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End of an Era?

Jason Stipp

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

There was momentous news in the market this week that left us, at times, feeling on the edge of a new era. Here with me to talk through the details is Morningstar markets editor, Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: So, what we have for the Friday Five this week?

Glaser: Well this week, we're going to talk about Steve Jobs, about mortgage rates, American Airlines, European central banks, and finally retail sales.

Stipp: So, there was momentous news this week in the market, and I think the most momentous, obviously, was the death of Steve Jobs at 56, co-founder of Apple. Is this going to be a new era for Apple?

Glaser: Well, I think, in a lot of ways, the new era for Apple happened when Steve Jobs stepped down from the CEO role in late August and handed the reins over to Tim Cook. And I think that Apple really is going to be a different place without Steve Jobs.

I talked with our Apple analyst Michael Holt about this, and he said that Jobs is really an irreplaceable figure. You can't find somebody who is going to have that kind of vision and really authority in a lot of ways to make big design choices and to push the company in the right direction. But at the same time, he really has built up that economic moat within Apple, so that they'll still be able to execute at a very high level.

They've built this great ecosystem that lots of people who use iPods and iPhones and iPads are kind of locked into right now. There are lots of products that he's probably personally approved in the pipeline for a few years, and we think that Tim Cook is really a very able operator, very able executive, who'll be able to continue to put new products into that pipeline.

So, will things be quite as smooth as they had been for the last 10 years of seeming unbroken successes? Probably not. But I think for Apple, it's certainly a different era, but probably one that is still very prosperous for them.

Stipp: Jeremy, in economic news, we learned this week that I could go out and get a 30-year mortgage for rates under 4%. This is something that I don't know if it has happened anytime, but it certainly seems like a momentous time to go out and buy a mortgage. But what does this news imply?

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Glaser: It's really eye-popping to see mortgage rates that low. And I think, first, it shows that the Fed's "Operation Twist" is really starting to work--that those long-term rates, those 30-year rates, the ones that the Fed is trying to bring down even lower, the banks are responding and people are lending at extremely low rates.

And now the question is, will this actually entice people to go out and get more mortgages and to go out and actually start buying houses again? And I think that's where it gets a little bit murkier. Just because it's down a little bit, they are still very cheap, and mortgages were very cheap beforehand.

I think a lot of the impediments to buying a house [are still present]--people worried that prices are going to keep going down, people worried about losing their job, about their financial security, and you still probably need a substantial amount of money down in order to get those mortgage rates, and people might not have that kind of cash as they are starting to de-lever.

So, I think that having low mortgage rates certainly doesn't hurt the housing industry in any way. But it's not clear that it's really going to be the magic bullet that's going to get house prices fully stabilized and start rising again.

Stipp: American Airlines parent AMR stock was whipsawed this week. This is an old-school airline carrier that's been around for a long time, but the airline industry has actually changed a lot. Are they not in the right era for airlines right now?

Glaser: It looks like American Airlines and their parent AMR are really going to be having a lot of trouble. They are the weakest of the major legacy players, mainly because they didn't go through bankruptcy protection before.

The other big airlines, namely Delta and United Continental, when they went through bankruptcy earlier in this decade, they were able to shed a lot of legacy costs, they were able to really pressure their unions to give back a lot on pay, to give back a lot on other benefits. And now that the airline industry is doing a little bit better and they are able to charge just a little bit more, and the revenues look a little bit better, they are doing OK. They are really starting to produce income. But American Airlines just can't seem to turn a profit with their higher legacy cost structure.

I think what we saw this week was the market saying that they really believe that American Airlines will have to go through that bankruptcy reorganization in order to be successful, in order to compete against some of their rivals that have had that advantage.

In terms of M&A, some of the other airlines have really joined up to create these huge airlines, which has dropped American from the largest to the third-largest carrier, and it's not clear there are any partners for them that make a lot of sense. U.S. Airways is kind of the lone big player out there in the legacy space, but their root networks wouldn't really fit together in a great way. There probably would be some culture issues. U.S. Airways is really still trying to recover from their America West merger from many years ago. So, it's really not all that cut and dry.

So, I think that these big price shifts in AMR stock are probably something that we will continue to see going forward. I think management there is going to have be laser-focused and find a way to either cut these costs outside of bankruptcy or they need to start getting ready for that reorganization.

Stipp: In European news, the European central banks acted again. I think we've been hoping for a long time that we'd be able to usher in a new era of stability in the region. Is this action going to help?

Glaser: Well that's really what they're trying to do. We saw both the European Central Bank and the Bank of England came out this week saying that the Bank of England is going to have more quantitative easing, that the European Central Bank is going to do some covered bond buys, and they're going to support European banks in other ways through some policy initiatives, and I think this is a good sign.

I don't think that these initiatives in and of themselves solve the European crisis, but I think it shows yet again that the big institutions in Europe are starting to take this crisis very seriously, and understand that this truly is a crisis and not something that's going to go away if they just wait long enough, or that just these little changes that you make on the edges are going to make the [difference].

So, I hope that this is signifying a new era, where we're going to see better policy responses, we are going to see bigger policy responses, ones that are really focused on solving these issues, shoring up the banks, and making sure we have a managed default of Greek debt, and finding a way to somehow save the euro or wind down the euro in a reasonable way versus kind of lurching toward crisis like we have been for the past couple of months.

Stipp: Lastly, Jeremy, there has been a lot of talk about the doom and gloom and how the economic situation seems to be deteriorating. We talk about consumer confidence that hasn't been that great, talk about the consumer that's not spending as much as they used to anymore. They are basically a "cheap" consumer now, and they have been that way since the downturn, but yet consumer sales and retail sales actually looked pretty good in the reports that we got this week. Is there a new era for the consumer?

Glaser: I think we certainly hope so. We have talked many times--I know [Morningstar director of economic analysis] Bob Johnson has also talked many times--about consumers being really important to the recovery. It's people going out and buying stuff that really stimulates everything. It gets companies producing more goods, and that leads to all sorts of auxiliary services, and that really gets the economy back on track.

And people are spending. I think in September we looked at same-store sales from a bunch of different firms, and really across the spectrum--from very high end at Saks and Nordstrom to Kohl's, across a lot of different department stores, a lot of different types of retailers (Costco as well had a good month)--people are out there and spending; people aren't being terribly cautious.

That certainly doesn't mean that across the board consumers are spending absolutely everywhere. The Gap had a bad quarter. It doesn't mean that we are back to go-go days of people just buying everything and putting down their credit card and hoping for the best. But the consumer is not totally scared and running, hiding in their turtle shells and hoping for this to pass.

So I think it's a good sign, it shows that even with some of the bad news in the marketplace, people still don't feel totally shell-shocked, and I think that hopefully this will ... usher in a good Christmas era, and we'll be able to see good sales there that should give us some momentum going into 2012.

Stipp: I think all the volatility that we've seen in the market may imply that it is a time of change out there, but thanks for being here this week and talking us through all the events.

Glaser: You're quite welcome, Jason.

Stipp: From Morningstar I'm Jason Stipp, thanks for watching.