Fri, 5 Apr 2013
Five stats from the market and the stories behind them. This week: Japan's 2% target, the 88,000-job disappointment, and the 20 million Facebook phones that will never be.
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: Glad to be here.
Stipp: So what do you have for The Friday Five this week?
Glaser: We're going to look at 2%, 88,000, minus 50%, 20 million, and finally, 45%.
Stipp: 2% is the inflation rate that Japan is hoping to target. They are taking some pretty extraordinary measures to do that. What's your take?
Glaser: This really is an incredibly aggressive program that the Bank of Japan is going to be embarking on. Before we knew that they were going to start targeting a 2% inflation rate, that already helped the Japanese stock market a little bit. That's being driven by the Prime Minister Abe, who is coming back into power. He is bringing with him a new central bank governor, who has a lot more unconventional ideas than the previous governor had. After he led his first meeting in the Central Bank, we got some more details on how they are going to hit that 2% target.
They are going to do it by doubling the monetary base by 2015 to get to that level, and to get rid of the deflation that has really plagued the country for decades now. They are going to be buying about 1% worth of GDP of Japanese government bonds, according to Barclays, every single month. That compares to about 0.5% that the Federal Reserve is buying of U.S. government bonds, to give you a sense of the scale of this program versus QE3.
So with this massive amount of new money being printed, the question is, will it actually get that inflationary effect? And we just don't know yet. If this ends up just being held in banks, and it doesn't really get out into the economy, there's no demand for that money, we might not see that inflation pick up exactly how they hope it's going to.
And it's going be really a lesson in psychology. Can the bank convince ordinary Japanese that there is going to be inflation? That they do need to spend now, or they're going to see their purchasing power either really diminish over time, and get their private spending up. Can it overcome some of the demographic and other issues that Japan is having right now? We just don't know, but this is really an aggressive plan. It will be interesting to watch to see how effective it is.
Stipp: Back here home, despite some continued Fed stimulus measures, we only got 88,000 jobs added to the economy in March--definitely a disappointing report. What's your take?
Glaser: Disappointing, I think, is the word for it. We already thought that March was going to be a little bit weaker than February. February looked exceptionally good. There are some other factors that we're going to be weighing against it, but it was even worse than the consensus that already had been taken down a notch. I think that this is not a reason to panic yet. It's the kind of case where one data point doesn't make a trend necessarily. It's just like February's good numbers didn't mean that all of a sudden we're on this much higher trajectory for job growth. This doesn't mean necessarily we're on a much lower trajectory yet.
We've had some kind of spring slumps over the last couple of years, where after what looked like pretty good data in the first part of the year, it started to get a little bit weak again before picking up. I don't know if that's a trend that we're going to see happen again this year, but it's probably too early to totally freak out about it. But it definitely is not a good sign.
Stipp: 50% is the decline in HP shares over a certain period of time, maybe related to some board decisions or some board activities that didn't really pan out. There was some news on that this week.
Glaser: The HP board has really been a mess for some time now. It is kind of surprising that there's not a Bravo show, The Real Board Members of HP, yet, because they have made a lot of very controversial decisions. There seems to be a lot of infighting. We had the spying scandal. We had the issues with Mark Hurd getting fired. And we look now at Raymond Lane, who was the most recent chairman and executive chairman, and over his tenure we also saw some problems. The shares dropped over 50% over his tenure, as you mentioned earlier. You had the Autonomy acquisition, which really appeared to be a disaster almost from Day One that it closed, that HP was just really way overpaying for it, and then we saw a pretty substantial write-down of the costs there.
I think for HP shareholders, they really have to hope that the board is able to get its act together and get good stewardship. There are a lot of really excellent assets within that company and a lot of potential there, but you need to have that good stewardship from the board level in order to realize that. I think Meg Whitman is beginning to do a good job, beginning to make the decisions that are needed to get back on track, and the performance is starting to get a little bit better very recently. But this is a board story and a saga that seems like it just won't end.
Stipp: If you had 20 million users of a phone, it might sound like a big number, but not so big to Mark Zuckerberg, who said that's maybe how many people would a Facebook phone. They decided to take a slightly different route for a mobile strategy.
Glaser: They did, and it's a strategy that makes a lot of sense for them. Instead of designing their own phone, and having their own piece of hardware, they're going to develop an App called "Facebook Home" that will live on a number of Android phones. The reason that this makes sense for them is that it lets them not lock-in to any one ecosystem, not lock-in to any one piece of hardware. It means that they get to lock their users into Facebook, that if you really enjoy using "Facebook Home" on Android, but then, let's say, there's a big move to Windows phone, Facebook said that there's a chance that they can port it there. And they said that, although the iOS rules make it difficult, they would like to have a deeper app for Apple.
If they feel like they can get their users, and that they can kind of own their users, that people want to see Facebook when they first turn on their phone, that will help them navigate the mobile and smartphone world. As it continues to proliferate, it will help in tablets, as those continue to become more popular across the world and makes them more relevant to their users. This seems like a much better idea than trying to bet the entire house on one particular phone and hope that enough people sign up for it.
Stipp: 45% is the amount of Verizon Wireless that Verizon does not own. They would like to get their hands on it. There may be some more news or some different pathways to that--maybe or maybe not a good idea?
Glaser: We will see. This week there was a rumor that Verizon in the United States was going to team up with AT&T to take out Vodafone, and Vodafone, of course, owns that 45% of Verizon Wireless that Verizon doesn't own, and Verizon would get that stake. And then, AT&T would then take over Vodafone's European and other operations as a way for them to expand, as they have really felt like they've hit their growth limit here in the United States.
This is a deal that our telecom analyst Mike Hodel is not terribly excited about if it actually happens. The reason is probably valuation. The only reason that Vodafone will agree to this is if they get a really rich valuation on their company. They feel like they can continue to operate the business as-is, buy back shares and create value that way. They don't feel that they need to do a deal and they need to be kind of forced into it.
When you pay too much for an acquisition, it's extremely difficult to make it work. The synergies, particularly for AT&T owning a huge European network all of a sudden might not be all that great, and if you're paying too much for it, it's probably not going to work out for shareholders. Verizon would love to own all of Verizon Wireless, but again, if you pay too much for it, it's hard for it to make a lot of sense. So maybe the financing for this won't come through. The parties are denying that this is really happening. It could be that this was just a rumor, but definitely it's something that investors and companies need watch out for, because it certainly might not be the kind of value creator that maybe some of the bankers are pitching it as.
Stipp: All right. Some ups and downs, ins and outs in the data this week, but thanks for walking us through the numbers again.
Glaser: Thanks, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.