum ching*

That's my intention to Mark to die broke an leveraged to the hilt. and I will also be seriously bummed if it doesn't work out that way. On the other hand I know a lot of older guys I worked with that died before they retired which would suck even more. My dad retired at 57 and died at 73 I retired at 53 thanks to the housing bubble and 70 is my target departure age with any luck at all. The worst thing I can think of is dying in a rest home after it had drained my finances, wearing Depends and drooling down my shirt. They don't even treat dogs like that.

Kevin

Stagflationary Mark said...

Kevin,

I first planned to live to 100 (worst case) but based on the direction our leaders seem to want to take us I don't think I'll need to hang on that long, lol.

Anonymous said...

Stag, Kevin,

May you both live to be a thousand.

Happy holidays.

Stagflationary Mark said...

MAB,

May you both live to be a thousand.

You are scaring me. Please tell me you haven't been studying up on your gypsy curses. I'm picturing my quality of life in those last 900 years. I'm especially picturing the price of supplemental health insurance at the age of 150+.

Happy holidays!

Anonymous said...

Stag,

"I'm not planning on living for ever. But with modern technology and my level of income, 240 or 250 isn't out of the question"

(ricky bobby, talledega nights)- paraphrased

Stagflationary Mark said...

Stranger than Fiction

What is wrong with you? Hey, I don't want to eat nothing but pancakes, I want to live! I mean, who in their right mind in a choice between pancakes and living chooses pancakes? - Harold Crick (Will Ferrell)

Harold, if you pause to think, you'd realize that that answer is inextricably contingent upon the type of life being led and, of course, the quality of the pancakes. - Professor Jules Hilbert (Dustin Hoffman)