FOLLOW THE MONEY – WITHIN THE RESTAURANT FINANCE MONITOR
FEBRUARY 15, 2025 – MONTHLY COLUMN
The macro winds that we said were “blowing fairly hard” last month are approaching hurricane strength, with the reality show in Washington, DC providing plenty of uncertainty along with optimism. However, before you chase the “Magnificent Seven” stocks because that is what all the smart money is doing, consider that there is a raft of thirty something money managers who have experienced nothing but Federal Reserve driven (mostly suppressed) interest rates at close to zero for over a decade. When there is no cost of capital, investment resources are inevitably mis-allocated. With literal trillions of dollars spent frivolously, the morning after hangover has yet to be experienced.
Speaking of misallocation of resources, while It’s been said that nobody rings a bell at the top, there are usually recognizable signals that common sense can suggest. For instance, is it logical that $3,000,000,000,000 (that’s three trillion dollars) of new crypto currency can be created, with no commensurate increased production of goods and services and there will be no rise in prices? We listened, at the recent ICR Conference, to Michael Saylor, CEO of MicroStrategy (MSTR), describe why MSTR has purchased about $30 billion worth of Bitcoin (now worth about $46 billon). Along the way, with MSTR (with no other business activity) having traded at a 50-100% premiums to the value of their Bitcoin, MSTR has sold convertible bonds, convertible 42.5% above the market with only a 0.625% yield and also sold Preferred Stock with a 10% cost to MSTR, the proceeds of both buying more Bitcoin (which of course has no yield). If Bitcoin and/or MSTR do not provide enough “action” for you, there are options on MSTR and leveraged ETFs that magnify the performance of MSTR. It was standing room only for Saylor at ICR, listening raptly as he suggested you forget about real estate or commodities or traditional stocks and bonds, and put your liquid assets into MSTR, a veritable “money machine”. Our opinion of Bitcoin, MSTR & Saylor: goes “There is never ‘standing room only’ at the bottom.”
More significant to worldwide economic expectations than Bitcoin or MSTR is the upside breakout in the price of gold. This is so, especially without any new justification, and in spite of the strength in the US Dollar. The most important source of demand continues to be worldwide Central Banks, for reasons we have repeatedly described. For the moment, in this limited space, we point out that new Treasury Secretary, Scott Bessent, is a student of monetary history, and likes gold. There have been a number of hints that a “revaluation” of the gold on the US Balance Sheet could be useful. To be discussed in future columns, somewhere in the late 2020s, there could be a monetary restructuring every bit as important as the creation of the Federal Reserve in 1913, FDRs revaluation of the US gold In the 1930s and the Bretton Woods Conference in 1944. Suffice to say, gold will trade a lot higher than 3,000 per ounce.
Back in our restaurants, it has not become any easier to build traffic. It was in November ’23, that we wrote about the unusually large number of “value” offerings at a normally strong time of year. Credit card usage was up, at the same time that interest rates on those cards was over 20%, and long-term savings was back to pre-Covid lows. Almost all publicly held restaurant companies are STILL reporting YTY traffic declines, while menu prices were catching up with increases in labor , cost of goods, as well as other operating expenses. Traffic continued to be challenged throughout calendar ’24, but profit margins improved due to the aforementioned price increases, less labor pressure and fairly controlled commodity cost. As Joh Hamburger astutely pointed out last month, almost all the big stock winners in ’24 were “company store” driven, thanks to positive operating leverage.
The problem today is that almost all the challenging macro factors of late ’23 are still in place. Our thanks to (the best) economist and market strategist, David Rosenberg, who points out that “holiday shopping was saved by a debt splurge. Aggregate consumer credit expanded at a surreal 10% annual rate, the sharpest runup since June 2022. Revolving Consumer Credit was up by an annual rate of 22%. Americans are rolling over a record amount of credit card obligations, and at punishingly high rates. Also-the share of borrowers who are only making the minimum payments required is now the highest on record”.
You get the picture. With consumers still stretched, we have not heard any publicly held management teams predict materially higher traffic or bottom-line results. Among the success stories of ’24 were Chili’s with their “Three For Me”, an obvious appeal to value driven customers, and Chipotle talked about getting back to more liberal portioning, their response to a “value-sensitive” customer. Lastly, as an example of a necessarily aggressive “traffic driver” – On February 10th Starbucks’ advertised on their App a Free Tall Coffee for Loyalty Members. We’ll talk about the pros and cons of “FREE” another time.
Roger Lipton
