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The Friday Five

Thu, 8 Aug 2013

Five stats from the market and the stories behind them. This week: the Bank of England gets explicit, housing reform at the door, and a good deal delivered to Washington Post shareholders.

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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 us, as always, for 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 are 7%, 5.1%, $188 billion, $250 million, and finally $190 million.

Stipp: 7% is the now-explicit target for the unemployment rate in the U.K. This is from the Bank of England. This is not unlike the Fed's own policy to get unemployment down to a [target] rate.

Glaser: It's not. The Bank of England really followed in the Fed's footsteps as their relatively new head, Mark Carney, came up with an explicit 7% unemployment rate goal. He said that they're going to keep rates low until they reach that level. [Unemployment is] at 7.8% right now in the U.K., so they still have some ways to go to bring unemployment back down to those levels.

I think this is interesting for a few reasons--the first being that this is the first time they've done this. The Bank of England in the past has really shied away from explicit targets and from giving a lot of forward guidance, and now they are out there trying to get expectations changed, [and set] expectations that policy will stay loose for a long time, hoping that will encourage people to go out and potentially borrow more, spend more, and get some stimulus into the economy.

I think it's also interesting because the Bank of England's mandate really is to be focused on inflation and not to be focused on employment. So by making employment an explicit target, it shows probably a culture shift within the Bank of England. That's one of the reasons why Carney was brought on. He previously ran the central bank in Canada and was really a pioneer in providing a lot of forward guidance. That was one of the things that attracted the U.K. into trying to lure him over. So it is not a surprise that this is happening, and I think that we're starting to see the fruits of that.

It also is part of a broader global picture of more activist central banks. From the Bank of Japan to the Fed to even the ECB, they are being a little bit more aggressive or being more thoughtful about what's happening in the broader economy and how their actions affect that, and not just narrowly being focused on what's happening with inflation. I think this is a big experiment in a lot of areas. It will be interesting to see how it plays out in the years to come.

Stipp: 5.1% is the year-over-year rise in China's exports. We got that data this week. So are things stabilizing there?

Glaser: According to at least a few data points here and there, it does look like the slide that we've seen in the past couple of months is certainly slowing down, if not starting to grow very rapidly again.

Like you mentioned, exports rebounded after a very disappointing report in June, which shows that probably external demand is looking pretty good. People are demanding those Chinese goods again.

Imports, although they fell, fell at a much lower rate than they had before, and lower than expected, which is a sign that maybe … Chinese consumers are starting to demand some goods that aren't being produced internally as well.

But it may be too soon to say that we don't have to be worried about China anymore, [and we shouldn't] be focused so much on the short term. There is a lot of talk about, is this going to be potentially a hard landing, are things going to get bad very quickly, or a soft landing, where growth will slow gradually.

I think investors [instead] need to focused on what's going to happen over the coming years and decades and less on what any given quarter looks like in China. That big transition that they make from investment-led growth to consumer-led growth is not a transition that's going to happen quickly. It's going to be painful. We're going to see bumps along the way, and I think focusing to see, is that transition actually happening and what does that look like 20 years from now is probably the more important question than worrying too much about any given data point in any given quarter.

Stipp: $188 billion is the amount of money the government poured into Fannie Mae and Freddie Mac to keep them from going under. The question is now what role will these entities, if any role at all, play in housing reform?

Glaser: It wasn't really that long ago, at the height of the crisis, that the federal government had to step in and make what was an implicit promise to backstop these mortgage entities, Fannie and Freddie, into an explicit promise. They poured a ton of money into them, $188 billion, basically in order to backstop the housing market and to keep things from getting much worse.

Now that it's been a few years, Fannie and Freddie are actually doing pretty well as the housing recovery has taken root. They're really paying back a lot of money in dividends, billions of dollars in dividends, back to the federal government. That's one of the reasons why the deficit is shrinking faster than many people had expected. As that money keeps flowing in, politicians are now wondering about the future of these entities. It was never a big plan to have them really become part of the federal government. It was something that just happened during the crisis, and now they're trying to figure out, what does this reform look like, and what do these regulations look like in the future.

President Obama gave a speech this week, where he laid out some guidelines, where he said that he wants to attract a lot more private capital into the mortgage market, and that he wants those private investors to really be taking the first losses if mortgages start to go bad. But he said that there was an important role for the government still to play in the market--that it was essential that we continue to promote homeownership, that the government is still there to make sure that things are backstopped.

This is very similar to some bipartisan legislation that's been introduced to the Senate that would essentially create an insurance scheme that would replace Fannie and Freddie, and there are a lot of different proposals out there going from some more extreme examples to ones that basically keep the status quo. But for the most part we really are starting to hear some really serious talk about how the housing market is going to be reformed.

This is important, both to consumers who are out there shopping for mortgages, and for the broader economy, given how important housing is to keeping the recovery going. I think that as we hear more about these reforms, and we hear more about potential new regulations, we should keep a close eye on it--maybe more so than some other parts of financial reform that have happened over the last couple of years. It's going to be a fascinating debate and hopefully one that will end up with a policy that is able to continue to support the housing market, but without promoting some of the bubble activity and some of the speculative activity that we had before that led to the 2008 crash.

Stipp: $250 million was the amount that Amazon's Jeff Bezos paid for The Washington Post. Bezos and Amazon, obviously, revolutionary in the book media space. What do you think is going to happen with the old guard of Washington Post [under this deal]?

Glaser: This was definitely a surprising one. Bezos, in his personal capacity, not as part of Amazon, is paying $250 million to take over most of the publishing business from The Washington Post. Liang Feng, who covers Washington Post for us, thinks that this is probably a net positive for Washington Post shareholders; they're going to keep the parts of the business that really are producing profits these days: the for-profit education unit Kaplan, their media business, cable networks. Those are the things that are really doing well and have been driving the stock for quite some time, and [current shareholders] get to shed those legacy assets at what turned out to be a decent valuation.

Now, if Bezos is able to actually turn around the print operation, that's really the big question mark. He says he doesn't have any grand plan yet of exactly what he wants to do. Many have tried to turn around formerly very grand empires that have been dealing with declining circulation and dealing with declining advertising rates. These things aren't going to turn around under new ownership. So if he can find a way to really make money in digital, he obviously has a track record that shows that he can be very successful. But I think it's still way too early to tell exactly what he'll do with The Washington Post. But luckily for Washington Post shareholders, they no longer have to worry about that, as they have the rest of the business that they can keep an eye on now.

Stipp: Disney warned about a $190 million write-down that they'll probably be taking on the Lone Ranger movie. You say that this loss, though, won't be a "high noon" moment for Disney.

Glaser: I think that this gets into our "wide moat in action" series, where you see that companies that really have great competitive advantages are able to easily withstand [versus] companies that were more concentrated or didn't have the kind of diversification that Disney does, [which] could get themselves in trouble very quickly.

The Long Ranger did not perform up to their expectations. They're going to take a $160 million to $190 million write-off in the current quarter; it wasn't in this quarter's results. That's going to, obviously, have a big hit on earnings.

But when you look across the rest of the business, there are so many other things going well for Disney that this particular issue in live-action film is not going to cause any stress for them. The theme parks are getting people to spend more. ESPN is still printing cash. The cable networks had an operating margin of 46.2% in the quarter, which is still pretty astounding.

Even in the film [business], they still have the Marvel films that are doing pretty well. They have Star Wars coming up. Their Pixar Monsters University did fairly well, even if it wasn't a huge breakout hit.

They have so many different things going that they're able to withstand some of the losses from things like John Carter last year or The Lone Ranger this year, and it just shows how important competitive advantages really are.

Stipp: No write-downs on the Friday Five, Jeremy. Thanks for joining me again and for your insights.

Glaser: You're welcome, Jason.

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

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