Best Time to Get Short Right Now
posted by Not Sure if Al Gore or Global Warming is a Bigger Joke at
10:30 AM
Monday, October 01, 2007
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10 Comments:
I have been thinking about restaurants as a possible short play.
First, you have the greater macro-economy and the impact on the consumer.
Second, you have commodity problems which are driven by too much farm land being devoted to ethanol and corn and too tight of supply. The supply issues are a function of land being moved away from farming purposes as well as greater demand from emerging market economies. Wheat, cheese, cattle, and soybeans are sky high. Pork has fallen off the map, but I am not sure how much pork people eat in the U.S. anyways.
Third, you have imports going sky high because of the dollar. Coffee and cocoa have run up. Rogers says sugar is following.
Fourth, you have honey bees being killed off en masse as a result of Australian bees being introduced into the U.S. The Australian bees have different immune systems than the U.S. bees and have resulted in some bee farmers losing 1/3 of their populations. Think smallpox and the Indians. As a result, bee farmers are going out of business and pushing tight supply tighter. This is a huge impact to a number of things that we eat because they rely on pollination: almonds, oranges, cranberries, blueberries, tomatoes, etc. Basically, anything that is a fruit, vegetable, or nut. Also, alfalfa (cattle feed) requires honey bee pollination.
One thing that scares me is that the multiples have come down significantly. According to FactSet, PFCB is still high at 16x. CMG is really high at 29x. CAKE is down around 11x. PNRA is inside of 10x. EAT is inside of 7x. DRI is 9x. APPB is 10x. CPKI is 8x. SBUX is 13x. MCD is 11x. BKC is 10x. YUM is 10x. WEN is 14x. PZZA is 7x. DPZ is 11x.
I have not done any company specific work... just developing a bit of a mental model.
I just realized that none of those multiples are adjusted for rent so they are totally meaningless.
Didnt know the bee issue was due to the introduction of Australian bees. Interesting.
My personal 2 cents is that the short story is largely priced. I am actually thinking about bargain hunting. Not there yet though.
If you go ahead with it and it is a broad sector short, consider hedging with oil. If oil pulls back like last year you could get smoked even if the rest of your thesis is correct.
What I like most about that idea is that it works in any volatile environment. Deflation it works. Inflation it works.
2002 was horrific for food retailers. MCD and burger king were marking down menus as fast as possible in deflation mode. Now as food costs come up, they will have to raise prices, raise labor costs, raise capital costs. It is ugly.
How do the restaurants hold up during fed cut cycles?
This is unlike past fed rate cut cycles...past reactions don't apply today.
I forgot, I'm going to have to learn to live on ramen noodles and stockpile those little propane tanks so I can cook it as we revisit 1930 and the world starts to end...
not saying that at all...I don't think the end of the world is at hand. I just think there will be an ugly correction. However, if you want me to discuss the numerous ways its different now vs. previous rate raising cycles I can educate you.
but 1930 is the appropriate time period to compare our current situation to btw.
What were you calling for in Sep. 05? In May '06? (was that your stagflation call) How big of a correction, you think?
(I may not see this, though, since I'm going away for 2.5 weeks)
The tape is getting to look kind of ugly...that much is for sure.
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