Bring on the Sugar From the Fed

by Richard Band | July 25, 2012 11:00 am

Stocks were falling hard in the last hour of trading on Tuesday until a story in the online edition of the Wall Street Journal — undoubtedly a leak — suggested that Federal Reserve officials are moving closer to taking new action to spur the economy.  (At the close, the Dow was off 104 points, but up 95 from its low.)  The Fed’s policy making committee meets next Tuesday and Wednesday, so a new shipment of monetary candy may arrive on the loading dock soon.

None too soon, apparently—because, after the market close, Apple (NASDAQ:AAPL) posted June-quarter sales and profits that disappointed the Street[1].  Worse, the 800-pound gorilla of the tech sector predicted a weak September period, with earnings 25% below the analyst consensus[2].  Brace for some turbulence immediately ahead, in both AAPL and the market at large.

The big question:  Will the Fed’s efforts (whatever they may ultimately consist of) offset the rather abrupt slowdown in corporate earnings that seems to be taking place?  I’m hopeful, but guardedly so.

Europe’s problems aren’t lessening a bit.  Indeed, with the benchmark 10-year Spanish bond[3] yield hitting a 16-year high today (7.6%), the risk of a disorderly breakup of the eurozone has never been greater.

If that were to happen, you can be sure our own stock market would feel the shock waves.

All isn’t lost, however.  Many businesses at home and abroad, including quite a few we own, are adapting amazingly well to a tough environment.  Barring a total collapse of the European economy, multinational firms with strong balance sheets and capable managements should be able to ride out this latest squall without major damage.

I think, for example, of McDonald’s (NYSE:MCD[4]).  Sure, I would have been happier if Europe hadn’t weighed on Mickey D’s Q2 results like a wet blanket.  But let’s remember:  despite a slight drop in Q2 profits, MCD’s worldwide same-store sales grew 3.7% for the quarter, faster than analysts had expected[5].

This outfit isn’t about to pack up its marbles[6] and go home.  Once the dollar levels off from its recent torrid run, I’m confident MCD’s dependable sales growth will again translate into higher earnings. Current yield: 3.2%, more than double what you could earn on a 10-year Treasury note.

  1. sales and profits that disappointed the Street:
  2. 25% below the analyst consensus:
  3. the benchmark 10-year Spanish bond:
  4. MCD:
  5. faster than analysts had expected:
  6. isn’t about to pack up its marbles:

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