Fri, 21 Jun 2013
Five stats from the market and the stories behind them. This week: Treasury yields on the rise, a nine-month low in China, and more.
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 Friday Five is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: Glad to be here, Jason.
Stipp: What do you have for The Friday Five this week?
Glaser: We're going to look at the number 2.3%, $21.6 billion, 9, 2%, and final 40 years.
Stipp: 2.3% is where the 10-year Treasury rate stands right now. [Editor's note: Yields on the 10-year Treasury bonds rose to nearly 2.5% after this segment was filmed.] It's up sizably after some recent Fed statements. What's the latest on this news?
Glaser: You're right, the bonds have had a pretty big move since the market has really started to get worried about the so-called "Fed taper," which is the reduction in purchases of mortgage-backed securities, which many thought might have been quite a while away. And now we hear from Bernanke, particularly this week, that it could happen, if everything goes right in the economy, as soon as the end of this year, that we could start to see the beginning of the taper.
But I think investors shouldn't be overly concerned about it. They should be focused on it, it's important, but it's not the be all and end all of what's happening in investing. The taper is only going to happen if the underlying economy looks pretty strong. Right now the Fed has some pretty bullish assumptions about what they think is going to happen. If those don't get hit, if those numbers don't happen, I don't think the Fed is going to feel obligated to start tapering, because they've said that they might start doing it at the end of the year. They've shown us that they're nothing if not flexible during this entire crisis, starting policies that would have been inconceivable, say, in like 2007 or 2008 before the crisis began.
I think that's going to happen here, that if the economy looks like it's on very solid ground, growth is starting to accelerate, employment growth looks pretty good, they're going to feel like they can taper and the economy will be able to handle that, particularly given that they're still going to have an enormous balance sheet compared to historical levels. It's not like they're going to start selling off any of these bonds anytime soon. I think that was made pretty clear.
Then if the economy doesn't look good, they won't do it, or if things go bad, they'll continue to buy more bonds again. They'll be able to go back in there. Given where inflation is right now, they have the flexibility to do that without worrying about price levels getting away from them, and I think that they will if Bernanke is there. If he leaves, whoever his successor will be will probably do that as well.
It's important, yes, but it shouldn't be the be all and end all of what you're thinking about when evaluating the economy, when evaluating your stock investments. Things like corporate earnings, what's happening with household formation, are also extremely important.
Stipp: $21.6 billion is the price that DISH Network won't beat in the quest for Sprint. This is an ongoing saga. What's the latest news?
Glaser: This one seems like it just doesn't end, and at least part of it seems to be coming to somewhat of a conclusion.
DISH Network threw their hat in the ring to try to take over Sprint and derail the Softbank deal, and they decided to walk away from that. Sprint said, OK, now you have to give us your final offer after Softbank sweetened their deal a little bit, and it just decided to walk away. The Softbank deal, which has gotten some approvals already, looks like it's going to close in the relative near future and will give the Japanese carrier an entry into the United States market.
But DISH is far from done. I think they see in the future really that they [will] need that wireless spectrum--they want that wireless spectrum--and now they're going to start looking at it from Clearwire, which is a company that's majority-owned by Sprint, which they've also been trying to take a pretty substantial stake in. They said that that is going to continue, and that they're going to keep going with their tender offer for Clearwire, try to get that big stake, and keep Sprint from buying all of that spectrum as well.
DISH really wants to be in this market. They really want to have those wireless services, and just because they've decided that the price for Sprint was going to be a little bit too lofty or maybe it was just more than they wanted to digest, that they're still going to go after Clearwire. And if Clearwire doesn't work out, I have a feeling we're going to be hearing DISH still poking around for spectrum in some other places.
Stipp: We've haven't seen Chinese manufacturing data as low as we got this week for nine months. There are still increased concerns about an emerging markets slowdown. What's your take on that?
Glaser: It didn't look great. The HSBC Flash PMI, which measures manufacturing output, did hit that nine-month low. It fell to 48.3 from 49.2, so not an enormous decline. But it shows that there is still some weakness in China, an area that for so long was thought of as an endless growth engine, just isn't any more.
When you couple that with the recession in the eurozone that's ongoing, and relatively sluggish growth in the United States, it just doesn't paint a rosy picture for all of global growth. That raises this question, can the U.S. be decoupled from Europe, be decoupled from China, and that even if they are not seeing particularly spectacular growth anywhere else, can the U.S. continue with its steady march upward? Or will those export markets falling off or will that lower demand elsewhere really start to pinch us here in the U.S.?
Stipp: Speaking of international growth, FedEx said that their international premium volume was down 2%. Is this just another symptom that we are seeing a lot of slowing of growth around the world?
Glaser: I think it is. We like to look at FedEx, because they really have their finger on the pulse of the global economy. They are moving all these packages around, and I think have a much keener sense of what's happening in a lot of other places.
To be fair, they had a decent quarter. Their ground services are looking pretty good, even if profitability was hurt as some of these premium international package volume declines as more people were opting for more basic services. But I think that FedEx reiterated some of what we were just talking about. The eurozone continues to be in some trouble. They're cutting some of their flights between the U.S. and Asia, saying that the demand just isn't there, and it's cheaper to move those packages to other ways of getting them to United States.
I think it just shows again that the global economy just remains stuck in neutral in a lot of places, and they did not have a very upbeat forecast. Often they are a little bit pessimistic. This management team tends to be somewhat conservative, but we did hear more of that with their earnings this week. Keith Schoonmaker, who covers FedEx for us, though, thinks the shares are in 4-star territory and that they could look fairly attractive right now.
Stipp: After 40 years, founder and spokesman for Men's Wearhouse George Zimmer is out.
Glaser: I hate to use this maybe overused pun, but I guess the board just didn't like the way that he looked.
After doing an incredible number of commercials for Men's Wearhouse for years, a couple of years ago he stepped down as CEO, remained as executive chairman of the board. And apparently he just had some disagreements with them and was very suddenly terminated right before the company meeting, which was postponed.
The board is releasing very little information; Zimmer said that he was trying to be silenced, that he had some suggestions for how he wanted the business to evolve and didn't think that the current management was really taking the right steps, and that they just didn't want to listen to those criticisms. Others have suggested that perhaps they didn't want to use him as the spokesperson anymore, that they wanted someone maybe a little bit more youthful, who would appeal to a new demographic, and they thought that there might have been some tension there, and that he was having trouble stepping away. But either way we'll have to see exactly how that board room drama plays out.
Stipp: Well, I like the way The Friday Five looks every week. Jeremy, thanks for joining me again.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.