Dec 19, 2011

Improving Profit Oulook for SBUX?

December 19, 2011

Equities are opening up this morning on a relatively quiet news day. The dollar is finding support on continued weakness in Europe and the death over the weekend of North Korea ruler Kim Jong Il. While the transition of power is unclear, the former leader’s son seems to have the support of the military. The transition is important to the region given the country’s nuclear position.

European banks have been borrowing low cost funds from the ECB. In exchange, the ECB has been pressuring the banks to use the funds to buy Eurozone government debt. Unfortunately for the ECB, the banks have been refusing to do so, citing concerns about the viability of the sovereign issuers. Since there were no restrictions on the use of funds, similar to the TARP funding of 2008-2009, the banks are at liberty to use the funds as they see fit.

Starbucks (SBUX) should benefit from recently falling coffee prices. Futures fell for the seventh consecutive week to $2.14 per pound, the lowest level in over a year. SBUX recently raised prices, and if they are able to capitalize on the lower coffee prices, profitability in the first half of 2012 should benefit.

While the world continues to be unpredictable, one thing is constant-the foolishness of the people running our government. After the House approved a one year extension of the payroll tax cut, the Senate offered their own, two month extension. I outlined Friday the folly of a two month extension. Now the Senate and House may work through their winter recess in an effort to do what both sides have already agreed is important-a one year extension.

Since we are close to year end, I thought the chart below, courtesy of Kimble Charting Solutions, might be interesting. It shows the S&P 500 going back to 1984. As you can see from the chart, the market has gone nowhere since 2000. Historically equity markets have alternated extended bull market runs like we experienced from 1982-2000 with equally long periods of futility.

The dollar and metals have been trading in well-worn trading ranges the past few months. Over the past few days the dollar has nosed slightly above resistance in response to the problems in Europe and a potential slowing of global growth. Metals have weakened as well, with gold and silver suffering after inflows into gold notably peaked. Should the metal weaken further and the inflows reverse into outflows, support could be broken. The chart below, also courtesy of Kimble Charting Solutions, shows the dollar on top with the CRX below.

The Packer’s hopes for an undefeated season ended last night with a loss to the Chiefs. The Packer’s win streak, dating back to last season, ended at 19.

Have a great day


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