Lower Interest Rates
Plus, what's brewing at Starbucks
by Jeff Fischer (JeffF@fool.com)
ALEXANDRIA, VA (Sept. 29, 1998) -- The Federal Reserve lowered interest rates by one-quarter point today, to the surprise of no one. Although it has been almost three years since the last rate cut, the majority of Fed watchers polled by Standard & Poor's saw this move coming. The question was: will it be a half-point or a quarter-point? The Fed took the conservative path and flipped a quarter to the masses, rather than a fifty-cent piece. The funds rate dropped from 5.5% to 5.25%.
This rate represents what commercial banks charge each other for overnight loans, effectively determining borrowing costs in the economy because most banks peg their own rates to the fed funds rate. One reason the Fed lowers the rate is it hopes to stimulate growth, both materially and psychologically. Decreasing the rate serves to increase investors and banks' confidence and facilitates growth by design. If the cost to borrow money is lower than the return that you can generate on it, you'll borrow cash and use it to expand. The lower the rate, the more this is possible.
This rate cut was also made due to an impending international credit crunch following the collapse of several world economies. It has recently become more difficult for many corporate borrowers to raise needed capital. Meanwhile, the constant objective is to keep growth in America steady (and strong enough) while keeping inflation controlled.
The irony of the situation is that very recently the Fed was leaning towards increasing rates, not lowering them. The lesson is that even the Fed, with its well paid and highly-educated staff (and a vast abundance of privileged information), can't foresee where the economy is going enough to know its own next move. So, it's funny to think that many stock market pundits pretend to know what will happen next in the economy and markets, whether based on charts, cash flow into stocks, or simply the latest bull and bear ratios. The fact is, they can't know.
The initial reaction from the stock market regarding the quarter-point (or 25 basis point) move by the Fed was that it wasn't enough. Many people were hoping for a more aggressive half-point move. The fact that the Fed can easily lower rates again in the future, however, argues that the conservative first step was likely the smartest. But whatever the consensus on the issue, Fools invest in great companies rather than the general stock market and its near-term whims, so -- like The Love Boat disembarking from the hand-waving legions on shore below -- let's leave this issue behind and sail to more interesting topics.
The Fool Port surrendered half of yesterday's gain as only AT&T and DuPont rose significantly -- along with Trump, our short, which was actually our largest percentage gainer. (Still, Trump is merely doing a $3 rattle of death.) We lost 1.6% in what ended as a flat-to-down market. For the year, the S&P is now up 8%, but the Dow Jones Industrial Average has only gained 2%. The simple Foolish Four approach has returned 12.4% and the Fool Port is up 47.8%.
The day lacked company-specific news, but there's plenty to discuss regarding Starbucks (Nasdaq: SBUX). Yesterday the company hosted an all-day analyst conference to address its business and its future. The presentations lasted nearly ten hours -- a streaming display of competent and genuine management laying out inspired plans for building the company's business, and its soul.
In ten to fifteen years, the company's goal is to become the most dynamic consumer brand worldwide, while operating significant lines of business outside of its retail locations. If North America is any indication, this goal actually seems reasonable. Easy? No. But possible? Indeed. Starbucks has already built a specialty coffee brand in the U.S. that no other company comes close to matching, and its relationship with consumers is one of the strongest of any retail-centric company, worthy of comparison with Coca-Cola, when it comes to repeat purchases.
In fact, several times the company compared its mission to that of Coca-Cola (NYSE: KO). Starbucks wants to be as ubiquitous as Coca-Cola while maintaining its very personal "third place away from home" relationship with consumers. Though expanding massively and remaining a personal experience sounds like a difficult, if not impossible task, I actually believe the opposite can be true.
Coca-Cola's ubiquity is the very thing that makes it an intimate product with consumers, in my opinion. It is everywhere, like an old friend. It enters your life daily, just as you wish some old friends would. Likewise, Starbucks has shown that it can proliferate on American soil and not surrender its soul or brand image while doing so, but instead actually grow it. Worldwide, the more that Starbucks expands, the more the company can enter your daily life, and the more intimate you can become with the brand on many levels anywhere in the world.
Already the brand image that this company possesses is incredible. Starbucks resonates on a personal level with millions of its patrons, so much so that it's difficult to name other public companies that emerged this decade and now hold the same quality to such a degree. Management knows that it's steering a ship with very special cargo, and is well aware that its brand (something very difficult to quantify) is the most valuable commodity onboard.
Very importantly, however, the fact that the company is operating under a magic glow that can't be touched, tied down or forever guaranteed is not keeping management from taking bold steps in new directions that involve risk, chance and surprise. It's very easy for a company to continue on its initial path when it's early and incredible success. That's not happening at Starbucks, however. Though it's sticking to its roots and what makes it great, Starbucks is far from resting, and is instead innovating. This innovation and an element of constant surprise keeps the company one step ahead of competition and of its consumers, and it only adds to its allure -- an allure that combines age-old quality with current life vitality.
I have pages of notes from yesterday, including news of several new initiatives and products that are coming soon from Starbucks. We'll discuss these and more the next time that I write, because we're out of time tonight!
To close, David Gardner carried the Fool message to the U.S. House Commerce Subcommittee on Finance and Hazardous Materials today, giving testimony on the fees in the mutual fund industry. Very interesting and Foolish reading.
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Day Month Year History Annualized FOOL -1.57% 28.47% 47.89% 396.33% 47.11% S&P: +0.03% 9.55% 8.10% 128.84% 22.07% NASDAQ: -0.30% 15.66% 10.42% 140.78% 23.58% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 117.00 3117.44% 9/9/97 580 Amazon.com 19.11 113.13 491.94% 5/17/95 1960 Iomega Cor 1.28 4.00 212.40% 10/1/96 84 LucentTech 23.81 74.25 211.87% 4/30/97 -1170*Trump* 8.47 3.50 58.67% 8/12/96 130 AT&T 39.58 59.88 51.28% 2/20/98 200 Exxon 64.09 71.25 11.17% 2/20/98 270 Int'l Pape 47.69 49.00 2.74% 2/20/98 215 DuPont 59.83 59.50 -0.56% 7/2/98 235 Starbucks 55.91 37.81 -32.37% 8/13/96 250 3Com Corp. 46.86 31.56 -32.65% 8/24/95 130 KLA-Tencor 44.71 26.63 -40.45% 1/8/98 425 3Dfx 25.67 12.00 -53.25% 6/26/97 325 Innovex 27.71 12.63 -54.44% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 83070.00 $80488.13 9/9/97 580 Amazon.com 11084.24 65612.50 $54528.26 4/30/97 -1170*Trump* -9908.50 -4095.00 $5813.50 5/17/95 1960 Iomega Cor 2509.60 7840.00 $5330.40 10/1/96 84 LucentTech 1999.88 6237.00 $4237.12 8/12/96 130 AT&T 5145.11 7783.75 $2638.64 2/20/98 200 Exxon 12818.00 14250.00 $1432.00 2/20/98 270 Int'l Pape 12876.75 13230.00 $353.25 2/20/98 215 DuPont 12864.25 12792.50 -$71.75 8/24/95 130 KLA-Tencor 5812.49 3461.25 -$2351.24 8/13/96 250 3Com Corp. 11715.99 7890.63 -$3825.37 7/2/98 235 Starbucks 13138.63 8885.94 -$4252.69 6/26/97 325 Innovex 9005.62 4103.13 -$4902.50 1/8/98 425 3Dfx 10908.63 5100.00 -$5808.63 CASH $12005.75 TOTAL $248167.44