Boston Globe Interview with Ken Heebner

Hat tip to Daniel Wahl for the heads up about this Boston Globe interview with Ken Heebner, "Portfolio manager casts an optimistic eye on economy". It's worth noting that the positives Heebner sees in the U.S. economy are those sectors benefiting from the weak dollar or the secular bull market in commodities. Says Heebner,

People are overlooking the fact that we're having a huge boom in the farm economy. Also, the energy area is very positive. And I further expect the weak dollar to energize our exports and manufacturing industries. Our natural competitive strengths, our innovation and creativity, remain unique skills in the global economy. We're going to start to export cars, we'll start to export steel.

This is in contrast to some self-described contrarians who have been buying beaten-down American stocks in sectors that are more dependent on the U.S. consumer.

It's unfortunate that, perhaps because this was such as short interview, the reporter wasn't able to ask more follow-up questions. For example, it would have been interesting to read Heebner's response to some additional follow questions about his prediction that inflation could hit 10% in three years. Heebner does say in this interview that he expects high inflation to lead to multiple compression, and that the way to offset this is by investing in companies with enough growth in earnings to offset this multiple compression. I would have been interested to read more of Heebner's thoughts on the consequences of a return to double-digit inflation, and the consequences of the Fed's response to it.

Starbucks

There have been some bearish articles about Starbucks this week, after the company announced plans to close a total of 600 under-performing stores and lay off 12,000 workers (hopefully, the Starbucks I am sitting in now won't be one of the stores that gets closed). The company is certainly facing two negative macro trends: rising input costs (milk, coffee, etc.) due to the Ag boom, and the weakness of the U.S. consumer (due to what I call the four horsemen¹ for short). Given those negative macro trends, I wouldn't buy SBUX here, trading at an enterprise value/estimated forward earnings multiple of nearly 18x.

That said, Starbucks management does seem to be making some smart course corrections to its business. In addition to the recently announced cutbacks in their over-saturated U.S. market, an article in the WSJ earlier this week ("New Brew Attracts Customers, Flak") indicates that the new Pike Place Roast has been successful in increasing sales of drip coffee in Starbucks stores by (if memory serves -- I read this in the dead tree edition earlier in the week) 5%-15%. Most of that WSJ article is behind a subscription wall, unfortunately, but the bottom line of it was that -- despite vocal protests by fans of bold coffee -- sales are up with the new brew. So it looks like this was a smart move.

Perhaps Starbucks will be worth considering as a potential investment in a couple of years, if most of the negative macro trend of U.S. consumer weakness is behind us then, and the company is trading at a lower EV/forward earnings multiple. Maybe the stock will be a buy then, when it's trading in the single digits.

¹High debt levels, lower access to credit, high energy prices, and the negative wealth effects due to the real estate bust and the struggling stock market.