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Working or Work-in-Progress?

Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar, and welcome to the Friday Five. Labor Day weekend is upon us, and here today to discuss some situations that seem to be working or at least being worked on, is Morningstar's markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome Christine. It never feels like work doing the Friday five with you.

Benz: So what you want to talk about today, Jeremy?

Glaser: Well, this week, I want to talk about AT&T/ T-Mobile, about ExxonMobil, Hurricane Irene, consumer spending, and finally the possibility of a third round of quantitative easing.

Benz: OK. Let's start with the AT&T/T-Mobile deal. In a lot of ways, that seems to be not working for those two. What do you think is going to work about it for someone?

Glaser: Yeah, it really is not working for them at all. In kind of a surprisingly early move, the Justice Department sued to stop the merger between AT&T and Deutsche Telekom's T-Mobile to create the largest mobile phone operator in the United States. I think, almost everyone assumed that the federal government was going to have some very big conditions on the deal, that there will be a lot of back-and-forth and they would be talking about this for a while. So the fact that they are already suing to stop it, saying that the proposed merger is uncompetitive for consumers, that T-Mobile being a scrappy upstart carrier really was driving prices down and bringing innovation, this all implies that the government wants to keep having four major players instead of just three.

So I think the real winner here is probably Sprint. Sprint has been running a distant third for some time now, and these two unbelievable monoliths of AT&T and Verizon at the front and Sprint in the back would just make it harder and harder for Sprint. So I think it's really going to work for Sprint if the deal doesn't go through. Certainly, this could still go to trial. There's still a chance that AT&T/T-Mobile deal will come to pass, but I think, this decision by the Justice Dept. is really going to make it that much more difficult.

Benz: So, do you think that job losses were in the mix here too in terms of what the Justice Department was thinking about?

Glaser: They may have been considering it, but I don't think it was a primary motivation behind blocking the deal. I think they were definitely more focused on kind of the consumer aspect about what it would mean in terms of pricing for cell phones and in terms of kind of speed to market on some new features. That seems to be what they're more focused on, more than the aggregate number of job losses that would come from some kind of combination.

Benz: Now, how about the Exxon and Rosneft deal? What's going on there and what do you think is working well at least for Exxon?

Glaser: This was kind of an incredible deal. ExxonMobil is getting together with the Russian oil company to really explore the Arctic region in Russia and to have some other joint ventures around the world. We didn't get a ton of specific details about exactly what the partnership is going to look like. It's not going to be a share swap. It's going to be investments from both sides and joint ventures in looking for these incredible amounts of oil reserves.

But the thing that's incredible is not so much this deal itself, but that a similar deal with BP fell apart just a few months ago. BP with great fanfare had announced this new deal that it was going to go into Russia and really saw this as a way to kind of remove the black eye that the firm had from the Gulf oil spill and to really show that the firm still had the ability to grow and still had the ability to make these big deals. But it turns out that it didn't. BP misread the political situation. BP misread how its other partners who are already in Russia would really feel about the firm trying to make this big move, and it really just blew up on the firm.

Now the Russian government is raiding BP's offices, looking for documents related to the deal. And at the same time, ExxonMobil kind of waltzes in after all of that happens and was able to get a deal on what industry observers think are much better terms. It just shows how good of an operator ExxonMobil is. It kind of reinforces Morningstar Exxon analyst Allen Good's view that the firm really is a best-in-class operator, and it's really a deal that could work for the firm for many years ahead.

Benz: So what's in a deal like this for Rosneft?

Glaser: Rosneft gets the expertise and experience that ExxonMobil has with exploration. When you have a company that certainly has a lot of reserves and maybe doesn't know how to get them out of the ground at the most efficient way and how to get them to market, ExxonMobil brings that expertise. Exxon also brings some capital to help make that happen, while Rosneft still get to share in the spoils of its oil wealth.

Benz: Now Hurricane Irene is obviously still a force to be reckoned with. A lot of people are still without power at this point, and there was some major destruction in a few spots, such as New Jersey and New Hampshire. But it seems like this storm was not as high-impact as many feared it would be?

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Glaser: Yeah, it certainly did leave quite a destructive trail. Many people lost their lives, and certainly it was a very serious weather event. But I think fortunately for many people, it turned out to be a little bit less serious than a lot of meteorologists had initially predicated. People were able to get back to work pretty quickly after the storm. Air travel was able to get back mostly to normal, and I think that is a good sign for the economy certainly that huge cities like New York, Washington, Philadelphia, or Boston would not be digging out for a long time from incredible power losses which really could have a big drag. So I think the fact that people are out there working, that the storm had a smaller impact than was originally anticipated is probably good news for all sorts of industries and for the economy as a whole.

Benz: So anytime there's a storm like this bearing down upon us, I think government forces have to kind of decide how much to shut things down and the economic impact. What's the general assessment on how they struck that balance this time?

Glaser: Yeah, it's certainly hard to say exactly, "Well, they shouldn't have done that because nothing happened," because you can't really live in that counterfactual world where the storm did hit directly or did gain speed and really would cause even more disruption. I think the fact that it was over a weekend really made it relatively minor, and the fact that things were opened up really as soon as possible after the storm has subsided I think points to some good proactive planning. I think it's easy to second guess too much media coverage, too much talk about how this was going to be a once-in-a-century storm. But certainly given how uncertain the world of hurricane forecasting is, I think that it probably made sense for people to be a little bit more safe than sorry.

Benz: So consumer spending, it seems that that is one area that's working, or at least consumers' credit card seem to be working. The numbers were surprisingly good.

Glaser: Yeah, consumer spending continues to be incredibly resilient in face of all of the headwinds that we've seen in terms of macroeconomic news, in terms of the job market still being relatively anemic with not a lot of new jobs. People out there at the mall; they are out there spending. They are buying new cars. Both the retail sales generally and auto sales in particular looked pretty good, and I think it just shows that, as much as we kind of talk about that there is a lot of bad things going on in the economy, there are also some good things going on, too. Consumers are big portion of gross domestic product and are big amount of what drives our economy. As long as people have the confidence to go and keep spending, it bodes well for the broader market.

Benz: So that's another question I have in that consumer sentiment numbers are really bad, even as the spending numbers look half-way decent. What's going on there?

Glaser: The consumer sentiment numbers are not the greatest economic indicator in the world. Bob Johnson, who's Morningstar's director of economic analysis, talks about this quite a bit. Really these are surveys where people call consumers and ask them, "How confident are you?" and "What do you think about the economy?" Every survey is structured a little bit different. But a lot of it is struck by what people say and not what people do. So a lot of times people could say, "I am very worried about the economy." These people see all this bad news, but they are still turning around, grabbing their credit card, going to the car, and going to the mall. So personally I prefer to look at the metrics that are driven by what people are actually spending versus what people are saying they are going to spend.

Benz: So Jeremy, last but not least, QE3 is maybe something that's being worked on?

Glaser: It certainly sounds like it. I know it can drive us a little bit crazy to try pick apart every single statement and every little piece of information we get from the Federal Reserve. But the minutes this week definitely show that there are a number of members of the board who are very serious about further monetary easing, either through bond buying, through a true QE3, or other ways of really keeping an even looser monetary policy. So we had heard a lot previously from some of the hawks, who wanted to not keep rates so loose and who wanted to really even start to think about how they are going to tighten policy.

But it sounds like the doves are still there, as well, and they still want to make sure that the Federal Reserve is ready with monetary easing in case the economy really starts to slow. Fed chairman Ben Bernanke hinted at this in his speech at Jackson Hole, Wyo., last week that the Fed is ready to go but that they are going to have to talk about this at the two-day meeting that's coming up in a few weeks. And I think that all eyes are going to be on that meeting to see if the Federal Reserve is going to act and what they are going to make of the economic data that has come out since Bernanke's speech in August. I think that it's something that is being worked on very closely, and it's something that's going to be watched with an even more intense gaze than it is at the moment.

Benz: Well Jeremy, it sounds like we'll all have to stay tuned. Thank you for joining me.

Glaser: You're welcome, Christine.

Benz: Thanks for watching. I am Christine Benz for