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Who's Checking Out?

Fri, 18 May 2012

Some high-profile exits in international and corporate news are worth checking into, says Morningstar markets editor Jeremy Glaser.

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Video Transcript

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

Morningstar markets editor Jeremy Glaser is checking in on who is checking out in the market this week. He is here to offer the details.

Jeremy, thanks for joining me.

Jeremy Glaser: Jason, thanks for having me.

Stipp: What do you have for The Friday Five this week?

Glaser: Well this week we're going to talk about Greece, Wal-Mart, J.P. Morgan, Avon, and finally Yahoo!

Stipp: Greece has been causing the market fits all week and even before this week, obviously. The big question is whether they will be able to stay in the eurozone or they will have to check out. What's your take?

Glaser: This week a lot of the conversation seems to have shifted from, will Greece be able to stay in the euro to when are they going to leave the euro and how exactly is it going to happen?

I think that it's a really interesting question. I think one of the things that we've talked about before is that it can be a bit of a self-fulfilling prophecy: If people in Greece believe that they are going to be leaving the euro, and that the drachma is going to be reintroduced, and that it's going to be massively devalued against the euro, there is a lot of incentive to move your deposits out of Greek banks into German banks, into other safer euro-denominated accounts in order to keep your purchase power parity up. And I think we're starting to see that happen. There are reports of pretty massive bank runs out of Greece, in the magnitude of almost $1 billion a day leaving some of the Greek banks, and that really weakens these already weak institutions, and I think it just makes it more likely that Greece won't be able to sustain its current path, and that almost no matter what happens with the government, no matter what happens with these new elections, that Greece will end up getting forced out of the single currency.

So this is going to be something that could happen very quickly. I think that investors just need to be aware of that kind of tail possibility. No one knows exactly what the impact will be on the market. I think it could be quite substantial, and I think it's a story that we're going to be following very closely.

Stipp: Certainly early in the week Greece was overshadowing every other piece of news, but we did get some corporate news out of Wal-Mart that showed lots of folks are checking out at their cash registers. What's the story?

<TRANSCRIPT>

Glaser: Wal-Mart had a good quarter. Their earnings were up 10%, and same-store sales growth looked good in the United States, growth looked good outside of the United States. Really the company is starting to do very well, even though their consumers are under a lot of pressure with higher gas prices, with stagnant wages and particularly for non-college educated workers. It's really been challenging for them, but they are starting to turn that around. They are starting to see their growth come back, and they are really seeing some good fundamental growth. We found out that Warren Buffett continues to be buying more of the company in a filing that we got from Berkshire Hathaway this week.

So, I think certainly they have a lot fundamentally going well for them, but of course there are also some dark clouds over Walmart right now, and particularly the allegations of bribery in Mexico. The New York Times wrote an exposé a couple of weeks ago that Wal-Mart had spent a ton of money to get permits and to get other sorts of things expedited so that they were able to grow very quickly in Mexico, were able to get that scale, were able to really boost their sales there. It was really seen as a big success story for the company.

I think that even though we still hear management talking about how they are really trying to strengthen their anticorruption practices, that they are really going to go after the people who are responsible for this, I still think that we could see some fines down the road. There is going to be more legal scrutiny. I think there is going to be a lot more bad news coming out about these allegations over the coming months, over the coming years, even.

So I think the fundamental strengths of the business are definitely improving; I don't think the scandal takes away their great scale, takes away their moat, but it's something investors are going to be keeping an eye on.

Stipp: Speaking of dark clouds, there is a big $2 billion-plus dark cloud over J.P. Morgan after the trading loss they disclosed last week. Some executives who were involved with that trading scandal have stepped away and checked out of the company. Now what's the story?

Glaser: They're out of there, but I don't think the story is going to go away. I think Jamie Dimon maybe had hoped that after he had his hastily arranged conference call and apologized and said that they were going to make changes so that this sort of thing could never happen again, that that would be the end of the story, and it just isn't.

I think that this is too big of a loss from what was a so-called hedging operation. It sure looked a lot like more of a naked bet on what was going to happen in the market to lose that much. I think it's going to be a big story. I think it brings into question the fact that J.P. Morgan certainly was touted for a long time as being really the best at risk management, that they were the ones who did not just rely on models. That they really tried to have those risk managers, and Jamie Dimon in particular, really thought about mitigating exposures to these kind of losses.

I think it also brings financial regulation into the spotlight again. Certainly, we talk a lot about the Volcker Rule, that you shouldn't be able to trade with those federally deposited funds and make these kinds of bets. This trade probably did not violate the letter of the law, but I think certainly it violated the spirit of those regulations, and I think we are going to be hearing a lot of from Congress, and we're already hearing a lot from Congress, [about] investigations into this sort of behavior, and it could even increase the regulatory burden on some of these big banks after this trade. So, I think this is a big story. I think it's one that's not going away no matter how many these executives check out of that office.

Stipp: Coty checking out of its offer for Avon early in the week. How much pressure does this put on a standalone Avon now?

Glaser: Avon was already under a tremendous amount of pressure to turn around. I think it's just going to be even worse.

When you walk away from a takeover bid, I think you're really saying to your shareholders that we think we can do better as a standalone company. And I think shareholders are going to expect to see that promise delivered on.

I think when you have a very new CEO who is still getting her feet wet--she's really only been there for a few weeks--with a lot of things that you need to turn around and a lot of ways that you need to make that business work again. It's going to be a big challenge.

Our analyst, Erin Lash, who covers the company thinks that it still has some great competitive advantages. It really has a brand name that, although there might be some damage, it's still well respected. Their entrepreneurial model really works well in a lot of developing countries and can certainly grow, but that they actually need to execute on that plan, which is something they have had a lot of trouble doing, and a lot of trouble really making it work.

So I think that Avon is going to be just under incredible pressure to really turn things around in the near term.

Stipp: Lastly Jeremy, Scott Thompson checking out as CEO of Yahoo after some revelations on his resume. What's the story for Yahoo now? It just throws them into even more uncertainty?

Glaser: Well, this certainly is a good lesson that if anyone thinks of padding their resume or maybe adding a degree that they don't have, it's probably not a good idea, because someone somewhere is going to figure that out, and it's going to cause some big problems for you.

It really was really surprising how long the Yahoo board kind of dragged their feet on this--that they really were setting up some kind of investigative committees and said they were going to look into it, but they really were sticking behind Thompson for quite some time, and I think finally their patience just kind of ran out. I think they realized that their position just wasn't tenable, ... he wasn't going to be able to effectively lead the company--and that's really what they need: a very effective leader.

Yahoo has been kind of adrift for quite some time. They've just been trying strategy-to-strategy. They have been trying to figure out ways to really unlock some of the value that they have. There are tons of people who are visiting Yahoo every day, but they haven't really been able to figure out recently how to turn that into growing earnings, or how to turn that into a company that's going to produce good results for shareholders.

I think they're going to need to find a leader who is able to really turn that core ad business around and really compete effectively against behemoths like Google, and until that happens, I think there is going to be a lot of skepticism around Yahoo.

Stipp: Well, Jeremy, you'll never find me checking out during The Friday Five. Thanks for joining me again this week.

Glaser: You're very welcome, Jason.

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

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