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This Week's Top Five Takeaways

Jason Stipp

Jason Stipp: I am Jason Stipp with Morningstar and this is the Friday Five. It is our look back at the week's most interesting, enlightening, and even outrageous data points and headlines. Joining me with the Five is Morningstar's markets editor, Jeremy Glaser. Thanks for being here Jeremy.

Jeremy Glaser: Oh, you are welcome.

Stipp: So what are the five this week?

Glaser: Well this week we had the fed funds. We had a cereal surprise. A potential fed fail. We saw Dell make a deal. And we had a little bit of housing being humbled.

Stipp: OK. So we had some fed news on Wednesday. Let's start there.

Glaser: This is probably the big story of the week is that the fed decided to hold rates at essentially zero. No big surprises there. The one thing that did jump out is that the fed, in their press release, certainly sees that the economy is improving. They still have some concerns about the consumer, but I think for the most part, the Federal Reserve thinks this recession is over.

Stipp: So it looks like they are going to be holding those rates steady, and being very accommodative for a while. It doesn't seem like inflation is on their radar. We have talked to some people who actually say deflation is the bigger threat in the short term. Jeffrey Gundlach from TCW said it is definitely on his radar screen for the intermediate term as being the issue that we need to address right now.

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Glaser: Yeah. I don't know if deflationary pressures are really going to be such a big problem for us right now. I think the Federal Reserve definitely doesn't see it. I think they want to keep money in the system. They don't want to raise rates too quickly. But I think if we look at the evidence on the ground, we don't see a ton of deflationary pressure.

I think a great example of this was this week, we saw General Mills come out with a really nice surprise, a cereal surprise if you will, that their results were even better than expected. Consumers are continuing to buy these core products, the price of which continues to rise on their branded products. We saw McCormick, which makes spices. They saw that both their branded and private-label products were doing very well.

The general price level is not really slipping. And it is at the same time that we see commodity prices falling. These firms aren't feeling the need to pass on these lower commodity prices. I think that is a decent sign that deflation has not really got its hooks into the economy.

Stipp: OK. What have you got for number three?

Glaser: The third one is the potential of a fed fail. This week, Sarah Palin made a speech in China where she talked about how the Federal Reserve was, in her view, the body that was the most responsible for causing this current financial crisis. And we have heard that echoed from Ron Paul and from a number of other people.

So I think one of the big questions that is going to come up for investors over the next, let's say year or two years, and certainly in the short- to immediate term, is how is the federal reserve going to react to this crisis? They have already put in an unprecedented amount of monetary easing and the quantitative easing of basically putting more money into the system. How are they going to extract themselves from the situation? Is it something that is going to be easy? Is it going to cause us to see another downturn, the dreaded "W" shaped recession?

I think the answer to that question is going to have a lot to do with the way our recovery looks, and is going to have a lot to do with the way investors see their returns in the future.

Stipp: So potentially the fed's future failing is of more concern now than trying to dig through the past and find someone to blame.

Glaser: Yeah. I think so.

Stipp: What do you have for number four?

Glaser: You know I think another interesting deal we saw this week was Dell bought Perot Systems for almost $4 billion. And this is not a huge deal from Dell's perspective, but they did pay a really big premium; 65% to the closing price, an even bigger premium to what we think Perot Systems was worth with our fair value estimate.

These kinds of valuations, we are seeing them pop up a lot in the M&A activity that is happening, just these huge premiums, these go-go valuations. This is sort of the activity that sometimes is correlated with the top of a market. We think generally stocks are basically fairly valued right now, but something to look out at: When you see these deals happen in huge valuations, investors might want to take a second look at the valuation of firms in general.

Stipp: It is like a big game about how all the synergies and the company has a strategic fit, but if you pay too much it is probably going to be tough to make that value squeezed out in the long run.

So for number five, I have a feeling you probably have a little bit of bad news.

Glaser: Yeah. Not everything can be so rosy. Housing numbers were not great this week. We saw that existing home sales had declined for the first time in a few months. I think we all had held out hope that the housing market had finally completely hit rock bottom and that we were only going to go up from here. That is just not the case.

I think that between the government programs starting to roll off...You can't get your first homebuyer's credit; it is probably too late to buy the house now and close in time. Mortgage rates are still low, but no one knows how long that support is going to last.

I think the housing market could still have some room to fall, especially considering the fact that a lot of banks have inventory that they still have to sell. So obviously real estate is a local thing, but in some MSAs [metropolitan statistical areas, or cities] I think we could still see further declines in housing prices. Or at the very least, we could be at the bottom for a while, and that kind of spooked the market a little bit.

Stipp: We are also going into a rougher season, sort of a down season in the housing market, which probably will put a little bit of pressure on that as well. We talked to Whitney Tilson last week. He said he sees housing in the seventh inning. So I guess the good news is we are through a lot of it, but the bad news is we probably still have a little bit of rough ground to go yet.

Glaser: Yeah. We are not quite there yet.

Stipp: Well thanks for joining me Jeremy.

Glaser: You are welcome.

Stipp: For Morningstar I am Jason Stipp. Thanks for watching.