On Monday July 28, Kraft (NYSE: KFT) will be reporting its earnings results for the second quarter. Kraft is a well-known manufacturer of supermarket foodstuffs. We all know the brands: Oreo cookies, Nabisco, Oscar Meyer and many, many others.

It should be a defensive stock, just like Campbell Soup (NYSE: CPB) or PepsiCo (NYSE: PEP), right? Well, it is and it isn't. It's defensive in the sense that, as the cliche goes, people still want to eat their favorite foods even during recessionary times. It isn't in the sense that the stock is down by 16% (as of this writing) in the one-year time period. It does have a nice dividend yield, however, and Warren Buffet seems to like it.

What should investors be looking for on Monday? Well, they should definitely be looking at the margins. Is Kraft navigating this inflationary period in as efficient a manner as possible? I think Kraft will do OK in this regard. I'm not expecting any sort of wide expansion of gross margin, but I think management will report stability in this area.

Hershey (NYSE: HSY) , which recently reported numbers for its own quarter (see Brent Archer's idea for a trade involving Hershey options), did well in keeping margin-erosion at bay. Hershey also beat estimates by a penny. Considering that Kraft beat analyst estimates last quarter, that it has a good history of going beyond expectations and that Hershey was able to beat, then I would have to say that Kraft should have no problem beating on Monday. Hershey has had its share of troubles lately, keep in mind.

Also, according to Earnings.com, Kraft earned 50 cents per share a year ago, and the call is for 50 cents per share on Monday. It shouldn't be too difficult to eke out a little growth, should it?

Investors will also want to look for news on price increases and volume trends. Many companies these days have been talking about passing on commodity-cost pressures to consumers, and Kraft is no different. Will the public take to such increases? As I alluded to before, Kraft has a powerhouse stable of products. People who love Ritz crackers will pay whatever price they need to pay to keep the item in their pantries. Will Kraft have any new marketing campaigns to keep up the brand equity? This is also crucial stuff.

In terms of Kraft being a trade going into earnings, I see that as a challenging situation at best. Consider the following: McDonald's (NYSE: MCD) sold off a little when it released its earnings; concern about the margins was mentioned. You'll note that McDonald's did very well on the bottom line, beating by 8 cents. Yet, it wasn't enough to overshadow other issues, and the stock did nothing. Personally, I think McDonald's deserved a higher bid on the results. But hey, it doesn't matter what I think, the market will do what it pleases. And when the market is volatile, a new thing pleases it (or irritates it) each day.

That's why I'm not infatuated with a Kraft-earnings trade. Maybe McDonald's sold off because it's been a stronger stock and investors were looking for an excuse to take some money off the table. Still, I'm not convinced. The best thing to do might be to wait until after earnings are issued to see the hard numbers and the reaction to the stock. Then, if you're still interested in Kraft, you could do something at that point.

Disclosure: I don't own any company mentioned; positions can change at any time.

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We're back to the 1970s. The Washington Post reports that the Fed's Beige Book suggests that growth is stagnant and prices are rising. That's an economic condition known as stagflation -- slow growth and high prices. That's bad news for policymakers and investors.

I first posted about Stagflation back in May 2006. What is striking to me is that the price of oil was $69 a barrel back then and it's almost double that now. Back then I noted that stagflation "prevailed in the US during the 1970s. For example, in 1979, US core inflation, excluding oil and food, rose at a 9.4% annual rate, GDP grew at roughly 3%, and unemployment averaged 6%. Furthermore, this condition was bad for stocks which rose an anemic 0.37% annual average during the decade." I also wrote about stagflation here and here.

Here are three key findings from the Beige Book:

• Weak retail spending - The Post reported that consumer spending was weak, despite the economic stimulus checks from the government that went out starting in May. There was some demand for electronics, and discount stores got a temporary boost. But discretionary spending froze on housing-related items and vacations.

• Declining real estate - The Post reported a weak national housing market. Also, a new real estate negative -- commercial real estate -- which had boosted economic growth, is also slowing down.
• Rising prices - The Post reported "skyrocketing prices for fuel and other commodities." It also noted that since their costs of higher raw materials had risen, companies were planning to boost prices to maintain margins. Today, McDonald's (NYSE: MCD) announced that it would join those companies by raising prices on its dollar menu.

So what should be done? To answer that, it might help to look at history. What got the U.S. out of stagflation in the 1980s was a massive increase in interest rates. Paul Volker raised the Fed Funds rate to about 19%. This was great for people invested in money market funds. It also caused a nasty recession and -- most importantly -- squeezed the life out of inflationary expectations. The result was very low stock prices relative to asset values. Junk bonds financed corporate takeovers that shifted those dormant asset values into the hands of investors. And the Dow began an 18 year rise from 800 to over 10,000.

The current administration has left a different problem for the next president than the one that Ronald Reagan faced in the early 1980s. In my view, the key to solving our current woes is a multi-pronged strategy to strengthen the dollar, which has lost 72% of its value since January 2001. That means raising interest rates to attack inflation, balancing the Federal budget, and cutting our national debt.

At the moment, however, Washington appears determined to add $800 billion to that debt to $10.6 trillion -- a perilous 75% of GDP -- so it can bail out Wall Street and its $12 trillion mortgage-backed securities holdings. So it will await the next president to kill stagflation and revive the economy.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in McDonald's securities.

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MOST NOTEWORTHY:

• Thomas Weisel downgraded shares of Varian (NASDAQ:VARI) to Market Weight from Overweight following the company's Q3 results to reflect manufacturing relocation issues and the slowdown in organic growth. The firm lowered their target to $47 from $70.
  
• Jefferies cut Chipotle Mexican Grill (NYSE:CMG) to Hold from Buy following the company's in-line Q2 results, as they believe consumer headwinds and commodity inflation are likely to pressure EPS in coming quarters. The firm lowered their target to $80 from $100.
  
• Deutsche Bank downgraded McDonald's (NYSE:MCD) to Hold from Buy as they believe higher beef costs and slower traffic could drive reduced profitability and limit upside. The firm reduced their target to $63 from $67.

• AT&T (NYSE:T) was lowered to Neutral from Overweight at JP Morgan.
  
• Baird cut Citrix Systems (NASDAQ:CTXS) to Neutral from Outperform.
  
• Raymond James (NYSE:RJF) was lowered to Market Perform from Outperform at Wachovia.

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Morgan Stanley upgrades Citigroup (NYSE:C) to "equal weight" from "underweight", according to Briefing.com. The news service also reports that Deutsche Bank downgraded McDonald's (NYSE:MCD) from "buy" to "hold".

Standard & Poor's added Hansen Natural Corp (NASDAQ:HANS) and Chattem (NASDQ:CHTT) to its list of mid-sized companies that show the "highest growth characteristics.", according to the AP.

Boeing (NYSE:BA) Cut to Neutral at Cowen & Co, according to 24/7 Wall St. The financial website also reports AT&T (NYSE:T) Cut to Neutral at JPMorgan

Douglas A. McIntyre

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When McDonald's (NYSE: MCD) reports earnings, it may be an indication for how badly the spending habits of the working class and middle class in America have been hurt by the current economic downturn. According to The Wall Street Journal, "McDonald's has advantages over its rivals. The omnipresence of its restaurants means customers don't have to go far looking for them, making them a convenient trade-down option that doesn't eat up gas."

That is only an advantage if people can go out to eat at all. It is highly likely that the rising costs of food and fuel are hurting the people at the bottom levels of the income pool much worse than everyone else. It is hard to imagine most families with incomes under $25,000 being able to manage their daily living costs at all.

Even if a meal for four at McDonald's costs less than $20, it may be that a cheaper meal can be made at home.

McDonald's is not the preferred restaurant for the upper classes and it may be moving beyond the reach of the spending habits of those with very modest incomes .

Douglas A. McIntyre is an editor at 247wallst.com.

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Europe is not exactly a growth market for most US companies. The economy there is slowing much as it is in America. But, McDonald's (NYSE: MCD) may be an exception. According to Bloomberg, "McDonald's Corp., the world's largest restaurant company, may report a second-quarter profit after European sales rose twice as fast as in the U.S."

The news is unusually good because rising commodities prices are likely to squeeze the fast food company's margins. The costs of bread and meat have been up sharply over the last year.

Europe seems an unlikely savior for McDonald's numbers. It is often viewed as a region where good food and traditional cuisine are part of the culture. Who wants a hamburger from a fast food place when the local restaurant has crepe suzette?

But fast food, filled with fat and salt, is irresistible. McDonald's has proved that in every country where it does business.

Douglas A. McIntyre is an editor at 247wallst.com.

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McDonald's (NYSE: MCD) program to sell premium coffee is not going well. That would make some sense. Even Starbucks (NASDAQ: SBUX), the kings of expensive Java, is doing poorly.

According to The Wall Street Journal, "Management may have to defend its giant bet on lattes and cappuccinos, which they want to add at all McDonald's 14,000 U.S. restaurants by next year." The newspaper says that early sales figures for the new drinks are mediocre.

If McDonald's did pull back on its sales of high end coffee-based drinks, it would be the best news Starbucks has had in a couple of years. As US same-store sales growth rates at the chain have fallen, the company's stock has moved from over $40 to below $15. Getting some competition out of the market could be critical to Starbucks recovery.

But Starbucks is not likely to be so lucky. With its massive size and tremendous cash-flow, McDonald's can afford to stay in the premium coffee business for years without a meaningful impact on its earnings. It sells too many hamburgers to be hurt by a slow start in latte sales.

McDonald's can wait Starbucks out and hope that, as things get worse for the coffee company, customers will turn to Ronald McDonald more frequently.

Douglas A. McIntyre can be reached at 247wallst.com.

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This post is part of a series on celebrity spokespeople who ended up doing serious harm to the brands they were hired to promote, or vice versa. See how we rank the 20 top spokesperson fiascos.

Basketball star Kobe Bryant may be this generation's Michael Jordon, a combination of lightning-quick moves, shooting touch and court savvy unmatched by any backcourt player in the world. As leader of the Los Angeles Lakers, he has become a fixture on the scoring leader stats sheet and the All-star roster.

Raised in Italy while his American father Joe "Jellybean" Bryant played basketball there, Bryant was a polished and appealing personality when he entered the NBA straight out of high school. His popularity quickly translated into lucrative endorsement contracts with Nike (NYSE:NKE), Coca-Cola (NYSE:KO) and McDonald's (NYSE:MCD).

Therefore, the sports world was stunned when a Colorado hotel maid accused the married Bryant of sexually assaulting her. The resulting tawdry court case made Bryant the laughingstock of the league's fandom. Although the case was eventually settled out of court with Bryant's public apology, the damage had been done. McDonald's declined to renew its agreement with Bryant, having had one unhappy meal too many.

Since then, Bryant has mended his marriage, grown in his career (MVP in 2008), and regained endorsement contracts. I doubt, though, that you'll ever seen Kobe and Ronald McDonald share the court again.

Read the entire series

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McDonald's (NYSE: MCD), whose competitors include Yum! Brands (NYSE: YUM), Burger King (NYSE: BKC), and Wendy's (NYSE: WEN), isn't known for being a part of a healthy diet, no matter how much branding it's done in that area. However, it is known for delivering good earnings. That's why investors probably aren't too worried when it comes to Wednesday, the day that the fast-food behemoth is set to hand off a sack of quarterly numbers at the earnings-report drive-thru.

According to AOL Finance, McDonald's beat the street by a wide margin in the first quarter. The call was for about 70 cents per share which Mickey Dee's beat by a whopping 11 cents. The previous quarters weren't as impressive, but they were solid enough. McDonald's seems to have the game of at least matching expectations down pat, so I am confident that come Wednesday, the company's bottom line will be close to the 86 cents per share that Wall Street is looking for in the second quarter, according to Earnings.com.

If McDonald's makes the number, then it will represent growth of over 20%. Double-digit appreciation is a valuable commodity in this time period. I can't say, though, that McDonald's won't have its challenges cut out for it. After all, inflation is affecting everyone, and fuel prices theoretically could hamper the popularity of the company's valuable drive-thru asset (I used one last evening myself). But McDonald's has that famous dollar menu going for it, so even in tough times, fans of fatty foodstuffs can still afford the oily, heart-clogging grub.

Of course, the company could still report decent numbers and see a sell-off in its shares. I took a look at Yum! Brands' most recent report and found that Wall Street was none too happy about the margins. So, even though Yum! beat expectations and otherwise had a decent report, Wall Street focused on other issues. Don't get me wrong, margins are important, and investors will be watching them when McDonald's reports. But if McDonald's sees a sell-off on outlook or margins or whatever, but beats earnings and has good comps, it might be a buying opportunity for long-term investors (after they perform their own due diligence, of course). The stock isn't too far away from a 52-week high as I write this, and it has been strong over most timeframes recorded at the AOL Finance snapshot page. And the dividend yield isn't bad right now, either.

In conclusion, I'm looking for McDonald's to report double-digit bottom-line growth and to meet earnings expectations for the most part (hey, maybe the beat-by-the-proverbial penny might happen). If the company misses, I would be surprised. Margins will be something to check out, and investors will need to see what management says as far as the rough economic times are concerned. I'm not looking to trade McDonald's ahead of the earnings.

Disclosure: I don't own any company mentioned; positions can change at any time.

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Yum! Brands (NYSE: YUM), which competes with Burger King (NYSE: BKC), McDonald's (NYSE: MCD) and Wendy's (NYSE: WEN), issued its Q2 report on Wednesday. Total revenues increased 12%, and earnings per share jumped 16% to $0.45. According to Briefing.com, Yum! beat expectations by three pennies, but it didn't seem to satisfy the big guns of Wall Street. The stock was down 5% in the after-hours session yesterday.

Some reports indicate that margins are to blame here. It's true, the margins aren't as good as one would like, but the company has nevertheless succeeded in cutting some costs. I see Yum!'s quarter as a very decent one in the context of the current bear market. In fact, the company posted worldwide same-store sales growth of 4%. U.S. comps exhibited a growth rate of 2%. There is opportunity in the U.S. for Yum! in terms of marketing for its Pizza Hut, KFC and Taco Bell brands. Management needs to see if it can increase comps in this territory. International restaurants, including locations in China, continue to do well.

I like Yum! and its long-term prospects, especially for restaurants located abroad. I also like that the dividend saw a great double-digit increase during the quarter, rising by a whopping 27%. Management is therefore signaling shareholders a high level of confidence behind the brands. I'm reticent about putting new money to work in any stock right now, but I think Yum! Brands is worth a place on the watch list and a round of due diligence on a pullback.

Disclosure: I don't own any company mentioned; positions can change at any time.

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Starbucks (NASDAQ: SBUX) is in such a pickle. On the one hand, it's famous for its java-room atmosphere and its quality coffees that cost an arm and a leg to acquire. On the other hand, growth is gone and its stock is in the dumps, forcing management to do what is necessary to bring traffic into its locations. According to this article, the company will be experimenting with vouchers and discounts at many of its stores throughout the summer. One example given involves a free iced coffee promotion in several major cities.

Just the other day, I wrote about increased competition in the coffee wars from McDonald's (NYSE: MCD), which continues to bolster its java strategy. Things are getting tough out there for Starbucks, and it's a shame that the company has to go this discount route. It's a funny thing when it comes to sales -- people get used to them awfully quick, and in the case of Starbucks, it sort of blemishes their model of making people pay up for their exotic lattes. Starbucks needs to be careful and not be too aggressive in offering discounts. Of course, the natural response to my assertion is, if the company is doing badly, isn't it management's responsibility to step up and get people to cross the threshold of their locations? It sure is, but one thing I've always noticed when any kind of retailer isn't performing like it used to is that it doesn't tend to implement new marketing campaigns that focus on the experience a consumer gets when she walks through the door. I think that can be more effective than waging a price war.

That's what I would say to Starbucks. Create an innovative, unique marketing campaign based on the image of Starbucks and try to keep people paying those high prices. Granted, that's easier said than done, considering everyone has a tight budget these days. Giving away free coffees is fine on one level, but it's a slippery slope for a company that based its model on expensive beverages.

Disclosure: I don't own any company mentioned; positions can change at any time.

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McDonald's (NYSE: MCD) has always been known for its famous French fries. Interestingly enough, though, it seems to me that the fast-food chain is becoming known these days for its coffee. I never thought McDonald's would invest as much as it has in coffee, but it looks like it's doing the right thing. According to this Bizjournals piece, McDonald's is putting its weight behind a coffee-bar initiative called McCafe. The program is being tested in various locations now and will be available nationally sometime next year.

I love the timing on this. After all, Starbucks (NASDAQ: SBUX) isn't doing so well. Not only is its stock hovering around 52-week-low territory, but the java king recently announced some store closings. That's almost unimaginable. Remember the days when every street corner needed a Starbucks? Yeah, those days are long gone. And I think McDonald's is smart in attempting to expand the brand equity of its coffee-brand portfolio. People need more of a reason to go to the palace of the hamburger-serving clown than just Big Macs these days, since the Big Mac and its various fat-saturated colleagues aren't as popular in these health-conscious times. I'm not saying drinking coffee is an exercise in life preservation, I'm just saying that it's good for McDonald's to focus on less controversial fare.

This significant foray into coffee is arguably a key reason for the company's stellar stock performance over the last few years and its competitive edge against rivals Burger King (NYSE: BKC) and Wendy's (NYSE: WEN). According to the AOL Finance snapshot, McDonald's is very much in the green for every timeframe save for year-to-date, which sees the stock down less than 1%. That's strength. McDonald's is a little below its 52-week high, and it might make for an interesting investment idea. At the very least, you can look forward to its McCafe program.

Disclosure: I don't own any company mentioned; positions can change at any time.

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I'll admit the headline is a bit deceptive. On one hand McDonald's (NYSE: MCD) has seen a resurgence in its business and frankly, the shares have done very well. In fact since McDonald's went through its own set of problems five years ago, the stock has since tripled in value.

The parallels between Starbucks (NASDAQ: SBUX) and McDonald's are very eerie. Starbucks has hit the proverbial wall after a successful ride from 1992 to 2007 as one of the premier GameChanger stocks around. Starbucks, like McDonald's over-expanded its store base in the United States and began to cannibalize its own revenues. Starbucks, like McDonald's, lost its principle focus and did not tend to 'what got them there".

In late 2002 McDonald's stock had just finished a 4 year run of losing 70% of its value. The company was becoming a hodgepodge of different menu items, culminating with the disastrous release of the McLean Deluxe, which was not even all beef! Advertising and marketing programs were a mish-mash of geographical themes yielding no consistency whatsoever. McDonald's even posted, for the first time in its illustrious history, an operating loss in 2002, and experienced negative same store sales for the first time, as well.

Then CEO Jim Cantalupo said enough was enough. McDonald's closed 700 unproductive stores (sound familiar?) and re-focused its menu and advertising campaign.

This is when the advent of "I'm Lovin It" went global -- yes, even in France! Unproductive stores closed and the rest of the survivors received a major face lift, including new kitchen equipment, new seating plans, fresh exteriors and even wide-screen TVs strategically placed for customer viewing and comfort. The menu went back to basics, eliminated the Super Size failure and introduced entree-size salads and other healthier alternatives. As I said, the stock has tripled since.

Starbucks has hit the wall. Sloppy execution, too many units, confusing menu, etc. Returning founder and now CEO Howard Schultz has now said "enough is enough." He is closing 600 unproductive units, re-training partners to the core founding principles and choosing to spend the company's expansion capital overseas where the true growth lies.

Starbucks has also experienced, painfully, negative same store sales. The stock is at a low point, as was McDonald's in early 2003. Can Starbucks stock triple over the next five years? Yes. With back-to-basics execution, expense control and controlled unit growth, Starbucks can elevate its value over the next five years. The good news for Starbucks is the competition remains on a regional basis and no one competitor is set to go national or even global. The early advantage still belongs to Starbucks. If Howard Schultz and the management team can re-set the bar, the stock is a screaming buy for patient investors. The full results of the June quarter are not out yet, nor will they be pretty. But, it's priced into the stock already.

History does have a way of repeating itself ...

Georges Yared is the editor of GameOn Investing, a free service devoted to investors spot GameChanging stocks before they break out.

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Starbucks (NASDAQ: SBUX) indicated plans to close 600 unprofitable domestic stores and incur pre-tax charges of $328-$348 million, including asset write-downs of $200 million.

Deutsche Bank says: "With US consumers still reeling and McDonalds (NYSE: MCD) on the cusp of a nationwide specialty coffee rollout, it is too early to call a bottom on fundamentals - maintain Hold."

SBUX July option implied volatility of 42 is near its 26-week average of 39 according to Track Data, suggesting non-directional price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

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This post is part of my series featuring established companies and the smaller, more aggressive or innovative rivals that may eventually succeed them.

The most impressive game-changer story in the fast food industry over the past 50 years is indisputably McDonald's (NYSE: MCD). Founder Ray Kroc was a visionary and pioneer in serving customers hot fast food at a reasonable price. Thirty thousand units later, McDonald's is still a growth story. But the better growth story is Chipotle Mexican Grill (NYSE: CMG), so much so, in fact, that McDonald's was an early investor in Chipotle! (McDonald's no longer owns shares of Chipotle.)

McDonald's went through some execution issues in the mid-1990s through 2003. The fast food industry was taking some hits from nutritionists, and the quality of food was suspect. McDonald's re-tooled its entire operation from store front to menu offerings. The standard hamburgers and those delicious french fries are still on the menu, but McDonald's has added a variety of salads, wraps and other healthier options. In the past five years the stock has nearly tripled in value, validating McDonald's make-over.

Chipotle, founded in 1993, has not had to re-tool or redefine itself. The freshest of ingredients, naturally raised poultry and beef are highlights of the limited, but superb menu. Chipotle is a favorite of almost every demographic group, from teenagers to the elderly. Chipotle has succeeded in offering the finest fresh Mexican food, but not at the cheapest price. The average ticket at Chipotle comes in near $9. The company recently raised prices at different levels depending on geography. Sales have not slowed a bit in spite of the price increases.

McDonald's has saturated its key markets and must make "the box" yield greater sales leverage. The company will add units strategically, but for the most part, the key real estate corners are already "Golden Arches" occupied. Whereas Chipotle, with only 730 units, has room to easily 10-fold that base over the next decade. This does not include any international expansion in the equation. The Chipotle concept is portable to selected nations that fancy Mexican food.

Only in existence for 15 years, Chipotle has defined the casual, fast-food Mexican industry. The company offered its initial public offering (IPO) on January 26, 2006, at $22 per share. The stock saw a high of $150 and now rests at $90, still a four-bagger since the IPO. The strength of the story lies in its flawless daily execution and fierce customer loyalty. Chipotle is a GameChanger company and Ray Kroc would be proud of Chipotle!

Georges Yared is the editor of YaredsGameChangers.com and author of the new report "How to Spot the Next Google."

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