Thu, 21 Mar 2013
Five stats from the market and the stories behind them. This week: 10 billion euros falls short for Cyprus, the Fed stays focused on 6.5%, 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 with the details is Morningstar markets Editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: Glad to be here.
Stipp: So what do you have for the Friday Five this week?
Glaser: We're going to look at 10 billion euros, 6.5%, 6, 20%, and $24.4 billion.
Stipp: 10 billion euros is the size of a loan that Cyprus maybe getting, but it's not enough and that's the big problem.
Glaser: You're right. That 10 billion euros is not going to be enough in order to really bail out Cyprus' banks, and nor did the EU think it was going to be enough.
They offered that money only if Cyprus also is able to find another huge chunk of cash that they would be able to put in, in order to keep their debt-to-GDP getting much higher. And really the only place that they could find that [money] was in bank deposits, and the EU suggested maybe a one-time tax on all accounts and using that money to recapitalize the banks in order to keep solvent.
This was not very popular with the Cyprus people. It wasn't popular with Cyprus' parliament, who soundly rejected this proposal, and is now looking for other ways to get that cash in order to get the bailout that they'll need to stay in the euro, in order to keep their banks open.
It's going to be an uphill battle. A lot of the sources of capital for them are going to be loans, something the EU said they're not open to. Again, they don't want that indebtedness to keep going higher. But I think more broadly, this story just shows that the European debt crisis is really far from over. [The fact that] these little things--small countries like Cyprus that make up 0.2% of the entire EU's GDP--can cause such big reverberations shows just how unstable the relative calm we have right now, and that it won't take much maybe to tilt us back into a hotter fire of the crisis.
The jury is still out if that's going to happen right now; I think it is a plausible explanation that Cyprus really is a one-off, that it's unique, that we're not going to see bank runs across Europe; we certainly didn't see them this week. But it is a reminder that the European debt crisis is far from solved and remains a risk.
Stipp: 6.5%--that's a figure that came in the news this week here at home. It's the unemployment rate that the Fed is targeting. We're not there yet, obviously, but the Fed said it's going to keep on keeping on with the stimulus measures until we get there. What's your take on the Fed's statement?
Glaser: The Fed is keeping their foot on the accelerator. There was nothing in the statement that really gave any sign that they're seriously considering pulling back. They said they're seeing the economy getting a little bit stronger. They're seeing some decent economic indicators. But they said we've seen that before only to see them pull back a little bit for various reasons.
So I think they're going to continue to be very aggressive there. That 6.5% unemployment rate might happen in early 2014, potentially, according to Bob Johnson, who's our economist, but it seems like they're really going to push all the way until then, and even though we're getting slightly better economic data, you shouldn't expect the Fed stimulus to run out.
Glaser: Another thing that the Fed did point to in the statement was concerns about the fiscal issues--the debt and the deficit, all the wrangling in Congress. Congress did buy themselves some time this week, however. It's our third data point--six months--six more months to try to figure out a resolution to some of these budget issues. What's your take on the situation?
Glaser: We can file this under "unexpectedly good news from Congress," which is an extremely small file, or at least has been in recent times.
Congress passed a continuing resolution this week that will fund the government through the rest of the fiscal year, and really it keeps a government shutdown from happening. And they did this with seven whole days to spare, which is something that's pretty remarkable given how close to the deadline we've come with issues like the fiscal cliff and the debt ceiling in the relatively recent past.
Now, this doesn't mean that the wrangling of these fiscal issues is totally over. The debt ceiling is still going to be an issue. We're hearing noise from John Boehner, the Speaker of the House, that he expects to see more cuts in the budget in order to get that debt ceiling raised. That's still a leverage point. But the fact that … both sides aren't using every single opportunity in order to make a big statement is probably a good sign they realized that this brinkmanship isn't good for the economy, it's not something that is sustainable to do over and over again, and I think that's certainly a good sign.
Stipp: 20%--that's one in five--the number of pairs of women's pants that I won't find when I go to lululemon to do my shopping. What's the story there? Can you help us see through this problem?
Glaser: Lululemon did have some big problems this week. Usually, we are very happy when we get transparency from companies, but this is one case where we're not so thrilled.
Lululemon said that, again, 20% of their women's yoga pants were extremely transparent, much more so than was acceptable to them or any other customers, and that they're going to have to pull them from the shelves and that it's going to have a pretty significant impact on sales.
And this raised some concerns that had already been bubbling a little bit about quality control, about the supply chain of this fast-growing yoga-wear company. But our analysts really don't see it as something that's going to be a game-changer for lululemon, or that it's going to kill their premium brand.
Lululemon is still expecting pretty good same-store sales growth throughout the next year. They're really building that premium brand, continuing to distance themselves from their competitors. Unless this expands and people really stop seeing the brand as premium, or stop [being] willing to pay that extra money to get that lululemon brand, their stores are going to be fine. Shares look fully valued right now, but it's potentially an interesting retailer if the shares were to become much less expensive.
Stipp: $24.4 billion is the size now of the Dell buyout. Is that number set in stone, or do we expect to see it go higher?
Glaser: It's going to go higher. This is story we have been following for a long time now. First, we had Michael Dell come up with his buyout offer. Then we heard from a lot of investors from Southeastern to Icahn, who said they weren't happy with that offer. They said it would undervalue the company; they were looking for a leveraged recapitalization instead.
Now we have the news that Blackstone Group, another private equity firm, is thinking of buying Dell and would potentially [name] Mark Hurd--who is at Oracle now, but was the former head of HP and grew the HP business fairly rapidly--as CEO to try to turn Dell around.
I think when you have all these competing interests who see value in Dell, it's going to be difficult for Michael Dell to get that deal done at the price that they originally had. It's likely going to go higher. Who will end up with the company, who will end up running it, we don't know, but this is a deal that is going to continue to expand.
Stipp: Jeremy, always transparency in your reporting. Thanks again for joining me for The Friday Five this week.
Glaser: Thanks Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.