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Friday Five: What Will Weigh on the Fed?

Tame inflation and overseas concerns could stop the Fed from raising rates in September despite signs of stability in the labor market. Plus: Apple's new way of selling iPhones, a new track for United Airlines, and more.

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

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: We got a couple of pieces of data this week relevant to the Fed's upcoming meeting. What's the latest?

Glaser: We had data from the labor department, the JOLTS data, that showed job openings were at an all-time high last month, a sign of labor market strength. We also got the weekly look at initial unemployment claims. Those ticked down, another sign of strength in the labor market.

As the Fed enters their meeting next week, there is not going to be a lot of dispute that the labor market looks reasonably strong after August's decent numbers and some decent numbers before that as well.

What's really going to come up are discussions of inflation--is it high enough where it makes sense to raise rates--and what's happening overseas. Do they consider some of the pleas from the IMF, the World Bank, and others that they shouldn't raise rates right now given what's going on in the rest of world? Do they take any of that into account? Do they think any of it will impact the United States? I think that will be a big part of the discussion.

It still seems very much a tossup. Anyone who tries to put a specific number on it, I think it's just too hard right now. But certainly none of the data we saw this week would dissuade the Fed from thinking the labor market is ready to have the rate increase. It's those other issues that they are really going to be focused on.

Stipp: United Airline's CEO is out after an internal probe. This is an interesting case. What are the details? What does it mean for the airline?

Glaser: CEO Jeff Smisek and two other executives did leave United this week after an internal probe following an ongoing federal investigation about the airline's dealings with the Port Authority of New York and New Jersey.

One of the allegations is that United started a flight to take the chairman of the Port Authority to his vacation home and back in South Carolina, even though there wasn't a lot of other demand for that flight to exist. I think we're going to get more details on some of the other things that may have happened in the weeks and months to come.

In terms of what it means for the airline and for investors in the airline, they should look at who has been selected to be the next CEO. Oscar Munoz is a board member at United right now. He also was the president and COO of CSX, the railroad. It's interesting to think about Munoz bringing some of the lessons that the railroads have learned over the last couple of decades and if that's going to make sense and translate into the airline industry.

Keith Schoonmaker, who covers transportation for us, sees the railroad industry as becoming much more consistently profitable over time now that they've been able to tame the boom and bust cycle that they were in for so long.

We see the airline industry trying to do the same thing by being more disciplined with capacity, by going through some mergers in order to get better pricing in the marketplace to keep them more consistently profitable.

So Munoz is an interesting choice. It will be interesting to see if he can bring some of those lessons to United. Still it's a tall order. United has lagged operationally and financially some of its peers. There is a lot of work to be done. They still don't have labor contracts for all of their major groups. They will have to work on that.

There's still work to be done, but it will be interesting to see if those lessons from railroads translate.

Stipp: Apple had their big new-product reveal this week. What does our Apple analyst have to say in the wake of that?

Glaser: Our Apple analyst Brian Colello was pretty impressed by the new iPhones, iPads, and Apple TV that Apple announced this week. He said it's another sign that Apple continues to innovate, they're continuing to be able to attract new customers and get them into the ecosystem, which is important for Apple's long-term profitability and competitive advantages.

One of the interesting things that they announced was that they are going to start selling the phone directly to consumers on a monthly installment plan. This is a reaction to some of the changes in the way that carriers in the U.S. are pricing phones and plans, which has led some consumers to wait a little bit longer between upgrades. This plan is trying to get people back on, if not an every-year upgrade, an every other year upgrade. The new plan does let you upgrade the phone every year, something that they are hoping drives more phone purchases, drives more loyalty, and is little bit higher margin because they are selling it directly as opposed to through one of their partners. We don't know if this is going to be a success yet. Chances are we'll start off relatively slow, but it is an interesting thing to watch.

Overall, Brian Colello still thinks that Apple is an attractively priced stock right now. It's in 4-star territory and definitely is worth a look.

Stipp: AGE acquisition cleared regulators this week and also marks a milestone for the industrial giant. What is the latest on that?

Glaser: GE got the clearance from both the EU and U.S. regulators to buy Alstom's energy business with only one relatively small divestiture that they will have to do to get this deal done.

Barbara Noverini, who covers GE for Morningstar, thinks this is a milestone as GE moves to be focused on their wide-moat industrial businesses and not be so concerned about some of these other areas that had become a big part of the business over time.

She thinks this deal does help increase the moat and that it makes sense with a lot of GE's other businesses, but the integration is not going to be easy. There will probably be some low-hanging fruit GE can pick in the beginning, but in order to get the full synergies, in order to really achieve the full results, it's going to take management's attention for some time, and it could be somewhat bumpy along the road.

GE is trading in 4-star territory right now. It does look attractively priced. And if you think management is able to pull off this integration over time, it could be an interesting name to take a closer look at right now.

Stipp: Some deals this week were fizzing in the beer industry. What's happening there?

Glaser: A few strategic investments happened in the alcoholic beverage industry this week. Phil Gorham, who covers the space for Morningstar, thinks this is indicative of some of the competitive pressures that a lot of these companies are feeling and how they are responding to it.

This week Diageo said they want to increase their stake in Guinness Nigeria in order to have more direct control over a major emerging market for them. We also had Heineken take a 50% stake in Lagunitas, which is a craft brewer here in the United States.

Diageo sees beer as an important part of their emerging-markets strategy. They obviously are a big spirits business as well, but see they need to have beer, too. That's where the volume growth is going to be in emerging markets, and it's important for them to have that control. That's why they want to make that deal happen.

For Heineken, they have resisted getting into the craft space, but with all the growth happening there in the U.S., they feel like they have to start making some of these acquisitions. They are playing catchup to Anheuser-Busch InBev and others who have been more aggressively pursuing some of these craft deals for some time. This is a shift in strategy for them as they respond to those pressures.

In terms of valuations, none of these deals are big enough to really move the needle, but Phil still thinks that Diageo is probably the most attractive name in the space right now--one of the most attractive names in consumer staples altogether--and another one that might be worth a closer look.

Stipp: Here's to another great week of market analysis, Jeremy. Thanks for joining me.

Glaser: Thanks, Jason.

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

Jason Stipp does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.