Thu, 19 Sep 2013
Five stats from the market and the stories behind them. This week: Fed defies predictions, dividend days for Microsoft, and JPMorgan's Whale tale continues.
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 are 0, 1, 1.7%, $920, and finally 22%.
Stipp: Zero, of course, is the amount of tapering that the Fed is going to do. It was a big surprise to almost everyone who expected at least some amount of tapering. What are the big takeaways?
Glaser: This was the big shock this week, that the Fed decided not to in any way taper its bond-buying program. Really the discussion had been how big the taper was going to be, not if it was going to happen at all.
The Fed cited a few reasons for not pulling back on the program. The first being that they're not 100% sure that the economy is strong enough to do it yet. They're seeing decent economic data, but there are other data points that they still just want to get more information on. They want to see a few more months that look relatively strong before they decide to pull back on these purchases.
The other thing they cited were some worries about fiscal policy. They're worried [about] fiscal retrenchment, the way that the deficit is shrinking relatively rapidly, and some of their concern is [over] the potential government shutdown or the debt ceiling debate that's coming up having a negative impact on the economy. They didn't want to also be pulling back from their bond buying purchase at the same time, [because] that combination could be problematic.
I think there is two big takeaways for investors from here.
The first is just how difficult it is to predict what the Fed is going to do. Even with all the new communication we're getting from the Fed over the last few years--like these press conferences, for example--we still don't know exactly when the Fed could tighten, when the Fed would taper or make any changes to their programs. So trying to base an investment strategy on trying to time the market, and time those changes in the Fed policy, is something that's going to be incredibly challenging, and probably a losing game for most investors. Staying focused on the long term is important.
The second is that the Fed really did highlight an important source of potential volatility over the next couple of months, which is some of these fiscal issues that are coming up--things like the potential government shutdown and the debt ceiling debate. Also there is going to be some volatility around when the Fed does decide to taper. Stocks rallied to record [highs] after the Fed said they weren't going to taper. We could really see that come back when they do decide to do that, which could be as early as the October meeting, and I think that's something investors need to be prepared for, and think about what they're going to do if there is a pretty significant sell-off in the coming months.
Stipp: One candidate for the top spot at the Fed, Bernanke's replacement, is out. That's Lawrence Summers. He said he was pulling his candidacy this week. What are the takeaways, and does it even matter who is going to be the next chairman?
Glaser: The second surprise out of the Fed was earlier, last weekend, when Larry Summers said that he would not be a candidate for the Fed chairman. He was really seen as the frontrunner, and it looked like Obama was getting ready to nominate him. What happened was some liberal senators and also some other groups really pushed back against the White House and said that this isn't who they wanted. They much preferred another candidate, probably Janet Yellen, who is the current vice chair of the Fed, to step into that role when Bernanke steps down in January.
The reason that we haven't talked about this too much is that it probably isn't going to make a huge difference, at least in the short term of monetary policy. The Fed is pretty much committed to some of these programs right now, and all of the candidates that are being discussed buy into this consensus--that what the Fed is doing now is helpful and really should continue in order to keep the economy moving forward.
I think that Janet Yellen, Larry Summers, and the other candidates probably would or will, at least in the short term, do things very similarly to the way that Ben Bernanke is running the Fed right now. You never know over the long term what kind of changes are going to happen. Obviously, [the Fed has] to react as the economy moves. But for most investors, worrying too much about exactly who the [next] Fed chair [is going to be] isn't something to spend a lot of time on. The political intrigue is certainly interesting, but the investment outcomes and what could happen with the Fed, probably that range of outcome is relatively narrow.
Stipp: 1.7% was the existing home sales increase. We heard that data this week. This wasn't bad data, but I also didn't hear any champagne corks popping.
Glaser: It wasn't bad at all. It was better than expected. Inventories are still very tight, and we're still seeing a decent number of sales. But I think when we look at the housing market, we think of it as a potential driver of growth going forward. As inventories get smaller, and there is a pent-up demand, and we see new houses getting built, that helps with employment, and it helps with a lot of other issues.
But the real question that we have is, will rising rates, or if mortgage rates continue to be relatively high, is that going to short-circuit this, and we're going to see a pullback in the housing markets a little bit. I think it's too early really to judge that. Even though rates have been high for some time in August, the process of buying a home is not instantaneous. I think as the data comes in over the next couple of months, things like existing home sales will be very closely [watched] to see if the housing market can keep up this momentum or if there is going to be some retrenchment, and we'll have to think about what that means for growth more broadly.
Stipp: $920 million is the amount that JPMorgan will pay, a fine related to the London Whale scandal. This is a black eye for the firm that came out of the financial crisis, at first at least, looking pretty good.
Glaser: The London Whale tale is one that just won't end for JPMorgan. As was widely expected, they're going to be paying over a $900 million fine to both U.S. and U.K. regulators in order to settle some claims around the London Whale. One of the big things is that the SEC did ask JPMorgan to admit wrongdoing, to say that they didn't have the controls in place to really keep their traders under a watchful eye and that they took risks that really were inappropriate.
I think it's a big change that the regulators are forcing these firms to admit wrongdoing. For JPMorgan, which really came out of the financial crisis looking pretty good and was really seen as one of the strongest and best run of the banks, to have to admit that certainly is bit of a reputational hit.
The fine, although it's a large one, is something that JPMorgan can easily absorb. They can absorb even more fines beyond that. We've talked about some of their potential liability issues in the past, but that reputational risk and having that additional regulatory scrutiny, both for JPMorgan and the other big banks, is something that's going to be there for quite some time.
Stipp: 22% is the increase in Microsoft's dividend. We heard about that this week. They're also going to do some more buybacks. This is probably good for shareholders, but what does it say about Microsoft's growth prospects?
Glaser: Microsoft has been making a lot of noise recently. First, Ballmer says he is going to step down as CEO. Then we have the big Nokia acquisition, and now we have a pretty sizable, 22% increase in the dividend and a $40 billion buyback program announced. This will bring Microsoft's yield at current prices to over 3%, which is pretty good when you consider where Treasuries still are, or where yields on a lot of other companies are at the moment.
For Microsoft, this isn't a fundamental change. They have plenty of cash on hand. They'll be able to fund this dividend easily. They're not levering up in order to make these new payments.
But the real question for investors is always going to be, is Microsoft able to really complete this transformation into a devices company, and be able to, as Norm Young who covers Microsoft for us [has noted], continue to really invest and defend their moat in their core products that produce all this cash that will let them continue to pay this dividend for years to come. That's really what investors need to be focused on.
But the dividend is certainly a nice touch. It gives people who might be waiting to see if Microsoft is able to do that a nice bonus, as it could be some time before we know if they're able to really make that transition work.
Stipp: The Friday Five always pays a nice dividend. Thanks for joining me again this week, Jeremy.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.