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A Good Day or a Bad Day — It All Depends

Human Genome and eBay shareholders have reasons to cheer


Good day?  Bad day?  Thursday on Wall Street was whatever kind of day you chose to make it.  If you owned eBay (NASDAQ:EBAY), or Gilead Sciences (NASDAQ:GILD) , or gosh!  Human Genome Sciences  (NASDAQ:HGSI) (up 98% on a bid from Glaxo (NYSE:GSK), it was a break-out-the-bubbly holiday.

Yet, in the same few trading hours, the Spanish bolsa skidded to its lowest close since the bottom of the last harrowing bear market on March 9, 2009.  The Madrid index has now dropped a screaming 57% from its November 2007 peak!

Clearly, there are powerful cross-currents at work right now—just as you would expect when global equity markets are tiring after a long, successful run.  Great earnings, or a takeover announcement, can still loft a stock.  One of our own, Microsoft (NASDAQ:MSFT), just posted blockbuster profits after the closing bell.

However, the underlying economic news is softening, even in the United States, as we learned again from Thursday’s surprisingly large count of 386,000 first-time unemployment claims. (The four-week average stands at 374,750, a three-month high.)  Existing-home sales for March also came in below consensus views, and the Philadelphia Fed index of manufacturing activity in the Middle Atlantic region ticked down from the previous month.

All we need to know, perhaps, is summed up in a single number: the 10-year Treasury yield.  At Thursday’s close of 1.97%, it has dropped 40 basis points in the past month.  Bond yields are dropping because the U.S. economy is slowing again.

Meanwhile, Europe has been downshifting for some time.  With both sides of the Atlantic in deceleration mode, it’s becoming more and more likely that stock markets around the world will pause—and retrench—over the summer months.

That’s why I’ve been so cautious (you might even say stingy!) about making new buy recommendations lately.  Sure, I know the conventional wisdom—advisors are supposed to pour out a cornucopia of “picks” all the time, to keep subscribers salivating.

But I’m buying very sparingly myself, and doing a fair amount of selling, too.  As a matter of principle, I only recommend to you what I think is prudent to do with my own money.  Let the chips fall where they may.

I continue to believe the oils, and gold representing some of the best values in the current market.  However, a few bargains are beginning to sprout in other industries.  McDonald’s (NYSE:MCD) dipped two points today, apparently on word from rival Yum Brands (NYSE:YUM) that its European business  has slowed. (YUM controls the Kentucky Fried Chicken, Pizza Hut and Taco Bell brands.)

In addition, some investors may have caught cold feet over the impending retirement of Mickey D’s CEO Jim Skinner.  I’m pleased and impressed with his successor, Don Thompson, but I guess some folks are always reaching for something to worry about.

MCD is the largest stock position in my personal portfolio.  Here’s why:

  1.  entrenched franchise with superb brand recognition;
  2.  excellent management, including a proven “farm system” that grooms future stars for executive leadership;
  3. strong business momentum for the past five years, and continuing into the present;
  4. attractive share price, with intrinsic value authenticated by a generous dividend yield of almost 3%.

Despite my reservations about the overall market, I have no hesitation advising conservative investors to buy MCD right now.  From the current level, I’m projecting a total return—dividends plus capital appreciation—of 15% in the next 12 months.

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