Thu, 6 Jun 2013
Five stats from the market and the stories behind them. This week: A big miss on Greek GDP, auto sales cruising along, 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 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: This week we're going to look at 5.5%, 18, 8.1%, $4 billion, and $2.6 trillion.
Stipp: 5.5% was the amount that Greece was supposed to have lost [from GDP] from 2009 to 2012. The reality looks much bleaker.
Glaser: In a confidential IMF report that was leaked this week, they point to poor data forecasting as one of many problems and one of many issues that they had during the height of the Greek bailout discussions.
Beyond forecasting or missing the forecast of just how much some of the austerity measures would hurt the Greek economy, they said they made a lot of other mistakes--that they didn't push enough for technical reforms and really big structural changes in the economy. They didn't push to have a bond restructuring happen earlier on in a way to really reduce that debt load to the point where Greece would be able to pay it back. They really were very self-critical in this report. But they also were very critical of some of their partners, including the European Commission. They said that trying to build a consensus around every decision made it almost impossible for any decisions to be made.
It turns out that the halting and confusing type of negotiations that we saw from the outside is what was happening on the inside as well, and they really were having trouble reaching a consensus about the best way to keep Greece inside the euro and to keep the eurozone together.
They said that, overall, the benefits to all of Europe seem to have been worth it, that bending these rules and making these mistakes was OK, because it's kept the eurozone together and gotten us past the worst of the crisis. But if they were to do it again, it seems like there were lot of things that they would do differently. We'll see, if there is another flare up in the coming years and the coming months, exactly how the troika with the ECB, the European Commission, and the IMF may handle things a little bit differently.
Stipp: Sticking in the eurozone, 18 refers to Latvia, which could become the 18th country to join the Eurozone. We got that news this week. It may have raised an eyebrow or two, but you say, don't read too much into this.
Glaser: I probably wouldn't. Latvia has been on the path to the euro for quite some time. It's not an easy process, and it's one that takes a lot of economic reforms, some political reforms, in order to harmonize your economy with rest of the eurozone.
We've seen what happens when this doesn't actually work out quite the way as advertised--Greece being a great example of a country that joined the euro a little bit too soon, before they had other ducks in a row. But Latvia seems to be there, and Europe seems poised to allow them to join potentially as early as January 2014.
I think that, again, you don't want to read too much, because they have been on this path for a long time. Once you're on it, it's somewhat hard to get off this path. They already have their currency tied to the euro; a lot of loans are made in euros. But still, that being said, it's somewhat of a vote of confidence that they haven't tried to derail this process, and that they're willing to join the common currency, given all of the potential issues that on balance they see. That economic integration has been more valuable than any of the potential downsides, and that's a good sign for the eurozone right now.
Stipp: 8.1% is the year-over-year increase we saw in May auto sales. We're still seeing some steady improvement in autos, but are we having much runway left for auto sales?
Glaser: Auto sales are getting closer to that normalized level of where we'd expect them to be. We look at things like the number of older cars on the road that probably are going to need to be replaced, and some economic factors like the improving housing market, and with decent inventory and decent cars in the showrooms, we do expect to see sales come up a little bit from where they are now. But you are right, that big growth runway is somewhat behind us.
Dave Whiston, who is our auto analyst, expects that this 15.3 million seasonally adjusted annual rate of sales in May was probably about where we are going to come out for the year, between 15.1 million and 15.5 million. That's still over a 7% rise at the high-end from 2012 levels, and it bodes well for some of the automakers. He thinks that GM and Ford are both now slightly undervalued--not as undervalued as they were a few months ago--but still somewhat compelling in a market that doesn't have a lot of undervalued names right now.
Stipp: The battle over Dell continued this week, with Dell saying that there is about a $4 billion shortfall in Carl Icahn and Southeastern's plan for the company. What's the latest?
Glaser: This is a battle that really has gone on for quite a long time. Dell released an investor presentation trying to convince shareholders to go with their plan, saying that Carl Icahn and Southeastern Management's plan is just too risky--that they don't really have the funding in place, that they have this $3.9 billion gap between the sources of funding that they've identified and what Dell says they'll need to actually get their deal done as described in their letter when they decided that they would try to go forward with an alternative deal.
Dell was very honest in their presentation about some of the challenges and earnings pressure that they are under right now, and they think they're going to be able to better handle that as a fully private company, not have this stub leveraged equity left, and that by having that done, they will have a better opportunity to really turn that company around. This is far from the end to the battle. I think we're still going to hear from the other group. We're going to go back and forth a lot, and we'll see how it eventually ends. But it's an interesting story to watch.
Stipp: Speaking of being in the middle of a battle, we got more news on potential regulations for money market funds this week. $2.6 trillion is the amount of money that's in money market funds. What do those regulations propose now?
Glaser: This has been, like you mentioned, a very long-fought battle between the SEC, which has been trying to make some money market reforms after there was some stress there during the financial crisis, and some ministry participants that are a little bit less excited about some of the proposed reforms.
What the SEC did this week was voted on some changes for the prime funds, which are mostly institutional funds, that would potentially allow the net asset values to trade freely and go below $1, and also potentially adding some rules that would make it difficult to pull money out in times of crisis, and basically give the funds the option to suspend under some limited conditions.
I think that this battle is really indicative of the broader battle over financial regulations since the crisis. We've had Dodd-Frank passed. We've had some big changes in the regulatory regime since then, but a lot of them are open-ended in terms of how the rules are actually going to be enforced, how they're going to be implemented, and actually getting that rule-writing done. I don't think we're going to see a fast acceleration in these rules getting implemented, and it's going to be a bit of a challenge to find that balance between trying to get rid of some of these systemic risks, and not putting handcuffs on the financial industry and making it so difficult for them to do business that it could hurt the economy in some way. I think finding that balance is what they're trying to do right now, and they seem to be very slowly going down that road.
Stipp: OK, Jeremy. Five more datapoints for the books. Thanks for the insights this week.
Glaser: Thanks, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.