Dear fellow investors,
The Federal Trade Commission (FTC) recently blocked the merger of Albertson’s and Kroger, which are the two largest stand-alone grocery chains. Their theory is that the merger would be anti-competitive and cause higher grocery prices. We find this to be another epic failure on their part to understand the purpose of the Sherman Antitrust Act as overseen by the Justice Department and the Federal Trade Commission.
The Sherman Antitrust Act was formed to break monopolies and was led by Ohio Congressman John Sherman, younger brother of Union General William Tecumseh Sherman. In the aftermath of the Civil War, a great deal of thought and effort was put into preventing things that could ruin our Democracy. Here, we quote Sherman, “The popular mind is agitated with problems that disturb the social order, and among them all, none is more threatening than the concentration of capital in vast combinations.”
Therefore, let’s take a look at the stock market capitalizations of Walmart (WMT), Amazon (AMZN), Kroger (KR) and Albertson’s (ACI):
- WMT-$760 billion
- AMZN-$2.4 trillion
- KR-$45 billion
- ACI-$11 billion
The first question is, how does this merger threaten competition? The obvious answer is that once merged these companies would be a pimple on the face of WMT-AMZN humanity. The second question is, what is the purpose of the merger? It is all about logistics, which is the biggest expense in the grocery business. These companies can offer lower prices by cutting the cost of the products on their shelves.
As the leaders of the most successful monopoly companies of the recent past donate money to the inauguration ceremony or get involved in the Federal Government or “kiss the ring” of the incoming President, we should step back and review what Sherman was trying to do. He was trying to get in the way of a great divide between our most fortunate citizens and our average citizens.
Envy is a lousy sin in Charlie Munger’s thinking because “…it’s the only one you could never possibly have any fun at.” The fact that it is no fun won’t stop it from poisoning the divide between the haves and have-nots.
The good news is that the stock market has a certain biblical symmetry and, many times, has cured the envy directed at the haves when we get to the end of great financial euphoria episodes. So, what can we invest in today that could frustrate the body politic in ten years but isn’t in the sights of most investors?
First, inflation is unlikely to go away any time soon and we are unlikely to use less fossil fuels in 20 years than today. Simultaneously, we are retarding the urge to find more oil and are setting up a scarcity that could play out over the next decade in the form of much higher prices. In the U.S., 40% of electricity is made with natural gas. As coal-fired plants are put out to pasture, that percentage is likely to grow. There is a significant possibility that we are matching what happened in the 1970s:
There has never been a more violent tax-loss selling season than in 2024 in my 44 years in the investment business. The selling for losses is centered on oil and gas stocks which have performed poorly and are designed to offset gains in tech and growth stocks. Some of the best candidates for a bounce beginning on the first day of 2025 are APA Corp (APA), Devon Energy (DVN) and Ovintiv (OVV). They are also well leveraged to rising natural gas prices, which have been so depressed that these companies are forced to burn off much of what is created in producing oil.
Fear stock market failure,
William Smead
The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.
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