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Better Days?

Fri, 1 Jun 2012

Data and results this week helped us size up our hopes for better days ahead in the EU, consumer spending, the housing market, and more.

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Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.

Data and results this week helped us size up our hopes for better days ahead. So, what moved up and down the hope index?

Joining me with the details is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're very welcome Jason.

Stipp: So what do we have for The Friday Five this week.

Glaser: We are going to talk about Research in Motion, same-store sales, Spanish banks, rates, and finally the housing market.

Stipp: If anyone has been looking for better days ahead for quite a long time, it's Research in Motion. They've really been struggling in the very competitive handset mobile market. What's the story after their results [preview] this week?

Glaser: They keep scrolling through their menus trying to find an app that's going help them turn that company around. They just haven't been able to find it yet.

We heard this week from the relatively new CEO of Research in Motion that first-quarter results are going to be much worse than expected. They are going to have an operating loss, the sales of their existing handsets just aren't doing very well, and we are still waiting anxiously for those next-generation Blackberries to hit the market and to really try to re-excite people about the possibility of getting a new Blackberry.

I think at this point, it's going to be extremely hard for them to get people back on the platform. In many ways, their brand image is very tarnished. It's been so long since they put out a product that people are really excited about and that's really built the kind of buzz that the iPhone, or that Android devices, or even some of the new Window phone devices have really been building.

Now, they also said that they are going to be exploring some strategic initiatives with J.P. Morgan and with RBC, and I think that some of those initiatives could be more interesting for the company.

There is a lot of value there. Certainly, owning that corporate e-mail security space could be potentially very lucrative for them if they bring that app to other platforms, potentially, and become more of a services company; there still could be a future for Research in Motion, even if it's not as a handset maker.

The stock is down over 75% over the last 12 months. It's really struggling. I think it's going to continue to struggle, but hopefully, those strategic alternatives will work out to something where they really can get to those better days

Stipp: We also got May same-store sales this week, and they looked pretty good. Are their better days ahead for the consumer, despite all the uncertainty that we're seeing in the headlines?

Glaser: May did look good. April was a little bit concerning--certainly, the numbers did not come in near where analysts had been expecting. May looks a little bit better.

And certainly, you don't want to read too much into one month missing [expectations] or one month doing better. When holidays fall, general seasonality, weather, other factors are going to impact the numbers [month to month]. But I think [May data] certainly does show that the consumer has not fallen off the cliff.

A lot of those major mass-market retailers out there--like Macy's and Target--are doing well. They are really growing sales at above inflation rates... Target said that they are seeing the average ticket size continue to increase--that people, when they do go shopping, are willing to load up on a few more discretionary items in the cart that maybe they weren't just a few months ago.

I think that's a good sign for the consumer. I know we've said this before, and we're probably going to say it a million times more, the consumer really drives the recovery. Consumer spending is just incredibly important. And I think we saw signs at least in this data that the consumer truly is holding up.

Stipp: So, the headlines out of Europe had been about Greece. We got our fill of Greece headlines for a while. And now increasingly they're about Spain and some of the issues that Spain is having with their banks.

If we can control the pain to just Greece and maybe also Spain as well, will there be better days for the EU ahead?

<TRANSCRIPT>

Glaser: It is looking very challenging.

This week we heard a lot about Bankia, which is one of the largest lenders in Spain. It was ... kind of cobbled together from some regional lenders [that] were put together in order to create a more stable institution, and that plan obviously has not worked out so well.

It was partially nationalized. Spain announced a plan to put about 19 billion euros to recapitalize it. I don't think anyone thinks that's really all that is going to be needed; it's probably just the tip of the iceberg.

There are a lot of rumors flying back and forth as to if Spain was going to be able to issue bonds to get this money for the bailout, or if the IMF would have to step in with a loan or with a line of their own in order to really keep Spanish banks solvent.

This problem with Bankia really highlights one of the big fault lines in the European Union right now, which is the banking system. When we talk about a potential Greek exit from the euro, and when we talk about people pulling money out of banks of the weaker peripheral countries and putting [money] into places like Germany, one of the big concerns is that the banking system itself becomes very unstable, requires even more money to keep it afloat. That just makes the sovereign debt problem even worse, and then as we've seen over the past couple of years, when you have financial institutions starting to fail, and you're not sure how they're going to be backstopped, that can easily become a contagion that spreads across different types of institutions that really are around the world, and in the United States as well.

So, I think that really the banking system is one of the big fault lines. I think all the attention that was being paid to Bankia and to Spanish banks was definitely well placed this week, and I think it's going to be an area of intense interest as we try to work through some of these sovereign debt problems in Europe.

Stipp: So, in the fixed-income markets Jeremy, we've said for a long time that there are a lot of concerns, there is a lot of uncertainty, and that yields cannot possibly get any lower. Yet we've seen bonds--Treasuries, mortgages--rally, especially over the last four weeks. Could it be that there are better days for fixed-income investors who already faced really low rates to begin with?

Glaser: It's certainly incredibly treacherous and has been incredibly treacherous to say, "Hey rates are so low, they could never get any lower."

[You can look] at the Treasury market and see that people are accepting negative real rates of return, so including inflation, you are probably going to be losing money in a 10-year bond, probably in a 30-year bond as well, depending on where inflation goes.

And ... why would investors accept that? Clearly, [in this case,] they would move into risk assets; that's what the Federal Reserve wants you to do. They are keeping those rates low to move people into riskier assets.

But I think what's happening is that people are not going into Treasuries--or into other safe-haven assets like German bunds and other sovereigns--just because they think they're going to get a real return; they're doing it because they want to preserve their capital. They are worried about Europe, and they're worried about what's going to happen to the financial systems, what's going to happen to stocks, and they just want to wait on the sidelines. They're willing to accept those abysmal rates in order to do that.

When you're in that kind of environment, if we get a situation where the crisis becomes more acute, I think you are going to see even more money flow into those safe-haven assets, and push those yields even lower than we have right now.

That doesn't necessarily mean that it's a great time to jump into Treasuries. We think that investors who have a longer-term time horizon, who can ride through that rollercoaster, are going to be rewarded with better excess return over time. They're going to pick up that risk premium, and they are really going to be happy about what their portfolio looks like 30 years down the road, even if they're not so happy ... in the one-, two-, three-year time horizon. But I think rates could go lower from here.

Stipp: Jeremy, I won't say that every single piece of data that we've gotten on the housing market has been good, but several pieces of housing data have shown that we might be hitting the bottom in the housing market. I want to ask you here today on The Friday Five, are there better days ahead for housing?

Glaser: Well, there must be, but the question is when those days are going to come, and it just seems like they haven't shown up yet.

I think housing is not in the freefall that it was a few years ago, but it just can't seem to really gain that traction, really start to do a lot better to the point where people are excited to buy houses again.

I think there are parts of the country where the housing markets are coming back pretty strongly, but we saw the pending sales of existing homes fell unexpectedly in the month. Case-Shiller showed that there was another decline in housing prices, and that we still haven't truly found that very, very bottom of where the prices are.

And I think that we might have to wait some time before people feel really comfortable enough with the housing market. Between a lot of that shadow inventory that banks have got, or individuals who want to get out of their house, [we may have to wait until] that hits the market before we can say housing is totally back on its feet, and we are going to start building units at that replacement rate again, which we're below at the moment, and that jobs are going to come back to build those houses.

We still seem to be a little bit away from that, which, as much as we'd like for it to be here right now because it would help so much in the recovery, the data shows that it's just not there.

Stipp: Jeremy, not every day can be a good day, but Fridays are always a little bit better thanks to your reporting. Thanks for joining me again.

Glaser: You're welcome, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

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