Search Results for: "balance sheet"

Date The Plain Girl With The Good Job

October 10, 2012

You folks are never going to learn, are you? By “you folks” we mean the investing public, never ones to be dissuaded by a tight sweater or hair extensions. (Or for a corresponding example, an Xtreme Couture shirt and a neck tattoo.)

Our latest entrant in the irrational exuberance category, Chipotle Mexican Grill. The first few chapters of Chipotle history were a classic success story worth emulating. The company opened its 1^st store in 1993, and opened its 2^nd

2 years later,
using the cash flow from the 1^st.

Chipotle didn’t expand for the sake of expanding. It didn’t develop an appetite for franchise fees, saturating the market and abandoning quality control. It grew modestly, as you do.

There’s a common misconception that Chipotle originated as a brand of McDonald’s. Not quite. McDonald’s became a minority investor 3 years after that 2^nd store opened, and within another 3 became Chipotle’s largest shareholder. With the resources of one of America’s healthiest corporations behind it, only then did Chipotle start growing exponentially and forever casting off its humble Denver origins.

And then, the initial public offering. January 2006, $42.40. Which is about where CMG stayed for the 1^st year.

Look at the chart, which comprises CMG stock’s entire history. Notice anything unusual about it? Not that we encourage technical analysis over fundamental analysis here, but again, regard the chart.

It’s a fractal! The movement from inception through 2007 is a smaller version of the movement from the start of 2009 through April of this year (when the stock hit its zenith of $442.40.) We’ve already been on this ride before, the one where Chipotle loses ¾ of its value. This time around, the stock has lost only 35% of its value.

That includes a 7% drop in 5 minutes. The company has the Department of Labor assailing it from one side (for hiring illegals, or more precisely for hiring illegals while not being a union shop or a proud political contributor.) On the other side are venture capitalists selling off their institutional holdings. Unless you were prescient enough to have loaded up on Chipotle when it bottomed out the first time, which you weren’t, you’re probably looking to bail out.

Chipotle trades at 34 times earnings. It’s profitable, but not crazily so. What do we have here, fundamentally?

A company that provides what’s on one hand a necessity (sustenance), but on the other, a luxury. (We’re in a protracted recession, remember? You can make your own burritos, perhaps in less time than it takes to wait for one if your local Chipotle has an exceptionally busy lunch hour.)
A company with competitors that make an almost indistinguishable and indistinguishably priced product. (Qdoba, Moe’s Southwest Grill.)
The market leader, which isn’t necessarily a good thing:

Chipotle operates 1310 stores throughout the United States and Canada (and another half dozen in the United Kingdom and France.) Revenue is about $4700 per store, per day. Qdoba has half as many locations, Moe’s half of that, and Baja Fresh slightly fewer than that. The subject of our post can only sustain so much more growth.

Are there any barriers to entry? If you’ve got a) the phone number of a grocery wholesaler and b) a kitchen, you’re a potential Chipotle competitor.

Chipotle is a $9 billion company if you measure by market capitalization, what its stock is worth. It’s a $1 billion company if you measure by stockholder equity, the difference between accounting assets and liabilities. To us, that’s a company that’s overvalued by something approaching a factor of 9.

The food is better than Taco Bell’s. That’s not the point. This isn’t about winning consumer accolades. It’s about showing profitability and the potential for growth. Goofing on the food at McDonald’s is the go-to material for hack comedians everywhere, but In-N-Out didn’t turn a $5½ billion profit with a 20% margin last year.

Ask your average CMG stockholder which he thinks the stock will do first: hit $430 (a 50% jump), or $191.16 (a 50% reduction.) It’s obvious, isn’t it? We’re now at the point where mathematical inevitability will trump all the investor confidence in the world.

Believe it or not, we don’t follow the movements of 5000+ publicly traded securities every single day. We don’t even follow market sectors all that closely. But a $400 price tag for a seemingly unremarkable stock got our attention. Was that merely a function of the IPO, the company just originally deciding to have divided itself into a small number of shares in the first place? No. Did Chipotle figure out a way to dramatically reduce costs? (Unless you count hiring illegals, no. And the company’s habit of rounding checks to the nearest nickel doesn’t quite count as “dramatic”.)

Have you bought lunch at McKesson recently? Has Cardinal Health ever caught your eye with a wacky promotional and/or advertising campaign? The questions are rhetorical, but the balance sheets are hearteningly real. If you’re going to buy stocks, research like crazy and don’t lose sight of the goal – making money, rather than patronizing businesses you have an emotional affinity for. And if you have no clue how to get started, don’t just buy our book, but read the free e-book that accompanies it if you buy it on our site.

Filed Under: Bad Examples, Finance, Investments Tagged With: chipotle

We Learn Nothing

January 13, 2012

We’re going to need more chairs

Not that many years ago, real estate was regarded as a safe investment. Now it’s the butt of jokes. What happened?

Fannie Mae (formerly the Federal National Mortgage Association) is one of the government-sponsored enterprises entrusted with making it easier for people to afford homes. Its sibling, Freddie Mac (né Federal Home Loan Mortgage Corporation), is another. A cousin, Ginnie Mae (Government National Mortgage Association) does pretty much the same thing, the big difference being that Ginnie Mae doesn’t pretend to be a private company.

One-paragraph summary:

You borrow money from ABC Bank to buy a house. Now you have a house, and ABC has your promise that you’ll pay them, say, $250,000 (with interest) over the next 30 years.

(On second thought, there’s no way in hell we can do this in one paragraph.)

That promise, from ABC’s perspective, is an asset. Of course it is, it’s money coming in. An annuity, if you will. ABC can then sell that asset to a secondary lender (ABC is the primary lender, duh) such as Fannie Mae.

ABC now has cash from Fannie Mae, cash that ABC can loan out. Loaning out money is the very purpose for a bank’s existence, thus ABC is happy with this situation. If ABC loans that money out to someone else for a mortgage, then if all goes according to plan, now you and that other person will own houses, instead of just you.

Fannie Mae was founded by the federal government in the 1930s, under the principle that having as many people as possible owning houses (and, by extension, owing banks money) was a goal worth pursuing. The logic went that with more liquidity – i.e., more money to be loaned out – not only would more people be able to afford homes, but mortgage interest rates should lower, too. A self-perpetuating cycle of easy loans for everyone!

I don’t understand what Fannie Mae is getting out of this. Wouldn’t they have to pay a premium to ABC for the transaction to be worth ABC’s while?

Yes. Fannie Mae pays the bank a ¼% servicing fee for the life of the loan.

Oh, I see. So Fannie Mae loses money on every loan. Sounds like a great way to do business.

Fannie Mae gets to borrow from the U.S. Treasury at extremely favorable rates. Currently ¾%. So with the average 30-year mortgage going for about 3.96%, Fannie Mae comes out way ahead.

So it’s the U.S. Treasury that’s losing money on every loan.

Yes! Isn’t “capitalism” great?

Now, Fannie Mae doesn’t just hold onto that money. It assembles your $250,000, your neighbor’s $281,384.34, and several other mortgagors’ loans into a multimillion-dollar mortgage-backed security. Then it sells that mortgage-backed security to an underwriter. The underwriter pays a higher interest rate to Fannie Mae than the ¾% at which Fannie Mae borrows from the U.S. Treasury, so Fannie Mae is happy. The underwriter is happy, because it has cash on hand (again, to loan out) and is paying a fairly favorable interest rate. But that rate is artificially low, because it’s based on the artificially low rate that Fannie Mae borrows from the U.S. Treasury at.

Isn’t this creating money out of thin air?

It’s creating “liquidity” out of thin air, which is almost the same thing.

With the creation of Fannie Mae and its relatives, the federal government effectively lowered the requirements for a prospective homeowner to get a mortgage. To the point where people who weren’t yet ready to own houses were owning houses. Some of whom were never going to be able to pay their mortgages back, and who got foreclosed upon.

Well, couldn’t lenders just charge those people sufficiently high interest rates that it’d be worth the increased risk to lend to them?

Of course not, this is America.

In the ‘90s, the government ordered Fannie Mae to keep a minimum percentage of its loans in mortgages for “low- and moderate-income” borrowers. By 2007, fully 55% of Fannie Mae’s loan originations were with such borrowers. The government then prohibited Fannie Mae – which is to say, the primary lenders who sold loans to Fannie Mae – from charging “predatory” rates.

So lenders were left with two choices: continue doing business with Fannie Mae, and risk losing money on bad clients; or don’t do business with Fannie Mae, and set their own high rates for borrowers with poor credit histories who didn’t deserve to borrow money at prime rates (the infamous “subprime market”.)

If lenders went with option B, they could create their own mortgage-backed securities, with higher interest rates and higher volatility. Those privately fostered mortgage-backed securities then hit the market, at which point people stopped buying Fannie Mae’s mortgage-backed securities (at their comparatively low interest rates.)

So Fannie Mae started offering higher, more competitive interest rates. The free market at work, right?

Sure, except Fannie Mae and Freddie Mac only pretend to be private corporations with stockholders and everything. The federal government goes to great lengths to explain that Fannie and Freddie are not branches of itself. Functionaries can quote you the 1968 act that led to Fannie Mae being named an “independent” company. In reality, the government wanted to remove Fannie Mae’s obscene levels of debt off the national balance sheet (cf. Abraham Lincoln, a tail ≠ a leg). Investors and customers alike continue to treat Fannie Mae as a branch of the government, with an implicit government guarantee if not an explicit one. Put it this way: if your elected representatives committed billions of dollars of your tax money to AIG, General Motors and Chrysler, they’ll do it for Fannie and Freddie. Again.

Which would you rather invest in, assuming each had the same credit rating: private or Fannie Mae mortgage-backed securities?

The latter offered returns similar to the former, only with that implicit guarantee. Therefore people bought more of them. To create more mortgage-backed securities, Fannie Mae made more and more low-interest, sketchily underwritten loans. A private bank like Lehman Brothers can die a quick death and leave the remaining banks healthier. But there’s no concept of culling the herd when it comes to Fannie Mae.

(There is nothing government can’t ruin. Vote Ron Paul.)

Meanwhile, because of the low mortgage rates Fannie Mae was responsible for spawning in the first place, millions more people bought houses than otherwise would have. Too many people chasing too few houses means prices rose. A “bubble”, if you will. Then borrowers started defaulting, and lenders realized that they didn’t have enough collateral to cover debts.

When there’s downward pressure on primary mortgage loans, and upward pressure on secondary mortgage loans, something has to give. Add to that the underqualified people who couldn’t make their mortgage payments, and thus got foreclosed on, and the result was even more houses sitting empty. By 2008:

Fannie Mae and Freddie Mac either owned or guaranteed half the residential mortgages in the country.
As “independent businesses”, “free of governmental control”, and publicly traded, their stocks began to drop. In the case of Fannie Mae, 99.66%:

It’s almost impossible to lose a higher percentage than that, yet Freddie Mac managed:

As investments, Fannie Mae and Freddie Mac were effectively worthless.
The Secretary of the Treasury, operating under the orders of his boss, lied through his teeth and told the public that Fannie Mae and Freddie Mac were financially sound. No one who’d examined the issue could possibly believe this, but the public at large might have.
Someone owned Fannie Mae’s and Freddie Mac’s mortgage-backed securities. Actually, lots of people. Foreign governments, retirees’ pension funds, etc. The argument went that if Fannie Mae and Freddie Mac were officially deemed worthless, disaster would occur. As if requiring half a trillion dollars from American taxpayers didn’t qualify as a disaster.

So the federal government did exactly that, putting you on the hook for every horrible decision made by entities that created no value in the first place, and distorted the market by their very existence. It would have been less damaging to have simply cut a five-digit check to each family that wanted a house and didn’t have the money for it.

Fannie Mae and Freddie Mac aren’t subject to the same capital and diversification requirements that private banks are. Nor do Fannie and Freddie ever have to worry about having their loan portfolios reviewed by regulators, nor rely on those same regulators to give them a safety and soundness rating.

Today, Fannie and Freddie continue to have a hand in most residential mortgages. They still lose staggering amounts of money – $14 billion and $22 billion last year, respectively. And as we’ve seen, their stocks now trade on the over-the-counter bulletin board, the Canadian Football League of securities trading.

Fannie Mae’s chairman made $6 million (of your money) last year, Freddie Mac’s $4 million. Yet none of those Occupy Wall Street vermin protested outside their respective headquarters. Merry Freaking Christmas.

This article is featured in:

**Top Personal Finance Posts of the Week: Apple is Kicking Google’s Tail Edition**

**Totally Money Carnival #51**

Filed Under: Bad Examples, Consumer Debt, Economy, Education, Newsflash

Totally Money Blog Carnival XXXVII

September 19, 2011

(Photographer’s conception)

Another carnival? Believe it. The Totally Money Blog Carnival is the brainchild of Crystal, founder of Budgeting in the Fun Stuff, who describes herself as “a late-20s, very happily married woman who is the definition of middle-class”, lives in Houston and owns 2 dogs.

(The “very happily married woman” part has to be to thwart cyberpervs, right? Otherwise it’d be an endless barrage of “Yeah, like, uh, Crystal…just a note to tell you that I really like your blog and I was wondering if you, like…hey, I’m going to be in Houston sometime, we should get together sometime.”)

Anyhow, Crystal gets it. And by “gets it” we mean “isn’t scared to let Control Your Cash host a blog.” Yes, Bank Nerd is taking a week off. So here goes. Actual blog posts from actual bloggers (and a couple of Indian remote assistants, evidently):

Every time we hear Roger the Amateur Financier, we can’t help but think of Roger the Engineer, because we’re a) huge Jeff Beck fans and b) old. This week Roger reviews an awesomely titled book, Getting Loaded, and includes a helpful explanation of the expression “don’t judge a book by its cover”.

Speaking of awesome names, Odysseas Papadimitriou gave us a guest post last week. (It seems the moniker Greeky Grecian had already been taken.) Anyhow, he’s back with a WalletBlog exclusive on the death of free checking. Thank you, Senator Dick Durbin, for proving government’s beneficence yet again.

Sen. Durbin and his cronies Sen. Chris Dodd and Rep. Barney Frank aren’t even close to done yet, either. Marjorie at Card Hub explains how when our elected representatives cap debit card interchange fees, it forces card issuers to find other revenue. And means merchants can ultimately set minima for card purchases. How convenient.

Phil at PT Money gives us an audio offering this week, his interview with a guy who makes money hosting online video contests and who looks like a contemporary Freddie Mercury.

(Submission deleted due to atrocious spelling. Unless Warren Buffett legally changed his name to Buffet between the 2^nd and 3^rd paragraphs, stay consistent. Also, the plural/possessive apostrophe thing. Shame, because the content wasn’t horrible.)

Our first list post! Stupid Cents recites 7 things you shouldn’t do when you receive a windfall. Briana draws on her windfall-receiving experience to let us know that gambling away what you receive is not a good idea. Repeat, NOT a good idea.

For a blog whose founder and logo both sport big smiles, Jim Yih’s Retire Happy Blog has something of a downer post on retirement. You might have to support your kids, or your grandkids, or your grandparents, or your…you know what? Do the smart thing and keep working until you die.

If you’re like us, you find it insulting that you’re still receiving mail in 2011. Tim at Faith & Finance looks at the staggeringly obese white elephant that is the United States Postal Service, and offers some suggestions to keep her viable. Good luck.

Dr. Dean at Millionaire Nurse Blog offers 15 recommendations on what not to do financially when a natural disaster takes you out. Our favorite line: “Stay calm…someone needs to be the Russell Crowe in the family.” Isn’t he the actor who screams at hotel desk clerks and throws telephones at them?

Another one. This is from Jen at Master the Art of Saving. She’s the only lady in the history of the internet who blogs about trying to both save money and lose weight.

We looked at this last post late at night, and initially thought that the uncapitalized rothira.com was the website of an underpublicized Japanese monster who does battle with Godzilla and Rodan. Instead, it’s Kevin Mulligan’s blog about…well, you can probably figure it out. This week he argues that you should automatically reinvest your dividends, unless you shouldn’t.

This week’s “infomercial masquerading as a blog post” is from Glen Craig at Free From Broke, who reviews the awesomest company ever, TD Ameritrade.

There’s nothing more fun than when ladies touch on sports. Our carnival matriarch, Crystal at Budgeting In The Fun Stuff, shares the story of Prince Amukamara. He’s a rookie defensive back for the New York Giants (she left that part out, they’re the team that has those pretty blue uniforms with the red trim), who learned how to haggle at a car dealership instead of pulling a Floyd Mayweather and throwing his money wherever it will land. Prince proves that not all sociology graduates (Nebraska, ’11) are financially inept.

His last name is Vachon, and his blog is called The Frugal Toad? That one took us a second, but we got it. This week he explains buying a car vs. leasing. (Helpful hint, Monsieur V.: if you’re assuming your readers don’t know what a lease is, they probably don’t know what the acronym MSRP means.)

Now THIS is what we’re talking about. Shaun at Smart Family Finance again runs the numbers on how college grads make more money than people who only have high school diplomas. Of course, he didn’t bother breaking down those college degrees by discipline. The women’s studies major who’s in a better financial position than the licensed electrician who got a 4-year head start on earning money while not incurring student loans has yet to be born. Also, going to college apparently still isn’t enough to help a professional writer distinguish between homonyms.

Ever wonder how sites like Beezid can auction off iPads that sell for $5? Bob at Christian PF explains the inner workings of this unseemly sector of commerce.

Scott McCartney at the Wall Street Journal, er, Dough Roller, examined the major airline loyalty programs and figured out which ones make it easy to redeem your rewards.

If you buy stuff in bulk, you can save money. But you need to have a place to store it, and you shouldn’t buy perishables that will rot. There’s a freaking revelation. Thank you, Kelsey at MoneyMom.com.au.

(One submission per customer. Read the directions.)

One of our new favorites is Shawanda Greene at They Call Me Cheap. She sums up her submission more succinctly than we could: “How to make money if you have a criminal past, you’re an illegal immigrant, or you have bad credit…there are no excuses for not earning money.”

Tired of squandering money on cigarettes, extended warranties and vehicle undercoating? Kyle Berks at the oxymoronic Safe Online Payday Loan tells you how to find “reputable” lenders who will charge you triple- or quadruple-digit interest. It seems he’s serious.

Are all Australians retarded, or just the ones who submit to carnivals? Andy Boyd at MyBusiness.com.au thinks you should learn your company’s rules on personal use before using your company credit card. Another secret of the universe uncovered, right here.

Finally, our Editor’s Picks:

Tangible investment advice that you can apply? No way. Dan at ETF Base has it. Shorting Treasury bonds isn’t for everyone, but Dan shows how to make it work (and more importantly, discloses everything.)

Sure, you think you know what an income statement is. But if you can’t tell the difference between one and a balance sheet or a cash flow statement, you need to read this magnificence by Nelson Smith at Canadian Finance Blog. Now might also be a good time to mention that CFB hosts next week’s Carnival. Oh, and that Nelson’s own Financial Uproar is hosting the Carnival of Wealth.

From T-bonds to their more ephemeral cousins, T-bills. Everything Finance explains how even though Treasury bills are the quintessential safe investment, they might not be for you.

Paula at Afford Anything says what we’ve been trying to articulate for years: The world is oversaturated in money management advice, and yet so many people are deep in debt. Why? Where are we screwing up? She nailed it. Amen.

Darwin at Darwin’s Money rounds out our Editor’s Picks, with this colorfully illustrated post on how old people are screwing us over with their incessant refusals to hold onto stocks and to die.

Next week, the Totally Money Blog Carnival sets sail for Canadian Finance Blog. ‘Til then.

Filed Under: Carnivals Tagged With: budgeting in the fun stuff, crystal, totally money blog carnival