A Matter of Meat

MARKETS

• U.S. markets gained after Paul Ryan raised concerns over the administration’s approach to tariffs…but that didn’t last.
• Nine S&P sectors finished higher—Netflix jumped 3.2%.

FOOD

McDonald’s Gets Fresh Beef for Quarter Pounders

Nutritionists rejoice—McDonald’s (+0.11%) is expanding its plan to replace Quarter Pounder frozen patties with fresh beef. It already rolled out the option to 3,500 stores in the U.S., and now it hopes to reach 14,000 total by May.

But McDonald’s isn’t quitting frozen patties cold turkey—especially when clean, ready-to-go meals have been its mission since inception. Rather, it’s giving in to consumers’ insatiable demand for higher-quality food offered by rivals like Shake Shack.

But can McDonald’s deliver?

Originally testing in Texas and Oklahoma, McDonald’s did get strong initial marks. But customers have also complained that the fresh beef patties take too long to prep (up to one minute longer), while they don’t even taste that much better.

And if that’s the case, is it worth the pivot?

Sure, McDonald’s isn’t uprooting the brand, but its meat suppliers have already spent $60 million to provide McDonald’s with fresh beef. And considering McDonald’s purchases 2% of all global beef production each year, and Quarter Pounders make up 25% of burger sales, this change will cause a serious (and expensive) shock to its supply chain.

Some say McDonald’s is losing focus

CEO Steve Easterbrook spent the last few years building McDonald’s into a breakfast brand with its all-day breakfast option. Since then, the conversation has jumped to healthier wraps, salads, Happy Meals, and different $1, $2, and $3 value menus.

All the while, it’s been outpaced in its core competency: fast-food. Seriously, a study shows drive-thru meal-prep takes 208.16 seconds. Wendy’s, on the other hand, averages 169.11 seconds.

We’re not saying McDonald’s should only focus on their speed of service, BUT 70% of the company’s U.S. revenue does come from impatient drivers ready to get their Mac on.

Bottom line: McDonald’s stock is on the decline in 2018. Is re-molding its supply chain for marginally better, fresh beef really the answer?

FINANCE

CVS Issues Debt for Aetna Acquisition

To fund its $67.5 billion takeover of health insurer Aetna, CVS wrote a script for $40 billion in debt—the third-largest bond sale ever, behind AB InBev and Verizon.

And as investors filed in to fill the order, they chose from 2 to 30-year bonds with attractive investment-grade yields. Remember, yields have been at rock-bottom levels for nearly a decade. Throw in rising market volatility and concerns of a trade war, and investors might’ve even signed up for a rewards card for this deal.

Here’s what investors will continue to watch: A little metric called interest coverage. Essentially it asks, “Will this company meet interest payments?” Before financing, CVS could handle 9x its interest expenses (a good thing). That said, shouldering $40 billion in debt can change things…and fast.

Best case scenario for CVS: With financing secured and no regulatory hiccups, the company adds 22 million Aetna members to its ecosystem and fends off Amazon’s push into pharma. Then? It eventually pays off the debt.

TRANSPORTATION

Uber’s Self-Driving Trucks Are Arizona Cruisin’

You might want to reconsider your upcoming vacation to the Grand Canyon.

That’s because you could be traveling on the same roads as Uber’s self-driving trucks, which have been making freight runs across Arizona since November. There’s a driver at the wheel, but only to take over in case of an emergency.

What it means for the $726 billion industry: Uber is navigating through a traffic jam of competitors (Waymo, Tesla, and others) trying to automate trucking. Last May, it introduced Uber Freight—an app matching drivers with freight loads.

What it means for 3.5 million American truckers: Not a whole lot…yet. In the current model, Uber uses its self-driving trucks for long, open-highway journeys, while relying on humans for narrower, local streets (allowing drivers to stay closer to home).

But we expect this relationship to hit the skids. Goldman Sachs says automation will eventually take 300,000 truck drivers off the road each year.

TECH

Washington State Takes Net Neutrality into Its Own Hands

We’ll call this heavyweight bout “Washington vs. Washington.”

Washington State became the first state to hop in the ring with D.C.’s Federal Communications Commission (FCC), signing its own net neutrality law banning broadband companies from favoring particular websites.

Rewind: In December, the FCC tossed out regulations requiring internet service providers (ISPs) like Comcast and Verizon to treat all content fairly. The agency argued the red tape prevented these broadband companies from making necessary investments.

Critics of the rollback, like Washington lawmakers and your neighborhood Redditor, counter that ISPs will have too much control over the web, and could theoretically “throttle” sites, while prioritizing some content over others.

What happens next: This is probably going to court, since the FCC blocked individual states from making their own net neutrality laws.

Who else is fighting the FCC this week? On Monday, tech companies Foursquare, Etsy, Expa, Shutterstock, Kickstarter, and Automattic said they planned to sue over the FCC’s decision.

WHAT ELSE IS HAPPENING

• Top White House economic adviser Gary Cohn is stepping down after disagreements over tariffs and trade.
• The Senate appears to have enough votes to pass legislation relaxing some banking regulation set by Dodd-Frank.
• Kobe Steel’s CEO is resigning after its widespread falsified data problems.
• Potential buyers of The Weinstein Company called off the deal after receiving “disappointing information” on the studio’s finances.
• With a net worth of $112 billion, Jeff Bezos topped Forbes’ list of billionaires in 2018.
• Lego annual revenue (down 8%) dropped for the first time since 2004
• Reporting earnings today: Costco, Abercrombie & Fitch, Dollar Tree

FROM THE CREW

From our office, to your inbox. We’ll keep you in-the-know about all the latest happenings from our perspective.

As the market took a turn in the wrong direction last month, the Crew sat in our office and barely flinched. After all, we viewed the “correction” as healthy, given most economic indicators showed strong fundamentals.

But there could be a slice of the economy worth keeping an eye on: credit card debt.

Let’s crunch the numbers:

* Total outstanding revolving debt (mostly through credit cards) in the U.S. is at $1.028 trillion—the most in history.
* Credit card delinquencies have increased to ~7.5% from 7% a year ago.
* NerdWallet calculates that the average household with credit card debt has a balance of $15,654.
* Average charge-off rates for large issuers, which measure how much outstanding debt banks expect consumers won’t be able to pay, climbed to 4-year highs in 2017.

These numbers aren’t that troubling, because they’re a reflection of growing consumer confidence and rising incomes. Delinquencies on credit card loans are also way below where they were during the recession.

Still, industry observers say with rising interest rates on the horizon, Americans should pay more attention to our record-high (and growing) credit card balances.

THE BREAKROOM

MENTAL STRETCH

Guess the logo



Brain Teaser

Two trains are on a head on collision course. The trains are currently 65 miles apart. The northbound train is traveling at 55 miles per hour and the southbound train is traveling at 80 miles per hour. What is the distance between the trains two minutes before they collide?

Answers

Guess the logo
Bacardi

Brain Teaser
4.5 miles apart (See explanation)