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Don't Feed Your Kids Lunchables And Don't Feed Your Portfolio Kraft Heinz


Kraft Heinz has headwinds of changing consumer tastes.

The stock is only going up because of macro conditions.

When these conditions abate, you will be left with a value stock which doesn't offer investors much value.

Kraft Heinz (NASDAQ:KHC) reported another ok quarter which I will review. I wrote about the company a week ago by starting with the macro economic conditions and how investors are allocating their money across asset classes and sectors. I believe this is of more critical importance than the actual results the company reported. It is the reason the company is trading near its all-time high. It is also the reason the stock went up 3% after its report.

The credit cycle is what leads the economy to grow faster and slower than productivity growth which is the long run growth rate of the economy. With benign credit conditions the economy starts out accelerating its leveraging which had caused it to grow slower than expected coming out of the previous recession. It then continues above the long term productivity growth and causes the economy to over-heat as the leverage is too high. There is then a deleveraging which starts the stress credit conditions. Debt is borrowing from future growth, while stress cycles are when we 'pay the piper' for the stolen growth of the future.

The debt cycle lasts an average of 5.5 years, with the longest one ever lasting 7 years. The current cycle has lasted 6.5 year meaning it's almost over. This ties into the way consumer staples stocks are traded. Investors started to anticipate the ending of the credit cycle in 2015 which is when corporate profits peaked. This caused a sector rotation into safety stocks because safety stocks outperform at the end of the cycle.

An interesting thing happened in February. The economy was about to roll over. As you can see from the chart below of the credit spreads, the spread was increasing in 2015 and early 2016 as the benign cycle was about to end and the stress cycle was beginning. However, there was a coordinated policy response by the major central banks especially the ECB and the JCB. This caused credit conditions to ease back. They were able to extend the cycle from the 9th inning to the 10th inning. This is a perfect analogy because, like baseball, we don't know how long the...