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The Friday Five

Thu, 20 Mar 2014

The Fed stays a course toward normalcy, stormy weather for FedEx, and housing hits a rough patch.


Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five: Five big stories from the market this week and Morningstar's take. Here with the Friday Five is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: In top news this week: We heard from the Fed and Janet Yellen; the market really didn't like what she had to say, though, at least initially. What's your take?

Glaser: It seems like the market is now expecting interest rates to start to creep up, maybe a little bit earlier than they had thought initially. But generally speaking, there weren't any major changes that were announced in this statement. Interest rates are still at very low levels. The Fed says they're still committed to keeping them at a low level for a long time.

They did change some of their forward guidance; instead of focusing on that 6.5% unemployment rate, which we're getting pretty close to, they said they're going to look at a number of different factors. This is something Bernanke had said as well, but now that's been made explicit--that maybe that quality of job growth hasn't been that high. So even if that rate is going down, if it's because people are dropping out of the job market, that's probably not a reason to think about tightening monetary policy.

And in a press conference, Yellen said that after the taper is over--and they did announce another $10 billion taper in this statement--it could be about six months until rates begin to rise. So if the taper continues on this track and finishes at the end of this year, we could be looking at mid-2015 for rates to start to rise. That was within the range of what the Fed had talked about before, but maybe a little bit earlier, apparently, than some of the market had expected.

But I think generally speaking, this is another sign that Yellen is going to continue the policies that Bernanke had put in place, and that it's a fairly, relatively seamless transition. And I think it's a sign that monetary policy is on the road back to normalcy.

Stipp: Yellen and others have talked about how the weather recently has made it hard to gauge the actual economic situation here in the U.S. One company, though, that weather does seem to have impacted is FedEx. They reported disappointing results this week.

Glaser: It had a big impact. Keith Schoonmaker, who covers FedEx for us, calls transportation an outdoor sport, and we really saw that over this last quarter. FedEx estimates that they had about $125 million in extra expenses just due to all of the shoveling and the deicing and the delays that were caused by this really horrible weather.

But overall, the quarter really wasn't that bad. They still saw a 3% rise in revenues. They saw a 9% increase in operating income. It seems like some of their cost-control buyouts and reducing some of their cost structure is starting to take hold and is helping them overcome some of these weather-related issues, which hopefully will not be a recurring expense from them.

Shares are about fairly valued right now, but the thesis of them being able to reduce costs over time seems to be playing out.

Stipp: We also got housing starts data this week, and it was disappointing, but as expected. The housing starts were down a little bit. So what does that mean for this area of the economy that seems like it should still be bouncing back?

Glaser: Housing starts fell 0.2% in February after a pretty big decrease in January, and of course some of this also could be due to some of the weather-related issues we've been talking about for a while. But even at the sub 1 million starts, we're still a fair way away from that 1.5 million number that maybe is a more normalized level that we've seen historically, and very far away from those peak levels that we saw during the housing boom.

It talked to Bob Johnson this week. He really sees this as potentially an opportunity. It means that there is some runway for housing to continue to grow and continue to be a driver of the economy. But he cautions that there are some demographic trends that really could blunt that impact somewhat, including a shift toward more multifamily housing, which tends to have less infrastructure build-out and tends to have fewer people involved in the construction. So that could be somewhat of a headwind there as well.

But generally, housing is a story that is still on track, but it's going to take a while to play out.

Stipp: In stock headlines this week, there was news that Alibaba is gearing up for a big IPO. You say there are a couple of interesting takeaways for investors potentially here.

Glaser: Alibaba is a Chinese e-commerce giant. And The Wall Street Journal is reporting that they're going to raise up to $15 billion in New York in an IPO. And this is interesting, because there were some talk that they were going to have an IPO in Hong Kong instead. But they seem to have chosen New York for some regulatory reasons.

I think there is two little side stories here that that might be of interest to investors. The first being that Yahoo of course, owns a 24% stake in Alibaba. There has been a lot of conversation over the years about how Yahoo is going to unlock this value eventually. But our analyst Rick Summer really cautions investors about focusing too much on that Alibaba stake, and they should really look a lot at Yahoo's core business as well. They're still going to have competitive challenges in competing with more personalized networks like Twitter or Facebook or competing against Google. The Alibaba money really doesn't make that magically disappear in any way.

Morningstar analyst Rick Summer thinks that these shares are a little bit overvalued right now.

And it's also interesting that Alibaba did choose the New York Stock Exchange versus Nasdaq. If they were going to be in New York, maybe it's a sign that the way Nasdaq handled the Facebook IPO and some of the problems around that are continuing to weigh on their business, even as we've passed a few years now. And I think that's somewhat interesting about how long it's taken that reputational risk really to be repaired.

Stipp: GM reported another recall, having some problems with some of their cars. So how should investors view this? It's a second one in a short period of time.

Glaser: They probably shouldn't be too worried right now, but there are some concerns that are going to have to be addressed.

First, they had the faulty ignition switches last month, and now we had some more recalls announced this month, and the announcement of a $300 million charge to take care of some of these recalls. On some level, recalls are cost of doing business in the auto industry. These are things that you're going to see occasionally and aren't outside of the scope of the liquidity that GM holds in order to take care of some of these issues.

Also a lot of the accidents that were caused by these recalls happened before their July 2009 emergence from bankruptcy, and they're not necessarily liable for it, that doesn't mean that they won't take responsibility for it. Dave Whiston, who covers GM for us, thinks it's likely that they will end up paying some money potentially into a victim's fund, into a compensation fund, even though they may not be legally required to.

But I think for more of the long term, it's a matter if GM can convince consumers that these really are past problems. That the quality of their cars is higher now, that they're not going to have recurring quality issues, that they can feel confident buying these cars. There's likely to be a short-term hit to sales, and what happens in the long term is really what's important there.

Whiston still thinks that the GM looks attractive. It's rated 4 stars right now, but these could potentially be some key risks.

Stipp: GM is hitting some bumps in the road, but the Friday Five is firing on all cylinders. Thanks for joining me again, Jeremy.

Glaser: You're welcome, Jason.

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

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