<FOOLISH FOUR PORTFOLIO>

The McDonald's Conspiracy
Every Dow stock is connected....

by Chris Rugaber (TMF [email protected])

Alexandria, VA (February 25, 1999) -- Thanks to all Fools who responded to last week's article that discussed whether the Dow needed an update and, if so, which companies might get the boot and which companies should replace them.

Many of our Foolish readers (which of course is meant as a compliment) defended the Dow in the face of all the criticism from the magazine articles I cited. Craig Stanaland, reporting in from an Air Force base in northern Japan, noted that Dow companies like General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>, Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %>, and Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> had "extensive high tech components," and though "they're not Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> or Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>... then again, they're not startups with zero profits and CEOs who wear flip-flops to board meetings, either."

Regarding specific companies, there were a variety of suggested additions to the Dow, from America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> to the companies I had suggested -- Lucent <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>, Time Warner <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWX)") else Response.Write("(NYSE: TWX)") end if %>, and Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> -- to companies like Archer Daniels Midland <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ADM)") else Response.Write("(NYSE: ADM)") end if %> and Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> that I certainly hadn't thought of.

On the whole, Microsoft was the company that was most frequently cited. Since Microsoft doesn't pay dividends, and all other Dow companies do, it's probably unlikely to show up in the Dow anytime soon, for better or worse. Fewer Fools suggested companies that should be removed, except to agree with me on perennial whipping boys Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> and International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %>. AlliedSignal <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALD)") else Response.Write("(NYSE: ALD)") end if %> and Alcoa <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AA)") else Response.Write("(NYSE: AA)") end if %> got their share of mentions, however.

On the issue of the size of the Dow, a Parisian Fool, Laurent Bennini -- bienvenu, mon ami -- pointed out that France's much smaller stock market uses a forty-stock index to track its progress, which makes the Dow's thirty look all the more inadequate.

George Johnston, known as Pantaloon on our message boards, also defended the Dow and its components against charges that it's out-of-date, arguing that "One pound of aluminum sells for more than a thousand page views and costs a lot less to produce." Presumably, the point here is that business efficiencies are being found outside the high-flying tech stocks.

Mr. Johnston makes a far more entertaining (and instructive) case for a McDonald's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %> Conspiracy regarding the Dow:

"[The Dow] galumphed along for decades in the low hundreds until [McDonald's (MCD)] was added. When you order a Coke (KO) from MCD it is rung up on an IBM cash register. The burgers (even the burgers that are not "to go") are wrapped in paper (IP) after being stored in plastic bags made by Union Carbide (UK) and cooked on nonstick surfaces sold by DuPont (DD) which, of course, cover aluminum (AA). In fact, Bethlehem Steel (BS) was probably dropped from DJIA around the time MCD stopped using stainless steel for their kitchens.

"Speaking of dropping stocks, McDonald's removed ashtrays from their fine establishments, but Philip Morris (MO) was allowed to stay on the DJIA because it sells Kraft cheese....

"... Wal-Mart (WMT) was added around the time it started opening up McDonald's franchises in its stores....

"Let's talk about their back office operations. The management reports are printed on laser printers sold by Hewlett-Packard (HWP) connected to computers with INTC processors (oops a Nasdaq stock... well, it would have been included...) with more paper from IP. (Maybe IP should be double weighted instead of dropped!) What office can run without office supplies (MMM)? MCD with offices and franchises all over the world needs a large and complicated phone system which AT&T (T) is capable of providing.

"The company jet comes from Boeing (BA). The company cars are, of course, GM, which are equipped with airbags from AlliedSignal (ALD), tires from Goodyear (GT) using antifreeze from Union Carbide (UK) as well as plastics from Dupont (DD) and other components from United Technologies (UTX). Speaking of cars, they need gas -- especially after sitting in a drive-through waiting for "fast" food. MCD knew for decades something that Starbucks just recently discovered. Starbucks noticed that they sold more coffee when they were near a Noah's Bagels and "invented" co-location (just like they "invented" espresso). MCD has long known that their franchises near gas stations (CHV and XON) do a lot more business. Fill 'er up!

"When a new McDonalds' is built, the workers use their Craftsman tools bought from Sears (S) to install the air conditioning and heating systems. (UTX again!) The heavy equipment to build a McDonald's comes from Caterpillar (CAT)... where else?

"The soap that MCD's employees are supposed to wash their hands with is made by Procter & Gamble (PG)... Every MCD has a first aid kit which comes from Johnson & Johnson (JNJ)... Speaking of happy and children, what visit to MCD is complete without a "Happy Meal," which usually has Mulan, Hercules or other toys licensed from Uncle Walt's company (DIS).

"MCD does a lot of advertising on television, including NBC (owned by GE), and the commercials and print ads are shot using cameras, lenses and film from Eastman Kodak (EK)....

"While McDonald's won't let you use Discover (S), American Express (AXP), MasterCard or VISA (those credit card companies are mostly owned by banks like C and JPM), the franchisees often need to arrange financing for those hefty franchise fees....

"One may think this is a crock (or Kroc) because I have left out one stock of the 30, but I left the ultimate hamburger play for last. Many people complain about the high salt and high saturated fat content of MCD hamburgers and fries and assume it is only meant to sell more Coke (which it does). There is another effect. The long-term play from the excess salt and fat is their contribution to heart disease. A heart attack starts a whole chain of costly events. One needs to be rushed by ambulance (GM) or helicopter (UTX) to a hospital, which is equipped with expensive equipment (MMM) and expensive supplies (JNJ) and lots and lots of profitable drug sales, which brings me to the 30th stock... Merck (MRK). Would you like fries with that?"

OK, enough, George, or you'll be replacing me here as a weekly Dow Dividend columnist. Aside from the humor of his e-mail, it does demonstrate the ubiquity of many of the Dow companies, even if they aren't as "sexy" as some of the Internet stocks. Thanks for the notes from everyone, and Fool on!

Today's Stock Lists | 1998 Dow Returns

02/25/99 Close

Stock Change Last -------------------- CAT - 5/16 45.69 JPM + 15/16 112.56 MMM - 15/16 75.25 IP - 9/16 42.25

Day Month Year History FOOL-4 -0.59% 3.68% 1.51% 3.02% DJIA -0.35% 0.08% 2.16% 1.76% S&P 500 -0.67% -2.71% 1.60% 1.85% NASDAQ -0.54% -7.15% 6.12% 7.57% Rec'd # Security In At Now Change 12/24/98 9 JP Morgan 105.51 112.56 6.68% 12/24/98 24 Caterpillar 43.08 45.69 6.05% 12/24/98 14 3M 73.57 75.25 2.28% 12/24/98 22 Int'l Paper 43.55 42.25 -2.99% Rec'd # Security In At Value Change 12/24/98 9 JP Morgan 949.62 1013.06 $63.44 12/24/98 24 Caterpillar 1034.00 1096.50 $62.50 12/24/98 14 3M 1030.00 1053.50 $23.50 12/24/98 22 Int'l Paper 958.12 929.50 -$28.62 Cash $28.26 TOTAL $4120.82 </FOOLISH FOUR PORTFOLIO>