DC Advisory
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October stock market strength should not be considered predictive of the economy. The Fed, and our government sometime soon will notice; (1) Consumer credit card debt has hit a historic high of $1 trillion and the average interest rate on those balances is over 20%. (2) Mortgage rates are almost 8%, more than twice two years ago. (3) The biggest US banks will likely write off more bad loans than in the early days or the pandemic. (4) The commercial real estate industry is still coping with work-from-home. (5) Unrealized losses on bank fixed income HTM (Held to Maturity) portfolios continue to restrict bank lending. With higher interest rates than at 6/30, the $309B of HTM securities as of 6/30 will no doubt have further markdowns. (6) Interest on the US debt is already approaching one trillion dollars, moving toward two trillion as very low interest government debt is refinanced at 5% (7) With the current deficit and the roll-over requirements the US needs to find buyers of about $10 trillion worth of US securities to be issued within 18 months.

Since the Chinese, the Japanese and others are pulling back, the Fed has become not only the buyer of “last resort” but “the only resort”. The supposedly independent Fed, once again, must choose between even higher interest rates (to kill inflation), bringing on a serious recession (or depression), or a new round of monetary ease to support the economy. We predict that when the economic turndown is on full display, the new round of monetary ease will have to be even larger than in the past. After all, it takes a larger and larger “fix” to maintain the easy money addict’s “high”.

Anti-obesity drugs are the latest craze on Wall Street, already predicted to be the largest selling medications of all time. The trade names are Wegovy and Ozempic (by Novo Nordisk) and Mounjaro (by Lilly), so far with FDA diabetes approval only for the former while all are used off-label for weight control. While Lilly and Nordisk stocks are hitting all-time highs, the valuations of food purveyors from snack manufacturers to restaurant chains have been under pressure. Before jumping to conclusions, let’s consider:

In 2004, as Panera was at the peak of their growth trajectory, the low carb craze hit and their same store sales progress stalled. In spite of a great deal of anxiety in the marketplace, Panera, with some relatively minor adjustments to the menu, kept growing. JAB bought the chain in 2017 for $7.5 billion and is reportedly preparing to bring them public again soon.

in 2019, meatless burgers and other meatless proteins captivated Wall Street and worried the beef and chicken purveyors. Beyond Meat (BYND) came public at $25.00/share and ran to over $200 with a $12 billion valuation. Back in ’19 we said: “The unanswered question is: how large is the demand, at restaurants, for a product that costs more, has the same calorie count and fat content, has a lot more sodium (which creates high blood pressure), but has no cholesterol and contains useful elements such as Thiamin…..B12..and Zinc.? We do not expect the introduction of meatless products to restaurant menus to improve sales in any meaningful way……. This, too, in terms of stock market excitement and restaurant industry focus, shall pass.”

The closest BYND got to annual profitability was $12M of pretax losses in ’20, reporting over $500M of losses in the last two years. The stock is $8/share, likely still overpriced with a market value of $600M.

Returning to anti-diabetes drugs: These (so far) injectable drugs cost over $1,000/month, even with insurance, out of reach for many potential users and it remains to be seen on what basis insurance companies will provide coverage. It is also uncertain how side effects will affect acceptance. Among those described: “a mild allergic skin reaction at the injection site…..common but not serious side effects, such as nausea, diarrhea, fatigue, constipation and upset….rare but serious side effects that affect less than 1% of people….like pancreatitis, cholecystitis, kidney injury and suicidal ideation…..needs to monitor a patient’s symptoms and bloodwork while they are on the medication.”

Obesity afflicts 43% of all Americans, according to the Center for Disease Control, up from 32% in 2000 and 14% in 1960, a growing problem to be sure. The jury is out, however, as to whether the current optimism (of over- weight individuals and the drug companies and the equity market) and the concern for the food purveyors is justified.

Our conclusion, relative to restaurant industry concerns over anti-obesity drugs: We are more concerned with the already obvious economic strain on the dining public than the undetermined reduction of food consumption because of the new medications. However, if you are providing more of a “fuel stop” than a “dining experience”, the consumers’ economic challenge will combine with the drugs’ reduction of the craving for fuel and together will reduce your traffic. Whether full service dine-in, drive-thru, pick-up or delivery, we suggest you double down (as Danny Meyer puts it) on the “hospitality quotient”. Fuel is widely available (as in “no problem”), a friendly face and warm greeting (“my pleasure”) not so easily.

Roger Lipton