From May 1st market commentary by the Palm Valley Capital Fund (PVCMX) co-manager Eric Cinnamond.
Original blog post can be found here: https://www.palmvalleycapital.com/post/undateable
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Undateable
May 1, 2024
You can learn a lot about the financial markets by watching Seinfeld. In season 7 episode 114, Jerry and Elaine have a conversation about the lack of dating opportunities. Although they were talking about the percentage of people they consider dateable, by making some minor changes to the script, their conversation fits the current stock market perfectly.
Jerry: Elaine, what percentage of people [stocks] would you say are good looking [attractively priced]?
Elaine: 25%
Jerry: 25%? No way. It’s like 4% to 6%. It’s a 20 to 1 shot.
Elaine: You’re way off.
Jerry: Way off? Have you been to the motor vehicle bureau [screened through stocks]? It’s a leper colony down there [horrendous opportunity set].
Elaine: Basically, what you’re saying is 95% of the population [the stock market] is undateable [overvalued]?
Jerry: Undateable [overvalued]!
Elaine: Then how are all of these people getting together [why are all these people buying stocks]?
Jerry: Alcohol
As if our dating scene couldn’t get much worse, the S&P 600 soared 15% in the fourth quarter of 2023. Encouraged by the Federal Reserve’s year-end pivot, investors piled into stocks, attempting to front run the return of easy money.
At the time, we were baffled as to why the Fed was in such a rush to cut rates. For the most part, corporate earnings remained inflated. Financial conditions were already loosening, with equity valuations elevated and credit spreads tight. Home prices were also rising and remained out of reach for millions of Americans. And while the rate of inflation had declined, many of the items helping inflation moderate were plateauing, and in some cases, reversing. Further, accumulated inflation remained a serious problem, putting pressure on middle- and lower-income consumers and keeping inflation expectations elevated.
Unsurprisingly, by pivoting before the inflation battle was won, the Fed unleashed another round of asset inflation, bolstering demand and pricing power. Instead of declining back to the Fed’s 2% target, inflation bottomed and is on the rise again. To date, the Fed’s 2023 preemptive pivot is aging about as well as its “inflation is transitory” assurances in 2021.
Instead of declaring victory on inflation, we believe the Fed prematurely signaled rate cuts to head off building threats to asset prices and the economy. While there are many risks to defuse, we believe refinancing risk was, and remains, near the top of the Fed’s list of concerns. With each passing day, the amount of low-cost government and corporate debt nearing maturity grows.
Extremely low interest rates allowed the U.S. government to borrow aggressively, supporting massive fiscal deficits and artificially inflating economic growth. Corporations also benefited from elevated government spending and lower rates. Low-cost debt allowed companies to acquire, fund generous dividends, and turbocharge earnings per share (EPS) through buybacks and depressed interest expense.
As accumulated inflation continues to build, along with a seemingly endless supply of U.S. Treasuries, we believe the era of ultra-low interest rates has ended. With interest rates remaining higher for longer, a growing number of businesses are facing difficult refinancing decisions as their maturity walls approach. While some are pushing off the decision—hoping rates will decline—the market isn’t waiting and is beginning to sniff out companies that require funding over the next 1-2 years.
As we search through our opportunity set of small cap companies, many of the stocks that have performed poorly have bonds approaching maturity or have refinancing risk. For example, Cracker Barrel Old Country Store’s stock (symbol: CBRL) has fallen 45% over the past year and 61% from its 2021 high. Cracker Barrel operates restaurants that are typically located along interstate highways. We know their home-style country food well, as we hold Palm Valley’s annual founders meeting at a local Cracker Barrel (and yes, we all order from the value menu!).

Similar to many consumer companies that cater to the middle class, Cracker Barrel’s traffic growth has slowed and has recently turned negative. Accumulated inflation has placed stress on discretionary spending and many of the casual dining companies we follow. Management expects industry and traffic challenges to continue. Based on analyst estimates, adjusted EPS is expected to decline from $5.47 in fiscal 2023 (ending July 31) to $4.60/share in fiscal 2024.
Even as operating results have weakened, Cracker Barrel has remained committed to its generous quarterly dividend of $1.30/share. If maintained, the $5.20/share in annual dividends will exceed this year’s expected net income. The company has also been an active buyer of its stock, purchasing $184 million over the past three fiscal years (2021-2023). Combined, dividends and buybacks have consumed $447 million in cash over the past three years versus $461 million of free cash flow.
With practically all of Cracker Barrel’s free cash flow being consumed by dividends and buybacks, debt reduction doesn’t appear to be a priority. As of January 26, 2024, debt was $452 million. Based on 2024 estimated EBITDA of $242 million, debt to EBITDA is 1.87x, or slightly above the high-end of the company’s target range of 1.3x to 1.7x.
On June 18, 2021, Cracker Barrel opportunistically issued a $300 million convertible bond with a 0.625% coupon. At the time of issuance, its stock was trading at $150.51. With a conversion price of $188, the bonds had a conversion premium of 25%. Currently, Cracker Barrel’s stock is trading near $59; therefore, the odds of the bond converting to equity before maturity are low. With a maturity of June 15, 2026, refinancing will likely become an increasingly important issue for the company and investors.

Cracker Barrel has $511 million available on its $700 million credit facility that could be used to fund its convertible bond maturity. However, the weighted average interest rate on the credit facility is currently 6.96% versus the 0.625% coupon on the convertible bond. Assuming the credit facility is used to fund its bond maturity, at current rates, Cracker Barrel’s interest expense would increase $19 million, causing a meaningful hit to earnings. For reference, earnings before interest expense and taxes (EBIT) in 2023 were $120.6 million. Like many companies with debt, Cracker Barrel’s cost of borrowing has shifted from an earnings tailwind to headwind.
We classify Cracker Barrel as a cyclical business. To consider cyclical businesses for purchase, we require a debt to normalized free cash flow ratio of 3x or less. Based on our free cash flow estimate, Cracker Barrel currently has too much financial leverage for our absolute return strategy. Nevertheless, its substantially lower market capitalization has caught our attention, and we’ll monitor its balance sheet closely for potential deleveraging catalysts, such as a cut in its dividend or sale-leasebacks of owned properties.
The small cap dating scene remains unattractive, in our opinion. However, for many consumer discretionary companies with debt, equity prices have fallen sharply, and valuations have become more attractive. That said, these aren’t dream dates! Cyclical companies with debt often come with a lot of baggage and potential drama. Before committing and getting too serious, we recommend stress testing the balance sheet and cash flow by including periods with high unemployment and tightening credit conditions. And if alcohol is needed to stomach the risk, we suggest patience and waiting for a better match. When it comes to leveraged cyclicals, there are plenty of fish in the sea!
Eric Cinnamond
[email protected]

I just finished a look for best performing Dividend and Dividend growth funds and was surprised that VDIGX has not beaten many similar funds.
VIG pays a higher Dividend and is ahead for last few years, as is SCHD
PRDGX seems to be a better dividend growth fund as well

The way the markets have been behaving lately, I’d hate to predict how the day ends. But everything looks hot at the moment - including bonds as rates fall. Gold isn’t doing much. Hanging around $2300. Consolidating I think.
So the drop in interest rates is helping equities. There’s been a remarkable correlation between stocks & bonds this year ISTM. Some of today’s uptick is a delayed reaction to something Powell said at the news conference Wednesday about a rate hike being “unlikely” at the next meeting.
Edit: I think a more interesting question is why the economy has stayed hot despite all the Fed tightening & inverted curve? I suspect in large measure that’s $$ going into goods & services that’s been amassed by investors in good markets over many years. Especially - the boomers are spending down before it’s too late. Feel free to disagree. I can’t find anyone else who agrees with me.

"We had previously owned OAKMX for several years. Very good fund - not sure why we ever parted with it."
Possibly it had something to do with the WaMu debacle.

Cha-ching!

"We had previously owned OAKMX for several years. Very good fund - not sure why we ever parted with it."
Possibly it had something to do with the WaMu debacle.

I have a 74 year-old neighbor who has stargardt disease and is losing his vision. He barely can log into his Vanguard account (will not be able to in a year or so) and can't facilitate the handful of trades his does per year online. And now Vanguard is going to penalize him for his disability?

At almost 74, this has been going through my mind in recent years also, not for failing eyesight, but more for dementia and not being able to track and tweak things, as necessary, as I do now. So far so good. My niece will have POA when I lose it, but she doesn't know anything about investing/portfolio management.
The local Schwab guy cold-called me last week, just to see how I was doing. Hadn't had contact with him in over a year, as I normally don't have any reason to.
I asked him specifically about this potential problem. He said they have people there that will do it, plus they can recommend local independent financial firms who will do it. I knew they are out there, but who to trust? But if Schwabbie recommends them, they are more than likely going to be fine.
It was a relief to hear that.

I own only one - PRWAX. Does anyone here own OAKMX?

Yes, we currently own OAKMX, having exchanged VWNDX for it earlier this year. We had previously owned OAKMX for several years. Very good fund - not sure why we ever parted with it.
We also like you own PRWAX.

@rforno … it was really interesting with a lot of good information. Examining the heatmap, personally, I’m hoping for a rebound for REITs, and have a big bet on RQI for a down payment in 2 years to buy out my auto lease.
One item was not helpful…on the “Taxable Equivalent Yield Comparison” table, they used an example for a married couple with combined W-2 income of 1MM+…since my tax status is “single“, that was of no help.

Same for me. Just divide the numbers by 2 and you can get a rough idea for yourself. :)

I've been pretty active in the CEF space over the years but very hard to be CEFS. Fantastic skill and their interest rate hedging has been spot on.

@rforno … it was really interesting with a lot of good information. Examining the heatmap, personally, I’m hoping for a rebound for REITs, and have a big bet on RQI for a down payment in 2 years to buy out my auto lease.
One item was not helpful…on the “Taxable Equivalent Yield Comparison” table, they used an example for a married couple with combined W-2 income of 1MM+…since my tax status is “single“, that was of no help.

There's a certain "fun element" in knocking Vanguard. While it's hard to find any upside to Vanguard's latest announcement, in itself it's not that big a deal. Most of the changes won't affect most people, as noted in the video Yogi linked to. It's more the idea these are more small steps in the wrong direction for Vanguard.
@randynevin wrote that Vanguard provides excellent products at competitive prices. True enough, and the main reason to have an account at Vanguard. All the brokerages have been pushing people toward digital "solutions" and away from human interaction. It used to be that a Flagship customer at Vanguard was assigned a specific rep. But it also used to be that a Private Client customer at Fidelity was assigned a specific rep. No more at either brokerage.
Fidelity can't even seem to assign me a "team" at its closest location any more. It used to be that a Fidelity team (formerly an individual rep) stayed with you for several years. These days, the turnover there is much quicker. Everyone seems to be moving in the wrong direction, even if Vanguard seems to be moving that way a little faster.
High Net Worth? Years ago, Vanguard introduced 8 free trades/year for Flagship customers. Both stock and TF fund trades were counted against those 8 trades. Then it upped the free trade allotment to 25/year. Then it eliminated stock commissions, so Flagship customers got 25 free TF fund trades/year regardless of any stock/ETF trades they make. A nice little perk moving in the right direction. A number of people have said that Schwab will cut some deals here, but you have to negotiate this.
Quality of execution ought to be high on the list of cost concerns. Vanguard, like Fidelity and Merrill does not receive payment for order flow - so it gets good price improvement. That's not changing.
Admiral shares? A long time ago, Vanguard treated index funds the same as actively managed funds - the entry level share class was Investor shares. Once Vanguard lowered the min for the Admiral share class of index funds to $3K, index fund Admiral shares became Investor shares in all but name. Consequently, restrictions on Admiral shares now apply only to actively managed funds' Admiral shares. One can usually transfer them to other brokerages but not buy additional shares.
ADR fees charged by a custodian are part of the ADR product and as Vanguard clearly states: "Banks that custody ADRs are permitted to charge ADR holders certain fees, as detailed in the ADR prospectuses." Vanguard is not trying to grab part of this any more than it is trying to grab part of the management fees of third party funds. Rather, it is adding a fee for processing divs from ADRs held in VBS accounts.
A feature Vanguard added recently is a bank sweep yielding 4.7% APY. That's still about 1/2% below what it pays on MMFs, but if one wants FDIC-insured cash at a brokerage, that may be better than anyone else is offering. Schwab? Not even worth looking up. Fidelity? 2.72%. Merrill? 4.71%, but that's non-sweep and requires a $100K min. Otherwise it's 3.54%. SoFi? 4.60%, but only if you have direct deposit, else 1.2%.
Not every change at Vanguard is in the wrong direction. Though unfortunately, most of them are.

also as i ~3 decade flagship user, dropping integrated banking services was when i noticed the steep decline in vanguard :
- vanguard themselves added the burden of tens of millions of small accounts by relentless promotion of index products, lower minimums, and lower ER.
they need to cover this burden, in addition to their generous 'not-for-profit' salaries, perks, and campus expansions.
- vanguard services\tools\fees have gotten worse for all clients.
i would say the impact is more for HNW , since some of these were never free for small accounts in the first place.
so i guess it is a form of democratization of the investing experience, but not one of pride.
on a side note, peter zeihan predicts a massive decline in employment in the financial services sector for ~10 years as retirees draw down and shift to lower risk non-equity vehicles. this will not reverse until the greatest wealth inheritance transfer in history slowly begins.
so expect the worst companies to get much worse.

I'm sorry some of you have had poor experiences with Vanguard. Our experiences have been exactly the opposite. We have had accounts with Vanguard for 30+ years and have received excellent support. I don't want newbies reading this thread to think Vanguard is uniformly bad. They deliver excellent products for extremely competitive prices. Their fee structure may be designed to discourage millions of tiny little accounts, but those are the bane of any mutual fund / etf company.

Agree, we do not want any newbies reading this thread to be misdirected.
I stayed away from participating on this and other threads discussing about Vanguard's negative virtues but your post prompted me to share my experience. I have a 7 figure account with Vanguard, which is my first investment account opened 30 years ago. While all brokerages' service quality has dropped since beginning of Covid, many are slowly recovering. Vanguard service quality stunk for more than 5 years and does not show any promise of abating. Rich folk do not care about costs of their investments but they care about total returns and quality of service is why they put their money in venture capital, private equity, and other structured products. Costs are important to the tiny investors that presumably (according to you) Vanguard is trying to restrict / kick out. I do not mind paying to encourage the tiny investor. Over the years, I sent many written suggestions to Vanguard to improve their service quality and then decided to keep my silence. Vanguard has a culture problem and has become the Boeing of investment firms.
Please see my previous post for what I am doing now.

@yogibb and @msf, thanks for your comments.
I am not buying I bond either. The $10K limit per year is too small for us, including the $2.5K from tax refund. The other challenge is navigating through TreasuryDirect that requires lots of patience. Will hold what we have until they reach 5 years.
Since the yield curve remains inverted, we continue to buy T bill every month as part of a ladder in our taxable account. USFR is a good vehicle I learned from this board. The yields are very competitive to I bond. Moreover, they can be bought and sold readily at many brokerages.

I'm sorry some of you have had poor experiences with Vanguard. Our experiences have been exactly the opposite. We have had accounts with Vanguard for 30+ years and have received excellent support. I don't want newbies reading this thread to think Vanguard is uniformly bad. They deliver excellent products for extremely competitive prices. Their fee structure may be designed to discourage millions of tiny little accounts, but those are the bane of any mutual fund / etf company.

Comparison should be with 5-yr T-Note (4.64%) and 5-yr TIPS (2.25% + inflation).
I suppose that's as good a reference as any. I can infer the rationale for five years - that after five years one can cash out an I bond w/o penalty. But an argument can be made for comparing with 30 year T-bonds. They, like I-bonds, have a rate locked for 30 years.
I view I-bonds as cash, much as one might view a 5 year CD with a 90 day early withdrawal penalty as cash. No interest rate risk. And that may be the biggest flaw in comparing I-bonds with 30 year T-bonds. The latter is extremely sensitive to interest rates.
At current rates, one will do better with a five year TIPS (2.25% + inflation) vs an I-bond cashed out after five years (1.3% + inflation). That's true (though a closer call) after accounting for the fact that you'll pay taxes annually on the TIPS, bleeding returns. I-bonds are tax deferred until you cash out.
(To do an apples-to-apples comparison, I'm looking at taxable accounts, since I-bonds can't be held in tax-sheltered accounts.)
It's the classic trade-off. Certainty vs. expected return. In normal environments, yield goes up as the length of the debt instrument increases. I bonds are like cash, while Treasuries, especially multi-year or multi-decade ones, have uncertain mark-to-market (cash out) value.
And I-bonds have no reinvestment risk (risk of reinvesting divs after rates drop). With I-bond's greater certainty (ability to cash out w/o loss, no reinvestment risk) and more favorable tax treatment (deferred), they should normally yield less than Treasuries.
As I noted in the OP, one can hold and still improve one's position by swapping older, lower fixed-rate I-bonds for new, 1.3% fixed-rate issues. Though there is a tax cost in cashing out those old I-bonds.

@davidrmoran,
i hope you recover soon.
I have my car insurance through AmFam for sometime and I do not shop around. Many, many years ago when I took their auto insurance, they were quite expensive for home insurance but they no longer underwrite home insurance in my State, at least not new policies. They have good customer satisfaction scores.

For many years now we have used Costco's American Family Connect for all three types of coverage, umbrella through some subsidiary. While I often feel I should shop around and compare premiums in detail, I've been very happy with their cost, their service, and their payouts. Even or especially when on "opposite" sides now, as I got hit by a car in January in our no-fault state and so AmFam, which is in Wisconsin, is among the insurers "paying" me and covering the v large medical expenses, approaching $200k. (Medicare rightly attaches some of the payout, being public moneys.)

Another market neutral fund, VMNFX (down -.14% today) has actually outperformed QDSNX by approx. 3% annualized over the past 3 years (15.6% vs. 12.6%) with same SD (7.3). Looks like Vanguard had changed up the Portfolio Mgr around 3 years ago.
Happy with QDSNX, it has performed admirably. One of these funds feels like enough.

@junkster,
Two years ago, I would not have expected floating rate stuff to do well for this long. JBBB and JAAA are green today.

Most of my monies is in CLOs (floating rate) and my complacency there worries me. Even Barron’s is extolling the virtues of CLOs. - never a good sign.
Maybe Powell will ignite another long duration rally tomorrow ala November 1.

CLOs / CDOs / CDS / etc always give me the queasies. The GFC was caused by their systemic risk and not long after the crisis ended, they were back under a different name as I recall. Bottom line, I avoid any investment I can't understand or has too much complexity.