Saturday, January 2, 2010

Early January Mental Potpourri

Here are some more thoughts. I hope you all had a good New Year's celebration, and wish you the best for the new one. A few years ago I gave up hoping for specific outcomes: I just hope for the best as it would be arrogant of me to assume that I know for sure what is best in aggregate, in the long-term for me and for the people I care about.

* How to tell if WMT is killing a certain competitor? Well, consider this press release "Weis Markets, Inc. today announced it has lowered the prices on 2,600 staple items, effective December 31, and frozen these lower prices for 90 days through April 1, 2010. It has also moved to freeze the prices on an additional 624 products...Founded in 1912, Weis Markets, Inc. (NYSE: WMK) is a Mid-Atlantic food retailer operating 165 stores in five states: Pennsylvania, Maryland, New Jersey, New York and West Virginia."

Just a reminder, businesses, no matter what the ads say, do not like lowering prices (unless there is some sort of a network effect or an exponential threshold to cross).

If I had to guess, in 10 years, most mid-sized supermarkets (think WMK GAP RDK WINN SPTN ARDNA VLGEA) will be either a part of the larger chains or not be around at all.

I'd be concerned longer term about the pharmacy chains, too (CVS, WAG, RAD), especially the latter two.

Also think about what this (and AMZN+EBAY) mean longer term for retail CRE.

* The connection between low and falling interest rates and outperforming equities. The first level of the relationship is pretty obvious to everyone: equity benefits from lower borrowing costs; also lower coupons make dividends more attractive. But there is another level of the relationship. Equities are like a perpetual call option on earning. Options' values, if priced by Black-Scholes, have an e^(-Rf) element in them. In other words, they are more valuable with a lower risk-free rate.

* Then there is the discussion of stocks as a protection for inflation. The Inoculated Investor has found something interesting. Read the whole thing but here is a snippet:

"In this issue Colin Moran and Geoff Gentile of Abdiel Capital discuss their study of the impact of inflation on stocks:

“The U.S.’s last stretch of high inflation was between 1973 and 1981. In the early 1970s many equity investors, as they do now, imagined generally rising prices would make earnings grow faster, sending stock prices higher and giving investors a good real rate of return.

It didn’t work out that way. Inflation turned out to be a kind of neutron bomb that left revenues and profits standing while decimating the free cash flow available to owners. Even if a company’s GAAP earnings kept pace with the general level of prices, higher working capital needs and increased prices for capital spending meant that free cash flows failed to keep up with the price level.

Overall, inflation and taxes together stripped public-company owners of more than 100% of their reported profits from 1973 to 1981. We measured that by tracking the book value per share of companies in the Fortune 500, which compounded at 10% per year over that period, adjusting for share repurchases and including the after-tax value of dividends paid out. Someone who bought a business in 1973 and sold it in 1981, in both cases for book value, would have actually lost ground. After capital-gains taxes, the investment would have doubled, but over the same period the overall price level more than doubled."

Something to keep in mind. Remember that you get taxed on nominal gains. There are a few more interesting things about how other instruments performed.

* In one of the more popular articles in this blog, I made a number of scatter-shot predictions as to how healthcare services will change under the current POS HCR that is being pushed through.

Quoting myself:
(4) Since the bill does nothing to address supply and demand, HC costs continue to outpace inflation to the politicians' surprise
(5) Attempts at cost-fixing in healthcare lead to rationing
(6) Rationing leads to a two-class health care system: one for the "rich" and one for the "masses". The "rich" pay cash to providers who do not want to deal with insurance companies or the government.
(7) The cash-only providers are banned because it is not egalitarian. End result: Royal Caribbean retrofits a few cruise ships into healthcare centers/hospitals, parks them in international waters near the big coastal cities and operates heli/ferry services lifting cash customers for treatment.

Well, it is already starting.

I strongly urge you to go read Yves Smith's whole article and commentary here. Interesting discussion in the comments, too. I recommend you read them, too.
"More than 3,000 patients eligible for Medicare, the government’s largest health-insurance program, will be forced to pay cash if they want to continue seeing their doctors at a Mayo family clinic in Glendale, northwest of Phoenix, said Michael Yardley, a Mayo spokesman. The decision, which Yardley called a two-year pilot project, won’t affect other Mayo facilities in Arizona, Florida and Minnesota….
Mayo’s hospital and four clinics in Arizona, including the Glendale facility, lost $120 million on Medicare patients last year, Yardley said. The program’s payments cover about 50 percent of the cost of treating elderly primary-care patients at the Glendale clinic, he said."
For the benefit of my non-US readers, the Mayo Clinic is a major cream-of-the-crop R&D and treatment clinic with several locations across the country. Also, Glendale, a Phoenix, Arizona, suburb, is a popular retirement destination for people from the northern mid-West, much like Spain and Southern France are popular with UK/Northern Europeans. Retirees are also a large voting block with high participation (which enables the current wealth transfer via borrowing from the younger folks to them).

So what is happening here? It must not have been an easy decision: Mayo is cutting a large chunk of its patient population because the government reimbursements (which are due for a cut this year) do not cover the costs of treatment by far. This is particularly true for primary care physician services, so no doc wants to do primary care (unless they are foreign grads slaving away for their green cards in some forsaken location).

As you can notice, cash patients are welcome. What is the conclusion? Despite some people's insistence that healthcare is a right, not a good, we have reached the natural state of affairs. Healthcare is a good that costs money. The money/coverage from the government is no longer accepted. Now at Mayo Glendale, soon at other places. This will lead to huge waiting lists (a form of rationing where one pays with his time) at the places that do accept Medicare patients.

This is not all bad, BTW. Cash customers are smarter customers and will shop around actively (right now medical services pricing in the US is rather hard to find). More clarity should lower costs. The "break" in the imaginary "social contract" with regards to elderly and poor healthcare will hopefully lead to real reforms that aim to address supply and demand, like I suggested, rather than the stinkers in discussions now. We are also going to see some forced austerity in care provision, such as not treating life-threatening conditions on otherwise terminally ill patients. We are also going to see more inter-generational strife playing out.

* On to some more seasonally appropriate topics.

Finding a true "independent" spirit brand is increasingly difficult. Producer and retail consolidation and shelfspace wars make it tough, so do the tons of federal and state regulations which act as taxes disproportionately borne by small businesses. Case in point, Big Tobacco supporting tobacco regulation by the FDA thus effectively crushing any potential entrants.

So I was rather happy some time ago, when I discovered and blogged about an independent French cognac brand: Jules Gautret. Yesterday, I came across a similar product states-side. This is Elijah Craig 12-year Old Bourbon. I enjoyed it neat. It is 47% alc. (94 proof) and has a surprisingly mild taste. I seem to have developed a taste for brown distillates, such as bourbon, armagnac, calvados, cognac, scotch and, to a lesser extent, rakia, and, to a much lesser extent, rum, so I have been enjoying my trips in the premium bourbon space.

Elijah Craig is owned by Heaven Hill Distilleries, which is a family-owned business. Most US bourbons are either owned by Fortune Brands (Jim Beam and extensions, Booker's, Knob Creek, etc.), Brown-Forman (Jack Daniel's-- not a bourbon, Southern Comfort, Woodford, etc.) or one of the other "majors".

Heaven Hill's master distiller is Parker Beam, whose grandfather was the brother of Jim Beam (yes, that Jim Beam).

So, there: Elijah Craig is another brand you can have an honest relationship with. If you're into brand relationships.

(PLUG: the author of Barbarian Capital blog is available for the right consumer- or inflation-focused analyst opportunity within the US)

1 comment:

Ian said...

Warren Buffet has written some interesting stuff on inflation's effect on cash flows. His conclusion is that you want businesses with a lot of intangible capital and not much in the way P,P,& E. In other words all of the hard asset plays that people think are great inflation hedges actually aren't because of the massive reinvestment needs.