I’m Just Now Seeing What The Federal Reserve Really Did
PART 1: JUST A CHART OF MCDONALD’S
The Federal Reserve saved the stock market. Quantitative easing and historically low rates. Let’s look back for a second and remember what the S&P 500 has done since the market bottomed.
Not so fast.
While this rise in the S&P 500 has been stunning, there are several things worth questioning. A certain saying actually comes to mind — “building castles in the sky.”
One such example comes from the other day when McDonald’s traded at a new all-time high. Yes, despite anything you’ve heard about how organic foods and gluten free eating habits would crush the golden arches — well take a look:
PART 2: THE GOLDEN ARCHES LOVES THE FED
On purpose or by accident, what you’re about to see paints an extraordinary picture about the stock market over the last 7 years.
First up, here’s a chart showing gross profit at McDonald’s. It had a nice run in 2011 and 2012. But today it’s roughly right back to where it was 2009 and 2010.
Next up we look at revenue for McDonald’s. While it did rise initially like gross profit did, today it is also back to where it was in 2009.
Wait a second. McDonald’s stock has climbed more than 150% over the last 7 years and its revenue and gross profit have basically stayed the same?
That’s where these next two charts come in. And they should get you thinking. You just first need to see them.
The orange line on the chart below shows the price of McDonald’s stock and it has been rising. The blue line shows the total number of McDonald’s shares that are on the stock market available for trading and it has been falling.
Now this next blue line shows something much different but really relevant. Here’s net debt issuance at McDonald’s.
PART 3: FINALLY IT ALL MAKES SENSE
The other day I was writing about McDonald’s. I was fascinated by its all-time highs. But that’s when someone showed me a link that is the cornerstone for this entire piece. It has had me thinking about the Federal Reserve ever since.
“Interest rates dropped; for 10-year Treasuries, for instance, from just over 4% in 2008 to less than 2% in 2015. This permitted McDonald’s to finance a massive share repurchase program that would otherwise not have been affordable but for these artificially low rates, which is why its interest expense only rose by 22% even as its debt ballooned.” — Horizon Kinetics
Building castles in the sky.
McDonald’s does not make more money than it did before the Financial Crisis.
McDonald’s is not doing anything particularly new or innovating.
McDonald’s is trading at all-time highs because they are borrowing money at cheap rates and buying their own stock. And buying back stock reduces the total number of shares available making it harder to buy and sell. If there were only 1 million Big Macs left in the world imagine how much each one would sell for? But now what if there were only 20 left — how much would each one sell for?
I am just now beginning to understand what low interest rates mean for the stock market and I hope this can serve as a lesson of some sort. Mostly that you have to buy stocks whenever the Federal Reserve lowers interest rates! 😜
