The Dow Rebounds for the Wrong Reason

In another case of the tail wagging the dog, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is up 0.35% today as of 2:45 P.M. EDT. Investors are speculating that the Federal Reserve will postpone the drawdown of its bond-buying program as tensions in Syria rise and housing data comes in weaker than expected. After new-home sales were reported to have dropped 13.4%, the National Association of Realtors said pending home sales index fell by 1.3% in July. Although that was worse than expected, the index is still up by 6.7% compared to the same time last year. Here are some of the movers and shakers inside and outside the Dow today.

Caterpillar (NYSE: CAT  ) is one of the rare losers today, down 0.5%, following the trend set by rival Joy Global (NYSE: JOY  ) which is down more than 4% after the company posted a 4.9% decline in revenue that led to a 5.3% drop in third-quarter earnings. Joy Global's results were actually better than Wall Street estimates, but investor optimism is fading, and most expect the next several quarters to be worse because of a slowing Chinese economy and uncertain mining-commodity prices.

The short-term mining weakness will hurt Caterpillar's stock price temporarily, but the long-term view is still solid. Caterpillar is the largest global manufacturer of heavy equipment and doesn't look ready to give up its No. 1 position anytime soon. The company also posesses a strong economic moat in its dealer network, which no competitor could replicate in the foreseeable future. Even in a rough patch, Caterpillar has repurchased $2 billion of its shares in 2013, and it announced a 15% increase in its quarterly dividend in June, proving it can consistently deliver value to patient investors.

McDonald's (NYSE: MCD  ) is a big winner in the Dow today, up 1.4%. Yesterday McDonald's had its "buy" rating reiterated by analysts at Sterne Agee, according to StockRatingsNetwork.

A new development to watch out for is the debut of McDonald's "Mighty Wings" -- another tactic in the broader effort to improve same-store sales -- on Sept. 9. This is an interesting play by McDonald's, and it makes sense as the popularity of chicken wings continues to surge. One problem that often haunts companies like Buffalo Wild Wings is that wing commodity prices are volatile, quickly affecting bottom-line results if the business model is solely dependent on wings. This will be less of a problem for McDonald's, with its diverse menu and low-cost position, and if it helps graduate consumers from the dollar menu -- a serious challenge for McDonald's lately -- and drive comparable-store sales higher, it will be a big short-term win.

Outside the Dow, automotive investors are waiting for major automakers to report August sales next week, hoping that the strong sales pace will continue throughout 2013. A combined forecast by J.D. Power & Associates and LMC Automotive predicts that sales in August could hit the 16 million mark for the first time in roughly six years. While retailers have seen weakness in consumer spending recently, cheap financing and strong pent-up demand have continued to fuel vehicle sales in the U.S. market. Investors also need to keep in mind that August sales could be slightly inflated, as Labor Day sales are counted in August instead of September, according to LMC Automotive.

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  • Report this Comment On August 29, 2013, at 1:27 PM, whyaduck1128 wrote:

    There is no right or wrong reason for a stock, an index, or the market in general rising or falling. It simply does so.

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