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Friday Five: Bond Market Volatility Is No Surprise

Jason Stipp
Jeremy Glaser

Jason Stipp: I'm Jason Stipp for Morningstar. Welcome to the Friday Five--Morningstar's take on five stories in the market this week. Joining me for the Friday Five is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: Mario Draghi this week said that he was unfazed by bond market volatility. We certainly saw bond market volatility this week. What's your take on that comment?

Glaser: The ECB held their regular policy meeting this week and, as expected, they left rates unchanged. But the real news was in Draghi's press conference afterward. That's often where the real news from these meetings comes from.

Draghi said that the quantitative-easing program that they've embarked on is continuing to work; there are signs that inflation is picking up in the eurozone. They said that they're going to stick with this program until they really see that 2% inflation firmly take hold across the entire continent. So, he's clearly working on that and even said that he'd be open to even further measures, if necessary, to keep inflation up.

But he also talked a bit about how he expects there to be more volatility in the bond market. We've seen some pretty wild swings in the eurozone and elsewhere as yields got extremely low when the QE program was announced. And they have come up a little bit since then. We saw, again, a lot of volatility this week, and he says that that isn't a huge surprise, given that we are at this kind of zero bound. [He said] that we should expect that and that he's not going to be fazed. He isn't going to change policy because of it. He isn't going to try to smooth that out in any way.

I think, given that we do have a lot of these very unconventional and unusual monetary policies out in the market right now that we haven't seen before, that this is kind of uncharted territory we're in. It's difficult to know exactly how these bond markets are going to react. I think, from an investor standpoint, it's difficult enough to predict where fixed-income markets and equity markets that matter are going in the short term in any conditions. I think, particularly now, it's very difficult to make those short-term bets, and you really need to keep an eye on the longer term--thinking about why you have fixed-income exposure and not trying to time where yields are going to go tomorrow or going to go next month.

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Stipp: In new deals this week, we learned that Intel (INTC) has reached an agreement to buy Altera (ALTR)--this is continuing a wave of consolidation among chipmakers. What's your take on that deal?

Glaser: After months of talks, Intel finally was able to grab Altera for about $16.7 billion. They are paying a pretty hefty premium here, and that probably is because of this wave of consolidation you mentioned. With so many deals getting done and so many people interested in it, I think they clearly had to pay up in order to get it done. Generally speaking, we think that this is a complementary deal.

Altera's chip portfolio really helps complement a lot of what Intel is doing, helps to showcase their manufacturing leadership. They already make a lot of the Altera chips. Bringing the whole company in-house is something that should be positive for Intel and gives them more room to spread their R&D over something that could help with costs in the long run and create some hybrid chips. There could be some interesting opportunities for them there. I think this shows that Intel really is trying to look at the post-PC world: How do they continue to grow their server business? How do they continue to think about what happens if personal computers continue to be in the doldrums?

Stipp: Sticking with deal news, there was a rumor this week that T-Mobile (TMUS) and Dish (DISH) might be getting together in a tie-up, but we're not necessarily buying it.

Glaser: These are two firms that sure get mentioned a lot whenever there are deal rumors out there. Mike Hodel, our telecom analyst, thinks that maybe you shouldn't buy that this one is going to happen either. Yes, there is some strategic rationale for bringing these together. Dish has been bringing together a lot of wireless spectrum but doesn't really have a wireless business to go with it. T-Mobile is growing pretty quickly now but doesn't have the spectrum to really expand. So, maybe you bring these two together. T-Mobile is able to expand their service a little bit.

But unfortunately, a lot of the spectrum that Dish has isn't really a great fit for what T-Mobile needs. It's in a higher frequency band, which isn't precisely what would work with T-Mobile's network right now. Mike Hodel thinks that if you combine the two, the company would have so much leverage that it would be difficult for them to really make the investments they need and difficult for them to bid on even more spectrum--particularly that high-value spectrum that T-Mobile needs at the moment.

Add in the fact that probably both [companies] are looking for pretty high valuations right now, and it could be difficult to come to a price that's going to be agreeable. So, even though it seems like they've worked out some details in terms of management and in terms of leadership, a lot of those other details are going to be very difficult to pull off. He just doesn't expect this deal to happen.

Stipp: The data report this week showed that auto sales were strong in May, so what was driving the results?

Glaser: They did look really good. We were at 17.78 million on that seasonally adjusted annualized rate, and that's up from 16.73 million in May of 2014. David Whiston, our autos analysts, thinks that there are a couple of things driving this. The big one is that we have five weekends in May this year, including the one after Memorial Day. That is potentially a big driver there. Weather is better. There are new products in the showrooms. People are interested in them. There's better credit availability than a year ago. All of these things really add up to a pretty good month for the automakers. We expect really for the rest of the year--and the rest of the summer particularly--to look pretty good for the automakers.

And this is an area where we still see some value. Ford (F) looks like it's trading pretty attractively. They're having a little bit of trouble getting the new F-150s out of the door; they're having some production issues there. But we think that, once those get worked out, that's going to continue to be a big driver for them. General Motors (GM) also is trading in 4-star territory and looks pretty attractive. So, in a market without a ton of values, the automakers still seem to be a pocket there.

Stipp: Narrow-moat apparel-maker PVH (PVH) reported earnings, and the stock popped this week. What was behind that? Is this one worth looking at?

Glaser: So, this is the owner of brands like Calvin Klein and Tommy Hilfiger. One of the big stories here has been the turnaround of Calvin Klein. PVH has really been making efforts to take it out of the bargain bin and really bring it back to a full-priced type of brand--something that people are willing to pay up for. And there were signs this quarter that they are making strides in having that happen. They're able to leverage their strong relationship with retailers in order to increase the amount of square footage devoted to Calvin Klein and to sell it at a full price.

With Tommy Hilfiger as well, there are signs that they're going to be able to pursue more international expansion. That, potentially, is another driver for the company. The stock popped quite considerably on these results, so it's not quite as cheap as it was. But Bridget Weishaar, our analyst here, does think that the shares are still trading below what she reckons they're worth and thinks that it could be an interesting name.

Stipp: Friday Five--on-trend, as always, with great insights. Thanks for joining me, Jeremy.

Glaser: You're welcome, Jason.

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