Our Blog

DWM is committed to learning for its team, clients and friends. In this changing world, it’s extremely important to stay current in all areas impacting your financial future.

We encourage all of team members to “drill down” on current topics important to you and contribute to our weekly blogs.  Questions from our clients and their families are often featured in our blogs.  

Financial literacy for clients and their families is very important to us.  We generally hold an annual wealth management seminar for all of our clients.  We encourage regular, at least semi-annual, meetings in person with our clients to review family updates, progress on financial goals, asset allocation and performance of investments.  We’re happy to assist younger members of the family as part of our total wealth management program.

Here’s our latest blog:

 

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Pizza Meets Technology

Written by Lester Detterbeck.

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What’s your favorite pizza? In Chicago, I love Lou Malnati’s deep-dish, in the Lowcountry, Grimaldi’s Brooklyn Bridge, with ricotta and Italian sausage, is amazing. And, now, thousands of years after pizza was invented, it too is being impacted by technology. Recently, the WSJ, in their “The Future of Everything” section, focused on the impact technology is having at Domino’s Pizza.

But first, let’s take a look at the history of pizza. Archeologists in Sardinia have found ancient remains from the 1st millennium B.C. of flattened bread that was apparently very popular. Writings in the 6th Century B.C. mentioned soldiers baking flatbread and covering it with cheese and dates. Stone ovens are mentioned in the 3rd B.C. when Roman historians described “flat round of dough dressed with olive oil, herbs, and honey baked in stones.” Excavations made in Pompeii show that in the 1st Century B.C. retail shops were making and selling pizzas.

Modern pizza seems to have come from Naples in the 16th century. Tomatoes from the New World combined with bread and other products to produce the earliest form of modern pizza. The Queen of Naples in the mid-18th century had a special oven in her palace for making pizzas. Antica Pizzeria Port’Alba, the first modern pizzeria, opened in Naples in 1830. By the end of the 19th century, citizens of Naples were consuming pizza for breakfast, lunch and dinner.

In the early 1900s, the first Italian pizza in America was introduced by street peddlers who walked up and down Taylor Street in Chicago. New York City got the first pizza license in 1905. Pizzerias spread across the U.S. in the early 20th century. In 1943, Chicago’s Ike Sewell invented the deep-dish pizza. In the 1950s, celebrities of Italian origin, including Frank Sinatra and Joe DiMaggio, promoted pizza. The first frozen pizza was released in 1957. Pizza Hut started in 1958, Little Caesar’s in 1959 and Domino’s in 1967.

These days, pizza is a huge business. According to 2018 “Pizza Power” report, the worldwide pizza market was $134 billion, with U.S. the top country, at $45 billion annually. There are 75,000 U.S. pizzerias and the top 50 chains have average unit sales of almost $600,000, with annual growth overall at 12%. The big winners were reported to be those who focused on consumer needs by embracing “websites, social media, online ordering and delivery technology.”

Domino’s, with 6,000 U.S. outlets is the world’s largest pizza company. Yet, their just-issued 2Q19 quarterly report showed slower growth. Their stock has gone “cold”- investors have “lost their appetite” for Domino’s Pizza. Technology has fueled new and improved competitors, delivery apps, online ordering and quality.

The growth of online ordering through companies like Grubhub and Door Dash has impacted Domino’s business. Domino’s, with its own delivery drivers, has declined to form partnerships with them. Also, food delivery companies, such as Uber Eats and Postmates, have jumped into the business aggressively with free or discounted delivery during the March NCAA tournament period with great success. Even though Domino’s hasn’t raised their prices on pizzas in over a decade, increases in same-store sales are slowing.

Ritch Allison, CEO of Domino’s, was recently interviewed by the WSJ for its “The Future of Everything” section. Mr. Allison was clear that “Pizza will endure. However, almost everything about how a pizza is made and transported to the customer is undergoing a high-tech shift.”

Domino’s has maintained that it won’t outsource delivery. Instead it will invest in operations to make delivery more efficient and better for customers. Low unemployment and rising minimum wages in some cities are pushing up labor costs and making it harder to find drivers. They’re working on a driverless vehicle smaller than a golf cart, with compartments that can be heated up or chilled. They are looking at drones and even deliveries by bike and scooter riders.

Mr. Allison indicated that they are working on upgrading their “Dom” automated telephone answering service. They’ve been missing customer calls during busy times. Their goal is to answer every call and hopefully build bigger orders as well. They hope improved data on customers will help them produce better menus, adding and deleting items over time based on demand patterns.

For Domino’s “Robots will help, but not replace human pizza makers.”   Robots can put dough balls on trays, but Mr. Allison wants to “keep the magic of pizza making” with humans. Domino’s is currently using, in locations in Australia and New Zealand, artificially intelligent cameras to photograph and grade each pie based on different criteria. This quality audit is designed to ensure that a subpar pizza never reaches a customer’s door. They hope to extend this quality method to operations worldwide.

Yes, even our beloved pizzas, that humanity has been eating for thousands of years, and hopefully for many more thousands as well, are being impacted by technology. Hopefully, that will make it easier in the future for all of us to get our perfect pizza at the perfect time.

 

https://www.dwmgmt.com

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DWM 2Q19 Market Commentary

Written by Brett Detterbeck.

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Summer is finally upon us! Weather is steamy, kids are out of school, and it’s the midst of carnival season. Merriam Webster has several definitions of carnival including:

  • An instance of merrymaking, feasting, and masquerading
  • An instance of riotous excess
  • An organized program of entertainment or exhibition

Sounds a little bit like the markets we’ve seen in 2019 so far: it’s certainly been an entertaining program with all asset classes parading higher. But does this Fun House continue or is it all just a House of Mirrors….

Equities: You win a small prize! Equities continue to be the most festive part of the fairground, with many stock markets up over 2-4% on the quarter and now up around 12-18% on the year! Domestic and large cap stocks continue to outperform value and smaller cap stocks, which is typical of a late-stage bull market, this one being over a decade-long!

Fixed Income: You can trade in that small prize for a medium prize!  Like a Ferris Wheel where one side goes up, the other side comes down; yields and bond prices operate the same way. With the 10-yr Treasury now down to around 2.06% at the time of this writing compared to 3.2% last November, it’s no surprise to see strong returns in bond land. In fact, the Barclays US Aggregate Bond Index & the Barclays Global Aggregate Bond Index popped another 3.1% and 3.3%, respectively for the quarter and 5.6 & 6.1%, respectively year-to-date (“YTD”).

Alternatives:  You can trade in that medium prize for the largest prize! The merrymaking continues as most alternatives we follow had good showings in 2Q19, evidenced by the Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, up 1.3% and now up 5.7% YTD.

It almost feels like you could go over to the Duck Pond and pick up a winner every time. There are indeed a lot of positives out there:

  • US stocks near record highs
  • A stock-market friendly Fed
  • Historically low unemployment with inflation that appears totally under control
  • Americans’ income and spending rising, leading to relatively strong consumer confidence

But this carnival has some roller coasters in the making given some riotous issues including:

  • US-China trade tensions most likely not ending with a solid deal anytime soon, which will fuel anxiety
  • A weakening European economy due to tariffs and other issues, which could bleed over to all markets
  • Slowing US economic growth here as the Tax Reform stimulus wears off
  • A relatively expensive US stock market, evidenced by the S&P500’s forward PE ratio now at 16.7 times versus its 25-year average of 16.2

It definitely wouldn’t be fun if the yummy funnel cake turns into spoiled fried dough…Yuck! We don’t know exactly when or what will happen, but we do know that at some point this bull market will indeed end. You cannot time the market so forget about getting out of the Cliff Hanger before the time comes. That said, you want to stay invested and continue to control what you can control. Don’t wind up being on the bottom end of a Whack-A-Mole game; make sure your portfolio is prepared for the next downturn, which includes making sure your risk level within is appropriate for your risk tolerance.

So don’t wind up being a carny clown. If you want to continue hearing “winner-winner-chicken-dinner!”, work with a proven wealth manager and you’ll be the one controlling the Zipper!

 

Zipper

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Real Estate: Time to Sell that Large House?

Written by Les Detterbeck.

McMansions for Sale

American homes are a lot larger than they used to be.  In 1973, the median size of a newly built house was 1,500 square feet.  In 2015, that figure was 2,500 sq. ft. - 67% more. Plus, with smaller families, there is lots more room per person: 507 sq. ft./person in 1973, and, almost double, 971 sq. ft./person in 2015.

In addition, Americans aren’t any happier with bigger houses.  A study by PhD Clement Bellet found that “house satisfaction in the American suburbs has remained steady for the last four decades.”  His reasoning is based on the premise that people compare their houses to others in the neighborhood-particularly the biggest ones.  The largest homes in the neighborhood seem to be the benchmark.  Dr. Bellet tracked the “one-upmanship” by owners of the biggest homes from 1980 to 2009.  He found that the size of largest 10% of houses increased 40% more than the size increase of median houses.  Apparently, the competition never ends.

Fifty years ago, a one bathroom house or a bedroom that slept 3 siblings might have felt cramped- but it also probably felt normal.  Today, many Americans can afford more space and they’ve bought it. They just don’t appear to be any happier with it.

Dr. Robert Shiller, the noted Nobel Prize winner and co-author of the Case-Shiller index of housing prices, was interviewed recently by the WSJ for an article titled “The Biggest Ways People Waste Money”.  Dr. Shiller opined that “Big houses are a waste.”  He believes that modernization has reduced our space needs.  However, he recognizes, that for some, a big house is a symbol of success. Your neighbors may not know about your finances and achievements, but they can see your big house.

Dr. Shiller suggests books such as “The New Small House”- that talk about designing houses to look impressive as well as function on a smaller scale. Living smaller can be easier on the pocketbook, the owner’s time and the environment.  He concludes: “Just like Uber and Lyft and Airbnb, using resources more efficiently, we can also build houses that are better at serving people’s needs without being big”.

As a result, we’re seeing that fewer people want to buy large, elaborate dream houses.  We know that in the high-end suburbs of Chicago that prices today, in some cases, are ½ of what they were 10-15 years ago. In the Southeast and the Sunbelt, McMansions are sitting on the market, enduring deep price cuts to sell.  For example, Kiawah Island currently has 225 houses for sale, which is a 3-4 year supply.  Of these, the largest and most expensive are the hardest to sell, especially if they haven’t been renovated recently.

The problem is expected to get worse in the next decade.  Baby Boomers currently own 32 million houses, 40% of all the homes in America, and many of these homes are big ones. As the Boomers advance into their 70s and 80s, many will be looking to downsize and/or move to senior housing and therefore will attempt to offload their big house.

When we at DWM talk with clients about housing, we generally ball park a figure of 5-7% of the market value of the house as the annual net cost.  The costs include interest, if there is a mortgage, the opportunity costs of not investing the equity in the house, real estate taxes, insurance, and maintenance and repairs. From this total we subtract the expected appreciation.  For example, a $500,000 house with a $200,000, 4.5% mortgage, might have $9,000 in interest, $18,000 in opportunity costs, $5,000 in real estate taxes, $3,000 in insurance and $5,000 in repairs. Total costs of $40,000 less 2% appreciation of $10,000 nets $30,000 in annual net costs or 6% of the market value.  Of course, values differ across the country and by house. Furthermore, there are some sections of the country experiencing excellent appreciation and some that are experiencing deprecation in value.

As we look at our spending, it’s always good to compare the value received to the cost and, if the cost exceeds the value, a change might be in order.  In our example, if the couple owning the $500,000 house feels they are getting $30,000 or more per year of value from the house, that’s great.  If they are not, particularly if they have a bigger house that may not be appreciating and may be hard to sell in the future, they may want to think about a change now.  Give us a call if you would like to discuss this very important topic.

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