Having a bad day? You’d be having a worse day if you were a middle manager at Kraft Foods (KRFT). In fact, you’d be furiously updating your resume — expecting to be kicked to the curb later this year.
As you might have heard, the big news on Wall Street this morning is H.J. Heinz buying Kraft. Warren Buffett has a hand in the deal. “This is my kind of transaction,” he says. “Uniting two world-class organizations and delivering shareholder value. I’m excited by the opportunities for what this new combined organization will achieve.”
But it’s the other player in the deal that catches our attention — Brazil’s 3G Capital Partners.
Buffett and 3G joined forces two years ago to buy Heinz. In recent years, 3G took over Anheuser-Busch and Burger King, too.
In each case, the formula has been the same: As one of the three Brazilian billionaires who runs 3G puts it, “Costs are like fingernails: You have to cut them constantly.”
“If you give people the right incentives, you can get amazing results,” says our Chris Mayer. “As an investor, I am always on the lookout for such magical firms as 3G.”
3G has been all about incentives going back to its roots in the Brazilian investment bank Garantia — founded in 1971.
“Garantia aimed to create a meritocracy,” says Chris. “It would pay and promote employees solely on performance. (This was unheard-of in Brazil.) Garantia wanted a certain kind of employee — poor, smart, desire to get rich.
“And second, it had a slavish devotion to cutting costs. Garantia had a modest office in Rio. There were no offices separating partners from other employees. Executives flew economy, stayed in cheap hotels and sometimes even shared rooms. Dress was casual.
“This had an ugly side, however,” says Chris. “The pressure was intense on employees. Management fueled that pressure by routinely cutting 10% of its staff. People worked all hours.”
But the results were indisputable, judging by numbers from the book Dream Big: How the Brazilian Trio Behind 3G Capital — Jorge Lemann, Marcel Telles and Beto Sicupira — Acquired Anheuser-Busch, Burger King and Heinz. “More than 200 of the people who worked at Garantia have earned more than $10 million,” Chris sums up. “Lemann meanwhile became the 33rd richest man in the world, according to Forbes. And Telles and Sicupira came in at 119th and 150th, respectively.”
Across more than four decades, the trio has applied the same formula to all its acquisitions — like Anheuser-Busch in 2008.
“They pulled down executive walls,” says Chris. “They cut the number of BlackBerrys in executives’ hands from 1,200 to 720. They put the brewer’s fleet of corporate jets up for sale. Everyone would travel economy class henceforth. No more free beer. No more free Cardinals tickets. No cash bonuses. The usual playbook, in other words.
“And again… fast results. Within five years, the stock of AB InBev, of which Anheuser-Busch was now a part, tripled on much improved performance.”
The Burger King acquisition came in 2010. Immediately, 650 administrators and managers were let go. Seniority offered no protection. The meritocracy is such that the current CEO is 33 years old and the CFO 28.
Before the open this morning came word of the Kraft deal. The market reaction was instant…
“The fact that a $36 billion stock moved 36% this morning shows you the respect the market has for 3G’s abilities to slim down fattened blue chips,” says Chris. (It’s now a $49 billion stock.)
“I’m not an admirer of theirs, but there is no denying their results. They make Kraft interesting — Kraft, of all things!
“I wouldn’t want to work for them. But I’ll invest with people like this any day.”
[Ed. note: And for the long haul, we hasten to add. That’s the essence of the “coffee can portfolio” Chris has enthused about in recent years.
It works like this. Buy a handful of quality stocks and sock ’em away for 10 years — the way folks in the Old West stashed their valuables in a coffee can. Buy right and you can multiply your money 20-fold.
Intrigued? Chris shows you how to make it work when you click here.]
Major U.S. stock indexes are in the red this morning. The S&P 500 has slipped two points, to 2,089. The Nasdaq isn’t holding up as well, shedding nearly two-thirds of a percent to 4,963.
The greenback is weakening, gold strengthening. The dollar index is now below 97, and gold is as close to $1,200 as it’s been in three weeks.
The big economic number of the day is stinking up the joint: Durable goods orders fell 1.4% in February. Whoops, the “expert consensus” was counting on an increase of 0.7%.
Even if you throw out motor vehicles and aircraft — which are lumpy from month to month — there was a 0.4% decrease, yet again confounding expectations of growth.
“The latest orders numbers point to continuing weakness in the manufacturing sector,” says Bloomberg, “and may soften Fed hawk rhetoric — especially taking into account the latest sluggish March manufacturing surveys.”
“The fuse is lit on a massive homebuilding bomb,” says Greg Guenthner of our trading desk. And to be clear, he’s bullish on homebuilders.
Still bullish, that is. As long ago as Oct. 21, Greg was telling readers of The 5 that homebuilders were set for a comeback despite lousy housing numbers. Since then, XHB — the big homebuilder ETF — has screamed up nearly 20%.
He reiterated his call on Dec. 5 and Jan. 23. And if you ignored him then, he says it’s still not too late. “I see additional catalysts for homebuilder stocks. Demographics tops the list. Millennials (a group larger than the baby boomers) are sprinting toward the critical household formation phase of their young lives. And the oldest of this group (approaching their mid-30s) who were hardest hit by the financial crisis are breaking free of its grasp.”
We’ll interrupt Greg’s train of thought to point out something interesting here…
Ignore everything you think about where millennials like to live — if new U.S. Census numbers are to be believed.
“Here’s the usual media narrative,” says an eye-opener at the number-crunching site FiveThirtyEight: “Millennials prefer cities to suburbs. They love renting lofts and disdain single-family homes; they ride the subway (or take an Uber) because they barely know how to drive. Where their parents wanted green lawns and cul-de-sacs, today’s young Americans want walkable neighborhoods and local bars with plenty of craft beers on draft.”
Here’s the reality: Last year, 529,000 Americans age 25-29 moved from cities to suburbs; only 426,000 moved the other way. The numbers are even more extreme among millennials in their early 20s.
It’s true, young adults were more likely to move to the suburbs 20 years ago. But the fact remains, “The fastest population growth right now is in the lowest-density neighborhoods, the suburb-iest suburbs,” says Jed Kolko, chief economist at the real-estate site Trulia.
Back to Greg’s case for homebuilders: “Add these bullish demographics to a market that hasn’t seen much new construction in almost 10 years and you have the spark to ignite a renewed building boom.”
Who knew bread was such a delicacy among the elites of North Korea?
From the Reuters newswire: “French-trained chefs are cooking up a storm in Pyongyang where North Korea’s privileged classes are devouring their baguettes, a pro-North newspaper reported on Wednesday, even as much of the population outside the capital struggles to feed itself.”
The 5’s voluminous archives reveal that the late dictator Kim Jong Il was fond of delicacies like hippos, snakes and spiders — prepared by his personal sushi chef.
Nothing so exotic anymore, it seems. A newspaper published by North Korean residents of Japan (who knew?) reports the Kumkop General Foodstuff Factory for Sportspersons (for real!) sent pastry chefs to train in France last year.
The factory got a visit from current dictator Kim Jong Un two months ago, as reported by the official KCNA news agency. Brace yourself for more flowery verbiage: “He said that the factory should wage a dynamic drive for developing and producing foodstuff including chewing gum which is badly needed by the sportspersons and suited to the constitution of the Koreans.”
We’re reminded of the “kim jong-un looking at things” Tumblr page we visited late last year…
No baguettes, but we have bread twists!
More recent entries are just as compelling…
Looking at bricks…
It would be funnier were it not for the fact the United Nations says a quarter of all North Korean children are malnourished…
“You seem to have forgotten property taxes,” a reader writes after our item about Tax Freedom Day — “which tax we pay with what little we have left over from our federal and state taxes (and you renters, don’t congratulate yourselves too early, as we landlords just pass that expense on to you).
“Then there are all those other taxes — at the mall, those red light cameras, etc., etc. Wonder what THAT grand total amounts to?”
The 5: Hmmm… The Tax Foundation study appears mighty comprehensive. There are tables about everything from property taxes to “sin” taxes to cellphone surcharges. Just for giggles, here’s a breakdown of the property tax burden…
We abhor taxes of all kinds around here, but your editor can’t shake the feeling that there’s something especially evil about property taxes. It’s as if you can never truly own your home and land.
At least you can still grow your own food in the backyard and not have your labor taxed…
“Where did The 5 get the mistaken impression that the U.S. Mint does not sell coins to individuals?” a reader writes. “I have been buying them for decades, and I am confident there are thousands of others also.”
The 5: Collector coins, yes. Bullion coins like Gold and Silver Eagles, no.
“I have not seen much attention being paid to the new Asian Infrastructure Investment Bank (AIIB),” writes one of our regulars, “which recently added Great Britain, Germany, France and Italy to its roster of member countries, which now total 35.
“In addition, Japan and its Asian Development Bank are making overtures to joining this new venture, and I am curious as to how this will affect the IMF and the World Bank going forward, as it would appear it would limit their ability to issue special drawing rights (SDRs) if their need has been diminished.
“This brings up another question. Since the IMF and the SDRs are supported by contributions from member countries, is it not probable that some, if not most, of these countries will abandon the IMF altogether in favor of the new AIIB? This could have serious implications for the IMF, and in particular the USA, as this will surely diminish the dollar’s use even more as the world’s reserve currency.
“This will create a large power shift — not all, but a substantial amount — from the West to the East. This will undoubtedly cause political relationships to change between many countries in the future, and tensions are sure to rise around the world.”
The 5: Where’ve you been the last two weeks?
We see now that IMF chief Christine Lagarde is paying a call on Chinese Premier Li Keqiang. Surely, Li pressed his case to have the yuan included in the SDR. Our own Jim Rickards says he has a strong case…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. That meeting in Beijing is another facet of the “de-dollarization” process declared last spring by the Russians — in conjunction with the Chinese.
It’s a rapidly shifting landscape. Are your finances ready to navigate it? Jim Rickards’ new book The Big Drop: How to Grow Your Wealth During the Coming Collapse, aims to help you preserve and even increase what’s yours as the de-dollarization storm gathers.
It’s yours free, if you can cover shipping and handling. Act here and we’ll have it on your doorstep within a week or two.
