THE PAULIE SPECIAL

Blue plate specials don't always get announced around noontime at those big warehouse outlets.

No sir. Some times they are offered from the bowels of media giants like the New York Times and show up on really big stages like Japan. Specials are supposed to be just that--special. 

And here's one we think is especially special. So much so we called it the Paulie Special.

You'll notice after a close reading the advice attached to the Paulie Special makes perfect sense. And we're sure you can't wait until it's playing at venue near you.

OMG Japan's Prime Minister is Acting on Advice He Has Received from Paul Krugman

Paulie writes at NYT:

Shinzo abe is dong the right thing. seeking to delay the next rise in consumption;
that is good economic policy, and also a fairly new experience for me--I met with
a national leader, made a case for the right policy, and he's doing it!

Of course, there is noting wrong with attempting to limit a tax burden. It should be
part of an overall program to shrink government involvement in an economy. But Paulie, 
no doubt, wants government spending to expand, with the government gong into debt to
fund the spending

How serious should Abe really take Paulie? Paulie's view on rice inflation in Japan
should be a clue. Paulie writes in the same NYT post:

But Japan isn;t suffering from stagflation; neither is Europe. They are, instead, suffering
from low inflation or deflation.How serious should Abe really take Paulie? Paulie's view
on price inflation in Japan should be a clue.

Low inflation/deflation?

Here are the latest CPI numbers out of Japan:
   

CPI JP recent months

period	inflation
september 2014	3.280 %
august 2014	3.290 %
july 2014	3.400 %
june 2014	3.607 %
may 2014	3.707 %
april 2014	3.410 %
march 2014	1.610 %
february 2014	1.512 %
january 2014	1.410 %
december 2013	1.611 %

 

 http://www.economicpolicyjournal.com/2014/11/omg-japans-prime-minister-is-acting-on.html

 

INTERESTING CHART

Here's one of those why worry charts from http://www.crossingwallstreet.com/archives/2014/11/equity-returns-and-the-yield-curve.html, one of the better websites we visit from time to time.

In the interest of fair disclosure, we have no connection to it nor have we ever spoken with its proprietor. But it's a site in our humble opinion often worth the read.

There's no such thing as a perfect indicator. As noted below this one flashed an early bullish signal months too early in 2008. So as always continue doing your homework.

Equity Returns and the Yield Curve

I did some research and found this fascinating stat. When the spread between the 90-day and 10-year Treasury yield is 121 basis points or more, the stock market does much better than when it’s 120 basis points or less.

Here’s how it works. Since 1962, the S&P 500 has averaged a 1.42% annualized gain when the yield spread is 120 points or less (that doesn’t include dividends). But it’s averaged 10.47% per year when the spread is 121 basis points or more. That’s a big difference.
Over the last 53 years, the spread has been 120 basis points or less about 41% of the time, and it’s been 121 basis points or more the other 59% of the time.
The spread has been over 121 points continuously for nearly seven straight years. In fact, the indicator’s only big miss came in early 2008 when it flashed bullish several months too early.
The yield spread is currently 230 basis points. If the 10-year yield stays at this level, then, according to our indicator, we don’t have to start worrying about stocks until the 90-day yield gets over 1%. It’s currently at 0.04%.
Here’s the spread over the last 30 years (the black line is at 120 basis points):

ECONOMIC HOUSE PAINTERS

Nearly everyone today is talking deflation, deflation, deflation.

Among the savvy that alone ought to be a sign.

At some point, however, deflation is like that card game Texas Hold 'Em, it's all in the market.

So to the Martin Wolfs of the economic world, spare us, sir, your crybaby columns calling for more  Keynesian nonsense.

Wolf's latest lament in the Financial Times, "The curse of weak global demand," is beginning to sound a lot like the late Freddy Fender's "Before the next teardrop falls." Wolf and his fellow Keynesian bellyachers keep urging Mario The Dragster Draghi and his fellow band of bankers to do something before the next teardrop hits the ECB balance sheet.

For Wolf and his minions there are two culprits--austerity and what Wolf apparently with a straight keyboard typed: chronic demand deficiency syndrome. That's correct. You're reading that right. Now let's all hear it for CDDS.

Anyone who doesn't recognize this as stand-up comedy material doesn't understand stand-up comedy. Where is Monty Python when he's needed? If we aren't careful we will all have something to really worry about like finding CDDS right up there with STD, PTSD, ADHD and 20 million other acronyms.

"Extreme policy has been ineffective," Wolf claims, "because economies suffer from such deep seated ailments." Conspicuously missing from Wolf's list of deep seated ailments is bloated global bureaucracies and their historical obsession with economic scatology.

In all of Wolf's wailing there's scant mention of just letting the market do what markets always do when unfettered by government meddling and nonsense--let those who ought to disappear disappear. It's called repairing the structure, not just slapping a fresh coat of paint on the exterior until the next time.

Like many others of similar bent, Wolf clearly missed his life's calling.

TAKE A TIP FROM THE TIPS

Any time government comes out with a program with the word affordable in the title you know you're about to get ripped.

If you buy an ounce of gold--something MSM is telling you not to do today because inflation and growth are DOA--there's a bid and ask, maybe even a dealer mark-up, in other words, a premium.

This is not about gold. It's about premiums. Usually, the greater the demand for something the greater the premium. Unless you're a gold bug, so goes MSM rhetoric, there's not much demand for having gold in your portfolio.

And following the same linear style of thinking, nor is their much demand for Tips.

In today's Financial Times," Long-term gauge for US inflation slides," the lead paragraph states:
 Long-term market measures of US inflation touched a three-year low yesterday with weaker oil prices and a stronger dollar dulling investor-appetite for owning inflation insurance.  

The article continues:

 The 10-year US  break-even inflation rate currenlty reflects an expectation that consumer prices will rise an average 1.86 per cent each year for the next decade. That is the lowest level since October 2011 and below the Federal Reserve's target of at least 2 per cent. 

During the past decade the US break-even rate, which reflects the difference between nominal Treasury and Treasury inflation protected securities (Tips), has tended to range between 2 and 2.5 per cent.

In turn the allure of US Tips, which help insulate their holders from the threat of rising consumer prices, has been eroded by the lack of inflation pressure.

To further buttress the point the article cites last week's University of Michigan's consumer sentiment showing "a drop in long-term US  inflation expectations from 2.8 to 2.6 per cent, the lowest level since 2009." 

That came as the Fed's preferred measure of inflation was up to an annualized rate of 1.4 per cent in September.

You can  bet the Fed's preferred rate is not necessarily yours or mine. All of this in the face of a new government offering this week of $13B 10-year TIPS. In short, these Tips essentially have no premium.  

So here's a question. Do you want to buy 10-years of inflation protection--notwithstanding the possibility of some opportunity loss--when there's zero premium or when the premium is much higher because the prospect of inflation is perceived to be much higher?

The fear of opportunity loss is greatly exaggerated. The premium you spend to protect your home or automobile could likewise be invested somewhere else and perhaps bring in a better return. 

But that's not why you invested it. And you never get that premium back unless the unexpected and unwanted happens.

As most avid American college football fans know, you can't predict what's going to happen on any autumn less-than-a-week-away Saturday let alone 10 seasons down the road.   

Who among us doesn't like cheaper insurance. So take a tip from the TIPS.

CHECK YOUR INSULATION

Insulation comes in many forms.

A friend several years ago told me as a poor kid growing up in the upper Midwest on those frigid, frozen tundra one mile morning walks to school he and his buddies use to put either newspaper or cardboard inside their coats to insulate themselves against the bitter cold.

Insulation is one of the things investors in the U.S. markets are hoping will keep the U.S. economy from joining the deflation parade many pundits worry is staring much of the rest of the globe squarely in the face.

Part of that hope emanates from Wall Street over the recent drop in oil prices. Nearly everyone  knows by now that cheaper energy prices puts more money aflame in would-be consumer pockets. Tied thereto is the belief that lower oil prices foreshadow weaker global demand for hydrocarbons in general--that is, slower growth.

And since the savings rate of individuals has been reportedly ramped up since the big recession, it's the Street's hope this will make consumers less wary and more willing to part with some of their savings at the pump.

Some equity gurus take a different tack, claiming that it's not about weaker demand at all but as the Financial Times recently noted, "a positive supply-side shock." This is another way of saying investors are ignoring any macro risk for the nonce.

Macro risk so thought many hedge fund gurus was supposed to be the theme of the market in 2014. It didn't happen. Whether what didn't happen in 2014 will arrive a year later in 2015 is anyone's guess. At this point a lot of money is riding on the U.S. economy being able to insulate itself from all the deflation doom and gloom.

WHERE TO NOW?

 
Question: Where do you go when you have nowhere else to go?

Answer: The stock market.

That's the view of billionaire investor Wilbur Ross

Global financial markets are living on borrowed time with geopolitical crises and deflationary risks still a concern, private-equity billionaire Wilbur Ross told CNBC.

"I think [markets] are living on borrowed time because investors have no alternatives," the chairman and chief executive of private equity firm WL Ross & Co told CNBC Europe's "Squawk Box" on Monday.

"Everyone's scared to death of long-term fixed income because we know rates will be going up, short-term fixed income doesn't give you any yield, commodities are going no place except down [so] where else can you put money unless you want to buy a $100 million [Alberto] Giacometti sculpture," he said.

Among the concerns Ross expressed were geopolitical.

Ross told CNBC earlier in the year that his company had been selling six times as much as it had been buying on the back of attractive stock valuations in the U.S. "We have been a seller on balance, not because we think a terrible crash is coming but we need to sell opportunistically because we tend to have relatively large stakes in relatively thin securities so we have to sell when the markets are very strong."

Read More I'm selling 6 times more than buying: Wilbur Ross

However, he added that geopolitical risks could still derail the apparent market recovery seen of late. "Markets tend to go farther in both directions than one might anticipate. I do think the big worries are geopolitical worries, that's one of the things we've been very concerned with all year and I've some concern about deflation becoming anew problem."

http://www.cnbc.com/id/102190203

GO FIGURE!

Go figure! is a term nearly everyone is familiar with, but buried in there is an irony or paradox about humanness.

That's right, human behavior. Let's look at an example but first a little rewind back to the recent Scottish in-or-out referendum. A lot of voters there wanted to break away from Britain. 

It was pretty simple. These voters believed they were getting less of less without much input or representation. Parliament was just a place off somewhere running the old out-of-sight-out-of-mind scheme.

When it became clear that the issue was going to come down to the wire, many in the UK, including most politicians, grew increasingly concerned and started rolling out the old scaremonger tactics.

It was clearly an issue about coffers, yours or mine. And that's humanness.

Now British Prime Minister David Cameron apparently has his own in-or-out issue reportedly set to be on the 2017 election ballot if he gets re-elected. 

The beef with Cameron and many British among other things is supposedly about immigration. We don't know about you but it sounds to us likes there's a Go figure! in there somewhere.

Then there's the recent bill those Brussels bureaucrats laid on the good prime minister with the not-so-implied threat of pay up on time or get fined.

Britain's crime apparently was structurally and successfully revivifying its economy after the big recession hit. Buried in here too is the term austerity, the bane of every EU bureaucrat. 

As one UK wag we spoke to put it: "Britain should just tell the EU to take their volumes of rules and regulations and that fine and lump it. 

And conclude the message with a capital: GO FIGURE!"

Meanwhile, here's an interesting post from former UK Prime Minister John Major's recent talk in Germany.

One of the key points is the "interference in day to day life" of UK citizens and that, my thirty friends, brings us once again full circle to a sovereignty issue, the bane of all globalists.

http://globaleconomicanalysis.blogspot.com/2014/11/john-major-sees-50-chance-uk-leaves-eu.html

Here's an update on Cameron from an editorial he gave the The Guardian over the weekend.

David Cameron has issued a stark message that “red warning lights are flashing on the dashboard of the global economy” in the same way as when the financial crash brought the world to its knees six years ago.

Writing in the Guardian at the close of the G20 summit in Brisbane, Cameron says there is now “a dangerous backdrop of instability and uncertainty” that presents a real risk to the UK recovery, adding that the eurozone slowdown is already having an impact on British exports and manufacturing.

http://www.theguardian.com/commentisfree/2014/nov/16/red-lights-global-economy-david-cameron

SNACK FOODS ANYONE?

Snack foods by any other name may have a negative ring to them, but like their air people love their snack foods, healthy or not.

Mondelez, the Kraft spin off of a while back is the world's largest snack food company with Pepsi Cola bringing up the rear. We have written about MDLZ before.

With the recent strength in the U.S. dollar MDLZ faces some headwinds beyond just the expected global slowdown. Nor on a P/E basis is the stock particularly cheap.

But on any pullback we intend to add to our positions particularly in our retirement accounts for the long term because we think there will be dividend and principle growth over the long haul. 

We don't want to re-invent the wheel, so here are two of our earlier posts on Cafe Financialspuds along with one not ours on the site Seeking Alpha that does an excellent job of pointing out MDLZ's prospects given one's entry point and one's investment horizon.

That the company's had its trouble cracking a strong foothold in Asia makes the latest news about it 80% partnership with the big Vietnam snack food business a good move

We owned shares of Kraft and we first wrote about MDLZ's prospects before the contemplated spin off. We continue to own shares. As always, however, one should do his or her own homework.

Sunday, March 10, 2013

PLAYING THE BRICS

Looking for a safer way to play the BRIC world?

You might want to look at last year's Kraft spin off, Mondelez, MDLZ. 

As a recent Barron's article notes the stock, trading at $28 and change, is essentially a snack food company. Just a few of its products include Cadbury, Ritz Crackers, Dentyne, Oreo Cookies and Wheat Thins. It has many others like Philadelphia cream cheese and Dentyne.

Buffett can have his cherry coke. Offhand we don't know of a single, solitary interplanetary soul who doesn't enjoy an Oreo and a cold glass of milk?

Right off the bat you need to know we own the stock and have been slowly adding to it since acquiring shares in the spin off last year. 

Understand in our view this is not a trader but one of those God-awful, Warren Buffett-like buy and holders with a small dividend and a lot of growth potential. The current p/e, around 18, is a little high, but isn't that what expected growth is all about?

Take a look at some of its competitors, all growing slower at much higher P/E ratios. And could this be a decent currency play if the dollar tanks?

According to Barron's, with revenue in 2012 of $35 billion, 75% of its sales last year came from three rapid growing snack food categories, chocolate, candy, cookies and crackers.

 As one analyst puts it, snack foods are lucrative with good profit margins and little competition from the ever-worrisome private-label firms that continue to chew away at the margins in the grocery business.

In case you're not aware Pepsi's another snack food business, more so than many realize. Here's a little snack to consider with your Oreos and milk. Of MDLZ's 29 well-known brands, nine generate more than $1 billion in annual sales. And, yes, Oreos is one of them.

Now about those BRIC countries, Brazil, Russia, India, China and South Africa. MDLZ gets about 30% of its annual sales there. When you consider the prospects for annual growth in developing versus developed countries, it's a no-contester.  And remember at least for the nonce snack foods are cheaper and have better profit margins than cars.

A possible unforeseen risk is the food police. We just toss that in so you can't say no one did.

One other quick point. Though we have not heard anything, this is just one of those wild, silly thoughts we get every once in a two-thirds moon while walking the dog, Taylor. 

You want to remember the MAINE. But recall too the HEINZ.

And again in June.

Thursday, June 27, 2013

NELSON PELTZ

Nelson Peltz is a well-known billionaire investor.
Recently, his firm, Trian Fund Management, took a huge position in Mondelez, a company we've written about before. Mondelez (MDLZ),  the big snack food company Peltz was at least partly responsible for getting Kraft to spin off, is as we've noted a decent way to play the BRICS.

But the story gets more intriguing. Pepsi is also a giant in the snack food business, a company Peltz is also quite active in, building his ownership to 12 million shares, according to the latest issue of Fortune. Around the same time Peltz doubled his holdings in MDLZ.

Put these two behemoths together, something many speculate Peltz wants to do, and you're talking huge. You're also talking some money being made. Activist Peltz held more than 5% of Heinz stock when that deal went down at a nice premium.
------

Seeking Alpha article.

Summary

• Increasing health awareness, competition, and the current economic situation in the developed world have all played important roles in weakening the company’s top line.
• Mondelez will acquire an 80 percent stake in Kinh Do Corporation's category-leading snack business in Vietnam.
• Vietnam’s industry and demographic trends highly favour Mondelez’s plans for advancement.

Mondelez (NASDAQ:MDLZ), the king of quite a few iconic biscuit and chocolate brands, recently reported its earnings for the third quarter of FY2014. Besides reporting a better than expected bottom line performance, the company has made some turning point announcements that greatly impact its future outlook.

 The company operates its business through five reportable segments that are indicated in the pie chart on the left along with the attribution of each geographical segment to the company's top line. The pie chart on the right indicates the company's revenue distribution as per consumer sector.

Source: Third Quarter Earnings

Latest Quarterly Earnings Overview

During the third quarter of FY2014, the company's revenues have shown a weaker performance primarily for forex reasons, which have hit all the multinational companies. The top line fell approximately 2% YoY to $8.3 billion in the recently ended quarter compared to $8.5 billion reported in the same period last year. Revenues remained relatively flat in Latin America, Asia Pacific, and North America but plunged 6% YoY in EEMEA and by 2% in Europe. Analysts were expecting the top line to hit the $8.38 billion mark.

Note that although the total revenues plunged, the organic aggregate revenues have been positive, especially in the emerging markets. Mondelez's total organic revenues increased approximately 3% YoY with the growth primarily owed to the emerging markets whose sales grew 9% YoY compared to the 1.3% organic revenue decline in the developed markets. However, one point that must be noted is the fact that the organic revenue growth is accredited to the high margin pricing instead of volumetric growth.

The company's bottom line plunged to $899 million compared to $1.01 billion reported in the third quarter of FY2013. In per share terms, earnings were 53 cents per share in the recently ended quarter down approximately 5% YoY. However, the adjusted earnings improved 25% YoY from 40 cents per share last year to 50 cents per share in the recently ended quarter compared with analysts' expectations of 39 cents per share. The per share earnings improvement is largely owed to the company's aggressive share buyback program.

Kinh Do Acquisition

Looking through the various consumer sectors the company operates it is obvious that food companies are facing challenges in the developed markets. Increasing health awareness, competition and economic situations in the developed world have all played important roles in weakening the company's top line. Previously, the company strengthened its position in the domestic market by acquiring Cadbury and LU biscuits. However, going forward the company sees major growth potential in the emerging markets and has the great opportunity to establish a strong foothold therein.

Mondelez has recently made an announcement that it would "acquire an 80 percent stake in Kinh Do Corporation's category-leading snacks business in Vietnam, subject to the approval of Kinh Do Corporation's shareholders." If the deal goes through the proposed transaction of an 80% ownership stake in exchange for $370 million would be completed by the end of the second quarter of 2015 and would give Mondelez the opportunity to eventually take 100% of the business 12 months after the deal is completed.

Note that the company penetrated the Vietnamese market not too long ago and realized that the country's industry and consumer demographic profile offered tremendous opportunity to grow its top and bottom lines. This will enable Mondelez to combat the weaker industry prospects in the developed markets. Almost 60% of Vietnam's 90 million citizens are under the age of 30 and the middle class is also growing. Both of these trends mean that the snack business in the country has the potential to grow. However, Mondelez has not yet been able to generate profits from the region due to the absence of its own established distribution channels. In addition to that, Kinh Do's presence in the country largely overshadowed the company's Vietnamese operations up until now; therefore, the potential acquisition creates a great opportunity for Mondelez to stretch its wings in the new high growth market with Kinh Do's established distribution network.

Kinh Do is a great company that generates $175 million in annual revenues, has increasing Cash From Operations, and a declining level of debt. The company presently maintains a negligible debt to equity ratio while its revenues and profits in 2014 are expected to increase by 13% YoY and 6.6% YoY respectively. Mondelez's APAC operations account for 14% of its top line as per the latest earnings report. The acquisition would not only immediately improve the region's revenues but future growth is a given considering the industry characteristics.

Shareholder Returns

Mondelez has recently upped its full year earnings forecast from the previous EPS estimate of $1.73-1.78 to $1.82-1.87 per share. In order to boost its bottom line in the wake of weaker domestic markets, the company increased product prices which led to a 60 basis points improvement in the gross profit margin. The company also cut costs which helped it to improve its bottom line in spite of the weakening top line.

The improvement in per share earnings were also attributed to the company's efforts to reduce the diluted average share count as indicated in the figure shown below.

Source: Third Quarter Earnings

Concluding Remarks

Although the global food industry is expected to remain soft for the foreseeable future, the company's acquisition of Kinh Do will help it to counter the slow growth of the developed markets using the positive industry trends in the developing Vietnamese market. The company has already been trying to boost its bottom line through cost cutting, price increases, and share buybacks and the acquisition will help to bolster the bottom line by adding to its top line growth.

Although the comparison of the company's P/E of 35.3 to the industry P/E of20.2 deems the stock
overvalued in the market, the comparison of Mondelez's TTM P/E ratio with its forward P/E ratio of 19.7 makes the stock an affable candidate for investment.

http://seekingalpha.com/article/2685955-mondelez-international-aiming-for-growth?