This past week’s sell-off might signal the beginning of the end to several recent manias, especially in the biotech, social media, and cloud computing sectors. But, to my amazement, one mania seems to be going strong. As just about every stock in the markets got eaten for lunch on Friday, a new restaurant company called Zoe’s Kitchen debuted—and jumped 65 percent.
I know a fair amount about the restaurant business, both the good and bad of it. I am lucky enough to own a restaurant that’s doing quite well (knock wood). A few years back, I owned another restaurant that didn’t do well. Like most eateries, it failed in less than three years. As a money manager, I’ve been studying the industry and investing in restaurant companies for thirty years, and I’ve never seen anything like this “fast casual” craze.
I am reading Vanguard founder John Bogle’s most recent book, The Clash of Cultures. It shares a common theme with many of his other writings: the investment management industry has increasingly promoted salesmanship over the stewardship of client assets. The evidence of this is everywhere–from the excessive fees for actively managed mutual funds to the excessive turnover of stocks in most funds to the proliferation of funds (including ETF’s) at many fund families.
I wish I could say that the hedge fund industry has done a better job than mutual funds and focused on stewardship over salesmanship, but I can’t. Hedge funds have been just as bad as mutual funds, especially when it comes to the oldest and most destructive temptation in the money management game: overgrowing one’s assets under management (AUM).
As I write about in the book I’m finishing up (it’s due out late this year or early next year–stay tuned for more details!), I’ve lived through a number of asset bubbles, or manias, in my career. By far, the most maniacal of these manias–and the biggest one in the history of capitalism–was the dotcom craziness of the late-1990s. It was absolute bedlam, and its epicenter was down the road from me in Silicon Valley, so I had a front row seat.
The normal metrics for valuing companies went haywire during those days. Revenues didn’t matter. Earnings mattered even less (because they were usually nonexistent). When it came to pricing a dotcom stock, it was all about “eyeballs”–the number of people visiting a given website.
If that sounds familiar, it should. It’s the exact same way people are valuing the darlings of the latest online mania–social media.
Something extraordinary happened last week: a politician went against the dogma of his own party and proposed something that might actually boost our economy and improve our country’s long-term fiscal health.
Of course, the plan has no chance of getting a vote, let alone passing congress. And even if it did manage to pass, President Obama would veto it before his first morning cigarette. But just because Representative Dave Camp’s tax reform bill is a lost cause doesn’t mean it’s not a worthy one.
Recently, I was subjected to the unpleasant experience of watching the press fawn over a bunch of self-satisfied celebrities who contribute little or nothing to society. No, I’m not talking about the interminable Oscars coverage this past week. I’m talking about the reaction to the Federal Reserve meeting minutes from the 2008 financial crisis, which were released two weeks ago.
In the popular press–even at the reliably liberal New York Times–it has become conventional wisdom that the biggest mistake of that era wasn’t bailing out the most corrupt and incompetent firms on Wall Street with billions of dollars in taxpayer money. The biggest mistake was not making the bailouts big enough.
It’s an election year, and election years bring out so-called wedge issues. This time around, it looks like the big wedge issue will be the minimum wage. Democrats want to push it above $10 an hour. I’m not a fan of government regulation and other burdens on business–like the excessive corporate tax rate–but I do believe Washington has a moral and financial obligation to help entry-level, unskilled, and young workers. Raising the minimum wage helps all three groups. It does something even more important, too:
Once again, I must apologize for the lack of blog updates recently. I’ve been on the road visiting company managements almost continuously for the past several months–first booming Texas, then booming China, then New Jersey and Long Island, then Texas again, and most recently Phoenix. After meeting with dozens of executives all over the country (and out of it, too) in all sorts of different industries–from retail to manufacturing to tech to finance–I was not at all surprised to see this past Friday’s big revision in third quarter GDP.
Almost to a person, corporate managers seem to be quite upbeat these days. So much so that I’m about to say something I didn’t think I would say for a long, long time: believe it or not, real estate is probably a good investment again.
I apologize for my recent lack of posts. I’ve been travelling a lot this past month. I just got back from ten days in China, where I visited with the chief financial officers of eight companies in Beijing, Shanghai, and Hong Kong. Their businesses ranged from solar panel manufacturing to construction to internet retailing. Aside from some minor language barriers, the meetings were all more or less identical to the thousands I’ve participated in here in United States–that is, they were straightforward, rather sleep-inducing discussions of things like cash flows, production capacities, and earnings forecasts. You can talk all you want about free trade and laissez faire government policies. In my opinion, the true indicator of a country’s commitment to a market economy is how professionally boring its corporate CFO’s are. By that metric, China might be even more capitalist than we are by now.
My last trip to China was six years ago, and its economic vitality hasn’t abated at all since then. Construction cranes still fill the horizon in every city, and traffic in Beijing and Shanghai made rush hour in Manhattan look like a Sunday drive. I think every American should go over there at least once to see what true growth looks like–both the good and the bad of it. I’d like to say I worked in some time to see the sights, but that would have been impossible, not just because my schedule was so busy, but because my eyes were burning from all the smog. The only “sight” you see most days is a thick brown haze that hangs over China’s cities like something straight out of a Dickens novel.
Two weeks ago, I had lunch with the legendary Dallas money manager Shad Rowe. Shad recounted an enlightening conversation about global economic trends he’d had with Sir Martin Sorrell, CEO of the British ad agency WPP. Sorrell told Shad that he believes the term ‘globalization’ is misleading.
When I’m scouting dead-companies-walking, I look for a number of factors. Businesses fail for all sorts of reasons, after all. But there are almost always two main symptoms of a company in terminal condition: falling revenues and mounting debt. These twin problems feed one another and create a kind of corporate death spiral. As revenues drop, debts rise. Making matters worse, creditors begin to demand higher and higher interest rates to service that debt, which means that repaying it eats up more and more of a company’s shrinking revenues. Pretty soon, that company can’t meet its obligations and its only option is to declare bankruptcy.
I usually find comparisons between government and business strained. But with a government shutdown looming by midnight tonight and the very real possibility that the U.S. Treasury will renege on its credit obligations becoming more likely every day, Washington D.C. is starting to look like the dysfunctional boardroom of a business fast on its way to insolvency.