Fri, 22 Feb 2013
Five stats from the market and the stories behind them. This week: Fed's $40 billion bond buys in question, Wal-Mart's worrisome 1% same-store sales growth, and more.
Jason Stipp: I'm Jason Stipp for Morningstar ,and welcome to The Friday Five: Five stats from the market and the stories behind them. Joining me as always with the numbers is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: My pleasure, Jason.
Stipp: So, what do you have for the Friday Five this week?
Glaser: We are going to look at the number 2,000, $40 billion, 1%, 4, and finally 47.3.
Stipp: 2,000 is a number of stores that the combined OfficeMax and Office Depot will have after the merger. That merger was announced this week, but you don't seem especially excited about this news, Jeremy?
Glaser: I think both these management teams are probably looking for that Staples "Easy Button" this week as they ran into a few problems. The first was the actual announcement of the merger. It kind of leaked a little bit early in a press release--probably in a place where it wasn't supposed to be. Then it was retracted, then had to come out again. It definitely had the sense that the announcement was somewhat thrown together. We are still missing some details in terms of management team, in terms of branding, in terms of some other things that are pretty important to assessing the prospects for this merger.
But they probably also want that Easy Button so that they can try to replicate the success that Staples has had in the space, particularly compared to OfficeMax and Office Depot. Our analyst Liang Feng, who has looked at this deal, sees that the combined company will have about 2,000 stores versus 1,900 for Staples, but the combined new OfficeMax-Office Depot will only get 70% of the revenue that Staples has and a tenth of the operating income. So, even if you assume that there are going to be some really impressive synergies, that they are going to be able to cut a lot of corporate costs, that somehow they are going to be able to drive higher revenue and get higher productivity out of their stores, these two are still going to be struggling next to the industry leader, which is Staples. And they also have a host of competition from people like Costco and Amazon and other players that that are moving into that space. So, this merger probably makes things no worse. It's probably something that they have to do in order to stay at all competitive, but it doesn't remove a lot of their core problems with their no-moat positioning.
Stipp: $40 billion is the amount of money that the Fed is shelling out [monthly] for mortgage-backed security purchases as part of its so-called QE3. This number came into attention this week because there are concerns about how long these purchases are going to go on. It gave the market a bit of a fit. What's your take?
Glaser: After a little bit of delay, the Federal Reserve releases the minutes of the FOMC meetings, and generally they are pretty dry affairs, but this week the release caused a bit of a stir when it seemed that there are some members of the committee who are seriously questioning if the Fed is going to be able to keep up QE3, to keep up these big bond purchases as long as they've said.
The Fed's current policy right now is that they are going to keep monetary policy incredibly loose and keep buying bonds until unemployment hits 6.5%. And this was a big deal when they made this explicit commitment to get to 6.5% unemployment, because what they were trying to say to the market was that even if things start to get a little bit better, even if we see some improvement in the economy, say inflation starts to pick up a little bit from the very low levels that it is right now, we are going to keep buying. We really want to ensure that the economy is on a much stronger footing, and that employment is on a stronger footing, before we [pull] back on the accelerator pedal a little bit.
But as we have these discussions, and the internal discussions have become public about is this really possible, are we inflating another bubble, is there going to be inflation, can we exit out of it? They could lose some of their credibility, and if they lose their credibility that they're going to be able to stick to that 6.5% unemployment rate before pulling back, that could make the policy less effective. We could get into the situation where when we see good economic news, the market actually pulls back because they are afraid that means the Fed is about to tighten policy again, and people worry about what will happen in that rising interest rate environment.
This is a story that's going to go on for years. We've talked about it a lot before. We are going to talk a lot in the future, but these minutes show that it's not very clear cut, that there are disagreements in the Fed, and even though the proponents of buying are still firmly in control, we'll be watching to see how that changes in the coming years.
Stipp: 1% is the anemic rise in same-store sales for Wal-Mart last quarter, but what really has investors concerned is Wal-Mart's outlook for sales to come. How bad is it?
Glaser: It wasn't good. Wal-Mart thinks that they are going to see 0% same-store sales growth in the United States next quarter, and a lot of it is because of the payroll tax cut expiration. Their core lower-income customer has seen a big chunk of their paycheck now [going] back to that payroll tax, and they are cutting back spending because of that. Wal-Mart also sees their profitability getting squeezed by this; they can't get that operating leverage that they had with higher sales levels.
Our analyst Michael Keara sees this as just another symptom of some other competitive pressures that Wal-Mart is facing. When you look at everyone from dollar stores to Target to Amazon to Costco who are really competing for those customers, who are competing on a bunch of different levels, it's just difficult for [Wal-Mart] to say, look, we have the absolute lowest price and that gets people in the doors. If there isn't money to spend, they are not going to get it, no one's going to get it. It really makes it difficult for them.
I think Wal-Mart is going to have to adjust to that, and I think investors are going to have to adjust to that new reality for them.
Stipp: "Four" refers to the fourth generation of the PlayStation, the PS4. It was, I guess you could say, unveiled this week, but really not.
Glaser: This was one of the more unusual consumer electronic unveilings we've had recently in that we didn't see what the product looked like. We didn't get any pricing on the product, nor do we have a release date, just kind of an amorphous "sometime before the holidays this year."
This is Sony's attempt to kick-start the PlayStation franchise again. Consoles have been under a lot of pressure. You see Nintendo is having a lot of difficulties moving their new Wii U console, and a lot of that's because consumers, particularly casual gamers, are now using their tablets, they are using their phones instead of going to that dedicated console in order to play games.
So you have hardcore gamers who are going to continue to want to use these machines, or continue to want some of the features, and that what Sony is adding here--faster processors, better video output, a cloud community aspect--are positive. They are [features] that are going to get those core [gamers] excited about it. It's probably not going to change the prospects of the company, probably not going to be a huge growth driver, like maybe some of the earlier systems were. It's just a different game, if you will, in the space than it was before.
Stipp: Anything below 50 is typically bad news for a purchasing manager report. The eurozone came in at 47.3. How bad is this number?
Glaser: It's not good for the Eurozone, and it's not good for the global economy. There was some hope that the eurozone's recession would be shallow and would be short-lived. And this data from research firm Markit shows that's probably not the case.
When they look across the entire Eurozone, including core countries like France, the recession is continuing and even steepening in some cases. And this just shows that growth is not going to come easily. This makes it that much more difficult to solve the eurozone crisis. If you don't have growth, those debts continue to look bigger and bigger. It puts a lot of pressure on the European Central Bank to do more--even though they've said that they are concerned about inflation and that they are not looking to do some of the extraordinary measures that you may see here in the United States and in Japan. And it's going to be a big challenge. Until they can find a way to grow, that crisis is going to continue. … For companies that sell into Europe, the European consumers are going to [remain] under pressure; unemployment is going to remain high. None of that is good news, and this report is just confirmation of that slow growth.
Stipp: Five stats, five very interesting stories. Thanks again for joining me Jeremy.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.