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Making Room

Fri, 17 Aug 2012

Google and Berkshire made room for new strategies, while others got some room to maneuver this week, reports 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.

Deals and news flow this week show company executives and others making room in their strategies for new things.

Here to offer a rundown is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: Jason, I always have room for The Friday Five.

Stipp: So who's making room in the market this week?

Glaser: Well, this week we are going to talk about Google, Standard Chartered, Europe, Staples, and finally Berkshire Hathaway.

Stipp: So Google had a deal that was interesting and maybe continues a trend of something we saw from them earlier regarding how they are thinking about content. What's the significance of that?

Glaser: After Google had picked up the Zagat guides earlier, they announced this week that they are going to buy Frommer's from John Wiley & Sons. This is the travel guide that people are probably familiar with, the print guides. They really want to bring a lot of that content online and probably into their local search product.

This is a little bit different from what we are seeing from other companies that are doing say, crowd-sourced reviews--you have TripAdvisor people writing reviews of different places or even Google's own Google+ trying to get people to share more things socially.

I think [this deal] is an admission that that kind of content can only go so far, and that sometimes you do need that editorial voice, you need that editorial content to kind of differentiate what Google can give you, and why you should go to Google Maps versus going to another service.

Certainly this is not an earth-shattering move for Google. It's not one that's going to alter the course of the company in any way, but I think it just shows how they are thinking about those incremental improvements to their product and how to really stay on top, particularly in the local search game that's just becoming ever so important.

Stipp: Standard Chartered dealing with a lot of negative headlines recently. Are they finding any room to maneuver?

<TRANSCRIPT>

Glaser: This has really been an incredible one. They went from indignation to resignation in just a few days. They were accused by regulators in New York, and they are a U.K.-based bank, of funneling some transactions to Iran that were against the sanctions that are put against that country.

At first when these accusations were made, the bank was very firm that it was an incredibly small number, that they really were within the bounds of the law, and that they were going to fight this very aggressively; they were even considering some lawsuits against the regulators. But the market was not very pleased with this. The stock sold off a lot. They were potentially going to be able to lose their license in New York, which could've been a major negative for the company.

So this week they acquiesced; they agreed to pay a $340 million fine to kind of clear these charges. I think probably it was more of a pragmatic decision than it has to do with an admission of guilt, admission they did something wrong. But it just shows you how that dance between the regulators and the banks continues to evolve and how, particularly in that financial sector, the global community is still trying to figure out how to get that regulatory balance right. Particularly after the financial crisis, particularly as we look to the European sovereign debt crisis, I think the difference between what the regulators want and what the banks want is going to be a tension that we are going to be hearing about a lot.

Stipp: We got some data on European growth this week, and it wasn't Armageddon. Do policymakers now have more room to maneuver as they deal with the crisis?

Glaser: It wasn't Armageddon, but certainly wasn't good news, either. Europe is sliding into recession, which shouldn't be a huge shock given all of the uncertainty created by the sovereign debt crisis and some of the austerity measures that are being pushed in. GDP was down 0.2% from last quarter and is down 0.4% year-over-year.

But the bright spot was that Germany is continuing to grow, albeit very slowly, and France was about flat. There was a lot of worry that France, too, was going to fall into that negative territory.

So I think this, along with accounts that the ECB ... will continue to support the euro, continues to create that space that's needed to do the hard work that needs to be done to get Europe back on track. But if the growth continues to decline from here, if the recession deepens, it's just going to make everything that much more challenging, and I think certainly this isn't a report that is going to be sending cheers throughout European capitals.

Stipp: Over here in U.S., office-supply superstore Staples reported results that seem to indicate that lots of businesses aren't making room for office supplies in their budgets. How bad were their numbers?

Glaser: This is true particularly in Europe for them. They saw international sales, which include Australia and Europe, down 18%. Now it's a little bit less when you strip out some of the currency movements--about 10%--but it's still a pretty big decline for them. Now, granted international is not necessarily their strongest suit generally, but I think the magnitude of this decline--and we've seen from a bunch of different businesses that they are seeing a lot of weakness in Europe--I think it just highlights how difficult the situation is.

As we talked about just a moment ago, European businesses are feeling very uncertain about what the future is going to bring, and that's manifesting itself across a bunch of different companies both domiciled in Europe but also elsewhere--that they are not willing to spend. They don't want to make those incremental investments they need, even on things as basic as office supplies.

This sunk Staples' stock. Management I think is really going to have to make a concerted effort to convince people they have an international strategy, and that they will be able to turn those numbers around in the relative short term. But I think even more important than the impact on just Staples is that it shows you just how nervous the European business community is right now.

Stipp: Lastly, Jeremy, Berkshire Hathaway released its 13-F report this week. This details the investments at Berkshire Hathaway. Some interesting insights about making room for new guys at Berkshire Hathaway who are making investments for the company

Glaser: It's certainly always fun to see what Berkshire, and particularly Warren Buffett, is up to, and he is giving more and more room to Todd Combs and Ted Weschler to really start managing bigger and bigger portfolios. It looks like they have about $4 billion now, so they keep getting more and more responsibility, and it's interesting to see what they are doing with it.

I think that for the most part, they have very similar investment criteria to Warren Buffett; that's why he hired them to manage his portfolio. They are looking for those long-term competitive advantages, they are looking for things that are really cheap.  But their circle of competence is slightly different. They are looking at different types of companies, and they might even have different ideas about holding periods.

One of the most interesting stories out of this report was that they have sold out of Intel. This was a company they only started buying in the third quarter of last year, and the fact that they are willing to turn that around so quickly and capture those gains so quickly is something that you just wouldn't see from Buffett. So I think that's a sign of things that could change.

But as always with Berkshire, as much as things change, they seem to always stay the same, and we saw that with Buffett continuing to put money into Wells Fargo. Our analyst on Berkshire, Gregg Warren, described [Wells Fargo] as [Buffett's] go-to stock, that when he has some money to put into play, he looks at Wells Fargo. I think Warren still thinks that the housing recovery is going to be right around the corner, that Wells Fargo is going to benefit greatly from that, that they are going to be able to use that great franchise power they have to continue to build earnings and continue to make shareholders happy in that stock. So watching him put a bunch of money into [Wells Fargo] certainly shows that as much as he's giving some power away, he still has control of the reins for as long as he can handle it.

Stipp: I'm sure shareholders will be happy for that.

Jeremy we'll always make room for you on The Friday Five, and your keen insights on the market. Thanks for joining me

Glaser: Thanks, Jason

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

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