Wednesday, September 10, 2014

McDonalds (MCD)....Getting 'Pounded'!! But May Be A Value Meal.....

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Best, Ed
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With the summer fading into the rearview mirror, and with 9/11 tomorrow and recent beheadings serving as perhaps the most stark reminders of how heinous terrorism has become in our day and age, the fact that the US equity market has recently continued to hit new historic highs is some combination of perplexing and troubling.  In the face of growing global geopolitical conflagrations (eg: ISIS, Syria, Iraq, Russia/Ukraine), it's hard to argue that corporate earnings will not face meaningful headwinds to growth.  If that's the case, then what would be propelling equity levels to higher and higher valuations?  Could it be that US equities have become the 'flight to quality' asset, pushing aside gold and US Treasuries?  Or is it that investors, US in particular, are somewhat sanguine to the global landscape of troubles and instead are more driven by what's becoming a cliché:  "where else will I go with my money"?!

You might have noticed (I hope) that I've written far less frequently in recent weeks, which, more than anything else, is reflective of my overall global macro views not changing much from missives that I've written earlier in the summer, namely, that I remain quite concerned that equity markets are in fact being driven more by the latter hypothesis above, than by the former.    With bond yields so low, and with recent economic data suggesting that any rate hikes by the Fed won't be until mid/late '15, and even then, in only very deliberate, small increments, investors are increasingly seeing equities as the 'only place to make money'. 

That kind of rationale for investing is likely to lead to mispricings and, in particular, the creation of 'bubbles', where stocks are priced too rich relative to their actual earnings potential.  That said, given the limited choices of compelling investments away from equities currently, even with a defensive view on the overall market, there are times when individual stocks appear to be 'priced right' for future growth (emphasis on 'appear to be'!)   Many quality companies with strong balance sheets and global footprints are paying reasonable dividends, and would seem likely to weather the current sluggish global economic growth challenges.  Where these kind of companies have valuations that represent a 'cautious optimism' about earnings growth, then owning them could make sense.  And even more so, when companies like these find themselves disenamored by the market due to an earnings miss, then they ought to be evaluated for whether the new lower valuations are overdone. 

By way of example, we see one of our long held holdings, McDonalds (MCD), getting pounded in recent trading, primarily on lower same-store-sales, a tough competitive environment and 'event risk' issues such as Russia's closing of several of MCD's stores and the meat-supplier issue in China.  The market has responded aggressively, selling the stock off from levels of over $100 only a few months ago, to roughly $91 currently.  I added to our position here as I believe that MCD will play well into one of our primary global macro investment themes:  the emerging growth of middle class consumers around the world.  (please continue reading below this chart)

So while our cash positions are still quite high in historical terms, which reflects my concern that equities overall are being driven to 'emotionally' higher levels, unsupported by economic underpinnings, I am nonetheless looking to put some of it to work when I assess that a value proposition presents itself.  But owing to my broader concerns about the overall level of equities in the face of the troubled global state of affairs, I'm holding off on other purchases that are teed up on my 'shopping list'.  
More on the 'shopping list' in coming days…...
Will keep you posted.

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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Additional Disclaimer: currently long many stocks/ETFs, including MCD.  Positions may change at any time without notice.   

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