Oil Stock Trading: This Is Going To End Poorly

Last month, the Wall Street Journal put out an article titled “The New Oil Traders: Moms and Millennials” that chronicled the daily experience for stay-at-home moms and people in the 18-35 age range that log into their account each day and make trades on the price of oil.

Assuming it can be done, the transaction and social costs are extremely high: These people are paying $20 per day, sometimes more, to make oil and oil stock trades. Assuming that they are entering and exiting their positions 5 times (e.g. ten fees for a round-trip transaction), then we are talking about a hobby that costs $5,200 per year.

To get the fee under $1,000 per year, and assuming $10 per trade, these people can only afford to make one trade per week. Which, considering they use E&P companies, oil itself, and the integrated oil stocks to make their trades, … Read the rest of this article!

American Stocks After Brexit

Perhaps it is because I have far more American than British stocks as a reference point when studying the stock market, but I was a little surprised to see that American stocks seemed to offer a good deal in the aftermath of Brexit than many British stocks themselves.

The only British stocks that came down substantially in the aftermath of Brexit were the financial institutions, and they have such difficult to determine intrinsic values that I am not sure any firm conclusions can be drawn regarding their fair value. They have wide latitude to engage in “the rehypothecation of collateral” which involves pledging the assets of customers as collateral for their own activities. At Barclays and Lloyds, you see the same assets getting rehypothecated two, three, four times over, and is a big reason why Barclays fell from $62 to $3 during the financial crisis. Because the financial sector is … Read the rest of this article!

Kellogg Stock: Investor Expectations 2016-2021

Kellogg’s stock now trades at its highest valuation this generation. Almost always, this has been a business that trades in the range of 15-16x earnings and offers a starting dividend yield over 3%. Today, at trades at $78 per share, offers a 2.5% dividend yield, and offers a starting P/E ratio of 21x earnings. This a business only growing earnings per share in the 4 to 6% range.

For the next five years, Kellogg shareholders will likely realize the following: 5% earnings growth, 5% dividends growth, and a P/E reversion to the 17x earnings range.

This means that earnings of $3.60 per share will grow to around $4.60 per share by around 2021. If the P/E ratio comes down from 21x earnings to 17x earnings, for a nearly 20% expected headwind, then this stock ought to trade at $78 per share five years from now. Right now, the price is … Read the rest of this article!

The McDonald’s Franchisee Business Model

McDonald’s earns insane profit margins for a company that operates in the fast food industry. Wendy’s executives, who are fairly bragging about the improved sales results stemming from their 4-for-$4 summer deal, have been able to improve the profit margins at Wendy’s from an all-time low of 1.8% in 2010 to 7.9% now. They deserve credit and praise for their accomplishments in a highly competitive area.

However, consider this: McDonald’s is going to make almost 20% profit margins this year, and it has never had profit margins below 13% in the past quarter-century. Most years, profit margins fall in the 16% to 20% range. It is worth posing the question: why is it that McDonald’s has delivered 16% annual returns for almost half-a-century, turning $1,500 invested in the IPO into over $1.3 million today? How come it has a record of paying out a higher and higher dividend each year … Read the rest of this article!

Brexit Through The Eyes of Jefferson and Hamilton

I’m working my way through the excellent John Ferling book “Jefferson and Hamilton: The Rivalry That Forged a Nation” which devotes tens of pages of ink to Alexander Hamilton and Thomas Jefferson’s differences on the economic relationship between the working man and his government.

Hamilton loved the rise of American cities which could harness efficiency through large markets. Want to become a dentist? Do it in a city with 100,000 rather than 1,000 because there are a million more cavities for you to fill. Want to build up factory resources? Same premise, do it where adding 200 workers only requires you to find .2% rather than 20% of the population. Ease of scalability is the proven formula for improving living standards dramatically within a generation.

Meanwhile, Jefferson had his mind on the yeomen farmers that would be displaced by the rise of centralized industrialization. The consolidation of power and resources … Read the rest of this article!