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5 Resolutions for the Market

Thu, 27 Dec 2012

Morningstar markets editor Jeremy Glaser highlights some must-dos in 2013 for banks, Blackberry devices, frazzled investors, and corporate America's balance sheets.

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Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five. On the cusp of New Year's, we've been thinking about resolutions, and not just for ourselves.

Here to offer five resolutions for the market is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Jason, my pleasure.

Stipp: So who do you have resolutions for this week?

Glaser: We're going to take a look at the big banks, the housing market, Research in Motion, corporate America, and finally a resolution for everyone.

Stipp: Jeremy, you say that in 2013 banks just simply need to stay out of trouble. What do you mean by that?

Glaser: The big banks' PR departments were working overtime last year. It just seemed like we were lurching from scandal to scandal. Everything from J.P. Morgan's alleged "whale" losses, to the LIBOR fixing scandal, to even more allegations of mortgage fraud during the housing boom. It just seemed like every day there was a new story involving a big bank or a lot of big banks across the globe that were finding themselves in trouble or still facing some big problems that happened a while ago.

And this is a problem for the sector. They are facing a lot of regulatory scrutiny right now. We're still trying to make the rules post financial crisis: what's it going to look like, how big can the banks be, what do capital ratios need to look like? And if they're seen as continuing to get into a lot of trouble, they're seen as not able to truly police themselves, that increases the likelihood that there will be more restrictive laws put in place, that the regulators are going to take a much firmer hand with some of these larger organizations, and maybe think about cutting them down to size, really restricting what they can do.

This is something I think the big banks don't want. They want to have the freedom, they want to have the flexibility, to not worry about some of those things. I think even from a return standpoint, they need to be focused on their core business and not worried about putting out all these fires.

So I think for next year, staying out of trouble, really keeping their heads down, and looking at that core business is going to be key for the financial-services industry.

Stipp: Jeremy, at long last, 2012 was finally a pretty good year for the housing market. So what needs to be on housing's list of resolutions for 2013?

<TRANSCRIPT>

Glaser: Housing is going to have to get ready for even more attention next year. They might have to gussy themselves up for the spotlight that's going to be shining on this sector.

Like you said, 2012 was a good year. Housing starts looked good, prices were starting to rise and were staying higher, and as our economist Bob Johnson has talked about, next year we are going to see a lot of the housing-related businesses potentially really see an uptick: Things like mortgage refinancing, the mortgage lenders, the home improvement stores, the inputs that go into these housing starts as people really begin to move into these homes, begin to think about moving, and we'll see a lot more action in the housing sector. It's almost a return to normalcy, where, instead of fretting about how the housing market is incredibly weak and is incredibly fragile, we can see it at a more normalized level. It won't be the huge part of the economy that it was before, but that … wasn't sustainable, and we'll be at a much healthier level, and that's a good thing for housing and a good thing for the broader economy.

Stipp: Fading handset-maker Research In Motion has been under pressure for a while now. What needs to be their top resolution priority for 2013?

Glaser: They're at their make or break moment. It's going to come down to BlackBerry 10, their new operating system and hardware that is their hope to be able to relaunch themselves into the smartphone race again.

We've seen this huge decline in terms of shipments, as even loyal BlackBerry customers just haven't seen anything in the current lineup that excites them, that they are willing to go out and pay that upgrade fee for, and pay the money to get their hands on.

BlackBerry 10 is supposed to change that. It's supposed to be a slicker hardware, more modern software that can compete with the likes of Apple and Google's Android system and even Microsoft and Nokia's Windows Phones. It's going to be a difficult battle for them. Certainly, they have their hardcore power users, but will they will be able to convince average consumers, average business users, that they should ditch their other smartphones and take a look at the BlackBerry, and [keep] their current customer base from defecting? It's all going to come down to these first couple of devices, if they work well. If you see a lot of bad reviews, if you see people just not interested in them, they might not get a crack at Blackberry 11, they might not get a crack even at the second-generation of these devices. These really have to be perfect when they come out of Waterloo.

Stipp: Coming out of the 2008 downturn, corporate America actually got in pretty good shape, better balance sheets, got rid of some leverage, became more productive. So what needs to be on their 2013 resolution list?

Glaser: They really need to try not to gain too much weight.

Next year there's going to be a lot of tempting opportunities in the acquisition buffet, in my opinion. We're going to see growth start to slow [in 2013]. I think even in the best scenario, 2013 growth is going to look below trend; it's going to be positive, but it's not going to be incredible. And when you couple that with pretty strong balance sheets and pretty strong cash balances, it's going to be tempting for companies to go and buy those competitors in order to boost growth.

And that might work in the short term, but over time a lot of these transformational acquisitions rarely work out for shareholders. They end up destroying economic value, because companies tend to pay way too much. So even for deals that might make sense at the right price, when you pay $2 for a $1 bill, it's hard to really make that work.

Certainly there are exceptions to this rule, but for the most part corporate America needs to be very cautious when it comes to acquisitions. As they are trying to deal with potentially slower growth, acquisitions may not be the way to go.

Stipp: Lastly, Jeremy, a resolution for all of us investors: bring a seatbelt in 2013.

Glaser: Prepare for volatility … is going to be a huge resolution, a huge thing that everyone is going to need to work on.

We have a lot of big question marks: What's going to happen with the fiscal situation in the United States? Will Europe be able to hold itself together or will there be a renewed crisis in the eurozone? Will there be slowing growth in China and other developing markets? We don't know the answers to those questions, and there's a lot of potential outcomes, and potential outcomes that could happen very quickly, that turn on a specific policy decision, that turn on a single election. When you have those kind of pinpoint events that could radically alter the growth trajectory for a lot of different companies, a lot of different countries, we'd expect to see a lot of volatility.

We talked about the new normal a lot in 2008-2009--something Bill Gross and Mohamed El-Erian at PIMCO talked about very often--it was more of this new normal of low returns, but it seems like we've really entered a new normal of high volatility with returns that have looked pretty good.

So we don't know what the returns are going to look like in 2013, of course, but certainly that volatility could be quite a bit higher, and we are going to have to get used to being able to stomach that, being able to put the money to work when we think we can, when we think the sell-off isn't justified, and really be in it for the long haul.

Stipp: Jeremy, we'll look forward to another year of great Friday Fives in 2013. Thanks for joining me today.

Glaser: You're welcome, Jason.

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

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