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Five Findings from the Morningstar Stocks Forum

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome the Friday Five.

Morningstar is finishing up its annual Stocks Forum today. Morningstar markets editor Jeremy Glaser was on the scene, and he's here with me to offer five big takeaways from the forum.

Jeremy, thanks for joining me.

Jeremy Glaser: Thanks, Jason. It was a great conference.

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

Glaser: At the forum we got some interesting information from General Mills, some more color around quantitative easing, we heard about for-profit education, we heard from FedEx, and finally, from AT&T.

Stipp: So certainly the consumer has been on a lot of investors' minds recently. General Mills a big player in the consumer market. Tell us a little bit about what they had to say, and what their outlook is for how consumers are spending.

Glaser: General Mills is one of those rare companies that touches almost every consumer in the United States, which I think gives them a really good perspective as to how the consumer is feeling. And they said that people are a little bit less fearful. Unlike at the height of the recession when people just wouldn't even buy yogurt, people are at the grocery store, they're buying, they're especially at a Costco or a Wal-Mart, they're out there buying. But the problem is that they're not necessarily willing to pay full price anymore. They're not necessarily willing to try a lot of new and interesting products.

This is in sharp contrast to the emerging-market consumer, which has been really strong for General Mills. They are out there; they're trying new products. These are a lot of consumers who are buying packaged goods, packaged food products for the first time.

In China [General Mills] launched a line of frozen noodles and frozen dumplings that have been doing very well for them. It shows the emerging-market consumer really could be driving us out of this recession, while the United States consumer gets back on their feet.

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Stipp: So it certainly will be interesting to see if the U.S. consumer here is on its way back to full recovery, or if there is sort of a "new normal" in how they spend and maybe they won't splurge for some of those items that they used to in the past.

So, Jeremy, in other big news this week, the Fed came out and said it was going to be buying more bonds in the future to try to stimulate the economy. You got some context around that so-called "quantitative easing" at the forum. Tell us what you found out about that.

Glaser: Quantitative easing is, as you said, this fancy way of saying that the Fed is going to buy $600 billion worth of bonds. We heard from Randy Kroszner who is a former Federal Reserve governor, and he said that this is really an effort to control the market's thinking that there could be deflation and to try to convince people that inflation is coming.

And this is probably for the best. I think deflation is an outcome that we would really want to avoid. It's certainly difficult to convince people that there is going to be a little bit of inflation but not too much inflation. And so far, it's been successful. Even before they bought a single bond, the market's estimate for inflation has begun to rise, and people seem to think that the Fed is going to be able to do this.

We heard from some other commentators at the conference who didn't think it was going to have much of a big impact, but there didn't seem to be anyone who thought this was going to be an absolute disaster. We read some stories recently from some commentators who think it could really be challenging, that it could be a really terrible decision. It doesn't look like that's the case, and it's already working. We already have those inflationary expectations. The hard part is going to be to get out of it, and to make sure that inflation doesn't become runaway.

Stipp: One of the more popular sessions at the forum was on for-profit education. Strayer's CEO was here to tell a little bit about what that industry has been facing. They've certainly had a rocky road because of some of the regulation that's out there.

What did he have to say about where he's expecting the industry to go given that uncertainty.

Glaser: Jason, you're absolutely right. Robert Silberman, who's the CEO of Strayer, had a lot to say about regulation. He isn't that worried that regulation is going to kill his business. He thinks that Strayer will be able to adjust their admissions standards, will be able to adjust their career counseling to get in line with any new regulations that the federal government gives them--but he isn't able to do that until he knows what those regulations are.

So for him, the biggest concern is the uncertainty. He really wants just a letter from the Department of Education that says "this is what we're going to hold you accountable to. Here's how we're going to measure it. And then he can manage the business to that.

Certainly, there are tail risks that could be much, much worse. Our own Pat Dorsey asked him what he thought the worst-case scenario was. Silberman said that it could be that they would just get rid of federal loans for all for-profit education. But he said that he thought the chances of that were very, very unlikely. It's not something that they're counting on. They're managing the business that they're going to have either similar levels of loans that they do today, maybe a few things on the side.

So I don't think it's going to be the death knell for the business. But there's going to be a lot of volatility there. We could see a bunch of different reports. I think the different regulations could change over time. And I think investors who get into those stocks are going to have to be prepared for that volatility.

Stipp: Another interesting session from a corporation: FedEx, often considered a bellwether indicator of how the world economy is doing. What did they have to say about how their business is shaping up in this stage of the recovery.

Glaser: Like General Mills, FedEx really gets a broad view of the entire global economy. Even more so, because they really touch almost every single country where it's possible for them to do business.

And I think that they've seen from their data that there's not a double-dip and that the fear of this double-dip recession is really gone, and that we're in a recovery, though it's going to be a very slow one.

One of the things that they did see is that industrial production is probably going to outpace GDP growth. And they think that's because a lot of industries, such as autos and housing, are way below their historical norms, and that there is that rubber-band effect that Bob Johnson has talked about several times, that that is going to start to come back. And as those industries come close to normal production, you're going to see a lot more shipping; you're going to see a lot more economic activity.

It's going to take awhile. It's going to take through 2011 and maybe even later, but that recovery is firmly on track.

Stipp: So lastly, Jeremy, one of the interesting things about the AT&T session was what you didn't hear there. Tell us a little bit about what wasn't mentioned in the AT&T session.

Glaser: Exactly. I wrote an article before the conference saying that when you listen to these managers' speeches, it's important not only to listen to what they're saying, but also what gets left out.

And in the prepared remarks for AT&T, it's amazing that they didn't mention Verizon Wireless or the iPhone the whole time. They occasionally referenced a "major competitor" and talked a lot about "integrated smartphones" and "integrated devices," but never did they talk about Apple specifically and never did they talk about Verizon specifically, which I think shows that they are probably extremely fearful or at least extremely cognizant that this is going to be a huge competitive headwind for them in the coming years.

Now during the Q&A, they addressed some of the concerns, and they think that it's not going to be a huge exodus of iPhone customers are going to leave and go to Verizon. A lot of those iPhone customers were AT&T customers before and are probably going to stick with AT&T. They either have family-plan relationships or corporate relationships. And also, a lot of AT&T iPhone users have already switched to other AT&T phones. And it's not like the iPhone is completely leaving AT&T, they're just not going to have exclusivity.

So they didn't mention it, which I thought was kind of an interesting way to do the presentation. But when they did address it head-on, I think they soothed a lot of those investor concerns. Is it going to be great for them? I think absolutely not. Is it going to completely kill the business and really take them away from their really dominant competitive business with Verizon in that wireless space in the United States? I don't think so.

Stipp: Well, Jeremy, it sounds like an interesting, informational forum. Thanks for your coverage and for joining me today.

Glaser: You're very welcome, Jason.

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