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Five Things You Need to Know: Trade-Down Consumers Skipping McDonald's


Who can afford to let their car idle in a drive-thru lane these days?


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. S&P 500 Earnings On Tap

Today we move into the heart of this weeks' earnings reports with at least 40 companies in the S&P 500 reporting.

Among the most watched will be this afternoon's report from Yahoo! (YHOO) for news on the Microsoft (MSFT) bid and what, if any, alternatives management is considering to stave off an offer they deem to low; Yum! Brands (YUM) will be watched for both international growth and any signs of domestic weakness in the fast food segment.

2. McDonald's

McDonald's (MCD) was out with earnings this morning. Apparently, folks trading down are skipping past McDonald's. Look, who can afford to let their car idle in a drive-thru lane these days?

Three reasons we're concerned with MCD: 1) international growth, which was good with global comparable sales driving earnings this quarter 2) commodity pricing pressures (yep, still tough out there) and 3) comments on the macro economy considering the fact that, in our view, the company was well-positioned as a key beneficiary of the "trade-down" effect in a weakening economy.

Unfortunately, the company's U.S. comps were slightly negative, which suggests the economic downturn may be steepening. That marks the first drop in U.S. comp sales in five years.

Campbell's (CPB) soup is typically the next step down from fast food dining. The company reports May 21.

3. AT&T: Classic Widows & iPhones Stock

AT&T (T) - remember it, the former "classic widows & orphans" stock? The company no longer evokes the image of stability and longevity it once did, an image that made it a staple of many a portfolio.

Instead, it's watched these days as the exclusive provider of the Apple (AAPL) iPhone network. The company this morning reported in-line results, but the addition of 1.3 million wireless subscribers in the quarter was about 200,000 subs below what some were looking for.

But you know what? It still pays a decent dividend with a 4.2% yield.

4. Existing Home Sales

Look, you know there's not going to be any good news here. Even though the headlines might say "Existing Home Sales Fell 2%, Less Than Expected," the median sales price fell 7.7% year-over-year. Even worse, the inventory of unsold homes at the current pace of sales increased from 9.6 months' to 9.9 months' worth.

Of the two home sales reports - existing homes and new homes - existing homes is the more important since it represents 85% of the housing market.

5. One Last Nail

We may already be standing here in the cemetery above a pile of dirt heaped upon the pine box wherein resides subprime lending, but that doesn't mean people can't still use a nail gun to try and fire off a few more rounds of nails into the subprime coffin.

We caught a story on Bloomberg today about Bank of America (BAC) and the company's plans to further tighten lending standards after taking over Countrywide Financial (CFC). Among the changes will be the curtailing of low-documentation loans, a discontinuance of Option-ARMs and the further restriction of credit to some borrowers.

This is more than anecdotal news of credit creation faltering. After taking over CFC, BAC will play a role in one of every four home loans in America.

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No positions in stocks mentioned.

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