Thu, 14 Jun 2012
The market was a selective shopper this week, latching onto the notion of more stimulus, but hesitating to buy into the Spanish bank bailout and cutbacks at Nokia.
Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.
A lot of stories were on sale in the market this week, but the question is, are you buying it?
Here to give his take is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: Jason, glad to be here.
Stipp: So, what do you have for The Friday Five this week?
Glaser: This week we're going to talk about Nokia, Apple, the Federal Reserve, the Spanish bank bailout, and finally Jamie Dimon.
Stipp: This week, Jeremy, Nokia announced some cutbacks. Their business is continuing to struggle. The market didn't seem to be buying that this was actually going to help Nokia in the end. What's your take?
Glaser: I don't think anyone is really buying this right now. Nokia said they are going to lay off about 10,000 workers and have some other cost-saving measures, like shutting some plants down, in an effort to really try to refocus the business and double down on trying to create smartphones that people actually want to buy.
But I don't think that trying to shrink their way to growth is really something that's going to be particularly useful for Nokia. I think that the market is looking for them to come out with some breakthrough products, to come out with products that people are going to actually push aside their iPhones for, push aside their Android devices for, and really be interested [in buying]--whether it be a Windows phone device or some other operating system that Nokia might want to work with.
So, I think that it's a good thing that they are trying to right-size their workforce, that they are trying to get their costs under control, but until they can get revenues looking up again and get excitement around their products again, they're in for a long struggle.
Stipp: It's not a stretch to say that a primary source of Nokia's pain has been Apple and their lead in the smartphone market. They released iOS 6, their new operating system for the iPhone, this week. The big question is, are you buying that this will keep them in the lead?
Glaser: By itself, it's not going to.
iOS 6 is going to be a very evolutionary product. Instead of coming up with big breakthrough features--things that people have never seen before and are really going to wow you--it really just makes what already is on the iPhone just a little bit better, and just improves things on the margins.
I think that for Apple, the real question is, how much longer can they go with these evolutionary changes to the iPhone--so the relatively small changes from the iPhone 4 to the iPhone 4S and the relatively small change to this software--before they really lose their lead, before people really stop thinking of it as the cutting-edge product, and start looking at the Android devices as the ones that are really on the bleeding edge of where the technology can go.
I think with [Apple's] network effect with their app store and with their installed base, it's not going to fall off the cliff overnight or anything, but a lot of Apple watchers are going to be closely seeing how they are able to manage continuing this growth with evolutionary versus revolutionary change.
Stipp: Jeremy, recently in the market we've seen that poor economic data, or at least lackluster economic data, here in the U.S. has combined with continued concerns over in Europe, and people now think that the Fed is going to be stepping in to act, which is fanning the flames of more stimulus. Are you buying that story though?
Glaser: Well, I think the market is certainly buying it.
Recently the Fed has been saying, "We're ready to act if the economy continues to weaken. We have other monetary tools in our toolbox. We'll go ahead and do another round of quantitative easing. We can do another Twist operation. We can find ways to bring rates even lower than they are right now." Certainly, the Fed has pointed to Congress and said, we need fiscal policy, too. But they are ready with monetary stimulus.
And some of the data we saw this week is going to make it easier for the Fed to act. We saw initial unemployment claims tick up again, and some data was revised upwards. I think that makes it easier to say that employment isn't really improving like we think it should be, and maybe that stimulus is needed.
And inflation looks very subdued. Falling gas prices have been a big reason that the consumer price index seems to be not increasing very rapidly or even decreasing, but even when you exclude those more volatile prices, that core index isn't increasing very quickly right now, either. I think that really makes it easier for the Fed to act without worrying about runaway inflation, which obviously is a potential threat from any of these actions.
So, I think when you combine that, I think the market takes a look at that, and probably correctly senses that the Fed is more likely to act. Does that mean it's going to happen right away? Does that mean we know exactly what form it will take or when it will [happen]? No, absolutely not. But I think the market is pricing in another round of monetary stimulus.
Stipp: Last weekend a bank bailout in Spain began to come together. On Monday it looked like the market might buy it at first, but it really trailed off very quickly, and it seemed that as the details of this bank bailout became more apparent, people really weren't buying that it was going to be a solution over there. What's your take?
Glaser: This certainly was not a very long-lived solution for the Spanish bank crisis.
The idea was basically that the European Union, through some of their stability mechanisms, would be able to funnel money through Spain, which could then funnel money into the banks, and that was going to really help prop up the banking sector without making Spanish debt kind of explode and take up an even larger percentage of Spanish GDP.
But I think the market just isn't very satisfied with this answer. I think they see that it still presents a lot of the same problems that we've been having in Europe, and it doesn't really solve a lot of the fundamental issues about how they are going to get past the sovereign debt crisis and how they are going to get enough stability in the marketplace to stop the bank runs and to get people to really feel much more stable in the currency and to keep the euro together.
It seems that Europe keeps coming up with these solutions that buy it a little bit of time, but it seems like every solution is buying less and less time, which just highlights the urgency of a lot of these European institutions to come up with a more final and permanent solution instead of these band-aid approaches that they've had so far.
Stipp: Head of J.P. Morgan Jamie Dimon headed to Washington, D.C., to sit in front of policymakers and answer for some of the issues that were going on in the London Office and some of the losses that the bank faced. Is anybody buying his explanation?
Glaser: Well, I think Congress did.
Almost all of the senators were relatively soft with their questioning of Jamie Dimon. I think anyone who was hoping for some explosive questions or some fireworks when he sat down in front of that committee was sorely disappointed.
He said that he was sorry for what happened, and I think that they took responsibility for it, but he said that it didn't strike him as something that was systematic risk. He didn't think that more regulations were the answer, or that you'd be able to even craft regulations that could stop something like this from happening again.
It really just highlights that there still are these risks out in the financial marketplace and that even with Dodd-Frank, even with new versions of these regulations, it doesn't exactly derisk the system. It's still important for banks to hold lots of capital [and] to try to have good internal risk management in order to really try to stop a lot of these things from happening.
So, I think that certainly Congress was buying his argument.
Stipp: Jeremy, I'm always a buyer of your news and analysis on The Friday Five. Thanks for joining me again this week.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.