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Smooth Sailing or Stormy Seas?

Jason Stipp

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

Clear sailing or stormy seas? Morningstar markets editor Jeremy Glaser is joining me this week with five things from the market that could bode well or poorly for corporations and the economy.

Thanks for joining me, Jeremy.

Jeremy Glaser: You're welcome, Jason.

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

Glaser: Well, we're going to talk about jobs, J.C. Penney, Yum Brands, Ford, and finally, Research In Motion.

Stipp: So, on Thursday we got pretty decent initial claims data that seems to indicate the job market might still be on a pretty good footing, hopefully, heading forward. What do you say about that data?

Glaser: We are actually getting a lot of encouraging jobs data, which had been a little bit disconcerting after just so much bad jobs data for so long, but it really does look like the economy is truly adding jobs now. We saw this in the unemployment report just a few weeks ago; we saw it in the initial jobless claims, continuing to track down, continuing claims continuing to track down, and we see it in other data. McDonald's, when they released their comparable same-store sales, they said that North America looked pretty strong because of seasonal items, but also because of breakfast, and breakfast at McDonald's is a great indicator for employment, because, really, only people with jobs are stopping at McDonald's for breakfast. I, for one, know that if I didn't have a job in the morning, I probably wouldn't be waking up quite that early and getting out to McDonald's for that Egg McMuffin. So, I think certainly that's another sign that people are really getting back to work, and I think that could bode well for the economy looking forward.

Stipp: In corporate news, Martha Stewart Omnimedia had a pop this week because of a deal with J.C. Penney. Does this mean better sales going ahead for them?

Glaser: I think J.C. Penney is going to be an interesting story to watch. They've seen a lot of trouble in their home business, and they're hoping that bringing in Martha Stewart, bringing in her brand, and really carving out niches in the store where people can buy those Martha Stewart goods, is really going to help them recapture some market share in that area.

This is one of the initiatives that their new chief executive Ron Johnson is really championing. He came over from the Apple stores, he was incredibly successful there, and I think we're all waiting to see exactly what he's going to do in J.C. Penney to really turn that business around and really get it up to snuff with some of their other peers.

I think this is just the first step, but I think it shows that he's willing to think maybe a little bit out-of-the-box to really build deep partnerships with brands that he thinks are going to be valuable in order to get J.C. Penney truly back on track.

Stipp: A possible slowdown in China has a lot of folks worried about rough seas coming ahead for the global economy. Yum Brands has a lot of business in China. We heard from them recently. What do they have to say on the story?

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Glaser: Yum Brands is pretty bullish on China, and obviously you're going to hear that from a company that gets 40% of their operating income from the country. But certainly, they don't see any big worry about a so-called hard landing, where either a slowing global economy or just too much infrastructure building and spending just sends China down the hole and consumers stop spending.

They're expecting 15%-plus operating income growth in China in the coming years. They really think that as that middle class consumer and the middle class continue to grow, they're going to continue to spend, and their restaurants are going to be on the forefront. We think it's probably an aggressive target, but one that they probably could reach if they don't see that hard landing, and their executives really don't see that coming right now.

Stipp: In automotive news, we had a company that took a corporate action that would seem to indicate a stabilization for their business. In the auto industry this is something that might seem surprising given that just a few years ago we were talking about bankruptcies there. What's the story?

Glaser: Ford is going to start paying a dividend. It's not going to be huge at first, but this is the first dividend that they're paying since 2006. I think it just shows how much of a recovery we've already seen in the auto industry, in particular in the U.S. auto industry.

Ford was able to avoid the bankruptcy fate of GM and Chrysler, but they still had some really tough times. They basically had to mortgage everything that they owned. They really were in a precarious position for a while there.

And I think the fact that they are willing to start paying out a dividend, that they are having some great success with lot of the new models, and that we still are really seeing auto sales that are really below their peak and even below normal levels, just shows that there's a lot of room for growth there, that they have a lot of faith that they're going to see some clear sailing ahead as those auto sales continue to tick up. And I think this is a good sign, not only for Ford, but I think for the auto industry in general.

Stipp: In telecom, Jeremy, Research In Motion seems to just hit storm after storm after storm. Are they ever going to make it out of the Bermuda Triangle?

Glaser: Research In Motion, it would almost be funny if it wasn't so sad, just the number of stories we hear about bad things befalling them. This week they had to fire two executives who were detained after becoming so inebriated on a flight from Toronto to China that they had to be removed in Vancouver. The plane had to be diverted. Obviously, that's not good PR for them.

In Indonesia, some of their executives are under now a criminal investigation for a stampede to get some new BlackBerrys that they are introducing in that country, where the BlackBerry continues to be very popular; another not great PR move for them.

And also just a week or two ago, they had to take a big charge on the BlackBerry PlayBook, because they're going to have a lot of unsold inventory--they almost wish there was a big surge of consumers who were really going out there to buy that tablet. Just not a lot of interest there.

It just seems like we get story after story after story of things going wrong there--that they can't get their new operating system really up and running on their handsets. They can't get that next generation. They are just really having trouble breaking through that Google-Apple duopoly that seems to really be taking over a lot of the smartphone market.

It's going to be challenging for them. I think we're going to see more rough waters and more bad stories going forward for them.

Stipp: Jeremy, it's always smooth sailing on the Friday Five thanks to your expert reporting. Thanks for joining me again this week.

Glaser: You're welcome, Jason.

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