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By Jason Stipp and Jeremy Glaser | 04-26-2012 04:00 PM

Who's Eating Crow?

Some marketwatchers could have reasons to reconsider following earnings reports, Fed statements, and other news this week.

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to the Friday Five.

Recent developments may have some market prognosticators eating at least a side dish of crow in the last week. So, who's got fork in hand?

Joining me with the details is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: Great to be here, Jason.

Stipp: So what do you have for the Friday Five this week?

Glaser: We are going to talk about Apple, Mitt Romney, the Federal Reserve, a slowdown in the United States, and asteroid mining.

Stipp: Jeremy, given Apple's performance in the days or weeks leading up to its earnings report, a lot of folks expected the report would disappoint, but they are probably eating a little bit of crow after we got those results this week.

Glaser: They definitely are. There was some worry that Apple, ahead of this quarter, was going to see their iPhone sales really slow down--maybe the iPad launch wasn't as successful as some people thought it could be. But all of those worries were blown out of the water after the results hit the wire.

This was the best March quarter that Apple has ever had. They saw great growth on iPhone, particularly in some emerging markets, and they really had great operating margins, too. Their component costs have come down a little bit. They were selling a good mix of higher-priced products, and they were able to post really good margins. I think this just shows that Apple really has some incredible momentum and how difficult it is to stop some of that momentum, and particularly in the mobile space.

But investors should still have some caution that some of these trends could reverse over the long term. I think that margins over time could shrink a little bit. We talked to our analyst Michael Holt about this earlier this week, and I think he really believes that although margins are certainly going to stay very high, that the levels today are somewhat unsustainable.

I think also carriers are going to continue to push back against Apple and the big subsidies they have to pay for the iPhone. We heard from executives from Verizon and from AT&T earlier this week [who said] they really felt like they need to have lots of options for their customers--they need to push Windows phone, they need to push Android--in order to make sure that they can offer some devices that might have a slightly lower subsidy, which might give Apple a little bit less power over the smartphone ecosystem.

Certainly, these aren't trends that are going to happen overnight. I think if people want an iPhone, the carriers are going to give them an iPhone. They are going to be willing to pay that [subsidy] to get those high-value customers. But I [still] think we could see how Apple's growth could slow down a little bit in the coming years.

Stipp: In political news those who expected a showdown at the Republican convention are probably eating a little bit of crow given some recent developments there. But what does this mean for investors?

Glaser: Certainly after Rick Santorum withdrew from the race, it wasn't a big surprise that Mitt Romney really swept the five Northeastern states that voted on Tuesday and really solidified his place as the presumptive Republican nominee, and it really sets up a showdown that we are going to be hearing a lot about until November.

But I think for investors, the thing they should be the most focused on is this so-called "fiscal cliff" that's going to happen at the beginning of 2013. The tax cuts that were temporarily extended in 2010 only go until the end of 2012. There are a lot of other little items that could be important to lots of investors that are going to revert back to the 2001 levels if no action is taken by Congress. And I think certainly some action will be taken, but exactly what is going to happen will depend a lot on what happens in this campaign, obviously who wins in November, and what that lame duck session after the election is really going to be able to accomplish.

So I think that, throughout all the noise, investors who are really focused on [the campaign should pay attention to] the different plans about ... those different tax rates, what they are going to do with those potential deductions, and that's what should really be front and center for them.

Stipp: In economic news, we heard from Ben Bernanke, the Federal Reserve, this week. I think some folks were expecting that, given some rockiness in economic data, the Fed was going to jump right back in there and get going [with more stimulus], but that might not be the case.

Glaser: It was no surprise that the Fed left rates really low, and that they said they were going to keep them low until at least the end of 2014, but there really wasn't a sense of panic in the statement, either. The Fed says they are still seeing some moderate growth. They said that inflation is starting to pick up a little bit, but they think that it's quite manageable and it's mostly driven by energy costs, which is something that doesn't concern them as much as other ... so-called "core" inflation.

So I think that anyone who was hoping for a big new round of quantitative easing, some big new programs being announced, would have been disappointed. But I think the Fed is going to be incredibly vigilant; if they see growth continue to moderate a little bit, I think those options are still on the table.

Stipp: Before earnings season, there was also a lot of hand-wringing about a slowdown in growth of earnings. We've had several quarters of good earnings, and a lot of people were wondering, how long will it last? But recent results may have them reconsidering the sustainability of earnings, right?

Glaser: Particularly in United States, we saw job growth didn't look quite as strong as we had hoped. There were some other contrary economic indicators. But from earnings so far--especially some of the big industrial companies like Caterpillar and 3M--they really have seen some great growth in the United States. They say that they really see good prospects for growth in North America. They saw their guidance actually tick up a little bit, which was interesting, considering all the economic uncertainty.

So I think that anyone who was predicting an immediate slowdown in the U.S., and [subscribed to] the idea that we are on the brink of really seeing economic growth fall back appreciably, earnings this week disproved that thesis somewhat.

Stipp: Finally, Jeremy, those who have long been pessimistic about our prospects for outer space industrial activity are definitely eating crow after news this week?

Glaser: I think so. A new company called Planetary Resources, which is backed by a number of Internet billionaires, director James Cameron, and some other notables, came out with a plan this week to initially send out some satellites to observe asteroids, but to eventually mine asteroids to bring some valuable metals back to earth and also to create water and other resources that could be useful for further space exploration.

I don't think this is going to have a big immediate impact on the basic materials industry here on earth, but certainly it's interesting to see a lot of very smart people putting a lot of money on a plan to see if they can extract just some more value out of those asteroids that are just floating around.

Stipp: Jeremy, I am going to avoid eating crow by saying that you'll definitely join me for another expert analysis next week, but thanks for being here today.

Glaser: You're welcome Jason.

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

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