Fall Guys

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

We're well into autumn and more than just the leaves were falling this week. Here with me to offer the details on that is Morningstar markets editor, Jeremy Glaser. Jeremy, thanks for joining me.

Jeremy Glaser: Jason, it's my pleasure.

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

Glaser: This week, we're going to talk about Italy, about jobless claims, inflation, Warren Buffett, and finally, Abercrombie & Fitch.

Stipp: So, one of the big stories in Italy is that confidence is dropping, and meanwhile, those yields sometimes are spiking above that 7% level that everyone is watching so closely. What's the story in Italy?

Glaser: Last week on the Friday Five, we didn't talk about Europe at all, so I thought that starting with Italy would be a good place to get back into the European sovereign debt crisis discussion, and I think that's because Italy really remains one of the big worries of investors, and one of the big worries of Europeans.

Now that Berlusconi has gotten the boot and been replaced by this technocratic government led by Mario Monti, the hope was that this would really soothe investors' fears, bond investors' fears, and that they would think that Italy would be on the right path. I think that theoretically there are a lot of good ideas that these technocrats and these academies can bring to the table, but we have to see if they're actually implemented and how that actually looks in reality.

This new government was a necessary but not a sufficient condition for Italy to really be on the right track. I think one of the major issues is that this is an unelected government. Certainly Monti has a lot of personal popularity in Italy, and I think that there will be a time when they'll have the ability to push through some reforms. They're going to need to be able to ensure investors that these reforms are going to continue on for years--that even after the next set of elections, they're going to stick to these paths of austerity. It's not like they can pass one bill, and all of a sudden the country is going to be incredibly solvent.

I think that's why we're seeing investors being a little bit skeptical, keeping those yields incredibly high, over that 7% level, and really putting this new government to task to make sure that they actually start implementing these reforms now and make sure that they're permanent.

Stipp: Over on this side of the pond, we got initial employment claims on Thursday, and those numbers look pretty good, again. This is a nice trend that we've been seeing, but will it persist?

Glaser: This is a weekly data point. It's something that we see a lot, and there's a lot of noise, where one week, initial claims will go up or will go down, based on any number of factors. But we've really seen a steady decline recently, and over the last few weeks, a pretty big decline below this 400,000 claims level, which is considered the level at which we're really adding jobs into the economy.

I think this is a good sign that the job recovery is still in progress. I think we had worried that it had stalled out at one point when we saw some very poor job growth over the summer, but this, I think, is a good sign. If it will continue indefinitely, I don't think we quite know the answer to that yet, but it shows that even as we have all these problems in Europe, there still are some good signs of economic data from the United States, and that the jobs market maybe will come back eventually to kind of normal unemployment rates.

Stipp: We also got economic data on inflation and prices. Although they might not be falling dramatically, they're certainly not rising very dramatically, either. What's the implication there?

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Glaser: Inflation was really, really muted last month. I think that this was not just caused by lower energy prices and lower food prices, which tend to be the most volatile, but just across the board inflation was not a major concern, both on the consumer side or on the producer side. I think that this gives the Federal Reserve more ammunition to have further monetary easing.

One of the big concerns about quantitative easing and about the Twist program and all these different initiatives that the Fed was implementing was that inflation was getting out of control. There's nothing the public hates more than out-of-control price levels, and [inflation would mean] that the Fed would have its hands tied and wouldn't be able to provide further support and further stimulus. I think this shows that this is not going to be a big worry. I think when the Fed gets together again, I think it could be more likely to expand programs, to start new programs, and to be a little bit more aggressive. I think that's only a good sign for the strength of the economic recovery and for that recovery to continue.

Stipp: In stock news, Jeremy, Warren Buffett's cash stake level probably went down a little bit; he initiated a stake in Big Blue. What's your thought on that purchase?

Glaser: This week we found out that Warren Buffett has acquired about 5.5% of IBM. This is somewhat surprising, because Warren Buffett in the past has really stayed away from technology companies. He says he just doesn't understand them. He can't wrap his head around it. And it's just a kind of investment that he walks away from.

So I think the fact that he is willing to dive into a tech company shows that he is really expanding the places that he is looking to put money to work, but I think it's also important to look at IBM and see that it's not really a traditional tech company like some of the other high-tech names that he has stayed away from. They are really focused on the services business, which I think is something he understands more. They are less tied to the success or failure of any one particular technology. You don't have to make a bet that this kind of connector or this kind of hard drive is going to win out over time, or the software is going to win out over time. Their services model allows them to adapt to the technological change.

So I think he saw a company with a wide economic moat. He called it a "great American company" that produces a lot of cash, and he thought it looked attractive, and he jumped in. So even though it's a tech company, it still has a lot of the fingerprints or a lot of the imprints of things that Warren Buffett really looks for when he is going to invest.

Stipp: In retail, Jeremy, apparently, you were spending less money at Abercrombie & Fitch, or at least shoppers weren't opening their wallets quite as widely. They had a rough quarter. What's the story there? Is it an anomaly or is it something that we're seeing across retail?

Glaser: Abercrombie is an interesting company. It's one that I look at, not because it's such a huge retailer or that it's really going to have a big impact on the broader economy, because I think it really targets a lot of discretionary spending that can kind of show you maybe the mindset of a lot of consumers. Parents aren't going to give their kids money to buy pretty expensive jeans and pretty expensive sweatshirts if they are feeling really tight. So I think, in that sense, it can be an interesting indicator.

And you're right that this quarter was not great for them. They had lower prices in order to get people into the door. They saw their commodity costs really were going up pretty quickly, which just killed their margins, which killed the stock as investors really weren't expecting profitability to fall that much, and it shows you those kind of discretionary purchases really are a bit under pressure, certainly for Abercrombie.

It's difficult to generalize that across the entire retail industry. We got sales from a bunch of other retailers that didn't look quite as dire and were able to keep their margins looking a little bit loftier, but I think it just shows that even though we see good consumer spending, we see people out there making purchases, the consumer is not 100% healthy in some of these really discretionary items. They might still be things that people aren't interested in buying.

Stipp: Well, Jeremy, one thing that's not dropping is the quality of your commentary on the Friday Five. Thanks for joining me again this week.

Glaser: You're quite welcome, Jason.

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