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By Jason Stipp and Jeremy Glaser | 09-06-2012 03:00 PM

Due for a Fall?

Morningstar markets editor Jeremy Glaser reports on European high hopes, former highfliers, and more in this week's roundup.

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

After reaching certain heights are some stocks due for a fall? Here to offer the roundup is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: Jason, glad to be here.

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

Glaser: We're going to talk about the ECB, FedEx, Realty Income, smartphones, and finally Netflix.

Stipp: Stocks in general rallied after news of the ECB's actions. Rallied, some might say, maybe too much? I'm wondering what your take is on that. Are we due for a fall after this rally, or was that a meaningful statement that they made?

Glaser: Certainly, ECB action has been in focus for a while now. We've talked about how the promise of action had kept markets somewhat placid during August, and the details we got this week, I think, were generally pretty satisfying. I think that they hit a lot of the boxes that investors were expecting, but certainly it doesn't solve all of the problems, and I think that when we see a rally of that size, that kind of assumes that the worst of the crisis is behind us, might be a little bit premature.

Taking a closer look at the action: I think three big points really jumped out of me from the statement. I think the first is that of conditionality, which is the idea that the ECB is only going to be buying back bonds from countries that have agreed to a bailout from one of the EU bailout mechanisms and is also in line with all of the terms of that bailout. So the ECB will only act, will only continue to be buying those bonds in unlimited amounts to keep rates low, for countries that are on one of these programs and that are agreeing to do everything that the rest of Europe says.

So, if you run into a situation later where someone, say Greece or Spain, decides that those terms are too onerous and wants to walk away from it, that could just make it even more difficult because they will lose both the bailout money and ECB support at the same time. I think that's a really important point there.

The second is how they're going to really think of themselves as creditors. In earlier actions, the ECB was clear that they were going to be the senior creditor, that they were coming in with a super-senior level above the existing sovereign debt, and if there needed to be a restructuring, they would get repaid first. In this new round, they're going to be treated the same as any private creditor. I think that's crucial because it shows that they really do want to get that private market open again, and they want people to feel that they could buy a Portuguese bond or could buy a Spanish bond and not feel like they're going to be undercut in some deal, maybe a year or two down the road. I think that's really critical.

Finally, the idea of sterilization, which is that the ECB doesn't see this as a quantitative easing program. So unlike what we're talking about in the U.S., where the Federal Reserve might buy a bunch of bonds in order to ease monetary policy even more and to increase that money supply, the ECB is going to try to sterilize what they're doing. So they're going to try to keep that amount of money out there basically stable, while trying to also bring down those rates.

So, I think that means they're really trying to work within the bounds that particularly Germany is putting them in, and not to be too easy with the policy and not to stoke inflation too much, and I think certainly that's going to be a crucial point here.

But really, even though this kind of buys some time and could be very useful for countries that need to get their short-term borrowing under control, it doesn't solve those major structural problems, it doesn't get rid of these giant debt loads that some of these countries have, and it doesn't really create that fiscal union that's going to be needed to keep these problems from cropping up in the future. So a good first step: I think they made a lot of important decisions and difficult decisions, but certainly not all the way.

Stipp: Sounds like it certainly also doesn't close the door on potential volatility down the road if we some of these issues flair up again.

Jeremy, in corporate news, FedEx warned on its results. This is a company that may be seen as a proxy for the broader economy. Does this bode poorly for economic results? Are we due for some kind of a fall in our economic metrics?

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