AUGUST 15, 2005

An interesting correlation last week, well actually since 8/2, is that every day the bond market closed near the high of its range for the day, so did stocks, regardless of what oil prices did. The opposite was true as well. Every day bonds closed near their lows of the range of the day, so did stocks, even if oil fell like it did 8/4. So oil didn't matter or its rise was compensated for by lower interest rates. Friday, however stocks closed neutral, about the middle of their range for the day, even though bonds had a big rally and finished strong. Oil might finally be exerting some influence as it broke the $67 barrier with fears of $70 around the corner. Inflation measures this week and gas pump prices will be negative, as will lingering concerns over tech stocks in light of DELL and CISCO. Earnings from retailers should be good, but it will be their guidance that matters most.

I don't usually comment a lot on individual stocks but the action in McDonald's last week, is to good to pass up. Rumors of a big REIT like Vornado buying a stake in the company to monetize it's real estate values sent the stock and its call options flying last week. MCD started to hit its lows in the spring of 2003, as same store sales were declining 4% a month. MCD had been a growth stock for decades and old management in an effort to keep that up started to diversify into other restaurant concepts in the late 90's as expansion opportunities waned and competition increased for their burger joints. That strategy failed, as their forays into other businesses never reached critical mass to contribute significantly to the bottom line and meanwhile tastes were changing as the population aged and they had their eye off the ball of their core business and it faltered. New management was brought in, cutoff all the expansion focused on the core business, introducing new menu items to cater to older and healthier tastes, extended store hours etc. Essentially pushing more product through existing distribution. It worked. Same store sales started to improve peaking at 13.9% growth in the spring of 2004. So from its low of around $14 a share in 2/03 the stock rallied to 34 1/2 in 3/05. But then same store sales started to settle down, as the comparisons grew more difficult and the stock pulled back to 27. June and July were better than April and May and so the stock bounced back a little to 31. The company itself is looking for mid single digit EPS growth. They fixed the business but are now in the same spot the old management was. How do you get growth out of a large, mature business going forward. They're already the biggest in every thing. They have the largest breakfast business, they expanded their menu, expanded their hours to get the late night crowd. By slowing international and domestic expansion and eschewing other restaurant concepts, they are back to being a one trick pony. Grow same store sales. This can be seen in the convergence of same store sales figures and total sales figures.
That brings us to the present. Up pops the rumor of Vornado, perhaps helped by the fact that they just recently raised some money in a secondary offering. Roughly 9m share at their current price, lets say 90 equals about 800M, sounds like a lot. Could it pop the stock $4? Sure, but consider this. MCD bought back 33M of its share in the last 6 months, approximately 1 billion dollars without much effect. Not to mention several analysts pointed out on Friday that MCD is not like Kmart. Though they have some nice parcels, most McDonald's are located on major streets next to gas stations and dry cleaners and the parcels are not that large if you are considering re-development. McDonald's picks their sites for a reason, so I don't think they want to go anywhere in the first place. Do they need the cash, that spinning them off in a REIT might provide. They have no major expansion plans, just the opposite.
Maybe someone should look into who benefited most from these rumors.