Thu, 4 Oct 2012
Policymakers and corporate leaders arrived at decision points this week.
Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.
Will they or won't they?
Policymakers and corporate leaders are at decision points this week. Here to offer some insights on whether they will go ahead with plans or maybe hold back 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 for this week?
Glaser: Today, we are going to talk about Spain, the fiscal cliff, HP, T-Mobile and PCS, and finally, Best Buy.
Stipp: So, Jeremy, the big question in international news this week was over Spain and some of the questions were, will they or won’t they need a bailout. But I think the real question is probably when they will need that bailout. What’s your take on the latest there?
Glaser: I think it’s absolutely the right question. Spain is going to need a bailout. Their financing problems right now with their yields being so high on their debt and with their budget deficit, although they are trying to get it smaller, still existing, it’s not going to be that easy for them to turn around without the help of the rest of the European community.
But the question is, when are they going to do it? Right now, it seems like Spain is playing a bit of a dangerous game in trying to delay taking the bailout funds as long as possible. So, even though there were some rumors this week that they were going to ask for those funds this weekend, very quickly both the prime minister and the finance minister of Spain came out and said, there is no imminent need to ask for the bailout money, they might not need the bailout money at all, and were very forceful in their statements about this.
It’s a big question about why they are putting this off so much. It could they are trying to appease some domestic political actors, and make it seem like they have exhausted every possible option before taking the harsh conditions of the European money--obviously, [a bailout] comes with strings attached. Maybe they really think that they can turn it around, and they want to just give themselves the space to do that before signing on the dotted line for getting the cash.
But either way, the truth is that they are going to need this money, particularly because getting this money is the condition that they need to satisfy for the European Central Bank to start buying the unlimited quantities of Spanish bonds to bring those financing costs down. And if their financing costs don’t come down … from that range a little bit below 6% where they have been at recently, it’s going to be too expensive for them to refinance, and they are going to find themselves in a pretty tricky situation. So, certainly they are going to need to do that sooner rather later, and it’s a big question as to why they haven't yet.
Stipp: Unfortunately Spain doesn't have a monopoly on fiscal issues. Here in the U.S. we are coming up upon the so-called fiscal cliff at the beginning of the year. At the ETF Invest Conference http://news.morningstar.com/articlenet/article.aspx?id=569319 here in Chicago, experts are talking about the likelihood that we may or may not go over that cliff.
What's the latest thinking?
Glaser: This has been a huge topic of conversation throughout the entire conference. It seems like one of the biggest threats to U.S. growth is the fiscal cliff. When you have the tax increases that could be coming along with those spending cuts, it really could be a big drag on growth, and when we are only growing about 2% as it is, that could be really something that pulls the United States back into potentially another recession.
But exactly what's going to happen, no one really knows. Liz Ann Sonders from Charles Schwab really thought that it's unlikely that the entire fiscal cliff will be felt, and that depending on exactly which way the elections go, some sort of deal will be cut and maybe half of it will be muted if not all of it will be taken care of, and that it's not something that investors should be keeping themselves up at night worrying about.
But Russ Koesterich from iShares looks at it a little bit differently. He thinks that it's possible that a last-minute deal could come through, but there is also a strong possibility that government will do nothing. That trying to fix all these issues in just a few months in that lame-duck session is something that is going to be easier said than done, and that it's possible that we could fall over January 1. Now maybe we go back and retroactively fix it, but a lot of the damage will already be done in terms of businesses choosing not to invest, holding back and waiting for the uncertainty to end.
So, certainly the fiscal cliff remains really a key tension point. I think it's one that we really need to keep our eyes on.
Stipp: In corporate news, HP in the spotlight under Meg Whitman. Will they or won't they see any kind of turnaround in the near future?
Glaser: Well, according to Meg Whitman, the answer is no. She gave an investor presentation this week where she said that they expect really broad declines across their entire business until 2015, which is what she described as the year that they'll start to see acceleration.
I think it just highlights the number of challenges that HP faces right now. They are going to need to make some big decisions about, how do they want to interact with the consumers, do they want to have their own phone offering, do they want to have consumer tablets, consumer PCs, is that an area that they want to play in and emphasize the design and try to compete against Apple and others in that space? Do they want to focus on being more of a services company and servicing enterprises? Do they want to think about server hardware? Exactly what parts of the businesses do they want to focus on? The printers and imaging, obviously, is a big part of their business as well. Where are their strengths, where do they want to invest, and where is their growth in the future?
They've had a couple of years now of just not having a really firm strategy, going through a number of different management teams, having turmoil in the boardroom, and I think that Meg Whitman is absolutely right that it's going to take a long time to fix these problems. The question is, will investors be able to stick around for that long, will they have the patience to wait to see if she can right the ship, and give her the time to right the ship, or if her clock will run out before they are really able to get HP back in fighting form again.
Stipp: In telecom corporate news, T-Mobile and MetroPCS in a deal this week to merge. The question is, will they be dancing alone or is there going to be a third-party?
Glaser: This is an interesting deal. Deutsche Telekom, which is the parent of T-Mobile, has been looking for something to do with T-Mobile for some time. T-Mobile is in that awkward fourth space in the U.S. mobile market. They don't really have enough spectrum, they don't really have enough scale to get the profitability that the key players, AT&T and Verizon Wireless, really have.
And they tried to merge the AT&T; the regulators scuttled that deal. So here they decided that they're going to pick up MetroPCS, which is a smaller carrier. They will still be the number four, but they will be the number four with a little bit more scale. They'll move into the fast-growing prepaid market for consumers who don't want to be on a contract for whatever reason. And I think certainly you can see the deal makes sense from that standpoint. I think there could be a lot of synergies. Our analyst Imari Love, who covers MetroPCS, certainly sees a lot of synergies there.
But the real question, as you mentioned, is, will Sprint also get into this bidding. It's been rumored for a long time that Sprint has been circling MetroPCS. Apparently they were prepared to make an offer earlier before Sprint's board decided that the price was just too rich. We haven't heard much from them yet. So I think certainly it’s possible that this deal is not quite done yet, and that Sprint will come out with potentially a higher offer and try to tempt MetroPCS shareholders into their camp. For the same reason that T-Mobile needs that scale, Sprint also certainly needs those new customers, and needs that new spectrum in order to be competitive over the long term.
I think this is a corporate saga whose end has not quite come.
Stipp: The former Best Buy CEO and founder is stepping up his efforts again to take that company private. The question is, will he or won't he be successful, and will it be successful for Best Buy as a company?
Glaser: I think those definitely are the two pertinent questions. In terms of getting the deal done, he is shopping around with a couple of different private equity funds to see if they are interested in investing, but it could still be challenging to get together the amount of financing they'll need to take Best Buy public. It’ll be one of the larger buyouts we have seen in a while. Our analyst RJ Hottovy, who covers Best Buy, thinks that could be the real big hang-up--that they'll really have to offer a pretty substantial sum in order to get the current shareholders to agree to the buyout, and it could be difficult to get that deal together.
Now if the deal is actually a good idea or not, I think that he definitely should be looking at that extended warranty before he goes in and tries to take over his baby again, and try to nurse it back to health, which is what he wants to do.
Best Buy is facing a lot of headwinds. People can either buy their electronics at Amazon, particularly media. Wal-Mart has made a very big move into other electronics. Maybe you could buy a TV there versus having to go to Best Buy. It's a business model that is going to see a lot of pressure. And just because you're outside of the focus of the public markets, it might give you a little bit more leeway to invest, it might give you a little bit more leeway to turn things around slowly, but it's not going to be easy. We know that it's something that can work, but just because he had success with it in a different era, it doesn't mean you can have success with it now. So he might be thankful if he doesn't get that financing in the long term.
Stipp: Jeremy, will we or won't we join you again next Friday for The Friday Five? I bet we will. Thanks for joining me this week, though.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.