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
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/
Yesterday I advised raising some cash in the uncertainty of the fiscal cliff–here are some thoughts on sources of cash
Yesterday, December 26, I wrote that raising some cash in the uncertainty over the U.S. fiscal cliff made sense. The added cash would lower your exposure to stocks—in case Congress and the President fail to act and the markets took it badly. And the cash would give you some money to put to work if the markets did sell off.
This isn’t a call to sell everything or move to a defensive crouch. It’s preparation given our inability to predict which way the market will jump and a judgment on where the relative risk/reward ratio lies right now.
How to decide what to sell, though.
Here are some suggestions for thinking your way through the process. I’m going to use the stocks in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ for some concrete examples.
First, sell stocks to raise cash that are near your target price. I don’t think that holding on here for that last dollar makes any sense. (And in a market that’s either stuck in a rut or trending downward, I don’t think it’s likely that you’ll get that last dollar anyway.) For example, two weeks ago I posted http://jubakpicks.com/2012/12/12/subdued-reaction-to-earnings-beat-from-costco/ that I thought I’d got most of the gains out of owning Costco Wholesale (COST) that I could expect for a while, especially after that $7 a share special dividend, but that I would hold on for a bit further into December since, on December 12, the market seemed to be trending upwards. Holding on here for an upward trend that seems to have vanished doesn’t make sense. A stock like this is a good source of cash right now and I’m selling it out of the Picks portfolio today.
Second, sell stocks to raise cash that have turned into short-term disappointments. Read more