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Trying to Hold On

Thu, 20 Sep 2012

Industry headwinds could slow down some companies, but further central bank moves and improving housing data offer the economy much-needed support.

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Video Transcript

Adam Zoll: I am Adam Zoll for Morningstar and welcome to the Friday Five. The stock market seems to be holding on, but how about the rest of the economy? Here to talk about five places in the market that are trying to hold on is Morningstar's markets editor, Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Adam, always good to be here.

Zoll: So, what's on your mind this week?

Glaser: Well, we're going to talk about consumer packaged goods, about FedEx, Europe, housing, and finally Japan.

Zoll: Jeremy, we saw some decent earnings news from some major food companies this week. What's your take?

Glaser: We got reports from both General Mills and ConAgra, which are big consumer packaged goods companies and generally, you're right, they had decent returns. Our analyst, Erin Lash, thought that they were really basically in line with our expectations; the stocks are fairly valued. But certainly I think there are some underlying trends there that are pretty interesting.

I think the fact that they are growing relatively slowly, that excluding acquisitions, their organic growth still looks relatively under pressure. They are having trouble pushing out huge growth in volume. They getting a little bit better price than they were before but are having trouble moving a lot more product. I think that shows that consumers are still a little bit cautious and are not just totally diving in. The companies are also starting to deal with those rising commodity prices again. This is a theme that we've talked about time and time again just how a lot of companies are getting squeezed by the fact that commodity prices are rising at a time when economic growth doesn't look great and how that potentially is very challenging for margins. So, certainly these companies are holding on for now. They've been making smart acquisitions. For the most part, they've been trying to develop new products, but it's not going to be an easy road ahead, particularly if those commodity pressures don't abate.

Zoll: Meanwhile, we also heard some noise of pessimism from a major shipping company this week?

Glaser: Yeah. We did. FedEx came out this week with its quarterly results. The results themselves were in line with what people were expecting. But what the market was really focused on was the firm's outlook for 2013, which was weaker than it had thought it was going to be previously, and FedEx is seeing weakness across the globe. It's not just that Europe is slowing down; it's not just that the firm is worried about Asia. Businesses across the globe are really cutting back on the inventory that they have to ship; they are cutting back on their shipping needs really everywhere. And FedEx is well-positioned to make these kind of comments. It is a truly global company. The firm is talking to these managers and how much they are going to be moving on a pretty regular basis.

So, I think, certainly it's useful to heed the firm's warnings that the rest of the economy is slowing down. Certainly just because it's one data point doesn't necessarily mean that the world is careening toward recession, but certainly it put investors on high alert to be keeping an eye out for any sort of slowdown.

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Zoll: Of course one of the most closely watched economic stories globally continues to be Europe? What's happening there these days?

Glaser: It was relatively quiet week in Europe. We didn't have any of the huge blow-ups that we've come somewhat accustomed to over the last few months, but we did get some disconcert in economic data. Market Economics which conducts a survey of purchasing managers said that the eurozone is contracting, and certainly it's looking as bad as it has since 2009. That doesn't bode well for any of the programs in order to end the sovereign debt crisis.

One glimmer of hope there was that Germany is performing better than the rest of eurozone. It's continuing to really hold up, certainly not growing very quickly, but holding up compared with the rest of Europe. That's very important because having a strong Germany and a Germany that's willing to backstop a lot of these bailout programs and that has both the economic power and also the political will to do that is going to be extremely important for defusing the European crisis and for continuing some of the progress that we've made so far. So, certainly the news wasn't great, but it wasn't a disaster either.

Zoll: Well, Jeremy last week's announcement of additional stimulus from the Federal Reserve is expected to help the housing market. But some numbers that came out this week indicate that perhaps it's already improving.

Glaser: Yes, the data for housing really is starting to look a little bit better. I think this is good news for the Fed. Certainly, the gist of their new proposal is that they are going to help stimulate the housing market, and that's going to help the employment market. I think that they are going to be helped by the fact that the housing market is already recovering a little bit. We're seeing this week that existing-home sales were up better than expected. We're seeing building starts and building permits for those new home sales that are so important for economic growth generally are starting to come back a little bit. I think certainly that bodes well for the housing market and bodes well for Fed's program, too because instead of having to fight a declining housing market and trying to pop it up, they get to kind of push the housing market or try to push the housing market when it's already facing those tailwinds instead of facing those headwinds.

So, I think that certainly could be very useful, and as I talked to [Morningstar director of economic analysis] Bob Johnson earlier this week about housing, that could be extremely beneficial for the economy. And I think it's one of the things that really could help keep the United States economy going, now that we're seeing some of the slowness in manufacturing and elsewhere.

Zoll: Of course, another central bank made news this week with a stimulus measure, this time in the Far East.

Glaser: Yes. The Bank of Japan announced further easing measures this week. On top of that, there are already relatively large easing measures that they've had in place. The idea is they are trying to kick-start the Japanese economy which has been struggling for quite some time now. I think certainly this is probably marginally helpful to the global economy as a whole. Japan is still a very important economic player, but it also just shows how global this crisis is. Just like we heard from FedEx that the weakness is really happening everywhere, we're seeing central banks across the world acting in order to try to stave off the worst of another global recession.

Obviously, the European Central Bank has stepped up in a big way with buying sovereign debt. We've seen the Fed with their huge program we just talked about for housing. Now the Bank of Japan [made a move]. There is talk that the Bank of England might be next.

So, I think certainly as we see central banks really across the world continue with this coordinated action, I think it bodes well that at least on the monetary side, policymakers are really focused on the possibility of another recession and are doing what they can in order to keep it from happening.

Zoll: Well, Jeremy it's always stimulating to hear your thoughts on this week's financial news. Thanks for being with us today.

Glaser: You're welcome, Adam.

Zoll: For Morningstar, I'm Adam Zoll. Thanks for watching.

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