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Tricks and Treats in This Week's Top Five Stories

Jason Stipp

Jason Stipp: I'm Jason Stipp with Morningstar, and welcome to a special Halloween edition of The Friday Five. This is our look back at the tricks, treats, and trivia of the last week. Here with me, as always, with The Five, is Morningstar markets editor, Jeremy Glaser. Thanks for joining me, Jeremy.

Jeremy Glaser: You're welcome, Jason.

Stipp: So what have we got for The Five this week?

Glaser: We finally got third-quarter GDP numbers. We saw some mixed housing news come out. We saw Apollo Group get itself into a little bit of trouble. We saw Garmin take a dive on one of Google's moves. And finally, we're going to talk a little bit about target date retirement funds, which have certainly been in the spotlight recently.

Stipp: So, GDP numbers, number one. That was a treat, right? Treats?

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Glaser: You know, I think, at first glance, it was a treat, but I think there could be some tricks embedded in it. A 3.5% growth, really strong, best result we've seen in two years. It's nice to see the economy actually expanding instead of just contracting at a lower rate, like it has been before. But at the same time, a lot of that expansion was driven by government spending, both in ways to encourage consumers to spend more and in direct government money that's coming out.

It's not to say that government spending is bad, or that it isn't helping the economy, but it hasn't really shown that we're on a sustainable path and that this isn't just the stimulus working its way out. So we seem to be moving in the right direction, but I don't think we should break out the party hats quite yet.

Stipp: Also on the macro front, we had some housing, and there's obviously been a lot of mixed news there. Was it a trick or treat in the housing news?

Glaser: I think it's both a trick and a treat. We saw the Case-Shiller index continue to move upwards in almost all of the cities that it tracks, which is again, a good sign, we need that housing to stabilize.

When we looked at new home sales, they were down much more than I think most economists expected. Which gives us some pause, that we're seeing a lot of people again buying homes may be because of the new home buyer credit, which was probably going to be extended, or just was extended by the federal government.

Again, we see the government being able to support the mortgage market. That's what's getting people moving, but doesn't show that maybe the demand for housing is really there or that the supply overhang isn't so great that we're going to see possibly another double dip of prices.

I think we're going to want to see sustained growth in both existing home sales and new home sales and in that Case-Shiller price index before I think we're ready to call that one no longer a "trick."

Stipp: Speaking of the government in another light, the government and corporations, there's a little bit of news on Apollo this week.

Glaser: Apollo Group, which is the parent company of the University of Phoenix, got into a little bit of trouble with the SEC over their accounting practices. There wasn't a lot of commentary on exactly what happened, but our analyst Todd Young thinks that it has something to do with how Apollo Group accounts for students who are considered dropped out and once were considered absent for a bit of time and how they account for that.

The stock took a pretty serious drive, 20%, on this news. Todd thinks that it's really just a whole bunch of nothing, that the SECs going to come out of this and say, "Oh, OK, you're doing it right, or you need to make a small adjustment." So it could be a trick for the company, but might be a treat for investors who are able to pick up the shares pretty cheaply.

Stipp: Also there was some news on Garmin, which also took a hit on a trick, so what was up with that?

Glaser: Google gave a treat to many people by announcing that they're going to have turn-by-turn navigation on all its Android 2.0 devices. There aren't really any of these out in the wild yet. One of the first is going to be the Droid that's going to be hitting Verizon soon. The idea is that you can get navigation that works fairly well, that works as well as Garmin's couple hundred dollar systems, but they're giving it to you for free.

Not too surprisingly, their stock fell 20% on the news. They could definitely be hurting. If Google is willing to take a loss on it and give away your core product for free, it's certainly difficult to convince people to go ahead and pay a premium for what you're offering.

Stipp: Certainly not a treat for your potential future revenues.

Glaser: No, I don't think so.

Stipp: Number five--now it would be unfair to call them tricks. But target date funds certainly have some tricks to picking the right ones. What's in the news on target date funds?

Glaser: You know, one of the big news is there are finally some congressional hearings as to these target date funds that did so poorly during the market downturn. These are essentially funds of funds that fix a certain allocation between stocks and bonds and cash for investors who might be retiring in 10 years or 40 years. The idea is that you buy them and then they automatically adjust over time so that you don't have to touch it.

The problem with these is, has been that the fees can be really variable. Some are extremely high, they tend to not always pick the best funds that you can get, sometimes the so-called "glide paths," or how it changes from stocks to fixed income over time, can be really variable and not very well explained.

There's a lot of issues that has surrounded these funds, so in theory, they're a great idea. For investors who aren't necessarily super plugged-in, it gives them an opportunity to put their money away and, to borrow a phrase from Ron Popeil, they could just "set it and forget it."

There certainly are these concerns. I think it's good that we have hearings, that we're talking about it, especially here at Morningstar, it's something that we've been talking about for a while, to make sure that these funds act responsibly and that when people trust their money for all of their retirement, they're being good stewards with that cash.

Stipp: So setting it and forgetting it--it is a nice idea, but maybe all the more reason to make sure you read the instructions on that Ron Popeil machine before you get in there. Don't want to end up with a big overcooked turkey at the end. Thanks so much for joining me, Jeremy.

Glaser: You're welcome.

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