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Five Changes to Check Into

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar and its change week on the Friday Five. Five notable changes out there in the market. One thing that hasn't change is my guest on the Friday Five, Morningstar markets editor, Jeremy Glaser. Jeremy, thanks for joining me.

Jeremy Glaser: You're welcome, Jason.

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

Glaser: Well, this week, we're going to look at changes in the book market, in industrial earnings, at the Farnborough Airshow, at General Motors, and finally at Nokia.

Stipp: So, for the first one, Amazon noted some big changes in the book world. What do you see there?

Glaser: Amazon said that this week for the first time sales on e-books on Kindle and Kindle-ready devices, actually surpassed that of hardcover books, and this is a big milestone for them.

They've been pushing the Kindle for a long time. After lowering the price, they said the devices were basically flying out of their warehouses and people are buying a lot of books. I think it shows that consumers are ready to accept the e-book format at the right price, and it kind of shows that there is definitely a shift in the publishing industry, I think, similar to the one that music industry saw with iTunes.

There could be a lot of interesting disruptive trends there, but for Amazon, their earnings were not fantastic. They were making money but a lot less than some analysts expected, so certainly lowering the price helped to get product out of the door, but didn't do great things for their bottom line.

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Stipp: So it might not necessarily be that people love the electronic format, but if they get a good deal on electronic books, they're going to go for it.

Glaser: Yeah.

Stipp: So, for number two, industrials actually a bright spot recently, amid some, uneven earnings. What do you see on industrials and what are they telling you that's perhaps a big change from the depths of the downturn?

Glaser: It's not all that surprising that in the depth of the downturn industrial earnings were pretty bad. No one's going to buy equipment to make stuff that nobody wants.

But things are getting a little bit better. In this quarter we saw really strong industrial earnings. Companies like 3M, Caterpillar, UPS had a lot of strength across end users, across geographies, and across all of their segments. I think that is somewhat surprising, because in the second quarter we saw a lot of mixed economic news. There was a talk of a sputtering recovery. But these results really pointed to a more robust recovery, one that's somewhat taken hold. Could it still kind of slip back? I think absolutely, but those results show that there has been some change there, and that we might be seeing the light at the end of the tunnel.

Stipp: Speaking of industrials, the Farnborough Airshow maybe had some bright spots for the airplane makers?

Glaser: Boeing and Airbus have actually been doing okay through the entire downturn, but this seems to mark a real turning point in people aggressively going out and buying new aircraft. The aircraft leasing companies are back in a big way. They didn't really have access to capital before, and they weren't able to have these big orders. And the airlines themselves are also buying a lot of new wide-body jets.

Now, some of these aren't adding new capacity. They're just taking out some older less-fuel-efficient jets out of their fleets, but still it shows a lot of confidence in the future of air travel, a lot of confidence in the future of people wanting to spend on premium business class and premium first class, and I think it does bode well, like you said, for Boeing and Airbus.

Stipp: In the auto sector there was news from GM buying AmeriCredit; GM's buying something?

Glaser: Yeah, that is a big change. GM has spent a lot of time over the past couple of years selling things off and closing down divisions, and now they are kind of moving back into expansion mode.

I think it probably says a few things. The first is that GM is very confident about their future. They think that they are going to be ready for their initial public offerings sometime in the coming months. They are going to be ready to become profitable eventually and to pay back the loans that they took from the government.

But at the same time, I think it could raise some troubling questions as well. They spun off GMAC because of some credit problems there. And I think if they are going to use this to try to push demand and to give credit to people who aren't necessarily creditworthy, they could run into those problems again. I think people are going to keeping a really close eye on this division now that they have it.

Stipp: Finally, in telecom Jeremy, there is an old school titan in that space having some trouble recently. What's the news on Nokia?

Glaser: Yeah. Nokia has not been great in adapting to a lot of changes. They got caught a little bit flat footed by the emergence of the iPhone, and the emergence of other big smartphones. Nokia still has a huge smartphone market with their Symbian platform and obviously, in other parts of emerging markets they have a very big footprint. But they've had a lot of problems breaking into these high-end markets. And it looks like there's going to be some big changes at the top of the executive suite.

The current CEO is probably on his way out, and they are interviewing new candidates, and I think that those kind of changes could help them get the footing again. They are such a big company, they have so many other competitive advantages, I think that it's possible for them to turn it around, but they are definitely going to have to put a lot of resources behind it and start to move fast.

Stipp: Well, Jeremy, I hope that if they do let their CEO go, they don't do it by text.

Glaser: Yeah. Not the best way to break up with someone.

Stipp: Thanks for joining me.

Glaser: You are very welcome, Jason.

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