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Five Stories We've Heard Before

Jason Stipp

Jason Stipp: I'm Jason Stipp from Morningstar and welcome to the Friday Five.

After a rough, volatile three years in the market, some recent headlines suggest that the more things change, the more they stay the same.

Here with me to report on those stories is Morningstar markets editor, Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: Always a pleasure, Jason.

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

Glaser: Well, this week we're going to take a look at the G-20, at Cisco, at European debt, aircraft woes, and finally a sneak peek at the holiday shopping season.

Stipp: G-20 in the news, especially with the Fed's recent actions last week. What do you see on that front, and what stories is it telling that maybe we've already heard before?

Glaser: The G-20 meeting, everybody is all smiles and saying that they're going to get a lot of cooperation, but really some of the key issues of how we're going to handle currency valuation and how we're going to handle trade imbalances are really at an impasse.

The United States thinks that China needs to let its currency rise even more than it has. China thinks the United States should not be doing this Quantitative Easing and lowering the value of the dollar to try to solve the imbalances that way.

It's not something that's going to be easy to solve, and it's an old problem. We've been trying to figure out what a good global exchange rate mechanism is for years, with so many countries pegged to a dollar currency. Their currencies are pegged to the dollar. It's challenging thing to fix. I don't think it's going to happen at this G-20, but it's good that they're having the conversation, and moving the ball forward on that one.

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Stipp: In stock news, Jeremy: Something happened this week in earnings news that hadn't happened for a long time and that was a big disappointment. Who was that from and what does that say about where we are with earnings?

Glaser: It was from Cisco. It was almost refreshing to see a big miss. We've had so many quarters of really surprisingly good corporate earnings. Out of the recession, any good sign, any good move was just cheered by investors as a sign that we're moving farther away from the abyss, and Cisco had an okay quarter but their outlook was pretty weak.

They said that all of their businesses are going to not do so well in the coming quarter. They're seeing a lot of competitive pressures; a lot of governments cutting back on spending, which is a big part of their business.

Investors do not care for this very much. Stock was off almost 16% on the news, but certainly it shows that people are expecting really good performance from companies now--just showing that you're not going to collapse isn't enough. You have to prove that you do have growth in front of you. People are expecting that. I think, with the way that valuations are right now, I think that's probably right that we're priced that there's going to be a pretty good recovery, and if you don't show it, you're going to get punished by the market.

Stipp: Another story that we haven't heard a lot about since earlier this year is the European debt crisis. Some concerns lingering around there cropped up again this week.

Glaser: It faded into the background. We had the bailout of Greece from a joint IMF-EU venture, but the truth is that these problems are still there, that even if you talk about these austerity measures, they're pretty difficult to actually implement, and the spreads on Irish bonds, and Spanish bonds, and Portuguese bonds versus German bonds just continues to rise, we're almost at record levels, and the truth is that people still aren't sure that these countries are going to be able to get their debt situation under control. People were talking about Ireland needing to get an IMF bailout again or an IMF bailout as well; it's something that that's somewhat troubling. These are big macro issues that are going to need to be controlled if we want the recovery to continue unabated.

Stipp: So Jeremy in the world of aircraft, just when we thought all the problems were behind us in the aircraft development, yet more bad news this week. What happened there? What turbulence did they encounter?

Glaser: Jason, I think, we all remember the incredible delays that both Airbus wase suffering on the launch of their A380 aircraft, and that Boeing is continuing to suffer on the 787.

This week we saw Airbus have some bad press and Rolls Royce have some bad press with an uncontrolled engine--an uncontained engine failure on a Qantas jet. It grounded their fleet. It grounded a couple of other fleets. There's going to need to be some engine swaps. They are looking at some of engineering problems. It just kind of shows that launching a project that big can be so challenging. One of the 787, there was an electrical fire in one of their test flights that caused an emergency landing that they had to do. It's going to delay that program even more. I think that the idea of trying to launch in the first quarter of 2011 is probably a pipedream at this point. I think, they might be lucky to launch any time in 2011. They are probably lucky, Boeing is, that a lot of their airline customers probably don't want a ton of new capacity, don't want a ton of delivery right now. I think, they are pretty happy with their load ratios. They are pretty happy with the pricing that they're getting, so they don't mind kind of deferring that for a couple of years, but any more delays, I think people are really going to start questioning how efficient these aircrafts are really going to be. It could be a big setback.

Stipp: Lastly, Jeremy, just when I was getting used to all the stories of the consumer barely having a pulse, it looks like we might actually have maybe a somewhat decent holiday season this year.

Glaser: It could be. Macy's earnings showed a nice uptick in sales, which we had seen probably coming thanks to their same store sales growing through the quarter, but the way that their inventory levels look and the way that they are viewing the consumer, they think the holiday season is actually going to be pretty good. And I think that this is a sentiment that's expressed on a bunch of retailers, especially those that really target kind of the heart of the American consumers, such as Macy's, more so than just very luxury brands or people who are just buying those very essential things. I think, kind of a broad-based good holiday shopping season will do a lot to boost retailer confidence – do lot to boost consumer confidence even more. It's a sign that we're kind of getting back to some sign of normalcy even if we're not quite to those levels that we're spending at earlier.

Stipp: Well one thing that all investors can hang their hats on is the Friday Five. We'll be here every Friday, but thanks for joining me today, Jeremy.

Glaser: You're welcome, Jason.

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