They may not be cliffhangers, but there are several forks in the road today leading us to this week's edition of the Friday Five: Will they or won't they?
Joining me as always with the Friday Five is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for joining me.
Though volume package growth looked pretty good, you know the global economy is still not just completely going gangbusters. Things especially in Europe and in other areas continue to be slow. Asia looks very strong, but it's a lot of the same trends that we've seen over and over again.
So, I don't think we have a definitive answer to that question yet, but there is lot of evidence that the economy and that the global recession is not over yet. It might be technically over, but that were not in a period of sustained growth and that it could be some while, and we might need to have more policy tools to get us there.
Glaser: I don't think anybody at the Fed is particularly concerned about inflation right now, because it just isn't there. Certainly, in some areas it is ticking up a little bit, but I mean even including those volatile food and energy prices, there is not an enormous increase in the price level.
That's something that you really have to see happen before the Fed is going to even think about raising rates, before they're going to think about putting the brakes on the economy at all. I think right now this is just further fodder for them to continue quantitative easing, to continue their extremely low interest rates for extended period of time. I wouldn't expect that language to change any time soon and I wouldn't expect them to think about tightening for quite some time.
Stipp: So, inflation may be tame here in the U.S. but one area where is it heating up is in China. This is obviously a big concern given China's prominence on the global stage. The question is, though, will the politicians there have the will power to throttle it back if they need to?
Glaser: It certainly could be difficult for them. It was widely expected this week that the Chinese government was going to raise interest rates, but instead all they did was raise the reserve requirements for banks. This is something they've done several times, and it certainly has the impact of keeping inflation lower; it lowers the velocity of the money supply. It's certainly a significant step to keeping the economy from overheating, but they didn't pull that direct lever. There's a lot of questions about why they haven't done this.
I think it's that the political system really loves growth. It thrives on growth, and if they start ratcheting that back in China to keep it from overheating, they are afraid that there was going to be some political instability. Now, certainly, I don't think they're going to let the economy completely overheat and get completely out of control, and they certainly have the levers to bring it back in when they need to, but it's certainly a dangerous game to play to walk that line between being completely overheated and getting into a bubble, something that could threatened the whole global economy, but also having enough growth and getting as much growth as you need in order to keep the political system stable and to keep everyone in China happy.
Stipp: In corporate America, the question of will they or won't they surrounding Novartis and Alcon, and their combination finally got some clarity this week. What's your take on that?
Glaser: They finally finished the Kabuki dance that they've been doing since last January. Novartis agreed to finally take out that last 23% of Alcon that they don't already owned.
The deal looks pretty sweet for Alcon shareholders. They're probably getting more than the firm is ever worth as a stand-alone basis, and for Novartis, it gives some access to the fast growing eye-care business. It's probably a good deal for them. I'm just glad that after year they finally got this finished and hopefully won't have to hear too much about the back and forth between those two ports.
Stipp: Lastly, Jeremy, we got some consumer spending data this week, it showed that consumers are out their spending, but maybe not as much or potentially in the future not as much at Best Buy. The question for Best Buy, will it continue to be such a leader that it's been in the past?
Glaser: It certainly doesn't look like anyone was spending money on buying TVs at Best Buy. They reported a quarter that showed pretty abysmal numbers for them. The stock sold off pretty significantly. I think it just goes to show how important competitive advantages are for a company. Best Buy is a company that we rate is no moat, and that means that we don't think they're able to sustain advantages.
So, for a while there they were doing really well. It looked like they had hit a model that people were excited to go there versus buying their TV at Wal-Mart, or Costco, or Target or wherever else. But last quarter when the pricing looked a little bit more attractive for their competitors, that's where consumers went. I think that when you get so much research that you can do online and there is just so much price competition, that's really where the battle is going to be won. The service of Best Buy is not so fantastic that you're willing to pay anymore for it.
It's challenging for them. It's still a decent business model. I think it's still a decent business that will be around for a while, but not one that's competitively advantaged, and I think that really showed in these results.
Stipp: Well, Jeremy, will you or won't you join me next week for the Friday Five?
Glaser: Well, we'll see.
Stipp: Well, thanks for joining me today.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.
