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Fireworks or Flops?

Jason Stipp
Jeremy Glaser

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

As we paused for Independence Day celebrations, we saw a few signs of the holiday across the market this week.

Here with me to offer the details is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Glad to be here, Jason.

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

Glaser: Well, this week we're going to talk about Barclays, Hillshire Brands, same-store sales, fireworks in Europe, and finally China.

Stipp: Top brass at Barclays got a certain kind of independence this week. Maybe he wasn't looking for it in quite that way. What's your take on the situation there?

Glaser:  I don't think Bob Diamond was fighting for his independence, but it was foisted upon him, because of the LIBOR fixing scandal.

In a nutshell, Barclays essentially manipulated this interbank rate, which a lot of other key interest rates are tied to, and this is something that is a big stain on Barclays' reputation. They're going to have to pay a pretty sizable fine to regulators both in the U.K. and elsewhere.

But I think there are two major things that come out of this that are important for investors.

The first is, it reinforces this notion, which a lot of particularly individual investors have been feeling since the financial crisis, that this whole game is rigged in a way. That the investment banks are using their power and using their position in order to just extract value wherever they can find it, but without really thinking about their stakeholders, without really thinking about individual investors in a very meaningful way.

Certainly, just because there are some bad actors doesn't mean that the entire financial system is out to get people. But stories like this, I think, really corrode that trust that's needed in the financial system for it to work, so I think that is a key part.

Secondly, for Barclays specifically, it now leaves this huge European bank without a leader in a time of transition for them. They've grown a lot in recent years and have to focus on finding their profitability, finding their stride, which they haven't been able to do yet. Our analyst Jim Sinegal is hopeful that someone will be able to come in and really focus on the retail bank--focus on that stable, profitable organization--and try to rein in some of the bigger risk-takers that obviously got in trouble with the LIBOR scandal and elsewhere.

Who knows if that's going to happen or not. I think we'll have to wait and see on that one, but certainly Barclays without a strong leader at the helm could be listless for some time.

Stipp: In consumer goods, we saw two breakfast-related brands, you might say, gain their independence from each other. What was behind that and is there a trend in the split-up of companies?

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Glaser: I talked earlier this week about Sara Lee's split-up just last week of Hillshire brands and a coffee business that will be based in Europe. And really what was happening there is Sara Lee realized that there just weren't a lot of synergies cross-selling in different aisles of the grocery store. Getting that scale wasn't that valuable for them, and in fact, it was making them lose focus on developing new products and really developing the brands that they needed in order to create a lot of value for their shareholders.

So far we think that the spin-off really did make a lot of sense. We talked to Erin Lash earlier this week about this--she is the analyst who covered Sara Lee--and she really sees that focus as being incredibly valuable, and that Hillshire Brands could potentially be a good takeover target for some other firms that maybe could create some more scale there, could create a lot more value there, when it comes to the supermarket.

So, creating that independence certainly makes sense for that firm. Kraft is also going to be splitting up in the relative near future, and we'll see if that one makes sense, too. Sometimes just being bigger does not mean that you're better.

Stipp: We also got retail same-store sales. They looked not especially strong. Were consumers not interested in doing holiday shopping for this week?

Glaser: Apparently not. The June same-store sale numbers just were not as strong as they had been. Consumer spending has been an area that obviously we've watched closely. Bob Johnson talks about it a lot. ... People go out there, spend money, and it drives the economy.

And same-store sales increased by the smallest amount in a number of years in June, and really people just seem to be pulling back. We saw it a lot at places like Macy's--which had been doing really well, the remerchandising had been really helping--they saw their same-store sales fall below expectations.

And I think that's just a sign that consumers are maybe becoming a little bit more fearful again. They're seeing some bad economic news. It's causing them to maybe be a little bit more cautious. It certainly was not a catastrophic report, and one month does not exactly make a trend, but I think it's going to be interesting to watch how same-store sales and how the consumer reacts to the potential of more softer economic news in the comings months.

Stipp: We were looking for, or maybe fearing, signs of fireworks in Europe over the last few days. Did we get them? Did we see the big explosions we were worried about?

Glaser: No big explosions in Europe, which is both good and bad.

So, on the good side, we didn't see any big explosions from some of our sovereign debt highflyers, like Greece and Spain, where there wasn't a big crisis [in the last week]--which, you know, no news is sometimes good news.

The summit that ended last week with some agreements to allow struggling financial institutions to borrow directly from the European stability mechanisms instead of having to go through the national governments first, and those first tentative steps to creating a banking union and eventually a fiscal union, I think, really were good steps in the direction of actually solving the crisis, instead of just putting band-aids on.

Now there is still a lot more work to do, and interest rates are still unsustainably high for a number of countries in the eurozone, but I think the fact that the market bought those as a credible step was apparent in the lack of fireworks in Europe.

But on the other side, the ECB, which did finally lower rates, I think people maybe were expecting a little bit more fireworks there. Instead the ECB basically said, we're going to make this limited step of lowering rates. We don't think it's going to be that helpful. We do see softening in the economy. We really do think that the eurozone is falling into recession. These certainly aren't the kind of words that you want to hear from the central bankers. So, I think people maybe were expecting a little bit more, or were hoping that the ECB would be a little bit more explosive in what it deployed there.

Stipp: We also saw that China lowered their rates. Is this going to create fireworks for that economy, which folks have been worried about?

Glaser: I think this has been one of the big question marks of the global economy, where people are super-focused on Europe, people think about the United States a lot, and then out in the background you also have this question of, is Chinese growth incredibly slowing down? Are we going to see this so-called hard landing? ... Is it a bubble that's just going to pop, or are we going to just see a gradual slowing to more sustainable levels of growth?

And the Chinese government is doing everything in their power to make sure that is a gradual slowdown, and they keep cutting rates, they keep trying to ease monetary policy in a way to make sure that the slowdown is controlled, and that they're able to really keep the economy from completely collapsing.

And so far, they've done a fairly good job at it. It seems like the Chinese economy is chugging along, even if at lower levels, and we haven't seen catastrophic numbers yet, and we'll have to hope that the Chinese government is a good steward of the economy for the sake of the rest of the global economy.

Stipp: Jeremy, The Friday Five is always a grand finale for the week. Thanks for joining me.

Glaser: You're welcome, Jason.

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