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Five Signs of Mounting Anxiety

Jason Stipp

Jason Stipp: I'm Jason Stipp from Morningstar, and welcome to the Friday Five. If a rough and tumble week in the market has left you nervous, you're not alone.

Joining me today is Morningstar markets editor Jeremy Glaser. He's got five stories of how anxiety is radiating through the market.

Jeremy, thanks for being here.

Jeremy Glaser: You are welcome, Jason.

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

Glaser: Well this week, we'll take a look at the Federal Reserve, at the IMF, at HP, FedEx, and finally at Bed Bath & Beyond.

Stipp: So Jeremy, a lot of the anxiety this week seem to pivot around the Federal Reserve meeting; we heard from the Fed this week. Why are people so nervous? Why is the Fed nervous? What did they have to say?

Glaser: The Fed's pretty nervous. In the statement that they came out this week after a two-day special meeting, the Fed basically said the economy continues to be incredibly slow. But crucially, they also said that there is some incredible downside risks into even worse economic growth.

They didn't name anything specifically, but when they talked about the financial system or the global financial system, I think it's clear that they had their eyes to Europe and to the sovereign debt crisis, and to some of the issues that are happening over there.

I think that that language really scared a lot of investors. The Federal Reserve obviously picks those words very carefully, and to see that kind of a strong language, I think shows that they are looking at the data, and they're obviously looking at it very closely, and they're seeing a lot of stuff that they don't like.

In response, they decided to announce a bit of an easing; it's a Twist. Essentially they're taking $400 billion of short-term Treasuries, selling them, using those proceeds to buy long-term Treasuries that should bring down long-term rates, maybe help mortgage rates come down a little bit.

It's not going to be a huge impact. I think clearly they felt they had to do something, but it just shows that in their policy toolkit, they don't have as many options as they did before, and I think that it made a lot of investors nervous this week,

Stipp: We also heard from the International Monetary Fund, the IMF. They're also worried, what are their concerns?

Glaser: Well, they're saying they were entering a dangerous new phase in the global economy, which is another one of those phrases that doesn't instill a lot of confidence in the market.

The IMF, I think, is worried about many of the same things that the Fed is. They really believe that the Europe crisis is something that needs to be solved. They're worried about the United States not being able to tackle some of its structural problems and the inability for anything really to get done in the year before the election, and they are also worried about global imbalances--that this idea that China needs to focus less on exports, that it needs to focus on internal consumption, and that the United States and other developed countries might have to focus more on exports to try to bring the global economy into balance. That's not really happening at a very quick rate, and I think they see that as a really crucial part and a really crucial way for the economy to truly get back on its feet, and I think that's something that makes them very anxious.

Stipp: In stock news, Jeremy, HP investors had reason to be anxious this week. This is probably not an unfamiliar feeling for them, but is the anxiety merited here? What was the story, and what's the potential outcome?

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Glaser: For investors who have lost nearly 50% of their investment over the last year in HP, they're probably used to lot of hand-wringing about what this company is doing. And this week, we found that Meg Whitman will be replacing Leo Apotheker as the CEO and president of HP.

Now this is a decision that happened very quickly. It seems like just in the course of a few days, the board of directors decided to kick out the current CEO, who had only been there for 11 months, and replace him with Meg Whitman. And Meg Whitman of course is the former CEO of eBay. She has run a big Internet company, but it's not clear that she has a ton of experience or what her experience will be in running such a big hardware and software company like HP.

I think it's going to be a challenge. She says that she wants to stay with the same strategy that the former CEO had, the idea of spinning off the PC business, potentially, of killing the webOS devices and the tablet business--getting out of that business. And also completing some other acquisitions to get more into the services and software space. But certainly she has her work cut out for her, and I think that investors are going to be looking very closely to see if she is able to actually execute on these plans.

But it also raised a lot of questions about the board again. If she is going to be having the exact same strategy as her predecessor, why do they feel they need to make this move so quickly? Why do they feel they need to make the move just right now? I think that raises a lot more questions than answers.

Stipp: Also heard from FedEx this week. This is a report that a lot of folks will extrapolate to the broader economy. It added to the woes that we saw on Thursday. Why was it so depressing for investors?

Glaser: FedEx really has their finger on the pulse of global trade. A lot of high-value products that are coming out of emerging markets or that are transiting the United States are coming through FedEx. They are loading them onto the planes, and they are flying them across the Pacific.

And they say that trade out of Asia is starting to slow down and they brought down their outlook for their 2012 earnings. There wasn't a huge downgrade to their outlook. They're not saying that the world is falling apart, but they are seeing a slowdown, and I think that the only bright spot in the economy right now has been Asia, and if there is a slowdown there, I think we're really in big trouble. If you don't have that engine going, it makes it that much harder for Europe to get back on its feet and makes it that much harder for the United States to see robust growth, and I think it really concerned a lot of people when FedEx came out with that statement.

Stipp: So in corporate news this week, Jeremy, a potential glimmer of hope in Bed Bath & Beyond results. Is it possible that the anxiety is giving them a bit of a tailwind?

Glaser: Well, they're really trying to capitalize on anxiety by having great 20%-off sales on scented candles for investors who maybe need a little bit of aromatherapy, who need to calm down a little bit.

Bed Bath & Beyond had a really great quarter. They beat analysts' expectations; they raised their view for the rest of the year. They think they're going to do even better than they thought before, and they did not have a modest view.

I think it just shows that consumers are not completely hiding under the couch. They are out there at Bed Bath & Beyond buying new pillows for their couch. And I think it just shows that it's not all bad news in the economy, but we are going to need to see more good corporate earnings, ... more good consumer spending news before we can really feel like the economy is on solid footing, and that the anxieties that we already talked about aren't ones that are going to turn into full-blown fear.

Stipp: Well Jeremy, a very troubling week in the market, but I wish you a restful weekend. Thanks for joining me.

Glaser: Thanks, Jason.

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