Bailout concerns slam Freddie, Fannie shares

Mon, 18 Aug 2008 15:38:00 US/Mountain

Bailout concerns slam Freddie, Fannie shares

Monday August 18, 4:45 pm ET
By Lynn Adler

NEW YORK (Reuters) - Investors dumped shares of Fannie Mae and Freddie Mac on Monday after a newspaper report said government officials may have no choice but to effectively nationalize the U.S. housing finance titans.

A government move to recapitalize the two companies by injecting funds could wipe out existing holders of the largest U.S. home funding companies' common stock, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.

Shares of Fannie Mae sank more than 22 percent to a 19-year low on Monday, closing at $6.15, while Freddie's shares plunged 25 percent to $4.39. Some of their bonds sharply underperformed Treasuries. A $4 billion sale of new Freddie Mac debt drew weak bids compared with similar issues last week.

A spokeswoman for the U.S. Treasury said the department has no plans to use its authority to backstop the two funding agencies. That authority was greatly increased by a rescue plan approved at the end of July.

"The Barron's article overstated Freddie Mac's financial situation," Sharon McHale, a Freddie Mac spokeswoman, told Reuters. "We continue to be adequately capitalized."

My feeling is that in the long run Freddie and Fannie will either have to be nationalized or fail in the old school style of capitalism. This current strategy of blindly supporting the companies with an unlimited line of credit is downright foolish and is not at all sustainable. Given the trend of current events, if I were a betting man I would say that there's a very likely chance that Freddie and Fannie will become nationalized businesses. Clearly the government won't let them fail, but today's bailout strategy is only encouraging poor decisions rather than punishing them. There's only so much the Fed and Treasury can do without getting more heat than they already are, so in all likelihood I would expect the government to make it official and nationalize the businesses. Don't stop at watered down socialism, go for the real deal!

I still can't stop laughing when I hear that the companies are "adequately capitalized". How's that working out for you, guys? I guess on one hand there is a bright side to this, we know the market can and will weed out the loser businesses even if they are monopolies like Freddie and Fannie (without the bailout from the Treasury both companies would almost certainly fall apart). The way I see it the market will eventually win out, whether the companies are nationalized or not. All attempts at socialism will inevitably fail anyway, the "invisible hand" is still at work over the long-term regardless of the system. The free market is almost always blamed for the problems created by government intervention and those problems are used as an excuse for more interventionism still. Having the government meddle in the affairs of the market may sound fantastic in the short-term, but the price must be paid sooner or later.

I've already repeated things I've said quite a bit over the past couple months, so I'll stop here for now. This is a very important topic at the moment and at the rate things are going we haven't seen the last in the short or long run.

Thoughts on ANWR

Sun, 17 Aug 2008 08:30:00 US/Mountain

The common argument against lifting federal restrictions of oil drilling in ANWR is that it would be years before oil was produced and it wouldn't provide any immediate relief. The way I see it, the exact same thing could be said with the ridiculous current and proposed subsidies for "green energy" or a windfall profits tax on "big oil". Of course the impact won't be immediate, it would be silly to expect a sudden increase in supply. But, the current price and price movements of oil is largely from speculation which is greatly fueled from the fact that we buy the majority of our oil from volatile, state-owned companies around the world. There is actually a good amount of oil in ANWR and the technology today is much better than it was ten years ago when people made the same argument that it wasn't worth drilling because the oil wouldn't be flowing for another ten years. It would take several years for oil to start pumping and I believe volatility would be greatly reduced because of it. Opening up ANWR would not solve all our problems, I'm not claiming that. Eventually, Americans will need to smarten up and lift the federal restrictions on nuclear, coal, and the land in the Midwest that's full of shale oil. Eventually people will realize that the Federal Reserve's idea that you can create wealth out of a printing press does contribute to higher energy prices through inflation.

Even so, opening up ANWR is a step in the right direction. When the state governor and the majority of Alaskans want it opened, it makes absolutely no sense for Congress to continue its restriction. At the very least, let the states decide which energy sources to produce and use. Continuing with an energy policy of "only what the federal government likes" is foolhardy, dangerous, and makes absolutely no sense. Like I said, ANWR is a step in the right direction. Not a long-term solution, but in the short and mid-term, it would lessen volatility, lower U.S. oil demand from unstable and anti-U.S. countries, and create a lot of new jobs. So while I really would love to see federal restrictions lifted on all sorts of energy sources, there has to be a starting point.

Thoughts on the future of Starbucks

Fri, 15 Aug 2008 16:02:00 US/Mountain

My feeling is that Starbucks did lose its way which is why Howard Schultz came back on board as CEO. Over the past several years the company has focused too much on new store expansion while pretty much ignoring the store atmosphere which is really what made the company so popular in the first place. I am still invested in Starbucks even though it has performed very poorly since I first bought it a year or two ago. With Schultz back in charge I feel much more comfortable with the company's ability to work through the store closings and once again bring the focus to the atmosphere and service. The transition period of these store closings and a revamping of current stores will not be easy or cheap, but I feel that in the long run it is absolutely the right move and I am confident that Schultz knows how to make it work. There's no one who understands the company more or what got the company to where it is today.

I'm not expecting much upside movement in the stock price over the next 1-2 years, so I'm certainly not jumping in at this price. I'm waiting to see how the closings go and get a better idea of what the long-term picture looks like. Financially it will most likely be a painful process in the short-term, but if management can stay focused I think Starbucks will come out of it a stronger business. Starbucks was a great business that screwed up and lost touch with its "thing". Over the next few years Starbucks will either prove that it is a great business and work through these troubles, or that the concept just isn't workable anymore.

The thing to realize is that Starbucks is still producing very strong cash flow. So while earnings growth will certainly be slowed and possibly negative in the near future, the key items to watch are cash flow production and the balance sheet. So far, the balance sheet has stayed steady and cash flow production is quite strong. As long as Starbucks can produce consistent and positive cash flow over the next couple years I'll be confident enough financially. However, if cash flow production slows considerably and/or turns negative, that would be a tempting sign to sell. But, it's impossible to predict, so for now I continue to hold my position with the hope that the Starbucks experience and atmosphere can work their way back into the stores.

On a slightly different note, I see Peet's Coffee & Tea as a very strong coffee/tea business. The company's growth has been picking up along with margins and is actually becoming a pretty strong company both financially and in terms of stores opened (I believe there are somewhere in the area of 180 stores opened). The company carries $18.1 million in cash with no debt, just recently opened a new roasting facility, has produced very strong cash flow so far this year, and like I said earnings and margins are both expanding nicely. I truly believe Peet's is a strong investment for the long run, management is experienced and so far has made some decisions that I believe will definitely benefit the company over the long-term. Let's just say that management is willing to sacrifice short-term results for the greater good (partly why the stock was so depressed for awhile). Peet's is a business that I'm very glad to own a part of and I see it as a nice way to get exposure to the specialty coffee/tea industry. It may be a good way to counter an investment in Starbucks, because Starbucks' store closings would probably help Peet's more than it hurt.

So, I'm not adding to my position in Starbucks but I'm confident that in the long run the company will come out stronger. For now we just have to take it quarter by quarter to see how this transition process is going and impacting the company financially. In the meantime, I see Peet's as a great growth opportunity and a better way to get exposure to the industry. Peet's is similar to Starbucks years ago because it is the atmosphere that attracts the customers, and management is very focused and committed to preserve and expand that atmosphere and experience. With Starbucks now doing what it's doing, I'm sure Peet's investors and management will be all the more careful going forward. Both companies are in interesting positions and I certainly am looking forward to how they both progress and compete.

FDIC Fund Strained by Bank Failures May Lift Premiums

Thu, 14 Aug 2008 07:54:00 US/Mountain

FDIC Fund Strained by Bank Failures May Lift Premiums

By Alison Vekshin

Aug. 11 (Bloomberg) -- The failure of IndyMac Bancorp Inc. and seven other banks this year may erase as much as 17 percent of a government insurance fund and raise premiums for all banks, from Franklin National of Minneapolis to Bank of America Corp.

The closing of IndyMac in July, the third-biggest U.S. bank failure, may cost the Federal Deposit Insurance Corp.'s fund $4 billion to $8 billion, in addition to an estimated $1.16 billion for seven closures through Aug. 1. Premiums for insuring deposits will likely rise, FDIC Chairman Sheila Bair said in a July 30 interview. A decision is due by the fourth quarter.

``It's going to be a bloody, expensive mess for the banking industry,'' said Bert Ely, president of Ely & Co. Inc., a bank consulting firm based in Alexandria, Virginia. ``Healthy banks are paying for the mistakes made by failed banks.''

The pace of bank closings is accelerating as financial firms have reported almost $495 billion in writedowns and credit losses since 2007. The FDIC's ``problem'' bank list grew by 18 percent in the first quarter from the fourth, to 90 banks with combined assets of $26.3 billion. A revised list is due this month. The insurance fund had $52.8 billion as of March 31.

This is not a cheap thing going on with these banks. Playing with a system and allowing the federal government to just step in may very well lessen the pain in the short-term, but few are looking at the long-term picture and whether or not the system itself is flawed. It has gotten to the point where a $300 billion homeowner bailout bill is passed almost without a second thought. Seriously, $300 billion? Fannie Mae and Freddie Mac received an unlimited line of credit to the Treasury. We are constantly assured by Paulson and Bernanke that the company's are in fine shape and its simply a precaution. In their most recent quarterly reports both companies lost a huge amount more than expected. In the end, who is going to pay the bill? While I would like to say that the hundreds of billions of dollars being used to bailout anyone who cries for help will not come out of thin air, it most likely will. Such is the fiat monetary system.

The unfortunate thing for the individual here is that the end result from this relentless printing will come in the form of more inflation and a further decline of the dollar. Heck, just today the Fed "auctioned" (*cough*printed*cough*) another $25 billion to banks in an effort to sort out the wide array of problems in the industry. I honestly don't know how people could believe that you can print trillions of dollars out of nowhere in the matter of a few years and not expect to face severe consequences as a result. It is nothing more than a counterfeiter sending counterfeit bills into the marketplace. The currency gets diluted, prices go up, and the hardships start.

Believe it or not, the Founding Fathers were some of the few who actually understood this. Paper money was briefly tried by the colonies in an effort to pay off the massive debt accumulated during the Revolutionary War with a great lack of success. Once the war was over and a monetary system had to be put in place, paper money was very unpopular and with the 1792 Coinage Act the mint was established and the backed-money system put into place. The penalty for counterfeit, embezzlement, and fraud from any employee or officer of the mint? Death. Times sure have changed.

I am not exactly saying that the best way to go is to return to the monetary policies of way back when. What I am saying is that Founders had firsthand experienced and seen what harm paper money brought to the economy and country. Fiat monetary systems have been played and experimented with dozens of times throughout all of history all around the world. The one thing all these experiments have in common is that the system collapsed and was no longer sustainable. Fiat money leads to a worthless currency, higher prices, and economic stability. And while I absolutely hope that I am wrong, I don't see why today it would be any different with the U.S. and the major economies around the world.

A fiat monetary system has other negative impacts. Easy money and easy credit from the Fed has taken a lot of the focus off of long-term results and sustainability and has rather put all the attention on short-term results, regardless of where that road leads. While the blame will most likely continue to be on capitalism and lack of regulation, hopefully somewhere along the line the blame will finally be brought to the Federal Reserve. I'm keeping my fingers crossed.

Analyzing stocks that are up after earnings

Sun, 10 Aug 2008 13:10:00 US/Mountain

Since we're in earnings season I thought I would expand a bit on the topic of watching for opportunities as companies report their quarterly results. I've talked quite often about looking for opportunities with stocks that have been hammered even after a good report. Today I thought it'd be a half-decent idea to discuss the situation of when a stock you're watching shoots up after releasing earnings. This situation is pretty common and can make life very frustrating for bargain hunters or people who just want to buy in at a good level.

For me, Dawson Geophysical is a great, recent example. The stock was trading at levels it hadn't seen (from a valuation standpoint) for years, the company was doing great, but of course I did not have the cash in my account to jump forward with opening a position. For someone like me who has an unpredictable flow of cash to use for investing, it makes the situation all the more frustrating. Dawson reported its earnings just a little more than a week ago. As you could probably guess from the context of this example, it was an exceptionally good report that beat estimates and gave Mr. Market a good amount of more confidence in the company. The next day the stock rocketed from the low $50s to more than $60 per share. After kicking myself for awhile, I decided to take another look at the valuation. To my surprise, the valuation remained quite attractive historically. Even though the stock had shot up, the valuation had not significantly changed. So despite the higher share price, Dawson remains high on my watch list.

A very recent example is Hansen (not again...). Yesterday the company released a solid earnings report and today the stock was up 7%. I've been buying shares in Hansen since 2006 so I can't exactly complain about the rise in share price, but this is another similar situation to Dawson. Hansen's P/E sits at approximately 13.5, still well below the competition and the industry average despite the company's stronger growth, bottom line margins, and balance sheet. A higher share price should not scare away interested investors. While the share price may seem important, the valuation is what's key.

This is certainly not earth shattering advice. And I can't say I've always followed this "advice" either, but I like to think that I'm learning from experience. In my experience, earnings season brings a lot of emotion to the table for investors. What I am saying is to not let those emotions get in the way of following a good business because the stock shot up 20% after a good earnings report. All too often I've completely dismissed a company after seeing its stock rise only to miss on what was still a great opportunity. Basically, the moral is this: don't let a higher share price take your attention off the valuation. The same could be said for stocks that have been hit. Just because the stock was hit does not mean it is automatically a smart investment. The one thing predictable about individual stocks is that they will be volatile. Keep your eye on the valuation, stay strong through the volatility, and in the long run the ride will be a lot of fun.

Hansen Reports 2Q 2008 Results

Thu, 07 Aug 2008 16:03:00 US/Mountain

Today Hansen reported its 2Q 2008 results.

** Gross sales up 15.5% to $324.1 million from $280.6 million in 2Q 2007
** Net sales up 15.3% to $282.2 million from $244.8 million in 2Q 2007
** Monster and Java Monster sales up 22.3% from 2Q 2007
** Case sales up to 28.72 million from 26.95 million in 2Q 2007
** International sales up to $19.5 million ($1.9 million in the U.K.) from $13.4 million in 2Q 2007
** Gross profit margin 51.8% from 52.4% in 2Q 2007
** Cost of sales $136.03 million from $116.51 million in 2Q 2007
** Operating income margin 27.7% from 25.1% in 2Q 2007

** Net income up 31.1% to $50.2 million ($0.51 per share) from $38.3 million ($0.39 per share) in 2Q 2007
** Profit margin 17.8% from 15.7% in 2Q 2007
** Company purchased 1.7 million shares in quarter at average price of $29.46 per share (total share count numbers not provided in press release)

** Cash and short-term investments $205.02 million

Press Release

Analysts were on average expecting an EPS of $0.52 with sales of $314.08 million. Hansen narrowly missed estimates, but this was far from a disappointing quarter. Considering how much the market has punished Hansen on speculation and fear only, this was a tremendous quarter. The profit margin increased yet again showing that this is a much stronger business than people have been crediting management for. The Monster brand has a very loyal following and the brand's strong performance this quarter only reiterates that. Monster is quickly gaining market share and management has been able to raise prices to offset higher costs. The Monster line is becoming very diversified in an intelligent way and I believe it will serve as all the more force to take over Red Bull's number one position over the energy drink market. The performance of Monster in this environment certainly makes me feel even more confident that it is not a fad as many have worried.

It's good to see that management bought back a good amount of shares over the past quarter, it would be an odd thing to see that they hadn't bought some shares with the very low valuation the stock. For investors it certainly isn't a bad thing either, because it means that management is confident enough in these low levels to buy the stock, and the balance sheet remains in extremely solid shape. Earnings did not growing at an eye opening pace, but when you take into account the status of the economy and especially the beverage industry, the fact that Hansen managed to expand both earnings and margins while keeping the balance sheet intact is simply amazing.

No doubt the media will hype this up as a failure of a quarter since the company missed estimates slightly and gross margins fell a tad. The top line is important for sure, but it is silly to criticize falling gross margins when both operating and net income margins are increasing at very respectable rates. Like I've said before, Hansen is not a darling of Wall Street anymore and Mr. Market has been extremely pessimistic with the stock. My feeling is that this quarter was good enough that the downside is pretty limited from here on out from today's stock price. Monster remains an incredibly strong and profitable brand with increasing market share, margins continue to increase, the balance sheet remains in fabulous shape, and international sales are starting to pick up. I have been buying more Hansen shares like crazy (at least for me) and I remain very confident in the company's future. Sure, growth is slower than it has been for awhile, but the economy is not in the best of shape right now either. Hansen has two great distribution deals still picking up and internationally the company has huge opportunity. For the next 5 years and beyond, I am confident that Hansen will easily and handily beat the market. With the EPS now at $1.72, the P/E sits at less than 13. This is less than Coca-Cola, PepsiCo, and the beverage industry as a whole. The stock is cheap and deserves a far higher valuation, making me all the more comfortable and confident with my most recent investments into the company.

For the 3Q 2008, analysts are on average expecting an EPS of $0.57 on sales of $317.31 million.

First written for StockHigh.net.

Report: Freddie Mac Chief Disregarded Warnings

Wed, 06 Aug 2008 12:52:00 US/Mountain

Report: Freddie Mac Chief Disregarded Warnings

08-05-2008
Reuters

U.S. mortgage market giant Freddie Mac's chief executive dismissed internal warnings that could have protected the company from some of the financial problems now engulfing it, the New York Times said, citing more than two dozen current and former high-ranking executives and others.

In 2004, Chief Executive Richard Syron received a memo from Freddie Mac's chief risk officer warning him that the firm was financing questionable loans that threatened its financial health, the paper said.

Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie Mac insiders say Syron heightened those perils by ignoring repeated recommendations, the NY Times said.

In an interview with the paper, Freddie Mac's former chief risk officer, David Andrukonis, recalled telling Syron in mid-2004 that the company was buying bad loans that would likely pose an enormous financial and reputational risk to the company and the country.

Syron received a memo stating that the firm's underwriting standards were becoming shoddier and that the company was becoming exposed to losses, the paper said, citing Andrukonis and two others familiar with the document.

But Syron refused to consider possibilities for reducing Freddie Mac's risks, the paper cited Andrukonis as saying.

"He said we couldn't afford to say no to anyone," the paper quoted Andrukonis as saying. Over the next three years, Freddie Mac continued buying riskier loans, the paper said.

You gotta love how this story continues to build up. The thing that amazes me is that few people are catching on to the correlation between low interest rates and the huge malinvestment that has occurred over the past several years. Look at the chart on this page and compare it to the dates mentioned in the above article:

http://www.moneycafe.com/library/fedfunds.htm

The subprime mortgage market starting heating up pretty much as soon as Alan Greenspan and the Fed lowered interest rates to 1% in an effort to stall a recession. When you factor in inflation (even the CPI as reported by the government), that is essentially giving away free money. If you go out onto the street and start handing out money and the only catch is that people have to pay you 1% annually in interest, there will be a lot of takers. The thing you then have to ask is where do you think that money would go? Probably on a "special item" or to something they wouldn't otherwise have bought. This is really what the situation was just several years ago with the Fed and the major banks. Banks could all of a sudden borrow money at insanely cheap rates and go into a market they otherwise wouldn't have entered (subprime). I am convinced that cheap money from the Fed is what got us into today's trouble. Easy money does not promote hard work and smart investment. Easy money creates bubbles and the "business cycle", all of which are conveniently blamed on capitalism as the call for more power to the Federal Reserve and the government over the economy persist.

What's hilarious is that easy money is seen as the solution to solve the malinvestment caused by easy money (that's a little tricky). There were plenty of people within Fannie and Freddie who saw or roughly saw where they were headed. Freddie CEO Richard Byron got plenty of pay increases over the past few years and sure must feel comfortable now that his company has an unlimited line of credit with the Treasury. It is ridiculous to believe that we must bail out these businesses who well knew what they were getting into. Not only should Freddie and Fannie fail, they deserve to fail. Unfortunately even if they were to fail, people would still likely ignore the role the Federal Reserve has and continues to play in manipulating the economy. What's also funny is that now Alan Greenspan is going around talking up how banks around the world will fail and be bailed out by governments (he's probably right) when he deserves to be blamed as much as Bernanke or anyone else involved in this. I don't know what changed Greenspan, as he used to actually be a big supporter of a gold standard:

Gold and Economic Freedom - Alan Greenspan (1967)

Anyway, just some thoughts and rambling on the same ol' topic of monetary policy and the Federal Reserve.

More than just a helping hand

Sat, 02 Aug 2008 20:32:00 US/Mountain

More Than a Helping Hand

One of the basic functions of a central bank is to act as the 'lender of last resort'. This facility is used to keep banks liquid during a period of distress.

For example, if a bank is experiencing a run on deposits, it will borrow from the central bank instead of trying to liquidate some of its assets to raise the cash it needs to meet its obligations. In other words, the central bank offers a 'helping hand' by providing liquidity to the bank in need.

The following chart is from the Economic Research Department of the St. Louis Federal Reserve Bank. Here is the link: http://research.stlouisfed.org/fred2/series/BORROW. This long-term chart illustrates the amount of money banks have borrowed from the Federal Reserve from 1910 to the present.

Take a look at the chart included in the article. Basically, banks have become far more dependent on the Federal Reserve in the past couple years than ever before. The thing to worry about is where this money comes from: out of thin air through a printing press, as well as taxpayers. A central bank put together with a fiat monetary policy is flat out dangerous yet very few people today even know how the Federal Reserve works and what type of monetary system we have today. Why have people given every ounce of trust to an unaudited organization with the tremendous power over money, credit, and interest rates? I don't think for a second that people truly understand how this system works.

All sorts of wacky excuses have been made up for what inflation is and what causes it. The idea that increased economic production, or too much production as the case may be, is bad for the economy is beyond ridiculous. It's the creation of the money, the dilution and debasement of the dollar, that is harmful to the economy. Increased production naturally would drive prices down, not up. However, if people really understood this basic lesson of free market economics, those at the Fed would have a very difficult time explaining why they are needed to "keep the markets stable." The "business cycle" is nothing more than the consequence of manipulated interest rates from the Fed. Sure, there may be other factors, but the root cause of the "business cycle" is the decisions made by the Fed.

A central bank by itself is dangerous. What's far more frightening to me is the fact that the Fed is getting more powers and abilities to regulate financial institutions. Over time, the Fed has been getting more trust from politicians (understandably, given how convenient it is for politicians) and continues to go unaudited and unchecked by nearly a soul. While a central bank itself is dangerous, a central bank with increased, unchecked powers is just plain dangerous, outrageous, and scary at the same time. I know I've written continually about the Fed and monetary policy over the past couple weeks and likely will continue to do so going forward. Simply put, I am convinced that the Federal Reserve is a huge threat the economy over the long run. In the short-term, all these great bailout packages where everyone shares the joy and no one fails may indeed sound terrific, but the long-term harm done to the dollar will come back to hurt us. A sound, steady currency is essential to a strong free market system and economy, not a strong central bank. On top of this, for some reason very few people will look back at history and see that this type of system has been tried many times before, not one of them being successful.

It is time that people research monetary policy rather than take it for granted like we have done for years. Even though the amount of people who understand this issue is quite small, I'm confident that it will continue to increase over time and eventually become a key issue and question in economics. At the very least, it will get some good discussions going in the future.

Court reverses Whole Foods-Wild Oats ruling

Thu, 31 Jul 2008 06:46:00 US/Mountain

Court reverses Whole Foods-Wild Oats ruling

Tuesday July 29, 3:11 pm ET
By Christopher S. Rugaber, AP Business Writer

Appeals court overturns ruling allowing Whole Foods to buy Wild Oats, but doesn't undo deal

WASHINGTON (AP) -- Whole Foods' long-running effort to acquire its rival organic supermarket chain Wild Oats isn't completely out of the legal woods yet.

A three-judge federal appeals court panel on Tuesday overturned a lower court ruling from last year that allowed Whole Foods Market Inc. to acquire Boulder, Colo.-based Wild Oats Markets Inc.

The 2-1 ruling sends the case back to the lower court for further consideration, but doesn't halt Austin, Texas-based Whole Foods' integration of the Wild Oats chain or require that the deal be undone.

However, if the district court ultimately rules in favor of the Federal Trade Commission, which sought last year to block the deal, it could disrupt Whole Foods' efforts to combine the companies.

Antitrust laws at work...

I honestly don't have any idea what the motivation behind this is, but this is a ridiculous, foolish, unbelievable move. Whole Foods and Wild Oats together is far from a monopoly. Both companies have sizable market share, but the competition is increasing in larger stores as well as in independent local grocery stores. Heck, buying organic food at Wal-Mart isn't too uncommon these days. Honestly I don't know how Whole Foods and Wild Oats could "hobble competition."

What I find especially hilarious is that the FTC continually goes after Whole Foods while meanwhile a massive bailout of Fannie Mae and Freddie Mac is underway. Henry Paulson and Ben Bernanke have all but admitted that Fannie and Freddie are monopolies. And why don't we look at the Federal Reserve while we're at. The Fed controls money, credit, and interest rates and is made up of the world's largest banks. Hmmm... could there be a conflict of interest there when deciding interest rates? Maybe disrupt the markets a bit? This is pick and choose interventionism at its best. For some reason the FTC will not accept that Whole Foods and Wild Oats together are not a monopoly.

Antitrust laws sound like a good idea, but they simply do not work well. The majority of antitrust lawsuits are from companies that see them as an easy, attractive way to tie up and slow down competition. I have a hard time taking the FTC seriously if they won't go after Fannie and Freddie. Basically the government will regulate the markets in the name of fairness, all the while creating socialistic monopolies also in the name of fairness ("Everyone needs to own a house!"). When monopolies created by the government failed, they are bailed out almost without a second thought by people who were not even elected to their positions (Ben Bernanke and Henry Paulson). Socialism, monopolies, and ridiculous regulations are created and expanded in the name of fairness and equality.

So, the FTC is going after a legitimate buyout between Whole Foods and Wild Oats, when it is clear that neither company has the ability to control the organic food market. Even though I am a shareholder of Whole Foods, it is absolutely ridiculous to think that both companies could control certain markets. Consumers can go elsewhere if they feel the companies are pricing items too high. You see, there's this doozy of an idea called capitalism. A market driven by the consumer? Maybe the government ought to look into it.

Monopolies are created through help by the government. Today no company can fail, the Federal Reserve for some reason is getting more power, and in the end the bill will come to the people. These bailouts are only increasing the dependency on Fannie and Freddie and will not come close to solving the problem. Eventually, these idiotic policies will get to the point where they aren't sustainable any longer. I can't say when, but history has shown that socialism, monopolies, and fiat monetary currencies are unsustainable and do not work in the long run. It will come to an end one way or another, hopefully sooner rather than later. Hopefully the district court is smart and understands the situation more than the buffoons at the FTC, allowing the Wild Oats buyout to go on as usual without further interruption.

Buffalo Wild Wings Reports 2Q 2008 Results

Tue, 29 Jul 2008 18:13:00 US/Mountain

Today Buffalo Wild Wings reported its 2Q 2008 results.

** Sales up 28.8% to $97.87 million from $76 million in 2Q 2007
** Company-owned restaurants sales up 29.5% to $87.5 million
** Franchise royalties and fees up 22.9% to $10.41 million from $8.46 million in 2Q 2007
** Company-owned SSS up 8.3%, franchise-operated SSS up 4.5%
** Cost of sales $89.73 million from $70.97 million in 2Q 2007

** Net income up 46% to $5.6 million ($0.31 per share) from $3.8 million ($0.22 per share) in 2Q 2007
** Profit margin 5.74% from 5.02% in 2Q 2007
** Diluted share count 17,906,000

** $73.97 million in cash
** No debt

** Cash flow from operating activities $14.63 million from $6.34 million in 2Q 2007
** Cash flow from investing activities -$21.62 million from -$14.38 million in 2Q 2007
** Cash flow from financing activities $0.48 million from $0.55 million in 2Q 2007

** Average company-owned restaurant weekly sales up 10.7% to $40,572 from $36,655 in 2Q 2007; average franchise-operated restaurant weekly sales up 5.4% to $46,390 from $43,998 in 2Q 2007
** 10 new restaurants in quarter (4 company-owned, 6 franchise-operated)
** 515 restaurants in operation (169 company-owned, 346 franchise-operated)

Press Release

Analysts were on average expecting an EPS of $0.27 on sales of $94.62 million. Buffalo Wild Wings managed to beat even the highest analyst estimates ($0.30 EPS, $95.67 million in sales). I must admit that this is the last thing I expected from the company this quarter. The doom and gloom surrounding restaurants added in with the shaky economic environment will do its part to weigh down on an investor's confidence in a business. But B-Dubs managed to whip up a fantastic quarter. And I mean fantastic. In terms of same-store sales, this was the company's strongest 2Q since 2004. Let me again say that given the environment today this is all the more impressive.

There's nothing I love to see more than improving margins and strong cash flow production. Management has done a very good job controlling costs and improving efficiency which should make the summer season very enjoyable financially for the company. The company's cash flow production more than doubled in the quarter and the balance sheet remains strong with $74 million in cash and no debt. This stellar cash situation allows management to take advantage of opportunities and work through tough times, and it makes me very optimistic to see cash flow production and the cash position remain in such great shape. Judging from what we've seen so far through the first half of this year, B-Dubs is on track to have a whopper of a year as far as cash flow production goes.

I see quite a few similarities in the situations of Buffalo Wild Wings and Chipotle. Both companies have experienced and dedicated management teams, both are cash producing machines, both have steady margins, and both have a good deal of opportunity over the long run with their unique concepts. I'm very impressed with both companies and look forward to how they progress over the short and long term.

For the 3Q 2008 analysts are expecting an EPS of $0.31 on sales of $103 million. Given how well the company did this quarter, seeing these estimates rise over the next couple months would not be surprising.

First written for StockHigh.net.