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The Friday Five

Thu, 23 May 2013

Five stats from the market and the stories behind them. This week: $3 trillion in stimulus (but how much more?), a $1 billion question mark at Yahoo, more.

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Video Transcript

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 Friday Five is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: What do you have for The Friday Five this week?

Glaser: The numbers we're going to look at: $3 trillion, 7, 68%, $1.1 billion, and one.

Stipp: $3 trillion refers to the amount of the bonds that the Fed has bought since the beginning of the crisis. There were worries about the continuation of that buying after Fed testimony this week.

Glaser: We had a good amount of Fed news. Bernanke testified in front of Congress on Wednesday, and also the release of the Fed minutes, which is a summary of what the FOMC was talking about before they set the most recent policy statement.

And from both of them there seemed to be some discussion of when are they going to stop buying more bonds. [There was] not a lot of discussion of when they were going to start selling some of those bonds, reducing the size of their balance sheet, but there does seem some possibility that as early as the June meeting, the Fed could decide to end QE3 or to taper it a little bit. And the market was a worried about that, and worried that this could mean that we're about to see the start of what could be a very long tightening of monetary policy.

I think that is a worry that might be a little bit premature. Definitely, Bernanke in his testimony said that they were looking to potentially taper. There are members of FOMC who are ready to start doing that. But the vast majority of the members are still very much looking at a very accommodative policy, and chances are any moves are going to be very, very gradual and are going to be tested against the economic data. If they pull pack on the purchase a little bit, and the economy kind of falls off a cliff, they're going to get right back and start making purchases again.

Remember, we're at QE3 now; that means we had QE1 that stopped, and then the Fed started up again with Q2 and stopped, and then started up again with this "QE Infinity" that was more open-ended, and that was because they realized that they hadn't done enough yet and they were willing to jump back in there. And I don't think there is any reason they wouldn't be willing to jump back in if the most recent tapering turns out to have some very detrimental effects.

Even if Bernanke leaves the chairmanship, which is certainly a possibility--he has been looking and talking a bit about potentially leaving and getting back into private life--I think any of his plausible successors, including Janet Yallen, who is currently head of the San Francisco Fed, would continue with these policies. I think we'll see some continuity there. It's just not something to be super-worried about at the moment. There is going to be tightening eventually, but the Fed seems committed to only doing it when the economy is ready to accept it.

Stipp: Seven is the number of months that we've gone without seeing contraction in the Chinese manufacturing sector, but we did see it again this week when the data came out. There is still global risk out there.

Glaser: There is, and this really roiled the markets, particularly in Japan. The HSBC Flash Purchasing Managers Index, which measures that manufacturing level, came in below that 50 mark, which means that there was contraction in the manufacturing sector in China.

This just goes to show, as we've talked about before, that China is really challenged in handing off fixed asset investment to become more of a consumer-driven society, and it's [a challenge] that China is somewhat struggling with, how to make that transition and how to do so without seeing growth fall precipitously.

This doesn't mean that China growth is going negative or that we're going to see really slow growth forever, but I think it does show that there are some risks to China's growth slowing from its current levels, [which would  have] pretty detrimental effects on global growth. With Europe in recession still, with the U.S. growing relatively slowly, China and other merchant markets really are the driver of global growth. We could see that come down a bit, and I think that this report just highlights that risk there.

Stipp: 68 is the percentage of votes this week to keep Jamie Dimon in both the CEO and the chairman roles at [J.P. Morgan]. It shows that he has weathered some knocks recently.

Glaser: He has. This has been a high-profile campaign over the last couple of weeks, where a number of different proxy advisory firms and shareholder advocacy groups were trying to strip Jamie Dimon of his chairmanship title.

And the theory was not that Jamie Dimon was doing anything particularly wrong, although there was some talk during the London Whale scandal, during the trading scandal, that maybe the board didn't have the amount of oversight and didn't exercise that oversight as appropriately as they could have. Just as a general rule of thumb, when you have a bank that's this incredibly large, it's important that the CEO has a boss and that the board takes a more active role in potentially being able to fire the CEO if you were to do something that wasn't in the best interest of shareholders.

But this really fizzled out. [There were] fewer votes for this resolution this year than when it was on the ballot last year--there were more people who wanted to keep him in both of the roles. I think it's a vote of confidence, in that most shareholders think that he is running the bank well, the London Whale issue notwithstanding. It also [shows] that these … activist shareholder proposals are very challenging to make work. There are a lot of institutional imperatives to keep the status quo, and even if they had shareholders' best interest in heart, it's difficult to get things like this done.

Stipp: $1.1 billion refers to the price tag on Tumblr. Yahoo made that purchase this week. Marissa Mayer making a big change there. Is this a new face for Yahoo?

Glaser: This deal is unlikely to be transformational for Yahoo. They're spending this $1.1 billion. They have a lot of money to spend--this isn't going to put a lot of financial strain on Yahoo necessarily. They're spending the money in order to get some of these younger users who are on Tumblr now. You get some of their habits, you maybe can sell some more ads to them. Tumblr right now is essentially an ad-free zone, and you hope that you'll be able to wring out those synergies.

Chances are they're paying too much for it; that's about par for the course for Internet companies right now, and we don't know if those young users are actually going to stay on Tumblr. Rick Summer--who covers Yahoo, Facebook, and a couple of the other big Internet companies for us--doesn't think that Tumblr has the kind of lock-in that a company like Facebook does on its users. It'd be easier for people to migrate to another cooler platform if they think that Yahoo has messed up Tumblr, even though they promised not to mess it up.

So I don't think this is going to be really a game-changer for Yahoo in any way. I think Marissa Mayer still has a lot of challenges in front of her. If she thinks that they're just going to make a lot of these overpriced acquisitions, and that's going to make Yahoo incredibly relevant again, she'll probably be disappointed. If this is just one stake in other plans in order to get Yahoo back on top, it might be more effective. It's just too early to tell exactly what's happening with Yahoo.

Stipp: "One" refers to the Xbox One that was unveiled this week--new hardware for that gaming system. Is this is a new battle for the living room?

Glaser: The battle for living room seems to have been going on for a while now. I think we're starting to see it really ramp up as a lot of different companies are trying to sit in between you, your content, and your television. And the Xbox One, which is the third generation of Xbox console for Microsoft, seems to be pushing very much in that direction. It's going to control your TV as well as your games, as well as your streaming content, and try to be the hub of your living room.

There have been persistent rumors that Apple has been trying to get into the television space. Talk of the Apple TV seems to have been going on for a few years now, [including talk] that they're trying to work out deals with content providers. Microsoft is in there now. Google has a product that hasn't been very well-received yet, but they keep iterating on it to try to get their Android software in front of the TV.

This is a place that businesses want to be. They see that TV is moving to the Internet through streaming, away from the traditional cable box, and they want to be able to potentially sell you content. To really control that experience, they think, is going to be very valuable for them over the long term, and they're going to invest in these hardware products to get consumers to buy into that. I think it's way too early to see exactly what the economics of this are going to look like, who is going to win, is this a winner take all, is it going to be more distributed and people will get their content from Netflix and from others and stream them on to different boxes? It's too early to say. But this will be a really interesting battle to watch, I think, over the coming years.

Stipp: Five stats, five interest stories in a news-filled week. Thanks for joining me again, Jeremy.

Glaser: You're welcome, Jason.

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

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