Paper Chase: Irish Whiskey
Retail sales at U.S. retailers rose .3% in February, which is better than economists expected. It reflects a rebound from the terrible weather experienced in the first quarter of 2014. This is important news because consumers make up two-thirds of the U.S. economy.
Five years into the bull market, worries of it ceasing would come from domestic concerns first, China second, and emerging markets third. These issues, in order, would have the greatest impact on corporate earnings. There is no reason to panic on equities unless you feel earnings will fall. Generally, the market never goes down 10% or more unless people fear an earnings recession; therefore, the focus should be on what introduces volatility into earnings. Still, most experts expect 8% growth of the S&P 500 in this improving economy.
As you know, the Paper Chase has been trying to determine whether some of the bad numbers we’ve seen have been a one off, or a decline in the economy. When looking at January, February, and March, it’s more like a three off. It’s no secret that I am a bull on growth, but the impact of the weather is clearly evident in the employment data when scrutinizing the answers to “did you have a job”?, “did you go to work?”, and “did you work part time?”. For instance, seven million people couldn’t work their part time jobs in February. After some waffling, weather clearly impacted some of the negative numbers, and I expect some snapback effect in the second quarter.
I don’t see why a bull market lasting until 2020 isn’t possible. We’ve had a soft recovery off the bottom, and positive upward movement on stocks and other risk instruments could certainly last into the next decade. As a result of quantitative easing, companies have pushed out their financial obligations into 2017 or 2018. This means over the next three to four years, few companies will go bankrupt. They borrowed money, and they don’t owe it until later. It’s extremely difficult to make a top of the cycle call unless debt is due and there is trouble financing it, or there is a collapse in earnings. If costs are not frothy and there is no debt due, neither of these things are likely.
I had a professor tell me that business cycles do not die of old age and equities do not peak until the next recession. When looking at profit margins using GDP data, stocks usually peak three to five years before an actual recession, meaning in an environment when margins are reverting to the mean and multiples are expanding, stocks are going up. Unless you think there will be a recession, equities and risk assets will be fine. Where is the imbalance in the market? Inflation is low, we aren’t overbuilt on inventories, nor have companies over-hired.
Why oh why is the ten year note at 2.7%? Well, the Fed is not raising rates for awhile. There is a lot of carry in the market and negative carry gain is a real issue. Forward yields are much higher. If you think rates are going to go higher, that better happen soon because paying the difference in financing costs is how you make your money. Quite simply, if the Fed doesn’t move rates for a long time, rates will stay low. But as we saw in 2013, when rates move, they move very quickly in a short amount of time.
What I’m Doing
I am overweight in healthcare and underweight in staples. Healthcare offers better estimate achievability, more cash flow, more cash return to shareholders, as well as cheaper stocks. Staples are expensive and missing estimates. I am for growth technology over consumer discretionary. Data analytics and the cloud are changing the way companies are operating. I also like chemicals over energy and industrials. I believe the best way to take advantage of high oil will be through chemical and not energy.
The Paper Chase has many of you going to work after college, graduate school, time off, or long stints of unemployment. Here is some sound advice from the perspective of management.
When your boss gives you an assignment, he has in mind what he wants you to do. In one word, over deliver. Do what you’re told to do plus the extra work that will make your boss smarter. To succeed, do more than just the homework assignment.
What if you’re boss is a jerk? Well, you have to first decide if you want to take on the issue. This means asking your shitty boss what it is you have to do and what it is you are doing wrong. The more candor, the better. Develop a dialogue with him or her. If not, you have to ask yourself if you are prepared to go somewhere else. Going around your boss is mostly a losing strategy.
For those of you who are your own boss (something i remind myself of every day), the recession has sucked the fun out of business. What are you doing to put fun back into business? What is your growth strategy? Do your employees ask themselves how we grow?
GM recalled 1.6 million vehicles in February due to faulty ignition switches. The issues were known as early as 2001, and the safety defect has been linked to 12 deaths and 31 accidents. There is currently a congressional and criminal probe underway.
This is a great opportunity for new GM CEO Mary Barra. She should say publicly that we (GM) really blew it. She should ask what went wrong, and get everything on the table. There should be no hidden agenda. She should tell everybody everything that’s happened, and what GM knows now. Most importantly, she should insist they fix it and make it right with their customers. She has the luxury of not owning the problem but she does own the solution, GM’s public image, and how they behave going forward. A new GM can be an open and constructive problem solver.
Tesla delivered 22,400 vehicles in 2013. The model S was the top selling vehicle compared to similarly priced cars in North America, Tesla had the world’s highest “Consumer Reports” customer satisfaction score of 99/100, and expects 55% vehicle delivery growth in 2014. Wally Pinkard has written a fantastic summary on the issues Tesla faces, specifically in New Jersey.
Tesla has to deal with the laws of the land. New jersey is the third and most recent state not to let Tesla deal without the use of car dealerships. They are apparently a great new car with great consumer ratings and a cult like following. In this case, political forces have overtaken good logic and good business. CEO Elon Musk hasn’t let anything stop him so far.
In 2013, Irish Whiskey increased it’s share of the spirit market by 17.5% ,compared with 11.6% for scotch-single malt, 6.8% for Bourbon and Tennessee Whiskey, and 1.1% for Vodka. Gin actually lost 3.8% of its market share. (I’m a Tanqueray and grapefruit juice guy). In the whiskey category, Irish Whiskey saw an increase in revenue of 20.55% compared to 18.2% for blended whiskey, 14.7% for scotch-single malt, 10.2% for Bourbon and Tennessee, 7.6% for scotch-blended, and 6.1% for Canadian. Jameson is by far an away the most popular Irish Whiskey with 1.6 million cases sold in 2012. Bushmills was second with 220,000 cases. Tullamore Dew was third with 95,000 cases, followed by John Power in fourth place with 43,000 cases.
Thanks to Mad Men, there has been a renewed interest in cocktail culture. Younger people are switching to brown spirits, and whiskey was largely forgotten until recently. While scotch is saturated in the market, sales for Irish whiskey topped 630 million in 2013. In fact, sales for Irish Whiskey have gone up more than 400% since 2002.
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