Investors Steamed

Investors Are Steamed at Darden
Shares in the restaurant opeartor tumbled Wednesday after weakness at newly acquired chains led to a profit shortfall

What the heck is a restaurant opeartor? Did spell checking get outsourced overseas? I fall victim to that myself from time to time, but I am not part of the well established media with a reputation to protect. Sloppy, sloppy, sloppy!

Raymond James & Co. downgraded the stock to outperform from a strong buy rating, with analyst Brian Elliott saying that Darden's sales at stores open at least one year are no longer strong enough to offset its cost inflation, which seems to have risen significantly in the past three months. Investors who buy the shares at around $33 will be well rewarded over the next one to three years, Elliott predicted in a research note.

So tell me Mr. Elliott, what is it about the restaurant business that excited you in this environment and continues to excite you? I'd really like to know how the next three years are going to be so wonderful. If inflation pushes up the price of houses, what will it do to the price of food and oil? If deflation brings down the price of food and oil, what will it do to the price of houses and the employment situation? No thanks. I'm having a hard time seeing the upside. Darden lost 21% today. Had I been a brave man, I would have shorted the heck out of your "strong buy" yesterday (when I shared my thoughts that we've got too many restaurants per capita based on where I think this economy is headed).

This brings me to the idea of shorting stocks in general. Even if we are right we could be wrong. If a company gradually slides into the abyss we would gradually make money, right? What if that gradual amount doesn't keep up with inflation? There's a timing aspect here that concerns me. In the 1970s the average company stagnated. The best thing to do in hindsight was to simply find something that could keep up with inflation as inflation rose.

Real threat is uncertainty, not stagflation:James Saft
LONDON (Reuters) - The problem isn't stagflation, scary as the specter of an ugly mix of poor or negative growth and high inflation is for investors. The problem is knowing which of the two to fear and fight.

That's EXACTLY why stagflation is here though. There are two things to fear and fight. The Fed will choose, if it must, to walk the line between the two. Will it not? Further, why would we want to choose, as individual investors, which one to fear and fight? Are we going to ignore the other and hope we are right? To me, the safest "bet" IS the one on an "ugly mix of poor or negative growth and high inflation." If we are wrong, at least we are only half wrong.

A sustained period of both the fire of inflation and the ice of a credit crunch-induced slowdown is highly unlikely.

You mean like the 1970s? When we kept toggling back and forth between serious inflations and serious recessions? Dare I remind you what eventually pulled us out of it? In my opinion, we embraced debt. How are we going to embrace even more debt this time around? What if we stay stuck in the 1970s? In the 1970s the rising price of oil was political. What if it is geological this time?

But while the combination of inflation and poor growth is daunting, currency strategist Stephen Jen of Morgan Stanley points out that the inflation data reflects the immediate past, rather than the future.

I refer Stephen Jen of Morgan Stanley (whose company was not well positioned for this environment if its stock price is any indicator, down 45% from its 52-week high) to the 5-year inflation chart as seen here. The CPI has risen at an average rate of 3% per year for the last five years and the trend has been rising.

Perhaps I am wrong to be a stagflationist. It is quite possible. However, I would argue that we've been stagflationary for a long time. The investments that worked best in the 1970s have worked best in this current environment. It didn't just start in the "immediate past" either. Look at the rising price of oil. It preceded the dotcom bust and was quite possibly a factor in popping that bubble.

Just opinions of course!