foxex: Highly Correlated

Chart Advisor | Focus on the Price

Friday, February 07, 2020

1. Stocks slip despite strong jobs data

2. What business is McDonald's in?

3. Dunkin sees beyond the breakfast burger

Market Moves

The news from the Non-Farm Payroll report for February was quite good, surpassing analysts' estimates for the number of new jobs created. The price of oil hit a new low as well, but neither of these data points held sellers at bay. The Nasdaq 100 index (NDX), the S&P 500 index (SPX) and the Dow Jones Industrial Average (DJX) all closed about one-half percent lower by session's end.

It is always interesting to note when investors seem to respond in the opposite manner anticipated. Such subtle indications are often a tell into the minds of investors. Perhaps at this time many are feeling a bit less adventurous towards taking investment risk. If that sentiment were to remain, then now might be a good time for shrewd chart watchers to consider more defensive stocks.

The chart below gives an indication that food-related defensive stocks might have a particular advantage in the near future. The chart depicts a positive correlation between the rate for the 10-year Treasury Note index (TNX), and agricultural prices, as tracked by Invesco's DB Agriculture Fund (DBA). This makes sense when you think about the reality of agricultural growers' capital needs, whether it be seed product, equipment, crop and livestock storage or transportation. If they can more easily borrow then they can grow more product, which in turn leads to an increase of supply and subsequently drives food prices lower. Is it possible that the current low interest rates and food prices could turn into higher profits for food production and delivery companies in the near future?

What Business is McDonald's in?

To answer the previously posed question, one only need look at the chart below for a little evidence. Consider the comparison between McDonalds' (MCD) share price and the rate on the 10-year Note (TNX). The correlation coefficient indicator shows a negative correlation between these two. Which makes sense for two reasons. The first is lower food costs, but the second is, as Ray Crock, founder of the fast-food empire, famously stated, McDonald's is in the real estate business. As the cost of mortgages on the company's formidable real estate holdings decreases, the profits of the company and its franchisees should likewise increase.

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Dunkin Sees Beyond the Breakfast Burger

Another correlation that has come to light more recently is that at least some fast food customers are willing to pay more for the right ingredients at the right time. An article today reported that Dunkin Donuts (DNKN) has noticed their average order amount is nearly double among customers who buy a plant-based-protein sandwich produced by Beyond Meat (BYND). The chart below shows that investors seem to have already caught on to this idea. A good question to ponder over the weekend is whether the positive correlation between these two stocks has more to do with espressos or eclairs.

The Bottom Line

Stocks slid and the VIX remained elevated, displaying a slight degree of nervousness among investors. Finding opportunities in such an environment may require looking at strong correlations among interest rates and defensive stocks such as those in food-related industries. McDonald's, Dunkin Donuts, and Beyond Meat all show interesting characteristics right now.