I wouldn’t make too much of today’s move to the upside in U.S. markets. It’s not unusual for the Friday of a down week to show a slight bounce.
And I certainly wouldn’t want to pin any move to the upside on better than expected earnings reports after the close in New York yesterday from Google (GOOG) and Microsoft (MSFT.) I think Google’s results continue a worrying trend of falling ad prices thanks to the growth of mobile traffic (with mobile’s lower ad prices) and Microsoft’s results are only better than expected because Wall Street had been aggressively cutting projections in the weeks before the company’s report.
Certainly today’s earnings results from market bellwethers McDonald’s (MCD) and General Electric (GE) won’t relieve market worries about revenue and earnings growth for U.S. companies. Read more
Growth fears have hit the market hard again this morning. The International Monetary Fund cut its forecast for 2013 global growth to 3.3% from 3.5%. A warning that debt at China’s local governments is out of control has reminded investors that on Monday they were worried that reports of 7.7% GDP growth in the first quarter of 2013 meant that China’s economy was slowing—or at least that it wouldn’t hit the 8% or better growth that investors were hoping for. Earnings reports from Alcoa (AA), Wells Fargo (WFC), and Coca Cola (KO) showed declining revenue in the first quarter.
But this morning, rather than giving more details on that news about growth, let me suggest what a revival of growth worries means for global markets and valuations.
First, and this may seem perverse, a rise in worries about growth will hit developing country stock markets especially hard—even though growth in those economies is still projected to outstrip growth in the EuroZone, Japan, and the United States. As we’ve seen over and over again in the last two years, when growth fears rise, the first reaction by traders and investors is to pull money out of “riskier” emerging markets in favor of “safer” developed markets. Read more
Today’s announcement of February same store sales from McDonald’s (MCD) shows what the company has been up against in the last few months. Same store sales fell 1.5% in the month from February 2012. That compares to a 7.5% year over year gain in same store sales back in February 2012.
But today’s news also signals the coming end of the McDonald’s year-to-year comparison problem after March or so. Read more
You and I aren’t Warren Buffett. And that means we aren’t going to get the kind of deals that Buffett gets.
Nobody is offering you or me preferred stock yielding 9% in a safe consumer Blue Chip like that Buffett got as part of last week’s $23 billion ($28 billion if you include assumed debt) buyout of HJ Heinz (HNZ.) To get 9%, you have to be Warren Buffett, Sage of Omaha, with a name that brings investment bankers flocking to finance any deal that includes you. (Part of Buffett’s profit from a deal like Heinz is in essence a fee from making the financing of a $28 billion deal easier for his other partners.)
But that doesn’t mean there’s nothing that you and I can learn from a Buffett deal like this. In fact, I think this particular Buffett deal is very educational. The Heinz buyout is confirmation, in case you needed it after looking at other recent Buffett deals like his buyout of railroad Burlington Northern, that he believes in what Pimco bond guru Bill Gross has called “the new normal market” and that I’ve called “the paranormal market.”
The Heinz deal makes the most sense if you see the next decade offering relatively modest returns. The new normal and the paranormal paradigms call for, at best, 5% annually from equities. And a continuation of the high volatility of recent markets. In the paranormal market I point to the extreme volatility of 2011 as something we can expect with frequency. For a description of the new normal and the paranormal paradigms see my posts http://jubakpicks.com/2012/03/02/call-it-the-new-paranormal-market-youll-need-some-new-investing-tools-but-the-profits-are-out-there/ and http://jubakpicks.com/2012/05/18/3-buys-for-this-sideways-market-and-more-thoughts-on-the-new-paranormal/
Why do I put the Heinz deal in this camp? Read more
A jump in December sales looks like it bailed out McDonald’s (MCD) fourth quarter earnings, reported today. Earnings climbed to $1.38 a share from $1.33 in the fourth quarter of 2011. Wall Street analysts were looking for $1.33 a share.
Analysts had forecast a 1.8% drop in December same store U.S. sales and instead the company reported a 0.9% gain.
The question, if you own McDonald’s (the stock is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ ,) is why? Do December results represent a one-time boost from company’s decision to keep more stores open on Christmas than in 2011 and a shift of a limited-time offering of the popular McRib sandwich to December? Or is there something more lasting in the unexpected December increase?
Actually, it looks like the December surprise might be the result of price cuts that McDonald’s implemented in November that opened a small but significant gap between McDonald’s and its competitors. The November price cuts came to about 0.75 percentage points. That kept the company’s price increase for the entire third quarter to 2%, according to Credit Suisse. That looks like it was significantly below price increases in the category.
This doesn’t change the calendar on the tough year-to-year comparisons that McDonald’s faces in the beginning of 2013. The earnings increase in the first quarter of 2012 from the first quarter of 2011 came to 6.9% and I don’t think there’s any way that McDonald’s matches that kind of growth in the first quarter of 2013. In its conference call the company said that it expects global same-store sales to decline in January.
If you own these shares, you own them for the easier year-to-year comparisons that set in after the March quarter.
All the same, McDonald’s unexpectedly strong showing in December looks to me like a sign that the company has limited the last half of 2012 resurgence of competitors such as Burger King (BKW) and Yum! Brands’ (YUM) Taco Bell.
As of January 23, I’m leaving my target price at $104 a share.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of McDonald’s as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/