What's Warren Buffett buying?...

What's Warren Buffett buying?... The market abandons fast food... Why we like McDonald's... Steve Sjuggerud on market extremes...
 

 In October 2008, billionaire investor Warren Buffett wrote an op-ed piece for the New York Times, titled "Buy American. I Am." It was a few months before U.S. markets bottomed. Investors were panicked.

 

It was similar to JPMorgan founder J. Pierpont Morgan's rally cry to provide the markets with liquidity during the banking panic of 1907.

 

 Buffett told the world he was buying U.S. equities. It was a great call... and a patriotic gesture. But Buffett was hardly being altruistic.

 

As he wrote in that piece, he would rather hold equities over cash...

 

"Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

 

"Equities will almost certainly outperform cash over the next decade, probably by a substantial degree."
 

 Since then, the S&P 500 has more than doubled. The index broke the 2,000 mark as of midday trading. Buffett has made even more of a fortune.

 

Today, U.S. stocks aren't cheap. And while market participants are fearful (though not nearly to the same degree as they were in late 2008), Buffett isn't being greedy... And he certainly isn't buying American.

 

 Buffett is a brilliant investor. He's probably the greatest investor that has ever lived (judging from his nearly $70 billion net worth). And while he's still producing great returns for investors (Berkshire Hathaway shares hit an all-time high last week), he has also started to speak out on social and political matters. That makes him look like a hypocrite.

 

 In lieu of buying American, today Buffett is financing a company owned by a Brazilian investment firm to move its tax status outside the U.S. (If you don't recall, Buffett has been an adamant supporter of wealthy Americans paying more taxes, often citing that he pays a lower tax rate than his secretary.)

 

You've likely seen the headlines that fast-food chain Burger King will purchase Canadian coffee-and-doughnut chain Tim Hortons. The combination will create the third-largest fast-food chain in the world.

 

The takeover is valued at approximately $10 billion. Berkshire Hathaway is expected to finance $3 billion for the deal. The combined company would have a market cap around $18 billion.

 

 Brazilian private-equity firm 3G Capital Management owns a majority stake in Burger King. After the deal closes, 3G will own a combined 51% of the company and will manage the business.

 

As you may remember, Buffett has worked with 3G before on its purchase of food-processing firm Heinz. Buffett also holds a large stake in brewing giant Anheuser-Busch InBev – and not coincidentally, 3G is the majority shareholder.

 

 If the merger goes through, Burger King would move its corporate headquarters to Canada in a so-called "corporate inversion." The U.S. corporate tax rate is 35%. It's only 15% in Canada.

 

The government is cracking down on corporate inversions... Pharma giant Pfizer tried to buy a British company to move its tax status abroad. Drugstore chain Walgreens also attempted to move abroad.

 

 Burger King argues a move to Canada wouldn't help the company much in terms of taxes. Instead, it would help the burger chain better compete with giants like Yum Brands (which owns Taco Bell and KFC) and McDonald's.

 

 It's a good deal for Buffett. He's investing alongside world-class operators. And he'll enjoy a preferred return, giving him downside protection and exposure to the upside.

 

We just wish he'd stick to what he's good at... allocating capital.

 

 On the topic of fast-food chains, McDonald's has had a rough run of it recently.

 

The burger chain had a PR crisis in China, where it was serving contaminated meat. Some locations are being closed in Russia as part of sanctions against the country. And sales are falling as consumers become more health conscious and choose fast-casual establishments like Chipotle.

 

 Earlier this month, McDonald's reported its largest monthly decline in global same-store sales since early 2003. In the U.S. (which houses more than 40% of the chain's 35,000 locations), sales at restaurants open at least 13 months have been flat or stagnant over the past year.

 

On Friday, McDonald's announced it would replace the president of its U.S. division for the second time in less than two years.

 

 A recent article from the Wall Street Journal shows customers in their 20s and 30s are leaving McDonald's in favor of Chipotle and burger chain Five Guys. From the article...

 

Increasingly, younger diners are seeking out fresher, healthier food and chains that offer customizable menu options for little more than the price of a combo meal.

 

 According to food-industry consultant Technomic, which compiled data for the Journal, the percentage of 10- to 21-year-olds visiting McDonald's each month is down 13% since the beginning of 2011. Visits from customers aged 22 to 37 have been flat.

 

Meanwhile, people ages 19 to 21 increased their monthly visits to fast-casual restaurants by 2.3%... and those aged 22 to 37 increased their visits by 5.2%.

 

As you can see in the chart below, the market also prefers fast-casual...

 

 

 But McDonald's isn't going anywhere. PR crises pass. Things will eventually calm down in Russia.

 

Meanwhile, energy giants BP and ExxonMobil have dumped loads of oil into our oceans... Both companies survived.

 

 Plus, as our "disappearing middle class" thesis continues to play out, McDonald's should regain its popularity... $10 lunches at Chipotle are great when you can afford them. But when things get tight, McDonald's Dollar Menu looks more and more attractive.

 

McDonald's is also campaigning against its unhealthy image. The company has introduced grilled chicken and veggie wraps and fruit to its menus... It also hosted a press event where chefs created "gourmet" meals from its ingredients.

 

 But as Porter explained in a recent private e-mail about McDonald's woes, "betting against sugar and fat is a losing proposition."

 

At the end of the day, McDonald's is still the world's largest restaurant by revenue. The stock trades at a reasonable 15.6 times forward earnings. And it produced more than $4 billion in free cash flow last year.

 

Plus, it pays a 3.4% dividend today. In today's low-interest-rate environment, that dividend (paired with McDonald's fair valuation) will act as a magnet to capital.

 

 And the company looks good on technicals, too...

 

As Steve Sjuggerud pointed out last week in the August 20 edition of True Wealth Systems' Review of Market Extremes, McDonald's is oversold right now, according to its relative strength index (RSI).

 

RSI takes a stock's recent gains and losses and builds them into an index ranked from 0-100. When RSI is low, it shows that a stock is oversold and could be poised to bounce higher. From the August 20 True Wealth Systems...

 

We've seen RSI readings this extreme in MCD just three times since 2011. Those three trades led to 17% average gains in just 4.5 months. And on average, they tripled the return of the S&P 500 over the same periods...   Oversold Peak Return S&P Return Time Period (months) 1/12/2011 8/29/2011 23.4% -5.9% 7.5 6/6/2012 7/19/2012 4.6% 4.9% 1.4 11/20/2012 4/12/2013 23.0% 15.5% 4.7 Average   17.0% 4.8% 4.5

 

 If you're not familiar, True Wealth Systems is Steve's quantitative-based trading service... He and a team of programmers spent years (and a small fortune) creating an intensive computer system to help monitor and emulate his top trading strategies across more than 40 markets and sectors.

 

To date, True Wealth Systems has one of the most impressive track records at S&A. The portfolio is up an average 64%... And positions that have been in the portfolio for more than six months are up an average of 97%. Steve's subscribers are sitting on huge gains on leveraged plays in health care (250%), stocks (110%), and technology (97%). Plus, two of Steve's recently closed biotech trades would have turned $10,000 into more than $44,000.

 

 Steve's team recently added the "Review of Market Extremes" feature to show subscribers the most overbought and oversold opportunities in the market today. This e-mail is a must-read for anyone looking for short-term trading opportunities.

 

In the August 20 edition, Steve showed subscribers how to make 36% over the next three months in a hated commodity. He also rated two of the world's best businesses a buy (one of which is McDonald's)... And he explained why you should buy U.S. stocks today.

 

To learn more about a subscription to True Wealth Systems – and how to get started with a 90-day free trial – click here.

 

 

 New 52-week highs (as of 8/25/14): Apple (AAPL), Dolby Laboratories (DLB), Enterprise Product Partners (EPD), KLA-Tencor (KLAC), AllianzGI Equity & Convertible Income Fund (NIE), PowerShares S&P 500 BuyWrite Fund (PBP), Pepsico (PEP), PowerShares Buyback Achievers Fund (PKW), PowerShares QQQ Fund (QQQ), ProShares Ultra Technology Fund (ROM), RPM International (RPM), ProShares Ultra Health Care Fund (RXL), Sprott Resource Corp. (SCP.TO), ProShares Ultra S&P 500 Fund (SSO), Cambria Shareholder Yield Fund (SYLD), Whiting Petroleum (WLL), and W.R. Berkley (WRB).

 

 In today's mailbag, one subscriber expresses his appreciation for being an Alliance member. Send your thoughts to feedback@stansberryresearch.com.

 

 "Dear Porter, I am a new full Alliance member, The 1st born American from a 17th Century Yorkshire England Farming family, my mother was 1 of 12, growing up on the family farm, near another family owned farm, that is home to the secret WW2 158 Bomber Squadron, air base, which is currently a working farm owned by my 1st cousin. You are very correct in that farmland is most certainly the most valuable asset & business, in the world today, with a cash cow business (your capital efficiency list) & gold in 2nd & 3rd place. My cousins over the years just kept buying more farmland with the annual profits, and over the decades since WW2, now have over a dozen separate working 400+ acre farms, farming everything from grapeseed oil to sheep to cattle.

 

"The weather may not be as nice as my Siesta Key, FLA home, but Yorkshire England, along the North Sea coast, is god's country, and not densely populated, with tourists (My wife & I were the only American on the flight over. When I get back, I will send you a full report on the actual banking rules, and all the requirements in general, for us Yanks to buy property & a business in the UK, & I hope it will help your readers be more clear on all the rules, to have assets, at least in the UK, remember paying taxes means you're making money, and a problem I welcome any day...

 

"At 43, I was lucky to sell my business in Florida, & retire, in Oct 2007, to be the Trustee & caretaker of the best person, I have ever known, my mother, who gave me the best life lessons, hard work, 3 jobs, living below one means, saving & keeping money long term, is way harder than making it, no get rich schemes, no debt, and to be a person, of high moral & ethics. The info you publish, has & will change my life, & my wife's for the better! And your school, and teaching, far exceeds any of my MBA classes. You have my mother's common sense & long term vision. Thank You, for being such a good teacher! Do not let the 1-3% of doubters ever discourage you. You are making the lives of thousands of people, much better, whether they know it or not. Please don't ever stop teaching us, or retire! P.S. I can't wait to go back to work, retirement is not good for a workaholic." – Paid-up subscriber Bobby Andrews

 

Regards,

 

Sean Goldsmith

August 26, 2014

 

Jeff Clark: Some of my favorite technical indicators today...

 

S&A Short Report editor Jeff Clark spends more time studying technical analysis and the market's ups and downs than almost anyone we know. But rarely do we get the chance to hear which indicators are working and which aren't.

 

In today's Digest Premium, Jeff discusses a few of his favorite indicators in today's market...

 

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

Jeff Clark: Some of my favorite technical indicators today...
 

Editor's note: S&A Short Report editor Jeff Clark spends more time studying technical analysis and the market's ups and downs than almost anyone we know. But rarely do we get the chance to hear which indicators are working and which aren't.

 

In today's Digest Premium, Jeff discusses a few of his favorite indicators in today's market...

 

 

 As the market evolves, so do the technical indicators. Things that work today didn't necessarily work a few months ago... and they won't necessarily work a few months from now.

 

One of my favorite momentum indicators is the moving average convergence-divergence indicator (or "MACD"). You look for turns in the indicator to help predict turns in the market. So when the market is moving in one direction and the MACD is going the other way, that's a giant caution sign that we're due for a reversal. I also like that you can use the MACD on multiple time frames.

 

Not only can you use it on a daily basis, but you can also use it on 60-minute and 30-minute charts. That's what helps us with scalp trading. Often, we'll use the positive and negative divergences on the MACD indicator's 15- or 30-minute charts to tell us to short a rally or buy on a dip. The MACD right now is one of my favorites.

 

 For more intermediate-term trends, I like to use moving-average crossovers. This might get technical, but bear with me...

 

A lot of folks like to use the 50-day and 200-day moving averages (DMA) to indicate changes in trends. Whenever the 50-DMA crosses over its 200-DMA – whether it's a bullish move higher or a bearish move lower – it's a good indicator of a change in the intermediate-term trend.

 

Likewise, another indicator that has been working well recently is the nine-day exponential moving average (EMA). When that crosses above the 50-DMA, that tends to be another terrific way to indicate a change in the intermediate-term trend.

 

 There are plenty of examples of times in the S&A Short Report where we have noted the nine-day EMA crossing over the 50-DMA as a reason to go ahead and take a position on a stock.

 

That was one of the first things I noticed with the Shanghai Stock Exchange Composite Index (the "SSEC"), and that got us into some of our Chinese-stock positions early. That's just one of a handful of stocks that we've recommended (and dozens more that I'm keeping my eye on) that was setting up with a moving-average crossover. So that's another indicator that is working well right now.

 

– Jeff Clark

Jeff Clark: Some of my favorite technical indicators today...

 

S&A Short Report editor Jeff Clark spends more time studying technical analysis and the market's ups and downs than almost anyone we know. But rarely do we get the chance to hear which indicators are working and which aren't.

 

In today's Digest Premium, Jeff discusses a few of his favorite indicators in today's market...

 

To continue reading, scroll down or click here.