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The Friday Five

Fri, 4 Jul 2014

This week: The June jobs report keeps the Fed on track, the Dow hits a milestone, and a story is developing in South America--not related to the World Cup.

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Video Transcript

Adam Zoll: For Morningstar, I'm Adam Zoll, and welcome to the Friday Five. Joining us as always with five events making news this week is Morningstar markets editor, Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Adam.

Zoll: This week we got some rather eye-opening jobs numbers. What can you tell us about that?

Glaser: This jobs report was well above the expectations: 288,000 jobs added, unemployment rate falls to 6.1%. What's interesting is this really was a broad-based gain. We saw a bunch of different industries add jobs, and the federal government wasn't detracting, which kind of helps keep that number relatively robust. Now, I would caution that you can't read too much into any one data point. There could be adjustments that could have gotten some things wrong that are going to be changed later. We could see some revision to the mean there.

But overall, I think it just showed that the employment market is doing pretty well and that it really is on track and this should give the Fed the space they need to exit from their extraordinary policies to end the taper on time, to maybe think about raising rates sometime in 2015. And this jobs report I think shows that plan is still very much on track.

Zoll: While many investors here in the U.S. are keeping an eye on what the Fed is doing, you say, they should also keep an eye on what's happening in Europe, with the European Central Bank.

Glaser: It is important to keep an eye on the ECB; you're right there. And I think that this week we got an interesting announcement from Mario Draghi, the head of the European Central Bank, that quantitative easing is still very much on the table. It's not imminent. We don't see asset purchases happening in the next month or something. But he still sees it as a potential tool that they will have to use if some of the other actions they've taken recently--like lowering key interest rates and trying to get banks to lend again--don't really start to work. This is notable because the ECB has really stayed away from quantitative easing out of fears, particularly from Germany, that this would really cause potentially runaway inflation or inflation higher than they wanted. The fact that they are still talking about it, I think, is a sign that ECB really is focused on getting rid of this specter of deflation and trying to get growth moving again.

It's also interesting because you have the Bank of Japan obviously in a very expansionary mode and the ECB potentially becoming more expansionary, both at the same time that the Fed is moving in the other direction. And I think when you look at the fact that say Treasury bonds and yields have actually decreased in 2014 instead of rates going up as many had expected, I think a lot of that could be explained by what's happening in the global central banks. There's still a lot of liquidity out there, and I think you need to look really at the central banking system as a whole and not just at the Fed in isolation.

Zoll: Again this week, Jeremy we saw some new record highs on Wall Street, including a milestone for the Dow. What does it mean for investors?

Glaser: The Dow hit 17,000 for the first time, and I think in isolation this isn't that important for investors. It's obviously just an arbitrary number. But it does raise the obvious question of are stocks tremendously overvalued right now? What do valuations look like? And our stock analyst team that does bottom-up approach does see the market as overvalued, but not horrendously overvalued. They kind of see, depending on the geography, 4%, 5%, 6% overvaluation in the markets right now, and they think that it is the time to be pretty cautious, that if you just buy any, particular individual stock, you really need to do your homework, you need to make sure that you're getting some margin of safety, and that some stocks really are priced for pretty poor returns in the future, if you're paying too high of a price.

I think it's also important to note that we very well could see a correction from these levels. We don't know obviously what would cause it or how big it would be or even the timing of it. Those are kind of market-timing questions that are almost impossible to answer. But if there were a correction, which, again, given the valuation wouldn't be shocking, it probably is worthwhile to have some ideas on a watchlist, things that you want to buy that you think are great companies, that maybe you're just looking for a better price so that you can take advantage of any sell-off if it does occur.

Zoll: This week we also got some encouraging numbers from the auto industry. What can you tell us about those?

Glaser: It did look really strong in June. We had a 17 million-unit seasonally adjusted sales rate, which is the best that we've seen since before the recession in 2006. Consumers are out there buying cars, and this is being driven by, cars are getting older, the average age of cars on the road is fairly high, and people just can't put off that purchase any longer. And also financing is still very much available, which helps consumers be able to actually make that purchase.

I think that when you look across the major U.S. manufacturers, they are doing pretty well, too. General Motors had very strong sales, despite some of the issues that they are having obviously with massive recalls and with the ignition-switch problems, and then the money that they have said this week as well that they are going to be paying out to those victims. Our analyst Dave Whiston, who covers GM, doesn't think that these settlements are going to make a large financial dent at least in terms of the company, and that even though it's probably hard to put an upper limit on how much they are going to spend, he thinks that it's certainly within the financial reach of the company. He still sees the shares as looking somewhat undervalued.

Zoll: Finally, this week, kind of an under-the-radar story involving Argentinian bonds. What can you tell us about that, and what should investor keep an eye on here?

Glaser: This has been a story that has been kind of winding its way through the courts and to the press for a long time, and it really goes back to the Argentina's default in 2001. With a lot of those bondholders, the government did some bond swaps to some on terms that are more favorable to Argentina. But not everybody took these swaps, so there were some hold-outs and these hold-outs really have been waiting to get their full payments. These are bonds that are governed by U.S. law. So, the U.S. court system has been taking a look at this and finally a Federal Appeals Court said that, yes, Argentina can't just pay the swapped bonds, they also have to pay the hold-outs at the full rate. They can't choose which bondholders they actually pick.

The Supreme Court decided not to hear any appeal and let that decision stand. So, now Argentina is a situation where they've missed the bond payment because they didn't want to pay the hold-out, and they are in this 30-day grace period where they have to either negotiate with those hold-outs and come up with solution that's going to work for them or potentially be in default.

Now this likely doesn't have a ton of systemic risk; you don't worry about an Argentinian default, kind of rippling across the rest of emerging markets or South America or anything like that. But it still is an important story, and I think one that we're going to be hearing more about over the next month.

Zoll: Jeremy it always pays to hear what you have to say on the Friday Five. Thanks for being with us.

Glaser: You're welcome, Adam.

Zoll: For Morningstar, I'm Adam Zoll. Thanks for watching.

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