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Who's Keeping Their Cool in the Market?

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. And welcome to the Friday Five. As a massive heat wave hit some parts of the United States this week, we found that New York commuters aren't the only ones trying to keep their cool.

Joining me with a special "staying cool" Friday Five is Morningstar's Markets Editor, Jeremy Glaser. Jeremy, thanks for joining me.

Jeremy Glaser: You're very welcome, Jason.

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

Glaser: Well, the five people trying to keep cool are BP, European Banks, The Australian Central Bank, retailers, and finally, Microsoft.

Stipp: Well, BP certainly has been in hot water for a while. How have they been trying to keep cool recently?

Glaser: Perennial Friday Five favorite BP decided this week that they are not going to issue new equity. They think that they have more than enough money to pay off their clean off costs and other claims that are going to come from the Gulf oil spill.

Now, it was rumored that they were talking to Abu Dhabi to have a potential investment in BP to kind of consolidate the shareholder base a little bit. This could be helpful as some sort of hostile takeover comes in; with the potential of BP shares trading in the basement for a long time even after the spill is capped, they are worried that someone is going to come in and pick up the company on a cheap and either just break up the assets or capture that value for themselves.

So, they're definitely trying to warn against that. So it kind of keeps them in the news that it certainly they seem to be pivoting away from worrying about the oil spill as much, and instead worrying about their financial strength and how the company is going to look afterwards.

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Stipp: Across the Atlantic there has been a lot of heat because of the sovereign debt issues in Europe. And the banks have felt a lot of that heat. They are trying to keep their cool in another way this week. What did you see on the bank front?

Glaser: I think the European banks are taking a cue from the American banks when they went through their own stress test. And what's happening is that, the European Union is going to take a look at some of their banks in a very rigorous way.

So, it's just like we did the stress test, they are going to take and see, okay, what kind of exposure do you have to some of these debt markets that we're worried about, what would happen if growth is much lower than we're actually expecting, how much extra capital would you need. And then they're going to publicly release these results.

And there were some talk before that it might not be public. So, I think the fact that the banks are going to let this information be out there and then kind of be open to suggestions of how to strengthen their capital position shows that they are keeping a little bit cooler heads and that they are not going to overreact to some of these tests.

Stipp: Going down under, the Australian Central Bank, keeping its cool this week with some news about what it plans to do on its monetary policy, can you talk a little bit about that?

Glaser: Sure. The Australian Central Bank, now, they kept the interest rates in the monetary policy exactly where it was now, but they have raised already a couple of times. They are one of the first large economies to do so. And they still seem pretty excited about, or maybe not excited, but bullish about the future of their economy. They certainly see that there are some potential pitfalls with the Chinese growth and with other issues that are happening around the world, but they are pretty optimistic, and I think we could see more rate increases in Australia. And it shows that at least part of the world feels like they are firmly on track for economic recovery.

Stipp: Back here in the U.S., I think there is a mix of a little bit of optimism but also some pessimism, a lot of it about the consumer. We got some retail news recently. What do you see on that front and how are retailers keeping their cool?

Glaser: Retailers certainly spend a lot of time trying to be cool and trying to protect their cool image. They want people to come in there and think that they are the hottest product on the block. And we saw with same-store sales this month that some brands like Abercrombie and Limited that are kind of in that cool category actually did pretty well, while some of the more discounter names like Kohl's didn't have such a strong quarter. Some of that is you have easier comps on the luxury side than you do on some of the discounter side, but it certainly shows that consumers are willing to spend a little bit on luxury. They might not be going hog wild with buying really expensive stuff, but the people who have jobs seem to be a little bit more confident than they were before.

Stipp: So, the king of cool in the handsets is definitely Apple these days with the iPhone. A lot of its competitors haven't been able to quite reach that same level of cool. One of those competitors is Microsoft, and they had a little bit of news on one of their less-than-cool handsets that recently didn't have too much of a good time in the market.

Glaser: Microsoft really has been trying to get this X factor, this cool factor for a long time. I don't think anyone has thought that any of their products have been particularly cool for a long time now. Bill Gates back in the day never exuded the coolness either. But, certainly, if they want to get into this market they realized that they had to create kind of a great handset.

And they released the KIN just a few weeks ago. And this was something we actually talked about on the Friday Five as we didn't think it would be terribly successful and apparently it wasn't. So they pulled it last week and said they're just not going to sell it anymore.

But the reports this week that kind of explore how many they actually sold. On the high end there are talks about 10,000, but there are some at the low ends, so they could have sold as little as 500. And really anywhere in that range is just staggering that a company the size of Microsoft with a pretty big marketing push could sell so few handsets. It shows how difficult the mobile space is and how to create that buzz around it, and it puts a lot of pressure on Microsoft to deliver on their new phone platform. And I think it's something that'll be carefully watched for the next couple of months.

Stipp: Well, Jeremy, it certainly sounds like you had the call right on the KIN?

Glaser: Yeah. Well, it seems like the KIN was the black sheep of the Microsoft family.

Stipp: Well, thanks for joining me.

Glaser: You're welcome, Jason.

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