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Need a Vacation?

Jason Stipp
Jeremy Glaser

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

After a rough few days in the market, many might be dreaming of vacation. Some might already be taking one. Here with me to offer the travelogue is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Jason, I never need to take a vacation from The Friday Five.

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

Glaser: This week we are going to talk about the ECB, retail sales, Knight Capital, BP, and finally General Motors.

Stipp: If I were part of the ECB, I'm not sure that now would be a time I would take vacation, yet we see August as a time that Europe usually is on holiday. What's the story--do they have time to take vacation over there?

Glaser: Well, the ECB apparently decided to join the rest of Europe by taking August off, instead of trying to act to [address] the increasingly high and increasingly dangerous yields that are on Spanish and, increasingly, Italian bonds right now.

A couple of weeks ago, ECB head Mario Draghi said that he is going to do everything in his power to keep the euro together, and many people took that to mean that an imminent round of bond buying in the open market was coming from the Central Bank, that they were going to buy as many bonds as necessary and print money to buy those bonds in order to keep yields on Spanish debt well under 7%, so that the country is able to refinance as those loans come due and is able to get the breathing room they need to make those structural reforms.

But at their meeting, when they held interest rates steady as expected, they didn't provide a whole lot of details about how they are going to keep those yields down, how they are going to save the euro. They basically said, well, give us a few weeks, we're thinking about it, and we'll get back to you, essentially after vacation, in order to actually go out and do this.

We don't know if they'll actually have that amount of time. I think the market is still very scared about Spain. Those yields shot up over 7% again after the ECB made their non-announcement. I think they might have to come back from vacation sooner than a couple of weeks from now if they are really serious about intervening in that market and really bringing those yields down from those very high levels.

Stipp: We know that students are on summer vacation right now. They have a lot of time on their hands. One thing that seems like they might not be doing, though, is going to the mall this summer.

Glaser: A lot of retail sales were pretty mixed for July. Not every store reports these monthly same-store sales, but the ones that did, particularly some teen retailers or teen-focused retailers, really saw a lot of slowness in July and really didn't look very good, as we are in that shoulder season before back-to-school really starts, when people already have all their summer apparel. And [teen retailers] just didn't see a lot of demand for what they had on the shelves right now.

Although there were some bright spots--Limited had a great month and Costco also continued its winning streak--the fact that consumers are only buying things when they absolutely need them, are only buying things if they just absolutely love the product, and they are not just out there spending willy-nilly is probably a pretty good indicator of where consumer sentiment is right now. It is not totally in the gutter, people aren't holding on to every dollar for dear life, but it is not totally free-spending, where people figure there is a lot more where that came from and they might as well get it out of the door right now.

Bob Johnson has talked time and time again about how the consumer really is going to drive the recovery. So I think watching retail sales, watching how the consumer is feeling and what they're doing is really a good indicator of what kind of growth we can expect from the economy as a whole.

Stipp: Knight Capital took a big hit this week after news of some weird trading activity, trading errors in their systems. Was their system analyst on vacation or what's going on with them?

Glaser: I'm not sure who was on vacation there. I don't know if it was their computer deciding that it needed a little break or the person who was operating the computer, but they really had some very major trading glitches, which involved some stopped trading on some relatively big, large-cap companies.

Obviously this is going to have a huge impact on Knight Capital itself, but I think the broader story here is, it's yet again another thing we see that could cause investors to lose some confidence in the system.

We saw the Flash Crash [in May 2010], and this obviously was nowhere near ... the scale of that issue, but certainly it was pretty big for investors who are in those stocks. We see things like the LIBOR fixing scandal, which is still unfolding, the very high-profile Facebook IPO, and there was a lot of trading irregularities there.

So it just seems like all of these things add up on top of each other and just make investors feel a lot more skeptical that they're really getting a fair deal in the market--that they are getting the best price that they can, that the money is not just kind of going into a casino, and they are really going to be long-term partners with these companies, they are going to get long-term returns. I think people are becoming more skeptical of that, and I think glitches like this don't help that perception.

Stipp: Former BP chief Tony Hayward infamously longed for a vacation in the midst of their Gulf oil spill crisis awhile back. BP executives may also recently be longing for a vacation after the [company released its] results [this week]. What's holding their numbers back so far?

Glaser: BP had, as our analyst Steve Simko called it, a very messy quarter. Like a lot of the other oil majors, they are seeing a lot of pressure on their upstream segment, particularly with oil prices being down from their highs. But BP just seems to not be able to really pull things together and to have a corporate strategy that's really going to put them back on track.

Their Russian joint venture just continues to sour--I think they'd like to get rid of that stake. They said they would like to get rid of that stake. But they are not providing a lot of detail about how that sale can go through, and what the Russians think about being able to find a new partner there. And when the sale does go through, then all the sudden they lose all of that great opportunity of offshore drilling in Russia, and that really makes it more difficult for them to grow their reserves, which makes it more difficult for them to ... really craft a path where they can get back to very high levels of profitability.

So I think for BP there is not going to be a lot of vacations coming up, certainly for their current crop of executives, as a lot of these problems are not going to go away overnight, and they are going to have to work extremely hard in order to correct them.

Stipp: Also this week, GM's marketing chief got forced into a permanent vacation after he was ousted following some controversial decisions. GM is a stock that has looked attractive for a while. What things do they need to do, though, to get their marketing back on track?

Glaser: Well, as Dave Whiston, our auto analyst, has mentioned multiple times, the fundamentals of the American auto industry are really looking pretty good right now. You have consumers who maybe put off auto purchases for a while are now out there looking at new cars, or out there in the showrooms. We are not back quite to that normalized level of sales yet, but we are inching our way up, and by shedding a lot of the excess labor costs, by shedding some of the pension costs in bankruptcy, GM looks much stronger from a balance sheet perspective.

But the question is, can they get people excited about the cars again, and GM decided that Joel Ewanick wasn't the guy to actually do that--that his decisions to, say, sponsor Manchester United or to not to do a Super Bowl commercial to launch the new line of Chevy pickup trucks, really was a mistake.

I think that you're not going to see any radical changes in marketing, but certainly they are going to need to make some changes around the edges, particularly in Europe. We talk about the United States certainly improving, but Europe is the exact opposite. There are continuing to be losses in Europe, given the crisis there in sovereign debt, people just aren’t particularly interested in going out and buying a new car right now, given the amount of uncertainty in the continent. So I think that's going to be a big push: trying to find a way to market their brands in Europe and make people feel like it's OK to go out and buy that new car, even against that backdrop of the crisis there.

So, I think GM has a lot of work in the road ahead of it, but given the fundamentals in the United States, they should be able to pull through.

Stipp: Jeremy, it's always a worthwhile trip with you on the Friday Five. Thanks again for joining us.

Glaser: You're welcome, Jason.

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