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Toyota Turmoil, Bernanke on the Brink, and the iPad Puzzler

Jason Stipp

Jason Stipp: I'm Jason Stipp from Morningstar, and welcome to the Friday Five. This is our look back at the week's most notable headlines for investors. Joining me, as always, for the Friday Five is Morningstar's markets editor Jeremy Glaser. Jeremy, thanks for being here again.

Jeremy Glaser: You are welcome, Jason.

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

Glaser: Toyota hits a bit of a speed bump. Earnings continue to roll in. Bernanke has probably not the best week that he has ever experienced. The housing not doing so great. And the fifth one I think I am going to keep under wraps until we get there.

Stipp: Well, it sounds like a good lineup. Let's take it from the top with Toyota.

Glaser: Toyota announced a pretty big recall of 2009 and 2010 models. There is an issue with the accelerator pedal. The issue itself isn't a big deal. They are going to have to spend a lot of money to fix it.

I think the bigger issue is the perception of consumers. Are they going to continue to think of Toyota as these really solid vehicles or are they going to think of them as something that they are going to have to bring to the shop every six months for a little adjustment, or they are afraid that they accelerator pedal is just going to continue to depress even if they are on it or not.

With the car market starting to really rebound from the depths of the recession, and with General Motors and Chrysler and other formerly strong players now just completely on the ropes, I think Toyota might miss some opportunity if the perception comes down. But overall, this is just a bump in the road for them. It's not going to really delay their dominance or really hinder their progress.

Stipp: So not a crash and burn incident for Toyota, but maybe a sign that they might need to do a little tune-up around the edges.

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Glaser: Yeah, I think so.

Stipp: OK. So for number two, earnings have started to roll in, but the market, you know, how has it responded? Has it been what you expected?

Glaser: The market has basically shrugged off most of the earnings that have happened so far. Obviously, here and there, there are companies that have moved around a lot. For the most part, expectations have been met or even exceeded in a lot of cases. And I think the fact that stocks haven't moved at all says that investors really are expecting for companies to either be beating or to really be exceeding estimates.

That gives me a little bit of worry about what happens a few quarters from now if the economy starts to slow a little bit again and companies aren't doing as well as the analysts thought. We could see some big pullbacks in stocks.

Stipp: So when you see companies beat expectations but that stock might go down a little bit, it could just be that expectations were built up so much that you got to do a little bit more than beat these days to really move that stock up with earnings.

OK. So for number three, Bernanke: It was a little bit touch and go for him this week. What did you see on that front?

Stipp: This was one of the most contentious re-nominations of a Fed chair in history. Bernanke looked like he wasn't going to get by. He couldn't get the votes in the Senate to be reconfirmed to his post by Jan. 31. The White House intervened and people kind of pulled back from the brink, and it looks like he is going to go ahead and retake his post.

But the fact that people were so upset at him shows the populist anger against the bank bailouts, the populist anger about all the things that the Fed has been doing. At the same time, no one really wanted to imperil the monetary policy of the United States. And I thick that it is clear that he is going to be confirmed or why he had to be confirmed.

At the same time, the Fed decided to keep rates at basically zero percent for the foreseeable future, but we did see one of the board of governors, for the first time, dissent and say, "We can't keep rates at zero forever. We are going to have to eventually be open to raising the rate and make sure that we don't let inflation get the best of us."

As the economy comes back to full employment, I think that is a good first step that at least some people in the Federal Reserve see a recovery coming relatively sooner within the next year, and it is something that we should definitely keep an eye on.

Stipp: Well, it is nice that some people are thinking that the economy is getting better, but the housing market sure doesn't seem to say that. What do you see on the housing front? And really, is this something that is going to take a long, long time to recover, or what?

Glaser: The housing numbers we got this week were not great. We saw new home sales fall about 7.6 percent, which is much worse than the slight increase that a lot of economists were expecting. The Case-Shiller index was up slightly. It was better than, you know, off the lows, but doesn't show any explosive growth. And we saw some cities actually start to retreat down again.

It could be a challenge for the housing market with unemployment so high, with uncertainty about how to get a loan, uncertainty about how the Federal Government is going to subsidize home ownership.

I think a lot of people are staying on the sidelines. And until we get a robust recovery in the housing market, it is going to be challenging to get a robust recovery in the broader economy.

Stipp: Well, it will be interesting to see how things play out through that spring selling season, as well, so that will be certainly one to keep an eye on.

So for number five, you have kept this under wraps the whole time. And I have to admit that I am on pins and needles here. What do you have for us for number five?

Glaser: Jason, as you know, we have many famous viewers of the Friday Five. Important people like Barack Obama who listen to our advice on financial reform, but also, Steve Jobs, who when last week we were complaining that the Apple Tablet is just so over hyped, there is no way it could live up to these expectations, that we all have to take a wait-and-see approach.

Well, he heard this. And after he announced on Wednesday the iPad, he decided to send us a prototype and send us a working model so we could get our hands on it and give our impression.

And I have a tablet right here, so we are just going to show it to you right now.

Stipp: Well, you know, it looks a little familiar!

Glaser: Yeah, surprisingly, it looks just kind of like a giant iPhone or a giant iPod Touch. I don't know if we were expecting anything particularly different, but, you know, it is certainly nice to get a hand on it and to get to finally see it in person.

We are still a little bit skeptical. I am just a little bit skeptical of when exactly this is being used, but it certainly is a beautiful looking device, and it is something we are going to see play out in the next couple of years if people actually want this.

Stipp: You know, I see with the iPhone... Everyone has a cell phone. Everyone needs one. They are eventually going to have to upgrade. And when they have a great choice like the iPhone, it is a natural choice to just go ahead and upgrade to that because of the functionality.

A tablet, you know, I don't know if I am naturally going to reach a point where I need a tablet or I want a tablet, at least not yet. So it will be interesting to see if the elegance of the design, and functionality will be enough to really draw people into that.

Glaser: Fortunately for Apple, we saw their earnings this week. They had their most profitable quarter ever. They are sitting on a ton of cash. Their business is really running on all cylinders. Even if the iPad is not a runaway success, I think they are still going to be OK.

Stipp: Well, it's certainly interesting. Thanks for bringing the device, and I can't wait to play with it, Jeremy. Thanks for joining us.

Glaser: You are very welcome.

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