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The Friday Five

Fri, 28 Feb 2014

How investors should think about Ukrainian unrest, the Bitcoin debacle, and home prices that are poised for a breather.


Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five: five stories from the market this week and Morningstar's take.

Joining me with The Friday Five is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: You're welcome, Jason.

Stipp: First story this week has been dominating headlines. It's the Ukraine story. This is a compelling story, but what should investors think about these events?

Glaser: It truly is compelling, but I think most U.S. investors don't need to be too concerned about what's happening in the Ukraine right now, at least from their portfolios' standpoint. What's happening there is being underpinned by economic issues, of course. That is driving a lot of what's happening on the ground, but the impact has been relatively localized. We've seen some currency impacts, but equity markets across the world have mostly held up and haven't been too spooked by what's happening yet. I think that's probably the right call, given that most of these issues do seem relatively localized.

But it is also part of a broader story that we've seen throughout 2014 of unrest in emerging markets, of relatively big changes in emerging-markets currencies, and that does have a real impact on companies with businesses across the world, but probably not one that's going to really change your investment thesis or the way you think about your asset allocation.

I think it's a very compelling political and human story, but not yet a really compelling investment story.

Stipp: We heard from Target this week. We discussed Wal-Mart's results recently, which were disappointing. Target had some headwinds going into their reporting period. How did the results stack up?

Glaser: They were better than expectations. They said that their same-store sales fell by about 2.5%, which might not sound great, but considering that they were dealing with the data breach and with a lot of unhappy customers who had to get new credits cards and new debit cards because of it, that result doesn't look so bad.

Their outlook of flat to +2% growth for the rest of the year also looked pretty good given some of those headwinds, both from the data breach and also from the broader consumer spending space.

I think Target has shown that their brand equity is not totally busted because of this issue that they are having, that they'll be able to come through, and people still are going to want to shop there.

Stipp: In men's apparel retailing, a drama is wearing on between Men's Wearhouse, Jos. A. Bank, and Eddie Bauer. What's the latest?

Glaser: I have a sinking suspicion that this might all be a ploy to get a lot more people in the legal sector employed, so that they'll buy more suits at these various stores.

This has been quite the drama back and forth. The news this week was that Men's Wearhouse was seeking an injunction from a Delaware court to stop the Eddie Bauer and Jos. A. Bank merger, saying that Jos. A. Bank is only doing it basically to fend off Men's Wearhouse's takeover bid, and not because Jos. A. Bank actually has anything that they want to do with Eddie Bauer.

There are probably a couple of takeaways here for investors--the big one being that management really matters. It seems like a lot of these management teams are not necessarily acting in the best interests of shareholders but are just trying to preserve their position instead of trying to unlock the most value. I think that's somewhat concerning.

Secondly, even if these deals do get done, are they actually going to create companies that are more competitive? We've seen recently that just because you take two companies, like OfficeMax and Office Depot, and put them together, it may give them some more scale, but it's not going to necessarily help them fight a lot of the headwinds that are facing the industry more broadly.

Even if one of these deals does finally get done, it's not going to be a slam-dunk for investors, either.

Stipp: In economic news, we got home price data from Case-Shiller. It showed home prices are moving up at a nice clip, but probably a rate that investors should not grow accustomed to.

Glazer: That's absolutely right. Case-Shiller said we had a 13%-plus increase over 2013 for 20 major metropolitan areas, and this is on the back of some other big increases. Now, of course, this is coming off of a base after the big price declines we saw during the financial crisis. We're still below those peak housing levels. But affordability is now starting to become a bit more of a question; home prices seem to be a little bit more fairly priced. With rising interest rates, it's harder for people to make those mortgage payments work. With tight lending standards, it's harder to get that mortgage even if they can make the payments work.

I think that's going to hold back housing prices and hold back the housing market generally. But it's still going to be a potential driver of the recovery. As Bob Johnson has said many times, housing really has a big multiplier impact across the entire economy. It's something to keep watching. But those double-digit increases in home prices are not something we should get used to.

Stipp: The bitcoin world shuddered this week as exchange Mt. Gox mysteriously shut down. Assuming I don't have a lot of investment in bitcoin, do I need to be worried about these events?

Glazer: You shouldn't be. I think that bitcoin gets a disproportionate amount of press compared to its importance to the global financial system. It's kind of an interesting concept of having this cryptocurrency out there that has no central bank and has no central governance system. It has some interesting implications in the payment space and elsewhere.

But right now, it's really more of a speculative vehicle: [Bitcoin investors] are betting that someone else is going to pay more for that bitcoin later down the line, and therefore it's worth investing in. It's not a financial asset, like a stock or a bond, that's actually giving you cash flow over time.

Most investors should probably should stay out of this speculation business, and the fact that one exchange happened to close down here and make a lot of headlines isn't something that should make you worried about anything that's happening in the real economy right now. This is more of a developing story, a technical-interest story, but maybe not one that deserves quite as much press as it's getting.

Stipp: Jeremy, your currency is always good on The Friday Five. Thanks for joining me.

Glazer: You're welcome, Jason.

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

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