Fri, 31 Aug 2012
As summer wanes, the housing, retail, and policy sectors prepare to get back to work.
Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five.
As summer wanes, we saw several signs of folks getting back to business this week. Here to offer the details is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: Jason, glad to be back.
Stipp: So, what do you have for The Friday Five this week?
Glaser: Well, this week we're going to talk about retail same-store sales, the Republican convention, housing, Barclays, and finally, confidence in the eurozone.
Stipp: So, students are gearing up to get back to business by going back to school. We saw some evidence of that in the retail sales report.
Glaser: One of the things that had been a little bit perplexing about sales that we'd seen so far is that we haven't seen a big boost for back-to-school yet. It seemed like parents were being very cautious and teenagers were being cautious about when they were going to spend that dollar, when they were going to get all of their shopping done before classes started.
But in those August numbers, I think, we really started to see a sign that people were in fact going to go back and do the shopping. They weren't just going to forget it altogether or try to find discounts maybe in a few weeks in hopes that prices would come down.
Now, granted, these numbers only represent just a handful of retailers. Some of the larger retailers out there, like Wal-Mart, don't report this, so you can't extrapolate too much, but I think it certainly gives you a window into consumer behavior, and it seems like people are not running scared. We saw great numbers from Target, we saw great numbers from Macy's, from Nordstrom, from some of the teen retailers. And really across the board there was pretty good strength, which I think bodes well for consumers.
Stipp: A presidential election is on tap for this fall. In preparation for that, both sides--Democrats and Republicans--are heating up the rhetoric about how to get the country back to business, get the economy back on track for higher growth. As investors, though, how should we look at all this rhetoric and think about that in terms of our portfolios. Any tips?
Glaser: We've certainly had no shortage of talking points hurled at us over the last couple of weeks, and I think it's not going to abate anytime soon.
Certainly, with Republicans this week and the Democrats next week, we're going to hear a lot of different policy proposals, different visions of where the respective parties see the country going.
But for investors it's very difficult to translate this into actionable ideas or into ways that they are going to fundamentally reshape their portfolios. ... The rhetoric that people talk about policy now is going to be very different than policy that's actually implemented. Politics is sometimes the art of the possible. Depending on what happens with the election in terms of Congressional seats, in terms of what's going to happen in the White House, is going to be very impactful [with respect to] what kind of policies can truly change.
So, I think that investors should be more focused probably on this near-term risk of this fiscal cliff that's happening in January--thinking about what are the different ways that the parties may be able to come together on some compromise, probably after the election, to try to mitigate some of these tax increases, some of the spending cuts that are planned for January of next year. I think that's probably the thing that's the most impactful versus some of these broader statements that are being made now in the conventions.
Stipp: Investors may also want to prepare a seatbelt just in case we see some volatility coming up, given some of this uncertainty.
Also Jeremy, the housing market is still well, well off its highs before the recession, but there are some signs that the housing market is getting back to business?
Glaser: We're definitely getting pretty good housing data. It's ... been creeping up on us a little bit--one of those things where it's been two steps forward, one step back. We've had a string of decent data now. Pending home sales looked really good this week. We're seeing prices begin to really creep back up it seems like in a very meaningful way across the country. And as we've said time and time again, housing is just crucially important to keeping this recovery going. It's going to provide an employment boost as people get back to work, and actually building these homes increases that economic mobility, which is important, again, in terms of reducing unemployment and really getting the American economy back on a much more solid footing.
So, I think that this data is certainly good news. Obviously, it's too early to really celebrate and to really say, OK we're totally out of the woods. But it is nice to see some better data there.
Stipp: In the financial sector, Barclays hoping to get back to its business with a new chief. What's the story there, and what are the chances that this bank will get back on track?
Glaser: They've been having a lot of trouble recently--particularly on the regulatory side of things. Barclays had to pay a fairly substantial fine for the LIBOR fixing scandal, which we talked about a little bit ago, and I think that they decided to move forward with the new CEO, who is an internal candidate.
[They went with] Anthony Jenkins--who used to run the retail side of the business, the much more conservative, staid part of collecting the deposits and making loans to consumers and small businesses--instead of someone from the investment banking side. I think that really is a sign that the board sees Barclays' future as probably being much more of a conservative bank they are now. That taking these big risks in the Barclays Capital part of the business just hadn't paid off for them and have just really, I think, hurt their franchise and hurt their ability to produce those earnings over time.
But at the same time, Jenkins is going to have to learn a lot about that investment banking business. It's not going to go away. He is going to have to really get up to speed. Our analyst Erin Davis thinks that he'll be able to lean on some of his lieutenants, who have more experience in that area in order to make sure that they don't clamp down too quickly or make any brash moves. I think watching his performance and seeing if he is able to rein in that risk without completely jettisoning that part of the business while continuing to grow that retail banking franchise is going to show us if Barclays is really able to become a world leader again.
Stipp: Lastly, Jeremy, in the eurozone, the policymakers went on vacation recently. When they come back to work, get back to business, their plates have a few things on them, right?
Glaser: They are going to have quite a bit to do, and I think that the Eurozone confidence numbers that came out for both consumer and businesses this week just point to how average people in Europe are really starting to lose confidence that the leaders are going to truly be able to ameliorate this crisis without seeing big impacts on the real economy.
Before we could take a look at the peripheral countries and say, OK, Greece is probably in a new depression. We're seeing huge unemployment in other peripheral countries like Spain. But the unemployment rate in places like Germany has remained relatively low. They have seen growth, although very slow growth. They haven't really seen the huge drop-offs in production as we've seen in those peripheral countries, but that's probably not sustainable forever if the crisis just continues to lurch on.
I think that these numbers [showing] that people are really starting to give up hope a little bit can become very much a self-fulfilling prophecy. And if Germany goes from being in that slow growth [mode] and it also sees its economy start to decline at a much faster rate, then I think really all bets are off when it comes to how the Eurozone crisis is going to play out and what impact it could have here in the U.S.
Stipp: Jeremy, great to see you back in business after your vacation last week. Thanks for joining me again on The Friday Five.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.