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The Friday Five

Thu, 18 Apr 2013

Five stats from the market and the stories behind them. This week: the 18% dent in gold, the disappointing data on earnings, and more.

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Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five: five stats from the market and the stories behind them. Joining me as always with the details is Morningstar's markets editor Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: You're welcome, Jason.

Stipp: So, what do you have for The Friday Five this week?

Glaser: Well, we're going to look at 7.7%, minus 18%, $7 a share, 0%, and 6%.

Stipp: 7.7% sounds good on an absolute level for GDP growth, but not for China. It came in lower than expectations.

Glaser: Most countries, I think, would kill for 7.7% GDP growth, but it was a disappointment for China. It was a sequential decline, and it also was below expectations. And what's happening here is, China is trying to navigate somewhat of a tricky transition from being an investment-led story--we're building new roads, building new housing blocks to really drive growth--to one that's more consumer-driven, and that's not something that's going to be easy.

And I think there have been quite a few worries about how that was going to be handled. Will it be kind of a soft landing? Will they be able to slowly tick down that growth? Or is it going to be more of a hard landing, and they're going to see growth slowed down pretty considerably.

And the 7.7% growth is hardly a disaster. It doesn't say we're definitely having that hard landing scenario, but being below expectations, I think, raises more concerns about what Chinese growth is going to look like. When we look at potential threats to the economic recovery here and across the entire world, one of the big ones is a slowing China and a slowing emerging-market story. If that really takes hold, and we see growth slow more permanently--that this isn't just a blip--that could have some potentially troubling consequences for the rest of the world.

Stipp: 18% is the drop in gold prices this year as measured by gold ETF GLD. What should gold investors be thinking about this precipitous decline?

Glaser: It's a pretty big decline. I talked to Elizabeth Collins this week. She is our director of basic materials research, about what's driving it, and there is no one factor. It's a combination of central bank sales of gold, fears of central bank sales of gold, that China slowing we are talking about, some momentum to the downside, and we've seen all of those combine together for gold to drop off that 18% that you mentioned earlier.

But I think for investors the thing to keep in mind is that it shows that … things that are considered safe havens sometimes aren't really all that safe. The rush to gold potentially as a [response to] worry about maybe stocks are overvalued or a worry about what was happening in the global financial marketplace as a safe haven didn't actually work out. They still saw these pretty big declines over a very short period of time, and they still had to suffer that volatility they thought they were getting away from. I think it's a good tale that if you think you're going to a safe haven to make sure that it actually is one.

Stipp: $7 per share is the price that DISH offered to Sprint for a combination of those two companies. This deal now in competition with an earlier deal for Sprint. What should investors make of it?

Glaser: We do have the potential for a little bit of a bidding war for Sprint now. Sprint had already agreed to enter into a deal with SoftBank, which is a Japanese company, in order to get some equity financing into the U.S. to give them the capital that they need to really compete against Verizon and AT&T, the two behemoths in the U.S. cellular market.

DISH came in and said, we're going to give you a little bit more cash per share, but then when we combine the company, that combined firm would have a lot more debt than the SoftBank deal. And that extra debt really makes our telecom analyst Mike Hodel a little bit nervous. He thinks that even if the DISH deal is a little bit richer, the SoftBank one might be better for shareholders over the long term, because that company would have the flexibility to make those investments that they're going to need for growth. SoftBank may have to raise their deal a little bit to compete, but in his view, that's really the deal that shareholders should be keeping their eyes on.

Stipp: 0% is Target's forecast for their first quarter same-store sales. Is this a really bad omen for retailers?

Glaser: Target was a voice and a bit of a chorus this week of relatively weak earnings or below-expectation earnings or guidance that maybe did not quite live up to what investors had hoped. And what they said was that same-store sales growth in the first quarter was going to be flat compared to 1% growth that had been originally expected, and they attribute this to weather and a few other factors.

But I think the part that's interesting is not so much the Target story is that it was that voice from a number of companies across a number of different industries. You look at something like eBay that had somewhat disappointing results, UnitedHealth, a bunch of different tech firms that had numbers that weren't quite up to expectations, and it shows that this might not be really rosy earnings season. We might start to see some of the pressures and slowing growth across the entire world really push down on firms, and that there isn't that much room to expand profitability anymore after pretty impressive gains over the last couple of years.

I think this is going to be the big story that we're going to be watching in the coming weeks as we get more results.

Stipp: Speaking of earnings that were weak, a 6% drop in year-over-year PC processors from Intel. Nobody is out there buying these machines anymore?

Glaser: Apparently not. We've talked about that IDC data earlier last week I believe, where they had a precipitous decline in PC sales the first quarter, the largest since they've begun measuring those sales, and that showed up in Intel's results. They saw that big drop, that 6% drop off, as consumers just aren't buying these PCs, and instead are looking at tablets and smartphones and elsewhere.

This isn't necessarily horrible news for Intel. Their Atom processors are starting to do better in terms of power consumption, and they're able to compete more against ARM Holdings' designs that have really dominated the smartphone and tablet space so far. And also their server processors are likely to do much better. They're likely to drive growth as more stuff moves into the cloud, and we need to build more of these high-end servers.

Our analyst Andy Ng thinks that this is hardly a death knell for Intel and that they'll be able to survive this post-PC world, and he think the shares are a little bit undervalued right now.

Stipp: Jeremy, not a lot of positive stats in The Friday Five this week. We'll hope for better numbers next week, but thanks for joining me today.

Glaser: Thanks, Jason.

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

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