”Regulators advanced a plan to ban derivatives contracts based on political elections, athletic competitions and awards contests, in a bid to clarify the boundaries between gambling and financial markets. The Commodity Futures Trading Commission voted Friday to propose a new regulation aimed at regulating event contracts, a small but fast-growing part of the markets in which investors can bet on the outcome of events. CFTC commissioners voted 3-2 to release the proposed regulation for public review, with the agency's three Democratic commissioners voting in favor and its two Republicans dissenting. The proposal won't take effect until commissioners approve a final version, a vote that is likely many months away.”
Excerpted from The Wall Street Journal / May 10, 2024
Subscription May Be Required https://www.wsj.com/finance/regulation/cftc-wants-to-ban-trades-tied-to-elections-sports-and-awards-contests-3d6fb3c6?st=selp4m3bjclxkdu&reflink=article_copyURL_share

Oh, I wasn't talking about Fidelity/Elan. I was thinking, perhaps of one of the AAA cards, though they are provided by Bread Financial/Comenity Bank. That is not well regarded either. So a AAA card may not be a better alternative.
I'm looking for a backup card for foreign travel. Backup means it won't be used frequently but reliability is important. It seems that QuickSilver (Capital One) changed from Visa to MC a couple of years ago. It checks all my boxes.
It pays only 1.5% cash back, but for an infrequently used card a half percent difference isn't important. What does matter is that it has no annual fee or foreign transaction fee. And MC means it complements the Visa card I use for foreign travel. A modest signup bonus ($200) is a small plus. Not to mention half off coffee drinks in their cafes.
Obviously, each person's criteria are different. The Fidelity card works nicely for many.

Invesco website says 5.44% comes from underlying funds - holdings look a mix of funds and individual MLPs. Why would there be funds within anything called "Select".
https://www.invesco.com/us/financial-products/mutual-funds/product-detail?audienceType=Investor&fundId=32052

Apart from a Fidelity MMF (which can't be THAT expensive!) I don't see any funds in their Portfolio holdings. Just straight equities from what I can tell.

Invesco website says 5.44% comes from underlying funds - holdings look a mix of funds and individual MLPs. Why would there be funds within anything called "Select".
https://www.invesco.com/us/financial-products/mutual-funds/product-detail?audienceType=Investor&fundId=32052

Jeff DeMaso discusses Vanguard's new CEO among other topics.
https://www.independentvanguardadviser.com/a-new-leader-comes-to-vanguard/

Thanks for the link. Always appreciated.
He writes:

it certainly feels like Vanguard's culture has been changing already. Vanguard adding fees and selling off non-core businesses—like its small-biz retirement accounts—lends a sense that the bottom line has taken priority from the shareholder (owner) experience

Though the antecedent (Vanguard returning to its core business) was apparent, I had drawn the opposite conclusion.
Some companies manage to expand their lines of business successfully. Many do not and decide to focus on strengthening their core competencies. For Vanguard, that has always been inexpensive, conservatively managed funds.
Between 2002 and 2019 Vanguard offered a cash management account, Vanguard Advantage. It was offered only to Voyager Select ($500K+) and Flagship ($1M+) customers; the former had to pay $30/year and $4.95/mo if you used BillPay.
https://www.investmentnews.com/industry-news/news/vanguard-to-end-its-small-cash-management-service-78435
https://www.mymoneyblog.com/vanguardadvantage-all-in-one-checking-account-at-vanguard.html
This was not Vanguard's core business, and it wasn't going to put money into it unless it saw it getting traction with it well-heeled customers. Today it offers a barebones cash management account that offers nothing but ACH transfers (and a bank sweep) - minimal services that are cheap to provide. Even here, it started with a controlled rollout.
It launched three managed payout funds in 2008 (talk about bad timing), merged them into a single fund in 2014, eliminated the managed payout feature in 2020 (renaming the fund Managed Allocation Fund), and ultimately merged the fund away altogether in 2023.
https://corporate.vanguard.com/content/corporatesite/us/en/corp/who-we-are/pressroom/Press-Release-Vanguard-Announces-Changes-To-Managed-Payout-Fund-02282020.html
It offered a variable annuity (through an outside insurer) with underlying Vanguard funds. Again not a core product, it got out of the business of administering the VA in 2019.
https://corporate.vanguard.com/content/corporatesite/us/en/corp/who-we-are/pressroom/Press-Release-Vanguard-Transitions-Variable-Annuity-Offering-061919.html
In that press release, Vanguard even comments that it will be "Focusing on core offerings". This is nothing new; it didn't start in 2024 with Vanguard shedding its small business retirement accounts.
Bogle built a solid money management firm. Once he left, Vanguard dabbled in expanding financial products. For the most part, it hasn't done this well. While still dabbling it has often retreated to its core business. Sticking to one's knitting does not mean that one is placing the bottom line ahead of shareholder interests.
This is not to say that Vanguard shouldn't be spending more to support its huge number of investors. It can, and IMHO should, nudge people toward electronic trading and communication. But it also needs to improve its human communications as well. This is not a matter of shedding lines of business. This is a matter of providing decent service for its core businesses.

Read the article and the complaints in there are garbage and the reporter is lazy, going for easy hits.
But the useful information in the article was that only 10% of the accounts were moved in the final batch this weekend. Schwab did not learn anything from moving 90% of the accounts prior to this or they did not care.
@rforno, I did not work for Schwab. In my work we had let people that worked on M&A integration go or re-assigned to mundane tasks outside M&A for repeating mistakes in M&A integration, depending how much of FU attitude they showed. The Schwab CEO should be held accountable for keep screwing up after doing this for a year. I always knew that financial industry is one of the slowest to adaptation and full of fat cats but this is beneath American work ethic and standards.

Following are excerpts from a current NPR report:

About 8.9% of credit card balances fell into delinquency over the last year, according to the Federal Reserve Bank of New York — a sign that a growing number of borrowers are feeling the strain of rising prices and high interest rates.
"Everything is more expensive. Debt is more expensive. Rent is more expensive. Food, gas, everything," says Charlie Wise, senior vice president at TransUnion, the credit reporting firm. "Even with relatively healthy wage gains we've seen over last several years, many consumers just aren't keeping up with the price pressures."

Maxed-out borrowers are a big concern-
The New York Fed's report shows the pain is not evenly spread. While many households are on solid financial footing, almost 1 in 5 cardholders is "maxed out," using at least 90% of their credit card limit. That's worrisome, the report says, because maxed-out borrowers are much more likely to fall behind on their bills.
People under 30 and those who live in low-income neighborhoods were particularly likely to be maxed out, according to the report. Among Generation Z borrowers, about 1 in 6 was close to exhausting their credit, compared with 4.8% of baby boomers.

IOW, the usual once a decade (or more) unexpected shocks.
https://www.ft.com/content/5148cd1e-cf01-11e4-893d-00144feab7de
At least we made it to 36,000, also predicted in 1999.
https://www.amazon.com/Dow-36-000-Strategy-Profiting/dp/0812931459

The Glassman [Dow 36,000] thesis was that investors had somehow, for all of history, misunderstood how truly risk-free investing in stocks was, and that they would within a few years come to this realization.
...
No one could have, in 1999, perfectly anticipated that there would be a crash in tech stocks, the Sept. 11, 2001 terrorist attacks, two major wars and a global financial crisis over the subsequent decade.

https://www.washingtonpost.com/news/wonk/wp/2013/03/08/the-author-of-the-spectacularly-wrong-dow-36000-has-some-new-thoughts-on-the-stock-market/

Naw @Mike … I prefer generally to pay cash for most things. (Just sent the propane company a $420 check for a tank top-off.) But for airfare, hotels, rental cars etc. I rely on credit. I could make an exception and charge the home project if Fido really wants to lend me 10 or 15K interest free for a year. Doesnt’t take rocket science to know you can invest that amount for 5%.
I’d rather not name my current Visa provider. Been with the firm 20 years. Large well known financial services company. But they will no longer accept “travel notes” ahead of domestic travel. So … after ending up stranded out of state in the early AM hours in January due to a flight delay, they declined a purchase for food (as “suspicious”). And the food / delivery provider would only accept credit at that time of night.
I do have a debit card tied to my Fido cash management account. And, thankfully, they allow you to leave travel notes, as I would expect their signature credit card would.
Thanks for the thoughts folks. I was thinking maybe there’s a hidden fee with the Fido card? Or maybe they’ll low ball me by offering only a small initial credit limit? Won’t know until I apply. Offer’s good until some time in July.

@Catch22 - No, nothing like that. If the letter is legit I don't think that they would be asking for any personal or financial info, since they must already have all of that before they sent it to you, and evidently they already know that you are a victim here. In any case since your personal info has been compromised (again!) I would at the very least immediately put a freeze on your credit at the three major credit reporting agencies. We have already done that because of an AT&T personal info hack.

https://www.morningstar.com/financial-advice/what-know-about-federal-thrift-savings-plan-tsp-g-fund
Background https://ybbpersonalfinance.proboards.com/thread/45/federal-tsp-fund-sv

Beer googles?

Definition from Oxford Languages:
"Beer goggles" - used to refer to the supposed influence of alcohol on one's visual perception, whereby one is sexually attracted to people who would not otherwise be appealing,
when applied to financial markets becomes:
"Beer GOOGLs" - used to refer to the supposed influence of AI on one's analytical perception, whereby one is financially attracted to stocks that would not otherwise be appealing,
(all strictly in the spirit of this commentary, of course).
While a long-time fan of Cinnamond's fund management, I also own (a rather smaller) position in VSMIX. To be fair, VSMIX has had an amazing run over the last 3+ years, but it might be worth keeping in mind that on the 10-y basis it's posted max DD / alpha of < -47% / -3.70 under the same management per M*. On the flip side, I do not recall Cinnamond getting much below -20% DD in his entire managerial carrier across four different funds.

But it also used to be that a Private Client customer at Fidelity was assigned a specific rep. No more at either brokerage.

Fidelity still assigns you an individual Premier Services Advisor.
@msf did they also used to assign another kind of "specific rep" as well?

As a matter of fact, they've assigned a Private Access Account Executive, a Private Client Group Account Executive (same person, different title), a Senior Account Executive (same person), an Account Executive (same person), and a Financial Consultant (same person).
Then the musical chairs began. No title changes, but in the span of three years, three different "Financial Consultants". Then a year later, when the last one left Fidelity, I was not assigned any specific rep, whatever title you wish to give to them.

@msf I think you might want to consider calling Fido and just asking for one.
In my case, I was offered an individual PSA several times, but declined because I thought it might lead to more marketing, to which I am quite averse. Finally, something made me try, so I just let them know and was promptly assigned one.

Merrill? 4.71%, but that's non-sweep and requires a $100K min.

I think this is in reference to their Preferred Deposit account. If so, this is only an initial investment min, hence one would conceivably put in $100K then take them out leaving, say, $1 and then add/withdraw funds as needed - manually, as this is indeed a non-sweep account. I believe they also have several sweep accounts paying 5.17% atm, but these require a greater commitment shown here.
(To be clear, I've never had a Merrill account before but have recently decided to try them out and am in the process of transferring some funds over. The above information has been confirmed with a phone rep, but I have not had a chance to verify it myself.
Btw, so far I have found their customer service to be surprisingly helpful and competent, though I have only had minor issues to address until now. One odd thing I've encountered with Merrill is that they do not allow you to ACAT in-kind any money market funds - even those that Merrill itself offers - which is a bit of a nuisance, iyam.
Incidentally, I was also told that one can trade against their mm fund balance at Merrill - the same way one can do, say, at Schwab - can anyone confirm this?)

Quick question - Do umbrella policy underwriters require you to account for your net-worth and, more specifically, your financial holdings, when applying for coverage? A lot of it is probably public record and easily verifiable (like home, auto, real estate ownership). But some of one’s wealth (like funds / securities held) are not public record / public knowledge - at least as I understand it. But I may be wrong.
Thanks @davidrmoran for the heads-up re Costco. Happy member.

Interesting article and the graphics in the article remind me of our MFO graphic:
Morgan Housel:

I think this is the most practical way to think about debt: As debt increases, you narrow the range of outcomes you can endure in life.

how-i-think-about-debt
Also this, from Matt Levine, regarding Debt and "Narrow Banking"

The traditional view of banks is that they have lots of money: They take deposits from their customers, giving them cheap funding that they then use to make corporate loans and mortgages and credit cards and everything else. [1] But when the actual bankers at Barclays think about how to fund their credit cards, they come up with ideas like “ask Blackstone for the money.” Blackstone has lots of money too, but its money comes not from bank depositors — who can withdraw their money at any time — but, in this case, from insurance customers, who have longer-term and more predictable liabilities. This makes Blackstone’s funding safer: Its customers are not going to ask for their money back all at once, the way that Barclays’ customers theoretically might (and the way that some banks’ customers actually have). Everyone knows this, which is why Barclays is subject to strict banking capital requirements, [2] making it expensive for it to do credit-card loans, while Blackstone is not, [3] making it cheaper for it to provide the money for those loans.
I mean, “cheaper” in some sense; Arroyo and Johnson add that “because non-banks have higher costs of funding, consumers and businesses may see loan rates rise.” The traditional view is that non-banks have higher costs of funding than banks: Blackstone’s insurance customers want to earn a juicy return on their investment in risky credit-card assets, while Barclays’ depositors are happy to get a return of 0% on their checking-account balances. It’s just that those cheap deposits are not actually so cheap anymore, when you take into account their risk, and the regulation designed to confine that risk. Barclays is in the traditional business of lulling depositors into lending it money at 0% so it can turn around and lend money to credit-card customers at 20%, but that trick no longer works as well as it used to.
One thing I wonder about is: If you were designing a financial system from scratch, in 2024, would you come up with banking? That central traditional trick of banks — that they fund themselves with safe short-term demand deposits, and use depositors’ money to invest in risky longer-term loans, with all of the run risk and regulatory supervision and It’s a Wonderful Life-ness that that involves — would you recreate that if you were starting over?

Banks-are-still-where-the-money-isn-t

From the Artisan statutory prospectus:

You may open a new account in a closed Fund only if that account meets the Fund’s other criteria (for example, minimum initial investment) and:
- you beneficially own shares of the closed Fund at the time of your application; or
- [various other exceptions]
A Fund may ask you to verify that you meet one of the guidelines above prior to permitting you to open a new account in a closed Fund. A Fund may permit you to open a new account if the Fund reasonably believes that you are eligible. A Fund also may decline to permit you to open a new account if the Fund believes that doing so would be in the best interests of the Fund and its shareholders, even if you would be eligible to open a new account under these guidelines.
The Funds’ ability to impose the guidelines above with respect to accounts held by financial intermediaries may vary depending on the systems capabilities of those intermediaries, applicable contractual and legal restrictions and cooperation of those intermediaries.

https://artisan.onlineprospectus.net/Artisan/s000006495/index.php?open=artisan!5fcombined!5fpro.pdf&scr=mob6JHBNJTYNO
That sounds like you ought to be able to open a new ARTKX account (in the trad IRAs), unless Artisan decides to be petulant. The last paragraph seems to suggest that at some institutions at least it should be possible to open the new account. That may take some three way communication among you, the institution, and Artisan, and a fair amount of arm twisting. If you can't open the account at Institution A or B, you might transfer some trad IRA dollars to an Artisan IRA, open the account there, and then at your convenience transfer the IRA back to wherever you want it.
With PRWCX, the situation is similar though slightly different. There is an institutional share class TRAIX that you might consider. TRAIX has a $500K min, but that is lowered to $50K if one invests directly at T. Rowe Price and has $500K in assets there. (That could even include cash that you were planning to invest in Cap Ap in a Trad IRA.) Even at the $250K mark, T. Rowe Price opens up its closed funds to investors. See Summit Program.
https://www.troweprice.com/personal-investing/about/client-benefits/index.html
Since these benefits (lower I class share min, access to closed funds) are a feature of T. Rowe Price's Summit Program, I would guess that they require you to actually have investments at T. Rowe Price. That doesn't mean you couldn't transfer them out once you opened the account (whether PRWCX or TRAIX); just that you'd have to move money into TRP to be able to start the process.

You will only be charged a transaction fee when you buy a FundsNetwork TF fund, not when you sell one.
The charge wasn't a transaction fee.
Fidelity does not charge a fee when selling any mutual fund - even if there is one for purchasing - unless it is an NTF fund held for less than 60 days.
Bingo. Fidelity doesn't charge transaction fees upon sale; it charges short term redemption fees.
But isn't VWINX a TF fund, and thus exempt from the short term fee?
Not from Fidelity's perspective. It didn't collect a transaction fee when the shares were purchased.
Suppose you purchase shares of a fund NTF at Fidelity on Jan 3. Then on Jan 10, Fidelity changes the fund status to TF. Then when you sell your shares on Jan 11th, that sale will incur a short-term transaction fee. Even though the fund was listed as TF when you sold. You can't go by the current fund status.

At the time you purchase shares of a fund, those shares will be assigned either a TF, NTF or Load status. When you sell those shares, any applicable fees will be assessed based on the status assigned to the shares at the time of purchase.

https://www.fidelity.com/mutual-funds/all-mutual-funds/fees
WABAC's shares of VWINX weren't assigned a status at the time of purchase because they weren't purchased at Fidelity. But when they came in they were tagged as not having been charged a fee, i.e. they were treated as NTF shares. And the reality is that they were purchased without a transaction fee anyway.
But they were (probably) purchased a long time ago. WABAC didn't tell us, so this is a surmise. So why did Fidelity charge a short-term fee?
Some brokerages restart the clock when shares are transferred in. Here are examples from a couple of Canadian brokerages:
https://www.reddit.com/r/PersonalFinanceCanada/comments/lhz2cp/td_mutual_funds_short_term_trading_fee_transfer/
Others waive the short term redemption fee altogether. TIAA writes: "Short-term redemption fee: $50 minimum for shares held less than three months (waived for shares transferred from another brokerage firm or financial institution)"
https://www.tiaa.org/public/pdf/commissions_and_fees.pdf
I'm surmising again, but it sounds like the shares were sold at Fidelity shortly after transferring them in. If that's what happened, then there's no need to transfer the remaining shares "to someplace more hospitable"; just wait out the 60 days at Fidelity.
Definitely check with Fidelity on why the short term fee was charged. I'm just guessing here, and as lawyers would say, "assuming facts not in evidence."

A Basic Guide To Financial Derivatives
Interesting line: ”Most derivatives are margin-powered, meaning you may be able to enter into them putting up relatively little of your own money. This is helpful when you’re trying to spread money out across many investments to optimize returns without tying a lot up in any one place, and it can also lead to much greater returns than you could get with your cash alone.”
Just to illustrate one possible method of boosting a fund distribution (in this case by a CEF I own):
* ”The Fund may pay distributions in excess of its net investment company taxable income, and this excess would be a retum of capital distributed from the Fund's assets.” FOF Fact Sheet
Technically a “distribution” is not a ”dividend”. But taken at a glance may at first appear so.
Watch out! @Crash! Be sure to read the fine print. :)
I think it was Marty Zweig who said, “It’s treacherous out there.”

But it also used to be that a Private Client customer at Fidelity was assigned a specific rep. No more at either brokerage.

Fidelity still assigns you an individual Premier Services Advisor.
@msf did they also used to assign another kind of "specific rep" as well?

As a matter of fact, they've assigned a Private Access Account Executive, a Private Client Group Account Executive (same person, different title), a Senior Account Executive (same person), an Account Executive (same person), and a Financial Consultant (same person).
Then the musical chairs began. No title changes, but in the span of three years, three different "Financial Consultants". Then a year later, when the last one left Fidelity, I was not assigned any specific rep, whatever title you wish to give to them.

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
*****************************************************************************************************************************
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]