McDonald’s (MCD: 63.97 +0.56 +0.88%), a company I’ve mentioned in Money and Markets, also posted its results yesterday. Quarterly profits beat analysts’ estimates. Moreover, December same-store sales rose 5.8% around the world.
The company did note that some international locations are starting to feel the effects of the global slowdown - including Germany and China.
The lesson here for investors is twofold: While no region or company is going to escape this once-in-a-generation slowdown completely unscathed, some businesses are clearly better able to handle a prolonged downturn - both because of their geographic diversification and the very nature of their products.
Related posts:
- Smucker Buying Folgers Coffee … Recently, I’ve been highlighting a number of consumer staples deals, including the Wrigley (WWY) purchase and takeover rumors surrounding...
- ACAS Suspending Dividend Bad news: American Capital Strategies has also fallen victim to the credit crunch and has decided to suspend its...
- General Electric Says Finance Unit Will Profit in Q1 … I just wanted to post a quick follow-up note to my Money & Markets column this past week … Today,...
{ 11 comments… read them below or add one }
What have you been smoking? Can you spell “Hyperinflation”?
Nilus Mattive Reply:
February 4th, 2009 at 10:56 AM
Sorry, Bob. The data right now is not showing hyperinflation — nor even inflation. Prices for some items are still rising moderately (healthcare, for example). But the general trend … right now … is deflationary.
Yes, I do think we will revert back to inflation as a result of how the current crisis is being addressed. I’m not willing to say it will be hyperinflation yet.
Regardless, if you watched my latest MaM TV webcast, you know that I’ve been suggesting TIPs as a terrific hedge for just such a scenario. As I’ve said, the time to buy protection for inflation is during deflation.
Even though you may think “doctor bills” are increasing, the onus of that price increase burden should not be placed on the shoulders of the doctors, but on the health insurance carriers.You should be saying “health insurance costs are rising” but the doctors contracts with the carriers do not include increased fees in most cases, and in many cases the doctors are stuck writing off 20% to as high as 60% of their actual charges, as a contractual agreement in order to be “in network”. I have been a practicing physician for thirty years and can tell you that my reimbursements from insurance companies have at best remained the same over the past ten years, and for many patients although their co pays are the same, the amount that the carrier pays for the same service has declined over the past few years. My point is that whenever there is a discussion about the booming cost of healthcare the “doctor bills” are being singled out, but this is an incorrect conclusion. The fact is that the insurance companies are making the killing, the CEO’s of these companies are overpaid, and provide essentially no benefit to humanity whatsoever. I have yet to hear the health care issue include a discussion of the actual reimburements to doctors, nor the fact that premiums continue to rise at astronomical rates, co payments continue to increase, but if you examine the facts, ask the doctors, if their reimbursements are rising at all let alone at the rate the premiums are rising.
Nilus Mattive Reply:
February 10th, 2009 at 4:26 PM
Hi, Robert. I thought I was careful not to place the blame on doctors. I simply referred to rising “medical care costs” and “health care costs” in the piece. And my statement that a trip to the doctor’s office will cost more is accurate, isn’t it?
But your point is well taken. Most of my friends in the medical profession tell me the same thing — they’re getting squeezed by an unfair system that compromises quality and costs everyone time and money.
I have a lot more to say on the topic, especially since I recently went shopping for a new health insurance policy for my own family. But I’ll save that for another Money & Markets piece.
For now, suffice it to say that I agree with you. This is not simply a case of doctors raising their prices on everyone. To the contrary, many are making less and dealing with more paperwork in the process. If you thought my article was insinuating otherwise, I apologize.
Nilus,
What impact will the President’s new stimulus package have on the yield of TIPS? Martin Weiss states that we are headed for a big crash in the equity markets. What effect will that have on yields?
Thanks,
Gerald
Nilus Mattive Reply:
February 11th, 2009 at 12:25 PM
I wouldn’t expect the stimulus package to immediately impact TIPS much at all. However, if all these bailout efforts are successful, and inflation returns, expect yields to go down as demand for TIPS increases. (Remember, when more investors buy bonds, prices go up and yields go down. If you’re already invested in those bonds, your yield doesn’t change. You simply show a capital gain on the purchase price.)
Martin does see a lot more additional downside for stocks. I understand his argument, and don’t rule out the possibility myself. However, I consider the risk-reward ratio for stocks to be pretty good at these levels.
If we did see another market crash, the ensuing flight to quality would likely push regular Treasury yields even lower. Perhaps the same for TIPS, which are also relatively safe government bonds.
Thank you for the Dividend Reports.
Check out these companies which seem to have defied the downward trend.
• Chocolate manufacturer Hershey went up by 2%?????
• Cochlear (internationally 2,000 employees, market includes USA (40%), Europe (40%), up by 20%?????).
• JW Hi Fi up by over 20%??????
Cheers!
As you said “some businesses are clearly better able to handle a prolonged downturn” I think I’ve found an investment that meets that criteria and hope you will give your iimpressions of such an investment and the logic I’ve used to draw my conclusion Here goes: -
Why are you not recommending Exchange Traded Debt Securities such as those sponsored by Southern Company ie ALZ, GUQ, GAT, IJD. These seem relatively safe; as compared to other fixed income choices is this terrible market. They are long term bonds, give about a 6% (unheard of now) dividend, backed by one of the best utilities in the nation, There have been only one or two utilities that have gone into bankruptcy in the last 100 yrs, they must pay the dividend quarterly, most investors have no idea they exist, are less risky right now than long term treasuries in my view and I can not eat well on what the short terms pay, They will not give any or little capital gain just a steady 6% which I will be very happy with. Most only dropped 15 to 30% in the Nov lows but have all come back to pre downturn prices and if the market drops to 5500 they probably won’t drop more than another 30%. Some are thinly traded but to me are worth that risk, some have larger trading volumes. Do you see SO defaulting on these bonds? If so at what probability? Where is this flawed analysis? Appreciate your candid and accurate news letter, I am a subscriber. ALZ description follows and is typical of them all:
ALZ SECURITY DESCRIPTION: Alabama Power Co., 5.875% Senior Notes Series II, issued in $25 denominations, redeemable at the issuer’s option on or after 3/15/2011 at $25 per share plus accrued and unpaid interest, maturing 3/15/2046, distributions of 5.875% ($1.46875) per annum are paid quarterly on 3/15, 6/15, 9/15 & 12/15 to holders of record on the 15th day prior to the payment date (NOTE: the ex-dividend date is at least 2 business days prior to the record date). The notes are insured as to the payment of principal and interest by a surety bond issued by XL Capital Insurance Inc. Distributions paid by these debt securities are interest and as such are NOT eligible for the 15% tax rate on dividends and is also NOT eligible for the dividend received deduction for corporate holders. The notes are expected to trade flat, which means accrued interest will be reflected in the trading price and the purchasers will not pay and the sellers will not receive any accrued and unpaid interest. The Notes are unsecured and unsubordinated obligations of the company and will rank equally with all existing and future unsecured and unsubordinated indebtedness of the company. See the IPO prospectus for further information on the debt securities by clicking on the ‘Link to IPO Prospectus’ provided below. Alabama Power Co. is a wholly-owned subsidiary of the Southern Co. (NYSE:SO).
Sincerely, John Freyler
Nilus Mattive Reply:
February 17th, 2009 at 11:20 AM
Hi, John. I have really never investigated ETDS before. But I will certainly do so now. Based on simply what you posted …
The first thing that jumps into my head is that there are plenty of quality common stocks (from utilities and others) that are easily paying 6% annually right now, too (or close enough).
While common shareholders are behind bond holders in the event of a bankruptcy, as you rightly note, that event is unlikely with stable utilities in the first place.
On the tax side, favor seems to go to common dividends, which are taxed at the more favorable rate.
Since I gravitate toward simple investments that I understand, the immediate appeal of ETDS vs. a regular common stock of a similar utility is not immediately apparent to me. Both can be easily bought and sold on a regular exchange. Many utility common stocks held up equally well during the market downturn.
The insurance sounds like a nice feature, though as we are learning, bond insurance isn’t exactly a rock-solid guarantee.
One other thing: The ETDS will carry ongoing expenses while the common doesn’t, right?
At any rate, the idea is interesting. Let me do some more digging, and perhaps I can cover these investments in a future issue of Dividend Superstars!
Let me add several othe advantages to investing in Exchange Traded Debt Securities (ETDS) I neglected to state in my Feb 14 comments. Alz is insured as to the payment of principal and interest by a surety bond issued by XL Capital Insurance Inc. This is some protection depending on the soundness of that surety company but the fact that SO is financially sound and has a high probability to stay that way is even better insurance, don’t you agree? Also when inflation starts in about a year, this investment can be easily and quickly sold on the exchange or kept to collect the 6% for a year or two depending on the severity of the inflation.
Can you tell me other investments that have comparable risk and return to these ETDS’s?
Sincerely, John Freyler
Nilus,
Thank you for your repy to my blog. Hope this is helpful to some retired investors.
But why buy common utility stock whose dividends rates are at the whims of management when they are locked in with ETDS bonds unless they are redeemed but even if they are, they are redeemed at par value (25) plus accrued and unpaid interest not at market value which might be to your advantage True the likelihood of a utility defaulting is small I still would rather be in a higher financial position than the share holders.
Also my investgation of utility stocks performance during the Nov lows showed me that in general the ETDS did not drop quite as far as the utility stocks and almost all ETDS have comeback to their prelow levels , more so than many of the utility the stocks
Looking forward to your future issue of Dividend Superstars. I f you find this is an important alternative to scarce dividend picking, you could send me a complementary copy. Just kidding
John Freyler.