Thu, 27 Sep 2012
Morningstar markets editor Jeremy Glaser offers a taste of housing news, Spain's new budget, GDP revisions, and third-quarter stock performance.
Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five. Headlines this week were either a) sweet; b) sour; or c) a little bit of both.
Here with me to offer the rundown is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: Jason glad to be here.
Stipp: So, what do you have for the Friday Five this week?
Glaser: This week we are going to talk about the Case-Shiller housing index, Spain, GDP, Kraft, and finally the end of the quarter.
Stipp: We saw a lot of housing metrics improving earlier this year. Case-Shiller was one of the last ones that we saw turn around. It seems like pretty sweet news, right?
Glaser: Yes, it is. The Case-Shiller, which is an index of housing prices on either 10 or 20 of the largest cities in United States, turned up again. Now, this is data for July--it lags, it takes little while to collect the data--and they said they saw about a 1.6% increase month-over-month.
This is pretty significant. We've talked to [Morningstar director of economic analysis] Bob Johnson about this before, and we've talked about this on The Friday Five before, that increasing housing prices are really almost good for everyone. It helps keep fewer people underwater. It allows them to refinance to low mortgage rates, which can free up cash for spending. It makes it possible for people to potentially move. It gets people excited to maybe put their houses on the market. It maybe gets builders thinking that it’s time to start building new houses and to get those jobs going.
This is only one data point, but it agrees with a lot of the other data points we’ve seen that show housing prices truly are moving up. So, certainly this is sweet news to get some confirmation from one of the most respected housing price indexes that things are moving in the right direction.
Stipp: In international news on Thursday Spain released details about its new budget. The market seemed to think that this was a pretty good budget to help Spain get where they want to go. Is this sweet or sour, though, in your opinion?
Glaser: It’s a little bit of both.
I think on the sweet side, this shows that Spain is listening to its European partners and that it wants to make those structural cuts and those structural changes that it will need to regain its competitiveness over the long term.
They are taking pretty big slices out of a lot of ministries. They said at the average, a department will see about a 9% cut, which is pretty significant given that they’ve already had fairly large cuts over the last couple of years. They are raising some taxes, although the majority of the budget is getting its savings from those reductions in spending.
But it's certainly not going to solve everything. If you look on the sour side, Spain already has a big employment crisis; it already is likely in a recession. This will probably deepen that. That’s a short-term pain, but certainly one that's going to be felt and is very real.
It doesn't get rid of the fact that Spain will probably still have to seek bailout funds. It doesn't solve some of the regional issues Spain is facing right now with some of the regional governments being forced to ask bailouts from the Spanish national government. The potential of Catalonia gaining independence--there is more talk about that again, something we haven't heard about in a little bit of time.
So, they still have a lot of challenges, and I think the budget is a step in the direction of addressing these challenges, but on its own it doesn't solve too many of them.
Stipp: In domestic news, Jeremy, we got another read on the GDP, a revision on second-quarter GDP. It dropped from 1.7%, which was an earlier read, to 1.3%. This seems like pretty sour news for the U.S. economy.
Glaser: It certainly wasn't sweet news. Now that's not to say that this reading was absolutely catastrophic. This change from 1.7% to 1.3% was driven by some issues with farm inventories because of the drought, with some export numbers, and the consumer spending number was brought back a little bit, but it wasn't that they looked back and saw that actually consumers had completely retrenched even though before we thought they were spending a little bit more. Some of these [were] technical factors that presumably will unwind as weather gets back to normal, inventories get back to normal.
But even at 1.3% or 1.7%, for that matter, shows that the economy is growing very slowly. That's not a rate that's going to be fast enough to really get us back to full employment, or to get people feeling very confident about the economy again.
So, even if you're going to quibble about exactly where that number is, I think no one is going to say that this is really the kind of growth that we want long-term, the kind of growth that we want given that it's so much below trend.
Stipp: In corporate news Kraft took some action to undo, you could say, earlier corporate actions. Is this a sweet or sour move from Kraft? What are the details?
Glaser: Well, it's a little bit of both. We've been talking about this breakup for a long time now, and it's finally about to happen. On Monday, Kraft is going to split up into Kraft Foods, which is going to have its traditional grocery business--the cheeses, the meats--and Mondelez, which is going to have the snack business; so, you've got cookies and candies. And in a lot of ways, this is a split-up from a deal that's kind of gone sour, which was the Cadbury acquisition.
A lot of the shareholders were not thrilled when Kraft decided to go out and spend quite a bit of money to buy Cadbury's confectionary business. Kraft had hoped that that would help power some of that emerging-markets growth, and certainly Cadbury has not performed poorly, but I think they found they really had two different types of investors.
Our analyst Erin Lash has been covering this story very closely for a long time, and she sees that Kraft Food really is a great pick for people who maybe are looking for income. It's going to be run to produce a lot of income and not use cash for acquisitions, not use it for growth, and really be a steady business. But Mondelez is going to go after those growing businesses in emerging markets. It's going after the snacking segment, which continues to expand, and that could be better for investors who are looking for a little bit of growth in the consumer packaged goods space.
So, it does seem like splitting those two companies--they have different goals--having them separate might make sense for those two different investor bases. So in that sense it's sweet, but it definitely shows that maybe that initial strategy was not one that was going to be successful over the long term.
Stipp: Lastly, Jeremy, although we had some ups and downs in September, the third quarter is probably going to come in pretty good for stock performance. This is sweet news for investors. What about for bargain-hunters?
Glaser: It certainly does look good for people who are going to be opening their brokerage statements after the third quarter. The Morningstar U.S. Index, which is a broad-based stock index, was up over 9% on the quarter, which was a pretty significant move, and up over 15% on the year so far.
I think that even though it might not always seem like the stock market is doing great--I know that a lot of investors still look at the big losses they had in 2008 and 2009, and internalize that to think that stock performance continues to be bad--but over the last few years, we've seen a pretty incredible rebound.
The flip side of that is, as you said is, it really has not left a lot of cheap stocks for bargain hunters. Our price-to-fair-value ratio, based on what our analysts think the market is worth versus where it's trading, is essentially at fair value right now. That's not to say there aren’t pockets of value here or there, but for the most part, stocks look pretty fairly valued. So, it definitely makes it harder to deploy new cash right now.
Stipp: Jeremy, never a sour note on the Friday Five. Thanks for joining me.
Glaser: Thanks, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.