US Videos

Not What It Seems?

Jason Stipp

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

Anyone who's seen the market rally on bad news, or no news, and correct on seemingly good news knows that things are not always what they seem.

Morningstar markets editor Jeremy Glaser has seen several such examples in the headlines this week. He is here to share them with us today.

Thanks for joining me, Jeremy.

Jeremy Glaser: You're welcome, Jason.

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

Glaser: We're going to talk about Best Buy, Europe, Intel, the Presidential race, and finally the economy.

Stipp: So, Best Buy had a relatively troubling report, at least for investors. The stock went down after they reported some recent results. Does this mean that the economy and the consumer spending, which had seemed like it was getting traction, is really faltering?

Glaser: Best Buy really took a hit this week when they announced that they just had a really tough quarter. Their margins compressed; the average sales size went down. They're just seeing a lot of pressure, and I think that it's easy to kind of jump to a conclusion, and say the consumer is totally scared, they're not out there buying, and the holiday season is going to be awful. But I think what's really happening here is more of a secular competition trend against Best Buy than it is that consumers just aren't buying electronics anymore.

There are just so many more options, including Amazon, going online, going to your Wal-Mart, your Target, which is really expanded into the consumer electronics space. You have so many more options of where to buy things, Best Buy isn't necessarily the top of everyone's mind--especially as physical media sales [decline]. So people aren't out there buying actual CDs and actual DVDs anymore, that loses a lot of foot traffic to the stores. It's just a tough competitive positioning for Best Buy.

So, they're going to struggle, and they'll probably continue to struggle for some time. They're not going to get back to the highs that they had before. But it doesn't mean that the entire economy is collapsing, the consumer is collapsing. It just means that there are some trends that are really hurting the competitive advantages of Best Buy.

Stipp: So, important to peel back the onion there.

At the end of last week, there was some positive sentiment about the EU Summit, and the market seemed to be pretty happy about this., And then we woke up on Monday morning and suddenly all of the woes and the concerns about the Eurozone were once again hitting the headlines. What should we think about this right now?

Read Full Transcript

Glaser: I think it's always very important that when you look at any of these European "deals," and I'll use air quotes for a reason, to make sure that anything was actually agreed to. I think that's the case here. I think that we got a lot of grand statements that this fiscal union was going to be created and that they're on this path that's going to create this very binding fiscal treaty.

But a lot of the countries that said that they're probably interested really want to see the fine print before people really sign up and it really gets going. Because the U.K. just is adamantly opposed to being involved, this has to happen outside of the framework of the EU. So, we have to create an entirely new international framework in order to get all of these countries on the same page and to get all of them in agreement that they're going to keep their fiscal houses in order.

That's not an easy task. There is going to be a lot of wrangling. This is really far from complete, and I think you saw the markets react to that this week--there was a lot of skepticism that this deal can actually happen.

So, I think there are probably going to be a lot more summits, a lot more of these so-called deals, and we just need to be very careful to make sure that something is actually happening, and it's not just a fancy press conference.

Stipp: In the tech sector, Intel lowered its outlook, which also troubled investors. They had some very specific reasons why their outlook was lowered. Do you buy that, or do you think this is somewhat emblematic of a larger slowdown in tech?

Glaser: This is another one where I think it's easy to say, "Wow the tech industry is really slowing down."

This is an area that has done surprisingly well throughout the downturn. And Intel lowered their forecast [this week], and a lot of it is that, flooding in Thailand has really put a big crimp on hard drive supplies, which is making it more difficult to ship new computers. And obviously without new computers, there there isn't as much demand for Intel chips.

I think that this is a pretty plausible explanation for why they're seeing demand slow. We've seen across a number of tech companies and a number of retailers who really want to be selling more computers and see the demand for new computers, that can't fulfill it because of the lack of hard drives.

I think that as the Thai floodwaters abate and that these factories are able to get back up to full production, we'll see that pent-up demand come back.

So I think that this is just a blip for Intel and not necessarily a sign of a broader slowdown.

Stipp: We know that we have a big election next year, in the meantime, though, we've got primary elections going on right now on, and one thing that really hasn't always been what it seemed is the front runner on the GOP side. What impact might all of this volatility that we're seeing in the race have for the markets, and this is something that should be on investors' radars.

Glaser: It's certainly difficult to ignore the presidential election. I think it's going to be one of the big drivers of what's happening, certainly in terms of policy over the next year. Nothing is going to get done that isn't directly related to the contest in November of 2012.

And we are really only a few weeks away from the first Republican primaries in Iowa, just right after the New Year. So I think certainly investors need to be keeping an eye on it.

And just like it seemed like the race was really Mitt Romney's to lose, and that no one was going to be able to touch him--it looked like he was really leading in the polls for a while, that's just been up-ended over the last couple of months, and especially even this week, and no one's really sure who is at the top of the race, who is at the bottom. The polling has been incredibly volatile, and I think that we just don't know.

I think that as we see different candidates put out different tax plans on different ways that they want to look at capital gains or dividends or what they want to do with government spending--a lot of those different options are going to have big impacts on investors. It's going to have impacts on industries really across the board, and the way that investors want to behave.

So, it's difficult to prepare for it, because there is so much volatility, but I think it's something that we're going to have to watch incredibly closely into November and beyond.

Stipp: So, Jeremy, we got some fund flow data for November; this tells us where investors are putting money and taking money out of mutual funds.

It seems to indicate that investors have one view of what's going on with the markets and potentially the economy, yet the [economic] data seems to indicate something else may be going on in the economy. Can you clear this up for us?

Glaser: There certainly seems to be a lot of investors who want to take risk off the table. They're moving out of categories that they see as being just too risky, and they really just want to keep their money safe.

But the economic data that's been coming out continues to point to a pretty good economy in the United States. Not great, but I think certainly we saw initial unemployment claims fall pretty substantially. I think that one of the economic factors that we've been worried about, especially, is unemployment. That's just been stuck at the bottom. We haven't seen a lot of job growth, and now we've seen week after week after week with those initial jobless claims below 400,000. We are at the lowest level since 2008, and I think if we keep at those levels for a while, we're going to see that show up in the payroll data. As more people get jobs, they start spending, and that produces more jobs. It's a virtuous cycle once we get employment going again.

And if that's really happening, and this isn't just some blip in the data or some sort of misreading, I think that is really good for the United States economy. Certainly there are plenty of things that could go wrong. We already talked about Europe and its potential impact on the United States. If emerging markets were to falter, that could have a big impact. But I think certainly the economy looks OK. So seeing people running for the exits in terms of risk while the economic indicators are starting to get a little bit better is slightly counterintuitive.

Stipp: Well, Jeremy, one thing that is always what it seems is your reporting. Very much on target. Thanks for joining me today.

Glaser: You're welcome Jason.

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