The Digest #111
Starbucks Halts Repurchases, Grant on Interest Rates, Costly Signaling, Yield Curve Inversion
“I do not envy the Fed for what it must do next: The stronger the recovery, the higher the rates that follow (I believe that this could be significantly higher than the markets expect) and the stronger the quantitative tightening (QT). If the Fed gets it just right, we can have years of growth, and inflation will eventually start to recede. In any event, this process will cause lots of consternation and very volatile markets. The Fed should not worry about volatile markets unless they affect the actual economy. A strong economy trumps market volatility.”
— Jamie Dimon’s Letter to Shareholders, April 4, 2022
Starbucks Suspends Share Repurchases
Howard Schultz is back as CEO of Starbucks and one of his first moves was to suspend the company’s share repurchase program. His comment at an employee forum that he will not make “every single decision based on the stock price for the quarter” is obviously something to be applauded. Share repurchases should not be done to engineer short-term support for the stock price.
Starbucks is facing a unionization effort by employees who want the company to “invest” more in employee wages and benefits. The reality is that employee wages and benefits represent a cost, but one that is essential for a company purporting to sell premium products at relatively high price points. The customer paying over $5 for a coffee expects cheerful and competent baristas in the cafes, not disgruntled workers.
It is unfortunate that repurchases have become controversial. The fact is that repurchases represent a legitimate potential use of free cash flow, after ensuring that the underlying business has received enough investment to sustain its competitive position. Repurchases should only be done if the shares are trading below intrinsic value, and only with true free cash flow available after ensuring the ongoing availability of a competent workforce and attractive cafes.
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The End of an Era: Jim Grant on Interest Rates by Richard Hurowitz, April 4, 2022. This is a great interview of Jim Grant, the legendary founder and editor of Grant’s Interest Rate Observer: “Right now, the Taylor Rule would have a funds rate of about 9.5 percent. But what is the actual funds rate? Just a little bit more than zero. So, it would take 30-odd quarter-point turns in the rate to get to the Taylor Rule, and we’re currently talking about many fewer. So the Fed has still not confronted the inflation problem, and people are hoping that it’s just going to go away, that the supply chain problems will cure themselves, that the Biden Treasury is going to rein in spending, and so on. But I think that inflation will prove less tractable and altogether more troublesome than most people realize.” (The Octavian Report)
Why Removing Monetary Policy Accommodation Is Necessary by James Bullard, March 29, 2022. The President of the Federal Reserve Bank of St. Louis is considered one of the more “hawkish” members of the Federal Open Market Committee, yet he is only calling for a fed funds rate of 3% by the end of 2022, which would still be deeply negative in real terms: “In my view, getting underway with the removal of accommodation was appropriate given the strong real economy and the ongoing inflation shock. I believe that the FOMC should raise the policy rate to 3% by the end of the year and implement a plan to quickly reduce the size of the Fed’s balance sheet.” (St. Louis Fed)
Bill Ackman Retires from Activist Short-Selling, March 30, 2022. When asked why he doesn’t short stocks, Charlie Munger once replied that he doesn’t like “trading agony for money”. Apparently Bill Ackman has come to the same conclusion based on this excerpt from his recent shareholder letter: “We have also on a few rare occasions engaged in the “noisiest” form of activism, activist short selling, although this has been limited to two high-profile activist short engagements. Despite our limited participation in this investment strategy, it has generated enormous media attention for Pershing Square. In addition to massive amounts of media hits, our two short activist investments managed to inspire a book and a movie. Fortunately for all of us, and as importantly for our reputation as a supportive constructive owner, we have permanently retired from this line of work.” (Pershing Square)
The Yield Curve Just Inverted…Now What? by Nick Maggiulli, April 5, 2022. An interesting study of how stocks perform when the yield curve inverts, which is a market indicator that often occurs prior to a recession. The problem with using yield curve inversions as a sell signal for stocks is that the indicator does not always work. For example, the yield curve inverted in August 2019, but stocks are up 68% since then. The best approach could be to ignore the yield curve as an indicator. (Of Dollars and Data)
There’s Nothing Wrong with Signaling by Rob Henderson, April 5, 2022. We are all familiar with cheap signaling, which has also been referred to as “virtue signaling” by Nassim Taleb. This is empty and annoying cheap talk (or cheap tawk, as Taleb might say). However, not all signaling is cheap: “The other is called “costly signaling” or “honest signaling.” These signals are hard to fake. Not many people volunteer for months in a homeless shelter or make large, verifiable donations to a charitable cause. It’s reasonable to infer that those who do care more than those who tweet.” (Rob Henderson’s Newsletter)
29 Lessons From Owning A Bookstore by Ryan Holiday, March 29, 2022. “It always takes longer than you think it’s going to take. That’s Hofstadter’s law. From the moment my wife suggested we open a small-town bookstore, everything has taken longer and been harder than we expected. If you can’t pass the marshmallow test of delaying gratification and deferring things into the future, you’re just going to get crushed.” (RyanHoliday.net)
TikTok Brain Explained: Why Some Kids Seem Hooked on Social Video Feeds by Julie Jargon, April 2, 2022. “Dopamine is a neurotransmitter that gets released in the brain when it’s expecting a reward. A flood of dopamine reinforces cravings for something enjoyable, whether it’s a tasty meal, a drug or a funny TikTok video. TikTok is a dopamine machine,” said John Hutton, a pediatrician and director of the Reading & Literacy Discovery Center at Cincinnati Children’s Hospital. “If you want kids to pay attention, they need to practice paying attention.” (WSJ)
Inside an 11-Year-Old’s Solo Escape From Ukraine by James Marson, March 31, 2022. This is an amazing story. “Alhasan Alkhalaf—known to his family as Hasan—set out on a three-day solo trip from the southeastern city of Zaporizhzhia. The trip’s success relied on a carefully laid plan, the goodwill of volunteers and border guards and the wits of a small boy bearing a ready smile, a plastic bag containing his documents and his brother’s name and telephone number scribbled on his left hand.” (WSJ)
Is the Buffett Partnership Strategy Still Applicable Today?, April 2, 2022. “Zack Oliva is an attorney by trade who runs his own 30 person law practice out of Houston. He’s also been a lifelong investor and has been running a partnership in the style of Buffett’s 1950’s partnerships and has been beating the market by a landslide.” (The Investors Podcast)
Investing in Housing and Homebuilders, April 3, 2022. This is an interesting discussion regarding the housing industry and today’s real estate market. There are a number of key points, particularly related to mortgage rates, that are important to keep in mind, both as an investor and as a potential home buyer in today’s highly competitive environment. (This Week in Intelligent Investing)
Eric Balchunas on the Bogle Effect, March 29, 2022. “Eric Balchunas is the Senior ETF Analyst at Bloomberg. He writes research reports, articles, and feature stories about ETFs for the Bloomberg terminal and Bloomberg.com. In this episode, we discuss his new book, The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions.” (Bogleheads on Investing)
Ten Things About Benjamin Franklin, March 29, 2022. You should listen to this podcast if you are a fan of Benjamin Franklin. Dr. Lindsay Chervinsky and Clay Jenkinson discuss some lesser known facts about Franklin in this entertaining episode. (The Thomas Jefferson Hour)
Old Annual Reports
This is a fun site to browse for old annual reports. I haven’t spent much time looking at the content, but it was interesting to see the 1943 Berkshire Fine Spinning Associates annual report in the archive. Not only are no zeros omitted in the balance sheet, but the accounts are presented down to the cent.
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