It was a fairly uneventful weekend.
Except for one thing… China began to re-open and that additional anticipated demand sent Oil (/CL) prices soaring from Friday's $115 to just under $120 this morning. That's putting retail Gasoline (/RB) prices over $5 per gallon in almost all of the country as we're now over $4 wholesale and, at the same time, the Dollar has popped back up from 101.30 to 102 – and that's puttting pressure on both indexes and commodities (thank Goodness in the case of Oil).
Oil may pop over $120 today as EU leaders are aligning to back an embargo of Russian Oil. This would be the 6th set of sanctions against Russia but the EU only consumes 2.3Mbd of the 7.8Mbd Russia exports and, oil being what it is – it's likely to be bought somewhere else – so it's hard to say how effective this will ultimately be. In theory, it will force Russia to sell oil in Asia, where oil is $34 cheaper per barrel and that will cost them $10Bn a year in lost revenues.
The definite effect is that it's going to make oil much more expensive in Europe, where Brent Crude is already $123 per barrel. The bottom line is inflation is still out of control and the ECB is planning rate hikes and Biden is meeting with Powell this afternoon to see if there isn't more we could be doing in the US.
Over in Europe, German Inflation is flying, now at 8.7%, which is the most since 1963 in a country that deeply fears inflation (one of the things that led to WWII):
“Inflation is an enormous economic risk,” German Finance Minister Christian Lindner told a news conference in Berlin. “We must fight it so that no economic crisis results and a spiral takes hold in which inflation feeds off itself.”
Looks a bit like it's feeding off itself already, doesn't it?
I was in Miami this weekend and there were a lot of restaurants that are closing 1 day a week to manage their staffing shortages so we're not out of the woods in the US either. 5.260 flights were cancelled this weekend due to weather and staffing issues. Nursing Homes (another Florida issue) are also facing extreme staffing shortages and Trucking Companies are offering $30,000 bonuses to new drivers, the Army is offering $50,000 to new recruits and hotels aren't cleaning your room every day anymore. So don't think for a second we are near the end of this – still early innings, actually.
Staffing shortages and the mental health of the overworked staff were the top two concerns for Patient Health in 2022 in a study released by the Emergency Care Research Institute. We talk a lot about hedging stocks here at PSW but what about hedging other aspects of your life? Do you know which is the best hospital in your area to go to in the case of an emergency? This may be a good time to do a little research – just in case…
We have a busy, busy data week ahead with our 4 remaining Fed Speakers all bunched up on Wednesday and Thursday around the Beige Book – which may be showing signs of Stagflation at this point. Case-Shiller, Chicago PMI, the Dallas Fed and Consumer Confidence this morning with PMI & ISM tomorrow with the Beige Book in the afternoon followed by Productivity and Factory Orders on Thursday and PMI and ISM Services on Friday along with the Big Kahuna – the Non-Farm Payroll Report.
Still plenty of Earnings Reports coming across the wire but none that are likely to move the markets – though there are a few we have bets on:
CAKE/Swamp – We've gone over them in detail before – I like them a lot down here. $32.66 is only $1.8Bn and they make $150M a year so it's just stupidly low. In 2018 they did $2.5Bn and last year, despite the pandemic, $2.9Bn and they made $72M but lost $253M in 2020. This year, they expect 10% growth to $3.3Bn and that should be normal growth going forward. Danger of another pandemic of course but only $283M in debt so not even a serious consideration and I like them because they have 6 other restaurant concepts in experimental phases so they are always looking for ways to grow while the cash-cow Cheesecake Factory keeps growing.
Hard to comp them for growth but there are 208 CkFs in US, RUTH has 150 Ruth Chris but I think it's no comparison with $500M in sales and $50M in profits so CAKE is way more profitable (and busy) per location. I'd say it could track well with M's and there's 800 of those (and 875 Olive Gardens) so a good 50-100% growth potential in US and Canada and then global potential. At barely over 10x though, they are undervalued now – even without the growth.
Getting back to DRI (Olive Garden/LongHorn), they are doing $9.5Bn and profiting 10% and getting a $15.7Bn valuation (16x) with arguably less growth potential from here.
In the LTP, we haven't touched CAKE since we went in in October. We were down net $20,500 in a $200,000 allocation block so certainly nothing to panic over and we rolled our short 2024 $35 to the $25s for $3 ($15,000), which didn't change the net loss but upped the net cash from $2,375 to $17,375 but now it's a $25/55 spread that could pay out $150,000 – so we don't mind!
Phil, just planted 16 oak trees grown from acorns collected during lockdown. Very literally planting trees!