I just read a great article in the Wall Street Journal about how businesses use recessions to outdo the competition:
A classic example is how Bed Bath & Beyond eliminated Linens 'n Things, a financially weaker competitor. Linens 'n Things based its strategy on growing 100 of its stores. Bed Bath & Beyond found out which 100 they were and matched all deals and coupons. Linens 'n Things was financially weak, due to heavy debts taken on when the company went private. It went out of business last year, and Bed Bath & Beyond stopped flooding the market with coupons. Bed Bath & Beyond CEO Steve Tamares said of the episode, "We will be able to look back at this period as one which afforded us an exceptional opportunity to continue to gain market share."
New York Life, MetLife, and Ford Motor are other examples of financially strong companies that grew market share by beating weaker competitors.
The company that wrote the book on how to use recessions to beat the competition is in the Extreme Value Model Portfolio, listed on page 8 of every monthly issue. It's the biggest consumer-products company in the world. During the Great Depression, it invented the soap opera, revolutionizing radio advertising, and kept its products front and center in consumers' minds.
It's raised its dividend every year for the past 55 years and by more than 11% a year for the last 10 years. Management bonuses are based on free-cash-flow generation. It earns consistently thick margins and is one of the most innovative companies in the world. It's one of the greatest businesses in history, bar none, and its share price is dirt-cheap and trading near historical lows.
I keep a special list of companies I call World Dominators, all of which are able to garner vast resources during a recession to strengthen their franchise and steal market share from the competition. Famed investor Jeremy Grantham, who is now bearish on stocks, is bullish on this special group of high-quality businesses. To get access to Extreme Value, click here.
If you want to know why economic stimulus programs never work, economist Russ Roberts hit the nail on the head when he said, "Stimulus is like trying to raise the level of water in a pool by taking water from the deep end and pouring it into the shallow end."
I'd add that, along the way, you spill a little from the bucket, and the pool is actually less full than before. That spillage represents the wealth that is destroyed when it is seized from a private individual by government, then winds its way through a bureaucracy (which always destroys some of the loot) before it is redistributed to another private individual or business.
Given the pain they cause, I can't help characterizing economic stimulus programs as economic waterboarding, financial torture writ large, across our country and beyond its borders, shackling the invisible hand of capitalism and replacing it with the jackboots and leather gloves of our perennially corrupt government.
Last fall, the shallow end of the pool was the banking system. Now, almost a year later, nearly 100 banks have drowned and the government has sided with its friends at the mega-banks, helping them become more competitive while smaller regional institutions struggle.
As the banks moved out of the shallow end of the pool, the auto industry drifted in. The cash for clunkers program brought car buyers out of the woodwork. As of Monday morning, more than 625,000 transactions totaling more than $2.58 billion had been submitted to the government. The paperwork is such a hassle, and the government's website is so god-awful, the deadline had to be extended until noon today. The program is expected to increase third-quarter GDP by 0.3%-0.4%.
Now, car companies will have to make more cars to replenish depleted dealer inventories. Trouble is, the new cars will hit the market after the stimulus-related demand is long gone. Many people who would have bought cars later this year are now off the market, thanks to the stimulus program.
Had the stimulus not occurred, car sales would have been lower, but car companies would have made fewer new cars, and the fall car-buying season would have proceeded normally, albeit at a lower level due to the recession.
The stimulus robbed the auto industry of a necessary rebuilding period. Now, it'll have to weather a horrible fourth quarter and cut production back early next year to adjust.
For the commercial real estate (CRE) bears out there – ourselves included – here is a list of the bank holding companies with the most exposure to CRE as of March 31, 2009. Wells Fargo tops the list with more than $88 billion of CRE on its balance sheet – a 163% increase from a year ago. Bank of America and MetLife are at No. 2 and No. 3 with $59 billion and $32 billion, respectively. Both increased their CRE holdings by a small amount. Interestingly, only four of the top 30 banks actually reduced their CRE exposure from one year ago.
The Federal Trade Commission is criticizing Anheuser-Busch InBev for its latest marketing attempt – selling cans of beer donning certain universities colors, just in time for the college football season. The FTC has "grave concern" the marketing campaign will encourage underage and binge drinking on college campuses. Dozens of universities oppose the campaign and have threatened legal action against AB InBev.
You could put beer (or anything else that will get you drunk) in a moldy garbage can, and college students would still drink it. So the cans with university colors aren't going to sell more beer. As for the puritans who oppose the campaign, encouraging a college student to drink heavily is like encouraging a politician to lie. All your encouragement will be for naught because they've already maxed out their potential.
If you want to discourage heavy drinking on university campuses, here's a radical concept: require that students actually work hard to get through an American university and kick out anybody who can't keep a C average.
The world's best short seller, Jim Chanos, is now targeting Big Pharma... In a recent radio interview, Chanos said, "Healthcare is growing now at about 10 per cent per annum in the US top line, versus 3 per cent for the economy. As someone with a sharp pencil and an eye for this kind of thing, this can't last."
He added, "The US healthcare system is probably the most interesting large group of companies that are heading for major problems that we've seen in a long, long time."
Chanos' bet won't be popular with other professional money managers. As a group, they have 12.9% of their portfolio in health care – the third-largest sector behind financial stocks and technology. Warren Buffett and Bruce Berkowitz, of The Fairholme Fund, are also both big health care bulls.
New highs: Annaly (NLY), QLT (QLTI), Novavax (NVAX), Addax Petroleum (AXC.TO), International Royalty (ROY).
In the mailbag... readers securing their gold and food supplies. Share your strategies at feedback@stansberryresearch.com.
"In response to Kurt in the 8/24/09 Digest, a good source to find local farming co-ops (otherwise known as Community Supported Agriculture) is http://www.localharvest.org/csa/. Type in your area code and you'll be presented with a list of local CSAs that subscribe to LocalHarvest's service. Google on Community Supported Agriculture for more options." – Paid-up subscriber Steve Testardi
"Gentlemen, Most of us loyal readers understand that the Fed is buying up US Treasury and MBS paper and paying for it by simply adding digits on their printing press, even buying from primary brokers so that all their purchases are not right out in front of the public at the auction, but why is it not showing up on their balance sheet? Is the Fed running SIV's like the banks to keep it off balance sheet? Inquiring minds want to know!" – Paid-up subscriber John Allen
Ferris comment: Looking at the Fed balance sheet, Treasury notes and bonds are up recently and way, way up the past year.
"It was suggested precious metals be stored in a Storage Unit. I strongly disagree. Too many things could go wrong. And the goods are still behind someone else's gate and key. Not Good. Get a short section of PVC pipe, 2-inch or 3-inch suggested, the 2-inch will fit into the 3-inch I hear, if added strength is needed, and glue on end caps. Bury in a secure, simple, location, tell a few select Loved Ones. No keys, no people, no issues." – Paid-up subscriber WD
Ferris comment: I might try that. In my neighborhood, if you don't pay your storage rent, they give you five days. Then, they auction off your stuff, no exceptions.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore
August 25, 2009