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The Friday Five

Thu, 5 Dec 2013

A watershed moment for munis, Apple advances on China market, 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, for 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 take a look at $18 billion, minus 2.7%, 30, $700 million, and finally $1 billion.

Stipp: $18 billion is the amount of liabilities that Detroit faces. A judge ruled this week, however, that they can proceed with bankruptcy, but there were some very important parts of that ruling that should be on investors' radars.

Glaser: We did get a lot of answers and some open questions about the Detroit bankruptcy this week, mainly when the judge said that yes, in fact, Detroit is eligible for bankruptcy protection and that it just wasn't feasible for them to try to come up with deals with all of their various creditors.

But I think one of the most interesting parts of the ruling was also that pension plans can be treated just like any other liability through the bankruptcy process. The Michigan Constitution guarantees that the contract guarantees the pension, and there were some questions if Detroit actually could renegotiate these contracts in bankruptcy, if that's something the judge would allow, and he is.

This has a lot interesting ramifications, not just in Detroit, but really around the country, as there are plenty of states and municipalities that have these large unfunded pension liabilities that need to make some serious changes. This might change the negotiating calculus a little bit between some of the public sector unions and the state itself. It will be interesting to see how that plays out over the coming years.

This is going to remain--as Beth Foos, who is a municipal credit analyst here at Morningstar, says--a real watershed event in the muni market. To have such a big city declare bankruptcy is going to change and has changed the way that a lot of muni investors think about the safety of seemingly guaranteed bonds in areas that have some weaker financials.

Now, it's important to point out that there are lot of special situations happening in Detroit, a lot of special considerations why it is somewhat of an outlier. Generally, the muni market remains very solid, the fundamentals behind it remain solid. But in some cases--we've seen it happen in Puerto Rico--there are some concerns about solvency, and those have really been exacerbated by what's happening in Detroit right now.

Stipp: 2.7% is the drop in Black Friday holiday sales. Does this portend what a lot of people have expected to be a disappointing holiday shopping season?

Glaser: These are numbers of the National Retail Federation. I think they really need to be taken with a grain of salt. They did, in fact, say that even though we had a very promotional holiday, with a lot of stores open extra early through Thanksgiving, that didn't really produce a huge bump in sales. And although they still expect sales to increase over the entire holiday period, it was down over that weekend.

And I think one of the reasons that these numbers are a little bit difficult to interpret is the methodology; it's really just a survey of customers. You have to remember exactly what you are spending, remember what you spent before. A lot of potential human error could be introduced there. When we see the actual earnings, and see the real numbers from the companies, that will give us a better picture of what happened.

And also the calendar is a little bit wonky this year, with Thanksgiving coming late and shortening the holiday season. Retailers began their marketing push and began their discounting much earlier than usual, and I think that is going to have an impact as well. Online sales, of course, are continuing to play a bigger role.

But overall, given the way that the consumer is so stretched right now in a lot of ways, the general idea that this is not going to be a fabulous holiday season, that discounting is going to be prevalent, is mostly confirmed by the data that we got after this first weekend. We have yet to see that there is going to be some huge pickup or that people are going to find a lot of extra money to spend this year.

Stipp: We do know that consumers are increasingly spending their holiday dollars by shopping online, and according to news from Amazon this week, it's possible some day you could get those orders in 30 minutes or less.

Glaser: Yes. In a 60 Minutes segment, [Amazon CEO] Jeff Bezos introduced a concept called Amazon Prime Air, where an unmanned drone would take your package directly from the Amazon warehouse to your house in 30 minutes or less, as long as the package is small enough to be held by the drone, of course. And he pointed out that--if it could clear some of the relatively large regulatory barriers--this would be another way for Amazon to keep innovating and to keep competing in an obviously very competitive market.

[Prime Air] is probably more of a publicity stunt at this point than it is a real product, given a lot of those barriers to it actually coming out. But it shows that Amazon really does want to project this idea that it's a very innovative company. It also shows that Amazon is keenly aware that there are going to be disruptive technologies in the future. They've had to deal with those in the past, and that they're going to need to continue to invest, continue to really be on their toes to make sure that they don't get caught being stuck in one model, while another startup comes in and really eats their lunch by being able to deliver things much faster or get much better prices.

This just shows that when you have a wide-moat company, which Amazon is now, they're going to keep investing to continue to be a wide-moat company for quite some time. Even if drones aren't necessarily the thing that gets them there, the fact that they're investing and really thinking about what those competitive changes could be bodes well for the company over the long term.

Stipp: 700 million subscribers to China Mobile might be able to get their hands on the iPhone soon.

Glaser: It looks like Apple finally bagged this one. For years, analysts and many other people have been talking about, when is Apple going to sign this deal with China Mobile? China Mobile is the largest mobile carrier in the world, as you said, with 700 million subscribers, and it was a big addressable market that Apple just wasn't getting.

Given how important China is to Apple and how Apple says that China is so important to it over the long term, it was a very obvious big hole and something that they are finally going to be able to fill by offering these phones.

It was broadly expected that this would eventually be signed. There is not a huge change to valuation or a huge change to the way people are thinking about the company. Our analyst Brian Colello is not changing his fair value estimate [for Apple], for example.

I think it will be interesting when we get ideas about pricing--are these [iPhones] going to be very aggressively positioned to try to get them in the hands of a lot of consumers? What does that uptake look like in China over the next couple of years, now that almost everyone will have access to [the iPhone], which wasn't the case before? I think that bodes well potentially for future growth. So it's nice to see this finally get done.

Stipp: $1 billion is the potential charge that GM might take to kill the Chevy brand in Europe. What does this say about the consumer spending on higher-ticket items over there?

Glaser: Well, it's hard to drive too much of a broad conclusion about what's happening in European consumer spending overall, but obviously the auto sector there has been under a lot of pressure. These are expensive items, ones that people have really been putting off buying, and we've seen a lot of the American car companies report that their sales in Europe have not been very good.

So GM is taking some steps to try to rationalize and really focus there. They had this idea that their Opel brand, which is their major brand in Europe, could become a little bit more upscale, and bring Chevy in to be a little bit more of a downscale brand there, and that two-brand strategy was going to be successful for them.

It just didn't work, and Dave Whiston, who covers GM, thinks that it's long overdue for them to make this move. Yes, they are going to have to take this charge, but it lets them focus and get rid of what was probably more of a distraction than anything else. They could still bring Cadillac in and expand its presence if they want to get into the higher end later. But trying to move Opel was really going to be an incredibly challenging thing.

I think this is just another sign that GM continues to mature, continues to make itself out of the shadow of the bailout and the [financial] crisis and try to get the business right-sized in order for future growth.

Stipp: Jeremy, the drone has delivered our lunch outside, so we're going to have to call it a week. Thanks for joining me.

Glaser: You're welcome, Jason.

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

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