My Quandry on BJ’s Restaurants


Regular readers will know that I’ve been buying up BJ’s Restaurants for sometime now.  I first bought at $40 or so, saw it climb to $60+, decided it was overpriced and sold off, making a nice profit.  I started buying again when it sank into the 30′s, and then made another, smaller profit this spring by writing covered calls on the position, which eventually resulted in the shares being called away.  To read that adventure, the initial post in the series can be found here.

I bought back in, little-by-little, on the way down from there and am now sitting on about a 10% loss.  I tried to buy a few more shares last week, only to see the stock rally away from my limit order of around $27.

BJ’s has a chain of casual dining pizza restaurants with microbrew beer.  I really like the stock for many reasons.  The company is very profitable.  They have no debt and a lot of money from operations, meaning that they can use cash from operations to grow and make investments rather than racking up large loans.  This says to me that they know how to run a business.  They also have plenty of room to expand, currently only having restaurants in less than 20 states.

This issue, however, is the ugly cloud called Obamacare that is hanging over the whole economy.  The healthcare law, formally known as the Affordable Care Act (ACA), was supposed to be in full force starting this January.  This would mean that employers with more than 50 fulltime employees would need to provide healthcare that meets the standards of the ACA (meaning the cost of the insurance would be higher) to their employees. All insurance plans offered to individuals would also need to meet these standards, meaning that a lot of the plans on the individual market would be cancelled, forcing individuals to go without insurance or pay $200-$500 a month more (or even more than that) for plans with higher limits and more services.  Even small businesses that had fewer than 50 fulltime employees would need to provide insurance that meets that new standards if they chose to continue to provide insurance.

The requirement for large employer plans to meet the new standards was delayed a year (probably illegally since the law was never changed by Congress, so this might change suddenly if anyone challenges the delay in court).  The requirement for individual plans remains in many states, however, as does the requirement that small employers offer plans that meet the higher standards, meaning they will need to pay a lot more per employee or, more likely, quit offering coverage.  This all means that 1) people are going to be paying a lot more of their income towards healthcare (or to pay the 2% of their income-tax if they go without insurance), particularly young, healthy individuals who spend little on healthcare now, 2) a lot of people are going to be placed on part-time status or laid off entirely since the cost to pay for their salary and healthcare cost will be more than they produce by working for the employer, and 3) salary growth will be slowed or salaries will even be cut, if the worker’s share of the health insurance payment grows, as employers deal with higher health insurance costs.

None of this looks good for the mid-priced casual dining segment who get a lot of their income from the disposable income of young people.  If suddenly all of the people in their 20′s and 30′s are spending 10% of their income to pay for the healthcare of those in their 60′s – 80′s, they might not have much money left over to go out to eat.  Even if they decide to go without insurance and pay the 2% tax, that owuld be $2000 per year out of the pockets of someone making $100,000, which might make those individuals on a mid-level income  LA decide to eat in more.  Restaurants like McDonald’s might do well as people scale back on their spending, and places like Ruth’s Crisp Steakhouse will probably do just fine since rich people and politicians (whose dining bill is picked up by lobbyists) will still go out for a ridiculously overpriced meals, but places like BJ’s might see a substantial drop in business.

I’ll probably therefore hold where I am and not build on my position in BJ’s.  I still like the business, but the effects of the ACA on the segment might be severe.  Hopefully as the estimated 80 million people lose their insurance next year when the large employer mandate kicks in, the outcry will be large enough to overturn the law.  All of this leads to uncertainty, however, which is what the stock market hates.  Expect a bumpy road ahead, even if things continue to go up for a while.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Now is Not the Time to Buy Bonds, Maybe


The conventional wisdom says that you should own your age in bonds.  If you are 20, you should have 20% of your investments in bonds.  If you’re sixty, it should be 60%.

The idea is that as people get older they need to get more conservative with their money, gradually shifting from uncertain growth investments to more certain income investments.  An ideal situation when you’re living on your savings is to have your bonds and dividend paying stocks paying enough interest to cover your expenses so you don’t need to sell stocks to raise cash.  Money just magically appears in your accounts as you need it.

The trouble is that we are not living in normal times.  To try to spur the economy, the Federal Reserve lowered interest rates essentially to zero.  When that didn’t work since no one had good enough credit to borrow money and businesses didn’t see any reason to expand with no one buying anything the Federal Reserve started buying buckets full of long-term bonds to bring down long-term rates.

This caused home mortgages to go down to unheard of levels.  No one was interested in buying a house, however, since so many people were upside-down in their mortgages.  People who could, however, refinanced their existing mortgages, reducing their payments and freeing up cash.  This has started to help the economy somewhat, but the recovery still isn’t much better than the recession.  Part of the reason is that unemployment benefits are so good that many people choose not to go back to work, meaning there are a lot of people not producing anything or moving up and increasing their income.

The good news for borrowers is that the economy has been so bad that interest rates have stayed low.  This has caused stock prices to go to new highs.  Bond prices also increased initially as rates were lowered, but have stayed in a trading range ever since.

Normally one would want to have a  substantial amount of savings in bonds later in life.  The trouble is currently that when rates do go up, either because the Federal Reserve raises rates to temper the economy or because inflation picks up because of all the easy money out there, bond prices will fall.  We could easily see declines of 10-20%, which would wipe out years’ worth of interest for bonds paying 3-5%.  Dividend paying stocks would be hit too unless the economy does start to recover and the underlying businesses start posting good profits.

The trouble is, sitting on the sideline waiting for this bond collapse that will occur eventually may leave an investor in cash waiting for years.  (These kind of things are easy to predict but very difficult to time.)  This could mean sitting in money market funds earning 0% when you could have been earning 3-5% for the next three years.  The internet bubble was similar in that it was obvious stocks were ripe for a fall back in 1997-1998, but the party continued on for a couple of years after that.

So, what to do?  It probably is best to have some bond exposure.  Sure, you’ll be looking at a reduction of 10-25% in price when interest rates rise, but if you hold long enough you’ll regain much of that loss.  Buying shorter term bonds would also be good, as would picking bonds which are below their redemption price (typically 100) per bond).

Spreading out into income investments would also help.  Buying dividend paying stocks would allow income both from dividends and price appreciation.  Stocks are also a good inflation hedge – if held long enough – since the price of the property of the company will increase with inflation and they will be able to pass along price hikes to their customers normally.

Another option is to get into real estate, either by buying rental properties or buying REITs.  These are also a good inflation hedge since the value of the real estate will increase with inflation.  There is some correlation with interest rates since investors will want a better return for their money when interest rates climb and higher rates make it harder for people to afford a loan, but in general bonds and real estate don’t move in lock-step, meaning you real estate portfolio may be up when bonds are down or vice-versa.

A final good source of income are Master Limited Partnerships (MLPs).  These typically own things like oil and gas pipelines and generate lots of cash.  Energy prices will also climb with inflation, making them a good inflation hedge.  The downside si that the tax treatment can be very confusing, even in an IRA.  It is well worth an hour with a CPA before buying into these to make sure you won’t be filing a dozen state income tax returns.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Beware the Jerk – How The Stock Market Trades on the Acceleration of the Economy


Ben Bernake, Chairman of the Federal Reserve,  was saying that by easing up on bond buying they would be easing off the accelerator rather than hitting the brakes on the economy.  Despite these assurances, the market has tanked, wiping out returns from June and May in two days.  The trouble is that the stock market trades on the acceleration of the economy rather than the velocity.  Changing interest rates may only effect earnings growth slightly, but this can have a big effect on the stock market which prices stocks based on expected future earnings.

In physics the rate of change in distance per unit time is velocity.  If you drive 50 miles in one hour, you have a velocity of fifty miles per hour.  The rate at which velocity changes is acceleration.  For example, something falling will go from zero feet per second to 32 feet per second over the period of a second, so the acceleration due to gravity is 32 feet per second per second, or 32 ft/s^2.  The rate at which the acceleration is changing is called “the jerk.”

A stock will be priced based on the expected future return of a stock.  This means that if earnings are expected to increase, the price will increase.  It is the rate of change, rather than the actual earnings, that causes the price to change.  The change in price occurs as soon as the earnings increase is expected and then generally will stay at the same price range with minor fluctuations due to trading and other factors so long as the earnings expectation remains the same.  Earnings are the rate at which money is produced, which is like the rate at which a distance is covered.  It is therefore like the velocity of money.

The rate of earnings growth is then like the change in velocity, or the acceleration.  A stock will be priced based on the rate of earnings growth.  If growth rate changes, the price will change as well.  A price change will occur rapidly when the jerk is non-zero – when the rate of growth of earnings changes. 

This is why we are seeing the stock market swoon despite Bernake’s assurances that they are just easing off the accelerator.  People know that interest rates will increase when that happens.  That will make money harder to get and make companies pay more to borrow money.  Both will cause earnings growth rates – acceleration – to slow.  The jerk is therefore negative, so the markets have reacted negatively.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why Is the Stock Market Hitting New Highs?


One would think that things were just ducky in the economy, judging from the rise in the stock market.  Indeed, the S&P500 keeps hitting new highs, as do the rest of the major indexes.  Even housing seems to be on a recovery, with prices in depressed areas such as Phoenix rising 20% year-over-year.  Obviously wages must be rising as businesses expand and try to lure talent away from other companies.  College seniors must be coming out of school, excited by all of the job opportunities they have in front of them.  Unemployment must be at multi-year lows and products must be flying off the shelf.

Unfortunately, this is not so much the case.  Unemployment is still well above 7%, and the real unemployment numbers are somewhere in the teens if you include the people who have quit looking for work and have gone from the unemployment roles to the disability roles or are working part-time jobs.  With layoffs and hours being cut as employers try to come in under the 50 employee limit at which Obamacare kicks in, there will be more and more people working less than 30 hours per week or not working at all.

Businesses are managing to get along without hiring a lot or new workers, and recent college grads have moved into their old rooms and settled in for the long haul.  At least their parents will have someone to water the plants and walk the dogs when they start to travel in their retirement.

So why is the stock market doing so well?   The reasons, as they often do, lie with the Federal Reserve.

The Federal Reserve control interest rates by controlling the supply of money and also by making loans directly to the banks.  If the Fed wants to take money out of the system, they simply tell the banks that they need to buy some federal reserve notes from them, which the Fed creates out of thin air.  If they want to add money, they buy the notes back or tell the banks they don’t need to keep as much in reserve in their vaults.  Lately they have even been creating money out of thin air by creating money and then using that cash to buy US Treasury debt when no one else will.  They also set the rate at which they loan money to banks, which in turn sets the interest rates for everything else.

The Fed does not have control over inflation, at least not directly and not with any precision.  If they add a lot of money and productivity does not increase (meaning there is no good place to put all of the extra cash), inflation spikes.  They can quell inflation by raising rates and causing the economy to crash, but this is obviously very crude.  It can also backfire, resulting in stagflation as Japan has dealt with for about 30 years where prices rise while the economy sits.

Equities (stocks) are things of value like anything else.  As inflation builds since the Fed has been pumping all sorts of money into the economy trying to make it recover from the housing bubble, the price of stocks goes up along with everything else.  If a slab of beef costs $20 instead of $10, the price of a share of XYZ might also go from $10 per share to $20 per share.  That doesn’t mean you can then buy more steak dinners with the value of your shares.  The value of both things remains the same relative to each other.

The other reason that stocks have been going up is that people are looking for a way to earn some income on their holdings.  Savings accounts have been paying nothing for a long time.  Retirees need some way to generate income to pay for things, and they just can’t cut it with a $1 M bank CD paying $10,000 per year.  They have therefore started to put money into stocks to increase their returns.  The trouble is this means they are taking on more risk, which may not end well.

So, enjoy the rise, but realize that some of the rise is just inflation, meaning you really aren’t making money.  The rest of the rise is due to interest rates, which could all disappear if the Fed raised rates again (or the market forces rates up because inflation starts to accelerate) and savers rushed back into traditional money markets and bond funds.  The real gain for stock investors will come as people create value and businesses grow.  Sadly, this is not happening yet to any meaningful extent.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Beware the Bond Bomb


The Federal Reserve has not been kind to retirees who tend to use bank CDs and other fixed-income investments to generate income for living expenses.  By pushing interest rates down and keeping them low it has forced retirees to take more risk since they can’t live on a 0.5% or 0.05% return.  The Fed has indicated that they plan to keep rates low for at least the next year, however, so don’t expect things to get any better soon.

We are also starting to see some signs of inflation.  It is true that housing prices have been depressed, but we have seen large increases in energy and food.  Indeed, February is traditionally the lowest priced month for gasoline, and yet we are seeing it over $3.50 per gallon.  A price that would have been unheard of just six years ago.  Expect $5 gas this summer.  Meat at the grocery store is also going through the roof, and produce isn’t far behind.  Maybe we haven’t seen wages grow yet, largely because workers are perennially scared of losing their jobs, but eventually wages will need to rise because people will not be able to buy food and gas to get to work if they don’t.

Because of the low interest rates, and despite the evidence of inflation starting to grow, bond prices have shot up dramatically.  Because bonds pay a fixed interest payment and because people buy them almost exclusively for their interest payment, they are very sensitive to interest rates.  If interest rates go down, as they have recently, people bid the price of bonds up since they are willing to take a lower return because at least it is better than the return they are getting from bank CDs.  When interest rates rise, however, or when inflation increases, wiping out the earnings of bond buyers unless they get a higher interest rate, people won’t buy bonds until the price drops to a point where the interest rate is high enough to justify the risk they take. 

Bond prices are currently extremely low as people have piled into them with money that used to be parked in bank CDs.  When the Federal Reserve raises interest rates to fight inflation, or even if they don’t and decide to let inflation grow, bond prices will fall once again hurting retirees.   Interest rates might remain low, and bond prices remain high, for another year or two. The thing about bubbles is that they last for a lot longer then you think they will.  Eventually, however, all bubbles pop.  It is just a question of the trigger.

Avoiding the bond bubble will be difficult for those who are on fixed incomes.  The fact is, they need to generate income somehow, and therefore they need to accept the high prices of bonds and meager returns because they are better than the returns they can get elsewhere and they need to make a certain amount to cover expenses.  One option would be to go into dividend paying stocks such as drug companies, household product makers, and utilities, as well as REITs, in addition to bonds.  While all of these will decline in price somewhat if interest rates rise, at least there is some diversification and growth in property or business value might offset some of the loss due to interest rate increases.  Because there is something of value that will grow in price with inflation underlying these investments, equities and REITs are better inflation hedges than bonds.

A second option, for those who have enough money to do so, is to invest more in equities and use capital gains for income.  This would involve keeping a portion of investments in equities and then selling off shares of equities for income periodically.  This can be risky because the returns on equities can be unpredictable.  One really needs to have a big enough account to keep several years’  worth of expenses in cash (bank CDs) and still be investing enough to generate enough income to replenish that cash periodically.  This would allow you to hold onto equities and use some of the cash to live on when stock prices decline in a year, and then replenish the cash by selling shares in years when the markets do well.  Overall you will do much better this way than you will with bonds, even in better bond markets, but it requires a substantial amount of savings or the risk is too great.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.