McDonald’s: The Downsizing of Supersizing
By Joshua Enomoto, Founder of ContangoDown.com and CrushTheStreet.com Contributor
If asked what companies best represent the American spirit, McDonald’s will likely be near, if not on, the very top of the list. And why not? Its stores stretch across vast expanses of land, sea, and time; its ethos no longer exclusively engrained in the minds of mere Americans, but of the entire global community. Whether enjoying a Biggu Makku in Tokyo, along with a side of Katory Friy in Kiev, McDonald’s is truly a universal consumer staple whose only rejection comes from the most extremist of sovereignties.
Given such a popular (as well as notorious) distinction, an expertise in fundamental analysis is not necessary to conclude that life as a McDonald’s exec is grand. With the entire globe enamored, if not functionally addicted, with its “culinary” confections, what could topple its reign? While various competitors have attempted different marketing messages themed either with humor, sexuality, or higher nutritional quality, the bottom line remains that McDonald’s is completely saturated in the two components of “consumer culturalism,” thus making it an apex-predator in the fast food industry.
Financially, apex-predators are important components within technical analysis and forecasting: they typically perform well regardless of outside fundamentals. Unlike the plethora of bottom feeders, the apex-predator can sustain many a body blow, and even if a knock-out uppercut were to be received, big government lobbyists would ensure that an extended count be given. Therefore, any fluctuations amongst these giant stocks is worthy of consideration and in the case of McDonald’s, a recurring technical pattern provides a possible glimpse of what we can expect to see in the overall equities market.
In the most recent edition of CrushTheStreet.com’s Weekly Market Wrap-up, we discussed the use of fractal analysis to forecast a decline in McDonald’s share (ticker symbol: MCD), which may entail a sharp correction in U.S. equities:
The main technical points of the fractal analysis are:
* MCD was on a growth curve from the late eighties until 1996, when it entered into a declining consolidation phase lasting approximately two years.
* From late 1997, when shares were $20, MCD skyrocketed to $50 (a 150% increase) before crashing prior to the eve of the new century. Shares ultimately hit a low of around $12 in the spring of 2003 before picking back up. This pattern represents the first fractal.
* From 2003 until 2008, MCD was on a growth curve until it entered into a declining consolidation phase lasting two years.
* From a price of around $47 at the epicenter of the 2008 financial collapse, shares began to skyrocket, hitting a high of over $100 for an approximate 211% increase. We are in the second fractal and if the logic of the first fractal plays out again, MCD could potentially face a $25 to $30 share valuation.
* From late 1997, when shares were $20, MCD skyrocketed to $50 (a 150% increase) before crashing prior to the eve of the new century. Shares ultimately hit a low of around $12 in the spring of 2003 before picking back up. This pattern represents the first fractal.
* From 2003 until 2008, MCD was on a growth curve until it entered into a declining consolidation phase lasting two years.
* From a price of around $47 at the epicenter of the 2008 financial collapse, shares began to skyrocket, hitting a high of over $100 for an approximate 211% increase. We are in the second fractal and if the logic of the first fractal plays out again, MCD could potentially face a $25 to $30 share valuation.
What was going on fundamentally during these pivotal moments? If we go back to the events leading up to the first fractal, the United States was on a massive bull run and the Federal Reserve worried that low interest rates would overcook the economy, bringing about a sharp correction. To avoid this, the Fed significantly raised rates between 1994 and 1995 to induce a “soft landing.” However, economic data prior to 1996 suggested that the landing may have been a little too soft and there were serious concerns at the time that the country would enter into a recession. Consider the following excerpt from a January 1996 article from The Los Angeles Times:
“Like a thundercloud over a picnic, the possibility of a recession is looming over the nation’s economic future for the first time since the early 1990s.
While Washington remains stalled by budget gridlock, a growing number of economists and business analysts are worried that the economic slowdown could deteriorate into a full-blown downturn this year or next.
Such arguments are bolstered by the poor Christmas retail season, wary consumers with maxed-out credit cards, past Federal Reserve interest-rate hikes and the bearish reaction of financial markets to Washington’s inability to resolve its budget mess.
A downturn in the nation’s economic fortunes would mean trouble for California’s emerging recovery, since about a third of the state’s economic activity is directly linked to the rest of the nation.
So far, the betting is still that a recession can be avoided in 1996. Most economists are hoping that earlier forecasts for positive, though slowing, growth in the nation’s gross domestic product will pan out.”
As it turned out, the bull market entered into a parabolic phase when doomsday scenarios failed to play out, and the mania would be eventually be led by the technology sector. Stupid money was pouring into the markets and the NASDAQ in particular saw insane valuations that have yet to be broken. Everybody was riding high until the inevitable bubble burst: while tech stocks invariably took the hardest hit, everyone suffered, including the consumer staple giant McDonald’s, which would end up losing 76% of its peak valuation. This was a particularly trying time for America, accentuated by the September 11th tragedy. Ironically, the pro-active lesson that the Federal Reserve was trying to “teach” the country fell on deaf ears once the tech mania began and a full market consolidation was necessary to get America back on the road.
Much of the years of the George W. Bush administration focused on this recovery and the economy radically improved, fueled by what would later be known as the Bush tax cuts. Americans were once again feeling good about themselves and began eyeing another opportunity: real estate. Stupid money came pouring in and dinky little condos from San Diego to Miami were seeing insane valuations. Another tragic story with an all-too-familiar theme emerged and many families first suffered massive losses of home equity, and then the indignities of foreclosure. It was at this time that MCD entered a consolidation phase after riding a sharp growth curve and this consolidation would last through the next big crash in the stock market.
A year after the financial collapse, America got the change they were looking for. Blaming Bush and the Republican party for much of the nation’s fiscal problems, Barack Obama, the first black President, took the White House on a campaign built largely on charisma. However, Obama knew that he had to make good on his core promises, namely economic recovery, and thus, the Federal Reserve was given the green light for reflationary policies. The markets took note and while pensive at times, the American public began feeling good about themselves. With the Dow Jones currently soaring above its previous all-time high, the conditions are set for the equities to receive in the stupid money.
McDonald’s is also bearing this out. On Friday, March 8th, MCD gapped up to close at over $98 per share and looks set to eventually topple its all-time high.
The story is a familiar one.
The consequences are the same.