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Five Unusual Pairings

Jason Stipp

Jason Stipp: I am Jason Stipp for Morningstar and welcome to The Friday Five.

Not since the Odd Couple rerun marathon have we seen a week filled with such unusual pairings.

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

Jeremy, thanks for joining me.

Jeremy Glaser: Thanks, Jason. Not everything can be peanut butter and chocolate.

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

Glaser: Well, this week, we will look at unusual pairings among world leaders, at Goldman Sachs, Apple, airlines, and finally we will look at some fast food companies.

Stipp: So President Obama this week had a shindig at the White House. What did you see was an unusual pairing there?

Glaser: Well, certainly we'd all want to know more about what Barbra Streisand and Chinese President Hu Jintao were talking about at the state dinner, but I think certainly the more important thing is, what were President Obama and President Jintao talking about.

Certainly, there are a lot of areas that the United States and China disagree about and places that they are going to try to work on: things like human rights, things like currency and the global markets.

These are issues that they don't necessarily see eye-to-eye on, but they are trying to come together, trying to reach common ground to find ways that can be mutually beneficial to both countries. I think it's great that they are talking. I think it's great that they are able to have these lines of communication open instead of just lobbing insults back and forth. The relationship has been a little bit testy at times. Certainly, in previous conferences, there has been some talk of the Chinese government kind of snubbing the United States and not necessarily playing along with some of the big picture ideas they have.

But they are trying to be constructive. They are trying to find ways to deal with some of these issues that are important to the global economy--ideas about exactly how the Chinese currency is going to appreciate over time. It's going to be a huge impact on the competitiveness of U.S. exports and a huge impact on the way that the recovery plays out globally.

I'm glad to see this pairing is going on, but certainly something a little bit unusual and a little bit different from normal.

Stipp: In corporate news this week, Goldman Sachs released earnings and it got paired with some headlines that maybe were a bit unusual compared with the recent past.

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Glaser: Usually, Goldman Sachs' headlines are about how much they are going to beat their earnings estimates versus if they are going to, and they actually missed this quarter. Their fixed-income trading, which is something that has really produced just a goldmine for them over the last couple of quarters just faltered, and they didn't produce the kind of results that they expected, and this is something that at Morningstar we have been talking about for a while.

So a lot of these investments banks, when they are trading their own book, you don't really know if these earnings are sustainable or not. I think it's going to be a big question moving into 2011 is, will Goldman be able to ride the strength of their investment bank and their merger and advisory business, or are they going to be beholden to relatively mediocre fixed-income results if those keep coming for them.

Stipp: Also in corporate news, Apple got paired with a road bump-- a bit of unusual pairing for a company that's it's been on a pretty hot streak for a while.

Glaser: News that iconic Apple CEO Steve Jobs will be taking indefinite medical leave was something that was not greeted warmly by the investment community. Now obviously news of his health difficulties have been on the top of a lot of people's minds for a while, but this open-ended leave really seems to point to the fact that he is getting sicker, and that it's possible he is not going to return to Apple.

Certainly, they are doing very well right now. Their quarterly results showed an incredible increase in revenue. For company that's already so big to be growing at 70% is really astonishing.

They have so many new products that are coming out. Products that are still really in the infancy, like the iPad. I think they have a lot of runway and can still succeed for many, many years, even without Steve Jobs at the helm. But it still leaves that big open question, which is that, when he is gone for a decade, will they still be able to innovate? Will they still be able to create these new products that consumers really love? Or are they going to start seeing some of that competitiveness chipped away by competitors? Lots of people spend a lot of money to try to create those products that other people are going to want.

We'll have to wait and see. We obviously wish Steve Jobs the best and hope that he recovers soon. But I think a lot investors are going to watching if he returns very closely.

Stipp: On the flipside, the airline industry is not one that's not normally paired with positive headlines, but yet they have actually been able to get off the ground a little bit recently.

Glaser: 2010 was a pretty good year for the airline industry. We saw results from Southwest Airlines and Delta where revenue rose pretty substantially. They were able to sell out more of their planes; the load factor was very high. They were not a lot of empty seats going out, and they are able to keep costs mainly under control.

This is not universally true. American had more mixed results. They still had a loss and their higher operating costs--because it never went to bankruptcy--we're hurting them. But certainly as a whole the airline industry is doing pretty well. If they can keep their capacity constraints and they can stop from just over-expanding like they usually do, they may be on a path to more sustainable profitability over time. It's a good thing for airline investors and maybe airlines and profitability won't be such an oxymoron anymore.

Stipp: Lastly, Jeremy there is an unusual combination of restaurants that are on the auction block what can you tell me about that?

Glaser: We have seen a lot of fast food restaurants all of the sudden for sale. Yum! Brands announced that they are going to divest of Long John Silver's and A&W, which are very small compared to the rest of their business, like KFC, Taco Bell, Pizza Hut. And Wendy's Arby's Group, really wants to get rid of Arby's--it's struggling, it's bringing Wendy's down.

So I think that it really can make a lot of sense to bring the three of them together. I think we can see a lot of great new food products. Now, on Morningstar before we've looked at things like the Triple Threat, which is a great new pairing, and we think that if they really put their minds to it, something involving fried shrimp, roast beef and root beer or hot dogs really could hit the consumer market and really help those companies. It might sound like an unusual pairing, but maybe few people will find it tasty.

Stipp: Well, I think I'm glad that you don't have sample of that with us here today, but thanks for the idea anyway.

Glaser: Maybe next week, Jason.

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