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Old and New

Jason Stipp
Jeremy Glaser

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five. There was some old, some new, and a mix of both in the headlines this week.

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

Jeremy, thanks for joining me.

Jeremy Glaser: Jason, it never gets old being here.

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

Glaser: We are going to look at the new Treasury secretary, at Supervalu, at Herbalife, at DISH and Clearwire, and finally the European Central Bank.

Stipp: Obama did nominate a new Treasury Secretary. It's a new position, a new appointment for this nominee, but somewhat old hat.

Glaser: I think so. Jacob Lew has been nominated to be the Treasury Secretary, as was expected, and he'll likely sail through Senate confirmation and will take over relatively soon as Tim Geithner, who's been wanting to step down for a while, finally has a chance to rest from the heat of the financial crisis.

But Jacob Lew doesn't really represent a lot of necessarily new ideas or new direction for the Treasury. He's currently Obama's chief of staff. He has spent his entire career really being a party loyalist, kind of towing the line, and being seen as a competent person, but not someone who is necessarily a big visionary. I think that is the kind of person that Obama obviously wanted to lead the department as it goes through a lot of challenging times ahead.

Immediately, the debt ceiling debate is going to be right there; you are going to have to work on the cash management and figure out how you continue these extraordinary measures until the debt ceiling is resolved. And then after that, we are going to be talking about the long-term fiscal issues. It's something that Jack Lew for a while has talked about--the importance of having new revenues along with spending cuts to bridge that fiscal gap over the long term, so that's nothing that's different from what the president has said.

So, I don't think we are going to see a lot of changes coming out of Treasury because of this announcement, but it's certainly good to have someone in place there. We don't have to worry about what could potentially happen, and it will be interesting to see if there are any surprises there, or if he does pull any surprises out of his hat.

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Stipp: An old-line grocer is hoping to make a new version of itself through selling off some brands. What's the story there?

Glaser: Supervalu has been under a lot of pressure for a while, mainly due to nontraditional grocery stores--everything from the high-end Whole Foods, where people want their organic groceries, to Walmart and Target continuing to expand their grocery lineup, and people seeing a better value there.

Supervalu has decided to sell off five of its supermarket brands for $100 million in cash and also the assumption of $3.2 billion in debt to a private-equity group led by Cerberus and a couple of other investors.

The hope is that by getting rid of some of these core brands, taking some of that debt off their balance sheet, they'll be able to emerge a leaner system, that their parts are going to be worth more than the whole. Cerberus has also said that they are willing to take up to a 30% stake in the company. They don't see this deal as just being this part. They could be potentially be interested in the rest of the company as well.

No matter who is in this ownership position, they're still going to have to face a lot of those challenges that traditional grocers are up against right now. You could see the case of people bidding the stock up right now, because they think there is going to be this big takeout premium, but it just isn't supported by the fundamentals right now. So, investors might want to steer clear of this one.

Stipp: Supplement provider Herbalife is facing some new concerns this week, but it's not the first time that they've been up against some tough critics.

Glaser: This has been one of the most fascinating stories. You know when a CEO starts an Investor Day with the quote, "We are confident that you will see that we're a legitimate company with legitimate customers," which is what Herbalife CEO Michael Johnson said this week, that you've gotten yourself into quite a bit of trouble.

The trouble has been caused by Pershing Square's Bill Ackman, who gave a speech last month about how he believes that Herbalife is actually a pyramid scheme, that the FTC and the federal regulators are going to come and shut it down, because instead of being focused on selling products to customers, it's exclusively focused on recruiting new people into the pyramid to continue to sell their products.

Obviously, Herbalife vehemently denies this; they say that they really are a product company, that they do create good business opportunities. And some others on Wall Street agree with them. Dan Loeb, another hedge fund manager, has taken a big long position in Herbalife. He sees that there's a lot of value there and that the sell-off that's come from Ackman's pressure is just not substantiated.

Now we'll have to see what the regulators do. The SEC has reportedly started some sort of investigation. We're not sure what they are looking at or what the outcome of that could be. The FTC knows about multi-level marketing. This isn't a new business. It's been 30-40 years they have decided not to prosecute. If they decide in this case, we just don't know. Ackman is betting that they will and that it's going to put incredible pressure on the stock and make him very rich. Others are betting that they won't. Making that bet is extremely difficult. It's hard to know what regulators are thinking at any given moment, but it is a fun drama to watch play out.

Stipp: There was a new bid this week for Clearwire from DISH, but will this push out an older offer from Sprint?

Glaser: It's unlikely to dislodge Sprint's offer. Sprint wants the rest of Clearwire--they already own a majority stake--to get more spectrum so that their expansion plans--now that they have that Softbank money behind them, the Japanese mobile operator--they will be able to expand, that they will have the capacity in order to get more people on their network.

But DISH came in this week and decided that they might want to try to play spoiler. They had an offer, but it's kind of an odd offer because it has a lot of contingencies.

DISH both wants Clearwire to first transfer some of the spectrum over for a price, then to enter into a commercial agreement to actually operate a new mobile network, and then after that happens, they will go and buy out Clearwire at the higher price. And this probably is not an offer that DISH is making so that they are able to actually take over the company. It's an offer that they are making to try to get Clearwire and Sprint to the bargaining table to potentially get some spectrum for them and open up possibilities for them to get that mobile network that they've wanted for a while.

Our analyst Mike Hodel really thinks that Sprint is going to end up taking the day here. They might have to increase their offer a little bit to mollify some of the minority shareholders. But given how much of it they already own, and that DISH's offer is contingent on so many different things, that one doesn't seem like the offer that will prevail.

Stipp: Lastly, Jeremy, we got a right decision from the ECB this week. Same old, same old?

Glaser: It is for them. No one expected the ECB to make any big changes, but some of the rhetoric around the rate … being kept the same was a little bit surprising. So, their key interest rate is staying at 0.75%, but the head of the ECB Mario Draghi did not seem particularly interested in doing anything else in order to support the recovery or to get a recovery going in Europe.

He said he expects that growth will be slow throughout and into 2013, that we might see a very tentative recovery by the end of the year, but that he doesn't think that it's appropriate for the ECB to get involved, to do quantitative easing, to be more aggressive. As we've seen the U.S. Federal Reserve and the Bank of England being extremely aggressive, the ECB continues to be much more conservative and to be focused on price stability.

Having this very slow growth makes it that much more difficult to fix the eurozone crisis, and makes it that much more difficult for the peripheral countries to fix some of their underlying issues. The ECB is going to have to act at one point. Last summer, Mario Draghi--when he said he would do anything possible to save the euro, that he wouldn't let the euro fail--he's yet to have to act on that. The market is taking him at his word at this point, and the ECB is resting on the laurels of that. When it comes time for them to actually act, they will have do it, and they will have to take decisive action or the market could really lose its faith there, and we could see the European crisis get out of control once again.

Stipp: Well, I am no hedge fund manager, but I am surely not shorting Friday Five stock. Jeremy, thanks for joining me again this week.

Glaser: You are welcome, Jason.

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