Follow the Money – November 15, 2025
Both the fiscal/monetary world and the capital markets are spinning out of control. Scott Bessent, our highly regarded Treasury secretary celebrates that the US annual deficit, as a percentage of GDP, has a “five handle”, meaning 5.9%. However, the deficit has not been as high as the 5-6% range since we were in the middle of World War II. President Trump is pushing hard for lower interest rates, which makes no sense when inflation, at about 3% annually, is still 50% away from the Fed’s presumed target of 2% and the economy is supposed to be strong and getting stronger. The day-to-day uncertainty relative to tariffs distorts economic results, and nobody we know of suggests that higher tariffs will lower inflation. The Federal Reserve, far from “independent”, has run their balance sheet (“temporarily” said Ben Bernanke) from under $1 trillion fifteen years ago to almost $9 trillion, After reducing it during the last several years by about 30% to about $6 trillion, they are prepared to grow it again. The Fed, by the way, if their portfolio of loans were marked to market, has a negative net worth supporting their $6 trillion balance sheet. With the trillions of short-term paper (both government and private) in need of refinancing over the next couple of years, it will take a great deal of money printing to keep rates stable let alone reduce them. Should rates not come down as Trump and Bessent (and now Powell) desire, we wonder what new monetary magic will be employed to keep the US economy growing.
Relative to the equity market, there have been quite a few “ringing bells” that signal the imminent end of the bull run, and we present here one of the most obvious. We all know about the new prominence of the cryptocurrency universe led by bitcoin. Setting aside our personal lack of confidence in the long-term viability of this new store of value: Publicly held companies, led by Strategy (previously MicroStrategy) (MSTR) CEO, Michael Saylor’s, have had a great run based on their confidence in bitcoin’s future. MSTR put their entire balance sheet into bitcoin, borrowed more and sold preferred stock as well, all to purchase bitcoin. Stock investors in late 2024 valued Strategy (MSTR) stock at almost a 100% premium to the value of its bitcoin. Mysterious (or ridiculous) as it is to buy MSTR at a major premium, rather than bitcoin itself, MSTR stock did so well that many other companies took on the same strategy. And it worked, for a while. Unfortunately, the premium on MSTR’s stock versus its owned bitcoin, came down in Q3 from about 80% to about 30%, and we calculate that it is currently under 10%, if not close to zero. The danger in MSTR, and bitcoin in turn, continues to play out, because MSTR is obligated to pay $159M per quarter in preferred dividends, but their balance sheet showed only $64M of cash at 9/30. Cash will be raised one way or another, but likely with dilution of value for shareholders, rather than the previous accretion. So, it looks like the warning bells are tolling within this portion of the financial bubble.
The Restaurant Finance Development Conference was once again informative, stimulating and entertaining. The ability to focus on restaurant finance, operations and strategy without the normal day to day distractions always provides new insight. Restaurant stocks are far below their highs of the year, The sluggish consumer spending and tariff related uncertainties which affected us all year were compounded lately by the government shutdown. Quite a few decimated stocks, such as Sweetgreen and Portillo’s, accurately reflect lackluster fundamentals. Portillo’s (PTLO – down from $30 to $5) was very successful in Chicago but had not proven itself elsewhere. Sweetgreen (SG – down from $40 to $5) had a great mission, was generating store level EBITDA margins in the twenties, but also had G&A in the mid-twenties. On the other hand, CAVA Group, First Watch and Dutch Bros were all doing well and continue to do so but were more than adequately priced at their IPO from which they proceeded to move even higher. CAVA, good as they are, was more than a bit ahead of the fundamentals at 150 times trailing twelve-month EBITDA (now $45 per share, down from $150).
At this juncture, with stocks down materially from previous highs, investors have an opportunity to upgrade their portfolio. Own the highest quality names, with traffic trends well established, store level margins under control, and a tolerable G&A burden. We consider that G&A should be somewhere between 6% and 10% of sales for well-established but still growing chains and somewhere in the low teens for relatively young growth situations. Marketing expenses, by the way, should be allocated to the units (not buried in G&A), because the sales don’t get done and the store level cash flow doesn’t get generated without the marketing support. We consider the best candidates for portfolio overweighting, not necessarily in this order, to be Wingstop, Dutch Bros, CAVA, Chipotle, Texas Roadhouse, Darden, McDonald’s, First Watch, Domino’s and Brinker. Buy a little and prepare to buy more if given the opportunity. Hardly anyone catches the bottom.
Roger Lipton
