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Big Themes, No Big Surprises

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five. Here on The Friday Five, we always like to bring you the latest and the greatest, and this week there are big themes, but frankly none of them were very big surprises.

Here with me to offer the details is Morningstar markets editor, Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: Glad to be here, Jason.

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

Glaser: Well, this week, we'll see that M&A is picking up again; that retail top lines were weak, but profitability still looked pretty good; that jobless claims keep getting worse; we'll look at fund flows; and finally Blockbuster circling the drain.

Stipp: So there were some M&A news this week, some of it was somewhat newsworthy, because of what was happening, what did you see on that front.

Glaser: There are a lot of M&A deals announced this week. We saw that Intel was going to buy McAfee, but I think the big news was obviously BHP's very aggressive bid to take over PotashCorp, which is a fertilizer manufacturer. Now what's not as interesting as these individual deals, but the fact that M&A in general is coming together, but really it's not that big of a surprise, because we have lots of corporations that are sitting on a lot of cash right now. There aren't a ton of opportunities to invest in businesses given the demand picture, and valuations are still relatively low. They are maybe not as low as they were 18 months ago, but still pretty reasonable. It seems like a pretty good opportunity for M&A, but only time will tell if these deals are going to work out; if they pay too much, they probably won't.

Stipp: Another big potentially non-newsmaker this week was retail sales. There wasn't a huge surprise there. What did you see in the numbers?

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Glaser: A lot of the big retailers, Wal-Mart, Target, Home Depot, reported results, and the top lines were pretty weak. People aren't out there spending a ton of money. [But] profitability looked great. It's seems like the retailers are finally being able to adjust to "the new normal" of consumer spending, have gotten their cost structures exactly where they need to be, but I don't think given the economic environment we're in right now, people are shocked that there isn't a lot of spending going on, but it is nice to see the profitability holding up.

Stipp: Certainly that theme of cost cuts we've seen in a lot another industries and certainly just more of the same in the retail industry.

Also this week there was some non-"stop the presses" news on the jobless market; apparently it's not getting that much better.

Glaser: It's not. For a while, the initial unemployment claims every week were getting smaller and smaller and smaller. But over the last month or so, it has gotten worse, and we're over 500,000 new claims every week now, and this just shows that the labor market is very weak, but given where retail sales were and given everything that's going on, we would hope that it would get better, but it's not shocking that it isn't yet.

Stipp: Also, we saw the continuation of a trend in mutual funds; apparently people still like bonds.

Glaser: Fund flows into bonds were enormous again. People are eschewing U.S. equities and are going into bonds, are going into alternatives, going into commodities, and also into emerging markets, which was the one area of equities that was particularly strong.

A lot of this just has to do with, people are afraid of the United States economy, the developed-world economy. They want relative safety of bonds, and we could argue if the bonds actually give that safety right now, but certainly people perceive them as being the safer investment right now. And with the emerging markets doing a little bit better and with a better growth trajectory in front of them, they find that their growth from those funds might be a little bit better suited to their needs right now.

Stipp: Lastly, Jeremy, it might come as a big surprise to you that the Blockbuster down the street from your house might not be there for a whole lot longer?

Glaser: You really have to file this under "unbelievable surprises."

Blockbuster for a while has avoided using the B word, the bankruptcy word, but this week on Footnoted, Michelle Leder pointed out that certainly they have finally announced that bankruptcy is a possibility. The shares are trading absolutely in the toilet, and I think it's not a big surprise to anyone who has been to a Blockbuster anytime recently that that company is not doing very well. I think their days could very well be numbered.

Stipp: Well, Jeremy, the upside for you is that overdue VHS of Sixteen Candles wedged under your futon: you might get away scot-free.

Glaser: I am excited about that.

Stipp: Thanks for joining me.

Glaser: You're always welcome, Jason.

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