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By Christine Benz | 08-18-2011 06:07 PM

Five Tales of Subtraction

Morningstar markets editor Jeremy Glaser sees if less is more for HP, Abercrombie & Fitch, the eurozone, and more.

Christine Benz: Hi, I am Christine Benz for Morningstar and welcome to the Friday Five. Here to discuss five recent tails of subtraction in the market is markets editor Jeremy Glaser. Jeremy, thanks so much for being here.

Jeremy Glaser: I am glad to be here, Christine. I wish we could subtract some of this volatility, but I guess that is not going to be the case.

Benz: We thought we were getting off to a pretty steady pace, but it's really gone crazy recently. So, Jeremy, what do you want to talk about today.

Glaser: Well, this week I want talk a little bit about inflation, Hewlett-Packard, Europe, Google and finally, Abercrombie &Fitch.

Benz: So let's talk about inflation. We've really been seeing some increasingly worrisome numbers about inflation. What's going on there?

Glaser: Sure. What could really subtract a lot from consumers' wallets and also from your investment returns is that inflation seems to be picking up a little bit again. We had seen the numbers really start to be muted and then this week with both the Producer Price Index and the Consumer Price Index which rose about 0.5% overall really gave us a little bit of pause that inflation maybe isn't completely as under control as we had assumed. Granted, core inflation is still relatively low, and these numbers are still reasonable in the grand scheme of inflation. But given that economic growth is so slow, we're concerned about that those price levels rising.

The other concern is that the Federal Reserve may not particularly want to tighten our monetary policy and try to get that inflation under control. Fed chairman Ben Bernanke has basically committed to keeping rates low through 2013. If anything, he would look at to do more easing than he would to tighten up policy. So inflation really did start to get out of control and really did start to pick up from these levels. We might not have a ton of policy tools available to take care of it without also affecting economic growth in a really serious way. So, I think that it is troubling, and these numbers are not a good sign.

Benz: Right. Especially, given slower growth, and I think also the fact that inflation is a global phenomenon, right? It's not just driven by what U.S. consumers are doing. The emerging markets have the potential to stoke inflation that affects consumers here in the U.S.

So, Jeremy, you also want to talk about HP getting out of the PC business, I am old enough to remember the firm's big acquisition of Compaq and how contentious that was. It was such a big deal about a decade ago. What's going on with HP, and why does it want to exist that business?

Glaser: Yeah, this was a surprising one. HP has decided to spin off its PC business. So it will discontinue webOS, the tablets, and the phones it bought from Palm, just about a year ago.

Benz: So brand new to the firm almost.

Glaser: Yeah, and it's kicking that out as well. And HP is just trying to subtract. I think that management has been disappointed with the performance of the stock of HP and decided to kind of kick it into high gear by getting rid of this low-margin business that is hardware sales. PCs are commodity products; a lot of people don't care if they have an HP PC, a Lenovo, or a Dell. It's really hard to differentiate yourself there.

Where you differentiate yourself is in services, and I think IBM showed this--by exiting by the PC business--that you can really succeed in selling these services. I think HP wants to go down that road. The firm is in talks to a company for about $10 billion out of the U.K., and I think HP's really going to try to focus on those higher-margin, higher-service areas that management thinks can build a better competitive advantage. We'll have to see if it's successful for the firm.

It definitely isn't unwinding of their really decades-long strategy of becoming a behemoth in the PC space. It is the largest PC maker. It has a lot of scale and capability there. So maybe the services business will work out for HP, but the firm is going to be competing with IBM and with a lot of companies that have been pursuing this strategy for a long time. It could be a bit of a messy breakup, and I think it's a story, at least to when we're talking about HP, that's going to be in the news for a long time.

Benz: So this tablet business is an interesting side story. Has anyone really been able to make a go at Apple in that space?

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