Thu, 12 Jul 2012
Morningstar markets editor Jeremy Glaser digs into divergent views on stimulus, Europe's way forward, in the media market, and more.
Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.
Bulls and bears aren't the only ones feuding in the market recently. Morningstar markets editor Jeremy Glaser is here with the scorecard.
Jeremy, thanks for joining me.
Jeremy Glaser: Always glad to be here, Jason.
Stipp: So, what do you have for The Friday Five this week.
Glaser: We're going to talk about the Fed, Europe, WellPoint, DirecTV, and finally Marriott.
Stipp: We got some insight into the recent Fed meeting and where the governors stand with respect to further stimulus this week. There is not complete agreement there.
Glaser: As the minutes came out, we saw that there is a little bit of a feud going on inside the Federal Reserve right now among those who think that the current economic weakness, or perceived weakness, is really just a temporary issue and that growth is going to continue and that more monetary stimulus is not necessary or would even be helpful. And there is another group that really thinks this is more of a permanent problem and that we're going to need to have another round of quantitative easing or other exceptional measures in order to get the economy moving again.
Right now, they just take a wait-and-see approach. They extended operation twist, which was expected. It's not going to have an enormous impact. And the idea is that if the economy continues to go down, certainly they will be ready to be there with new measures, but it doesn't seem like anything is imminently happening. I think the answer to this feud and who wins this feud is going to have an enormous impact on the markets, depending on how it moves the Fed to act.
Stipp: The domestic economy, obviously, is a point of discussion among of a lot of market watchers, but the European economy is also creating quite a bit of disagreement and feuds over there: What kind of reform should we do? How quickly should we do it?
What's your take on the outcome of these feuds?
Glaser: Well, feuds are definitely nothing new in Europe. In the last couple of years and couple of months, they have tried to really stem the sovereign debt crisis. We've just seen a lot of competing interests. We always seem to muddle through and kick the can just a little bit further down [the road]. Sometimes the plan keeps the markets satisfied for few weeks. Most recently, it's been for a few days or even a few hours as Europe tries to come together with a plan that's actually going to be useful.
I think we saw this week a couple different feuds with the idea of, is Spain going to implement more austerity measures or should they be focused on growth? With what's the best way to have a Spanish bank bailout? ... Who should have to take losses, if they have to take these [bailout] funds?
I think as we see all these different feuds, they come down in kind of two big camps: The first is those who really think that reform is the absolute, most tantamount thing--that instead of worrying about getting the money right away, it really needs to be contingent on huge structural reforms that could take some time and could be extremely unpopular, but that those have to be implemented in order for that money to be released.
And there are those who are more concerned about expediency, who want to see more growth right now, who want to just get the banking system back up on its feet, and they'll worry about those reforms later on.
So, everyone agrees there needs to be reforms. Everyone agrees that there needs to be some of this bailout money spent, but the challenge is exactly what order should it happen and how fast both of those things should happen. I think that that's the tension that's really going to drive the crisis in the coming weeks, the coming months, and the coming years as they try to build this fiscal union.
Stipp: Back here in the U.S., pundits are still feuding about the recent Supreme Court decision over health care, but meanwhile, health-care companies are moving forward with their business plans. We got some news on that front this week.
Glaser: Managed-care organization WellPoint decided to move forward now that health-care reform is the law of the land, and they bought Amerigroup, which is another managed-care company, for about $4.9 billion. What's interesting about this deal is that Amerigroup really specializes in Medicaid plans. So, Medicaid is an area that's going to see a pretty big expansion. Even though the Supreme Court is allowing states to opt out of the Medicaid expansion, we believe that most states will end up taking the money eventually, and there will be a lot of new consumers in this plan. It's one of the primary ways that the bill tries to reduce the number of people who don't have insurance.
Our analysts think that this deal actually makes a lot of sense for WellPoint, mainly because it will help bring down some administrative costs. Medicaid is a state-run program. You have 50 different Medicaid programs, and it can be difficult to keep track of all those different regulations and different requirements, and I think certainly by having this bigger scale, WellPoint should be able to eke a little bit more profitability out of these new customers. We also think that WellPoint remains pretty attractively valued right now, and our analyst Matt Coffina has it as a 5-star stock.
Stipp: Lots of kids across the country going through SpongeBob withdrawal recently because of a high-profile media feud. What's going on with that?
Glaser: DirecTV lost SpongeBob and The Daily Show recently due to a spat with Viacom over re-transmission fees. I think this is just a one battle in what's been a very long war between those that control the distribution networks into homes and the content providers. And I think it's one that is not going to be resolved anytime soon.
As the Internet really opens up the way that people can get information and can get programs into their homes, the traditional cable model, traditional satellite-TV model, is really under a ton of pressure, and they don't want to have to pass along the huge cost increases for carrying the channels. But the channels know that without the content, no one is going to pay for cable just to see infomercials all day or to see channels that they're not particularly interested in.
So, we saw Comcast dealt with this by buying NBC Universal. They figured, we'll just get into the content game; maybe that's the way to help. DirecTV is trying to push back publicly by saying, no, they are not going to increase the prices and try to get consumers to maybe put the pressure on Viacom to allow them to get those shows. So, we'll have to see how all of this works out, but I think that's a feud that even when this battle is done will be going on for probably years as the two sides really try to figure out their places in the modern ecosystem.
Stipp: Some families may be feuding about staycation versus vacation this summer. What's the implication for companies in the travel and leisure business?
Glaser: It seems like more people are choosing vacation recently. Marriott reported fairly good earnings this week. I think one of the things that they pointed out was that North America is pretty strong, both in the leisure and business side. People are going out there. They are traveling. They are staying in hotels. I think that is certainly a good sign for the travel industry in the U.S., but also it shows that the U.S consumer hasn't completely disappeared.
When we think about the economy slowing down a little bit, one of the fears is that consumer spending will drop a cliff. People will again just really stay close to home and really try to treasure every single dollar without spending it. The fact that people are traveling certainly is a sign that there is some consumer confidence still left in the market.
Marriott did say that internationally the results are a lot more mixed. They're seeing trouble in Europe; they are seeing some trouble elsewhere. I think that underscores some of those global growth worries as well.
So, Marriott's results were a mix of good and bad news, but certainly good from a domestic perspective.
Stipp: Jeremy, no feuding about the quality of your report this week. Thanks for joining me.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.