Fri, 10 Jan 2014
This week: The ECB tries to accommodate, JPMorgan is fined again, and 'liquid gold' gets scarce.
Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five: five more stats from the market this week along with the stories behind them, courtesy of Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: Jason, you're welcome.
Stipp: What you have for The Friday Five this week.
Glaser: We're going to look at the numbers 0.25%, over $2 billion, 4.3%, 12 months, and finally zero.
Stipp: 0.25% is where the ECB is keeping rates. We heard from them this week. We also got a lot of talk from the ECB, but what comes next?
Glaser: No surprise that the ECB decided to keep with a lower rate, trying to keep monetary policy fairly accommodative in the eurozone in the face of inflation that's been reasonably low there, as it has in the United States, but an economy that's been much weaker than we've seen in the U.S.
We heard from the Bank of England, too. They're also keeping rates low, but they are sticking with their quantitative easing program--that bond buying program--that the ECB has so far shied away from, even though they faced a lot of the same pressures that we've seen in the United States and in the U.K. and elsewhere.
A lot of that is [due to] political pressures. Europe generally tends to be more focused on inflation, more worried about inflation than you might see elsewhere, and there's a lot of concern about what would happen if you have this bond buying program--how you would do it, given the way that the bonds are distributed across all of the member nations?
But Mario Draghi in his press conference was very adamant that this is an accommodative policy, that they are going to continue to be accommodative, that they want to keep the recovery going, that they're seeing some good signs, but that they know they're not totally out of the woods yet, and they are open to everything that's legal under their charter, which could potentially mean bond buying eventually. But it doesn't look like that's on the table anytime soon. There probably would have to be a major change in the trajectory of the European economy before we really start hearing discussions of that again.
This will be one of the more interesting stories that will happen in 2014 on the Central Bank front: What does the ECB decide to do? How aggressive are they going to be in the face of some of the challenges they're seeing?
Stipp: JPMorgan will be paying a more than $2 billion fine related to the Madoff scandal. This might be alarming to JPMorgan investors, but how should they really view this fine and this particular incident?
Glaser: Speaking of scandals that just don't want to go away: Bernie Madoff and the reoccurrence of these relatively large fines for JPMorgan that we've seen time and time again over the last couple of months.
This one is a little bit different. No one is alleging that JPMorgan knew that Madoff was running a Ponzi scheme or that they were in cahoots with him, or were really trying to enable it. But what they are saying is that, given the amount of business that Madoff did with different parts of JPMorgan, they should have been able to put those pieces together, realize that something wasn't quite right, and alert authorities that they might want to take a closer look at what was happening with his investments.
They didn't do this, and part of that is really more of a failure of communication than a sense that the JPMorgan is somehow a den of sin and they were doing this intentionally in any way. That failure of communication is really because they are so big. That just points to the problem we've seen time and time again with them recently, which is that when you are running an organization of that size, it's almost impossible to really keep tabs on everything that's going on. Even with the best of intentions to have the bankers do the right thing, it might not always happen. They might not really think all of these different things are going to be connected.
For investors who are going to own this mega-bank, which obviously has some advantages to that scale, you should be worried there are drawbacks to that, too, and these regulatory costs are going to be one of them. This is not going to go away overnight. We're not dealing with just getting rid of legacy issues. These are things that could potentially crop up more and more as time goes on.
Stipp: Macy's reported a 4.3% increase in holiday sales. That was a good result for them, but it's not all good news on the retailer front.
Glaser: It's not. But Macy's had a good Christmas. They reported results [showing] very strong same-store sales that were driven by their e-commerce platforms doing well. They've really made a push to have localized, fresh merchandise in all the stores instead of trying a one-size-fits-all for the entire country approach. That's been doing well for them. So they reported good numbers there.
We saw Costco's December same-store sales up 5%, another above-expectation performance for them. Costco continues to do well.
But as you said, this is not totally even. L Brands--which owns Victoria's Secret, Bath & Body Works, and some other brands--came in below expectations. The shares got punished. Bed Bath & Beyond was below expectations, and their shares also were down sharply this week.
It just shows that there really are some winners and losers during the holiday season, and it's probably too early to paint the whole retail picture with a broad brush. We need some more of the data to come in. It looks like consumers didn't completely close their wallets, but there was a lot of pressure. We saw the pressure on retailers' margins. There was a promotional environment, like we expected, and we will see how the other results shake out in the next couple of weeks.
Stipp: Ford chief Alan Mulally will be sticking with Ford for at least 12 more months. Of course, he was a contender for the top spot at Microsoft. So, given this news, what's the bottom line for Ford and Microsoft, since he will be staying in place?
Glaser: Mulally finally ended the speculations that have been going on for months now that he was going to leave Ford and go into Microsoft to take over from Steve Ballmer. He said that he wasn't, and he is going to stay at least until the end of 2014. It's generally assumed that he'll retire after that, and that one of his deputies will take over.
We think that on balance this is good news for Ford. Dave Whiston, who covers the company for us, thinks that Mulally has done a great job and will continue to be able to do that over the next year, and that the people behind him will be able to take over pretty easily. Ford also raised their dividend this week by 25% per quarter, which is another sign that they're doing much better.
With Mulally now [staying], people can really focus on the fundamentals of Ford instead of being overly worried about what would happen if he were to depart and how the company would fare. In a market that has very few values, we think Ford is one of the few pockets of value. Its rated 5-stars right now. It's one of the few companies that is and could be an interesting one to watch.
For Microsoft, they really need to pick a CEO eventually. They are taking a long time to work through this process. It's been fairly public. It seems like they've narrowed down the candidates, mostly internal at this point, to find someone who is going to be able to really run this behemoth of a company. They need that leadership. They need to be moving all together in one direction and hopefully it won't take too much longer before they're able to settle on who the successor is going to be.
Stipp: Zero bars of Velveeta on some store shelves, according to Kraft, because there is a shortage of Velveeta right now. There weren't any riots in the streets this morning, though, so why was this a headline this week?
Glaser: Not yet. Kraft did admit that they're having some short-term supply issues with Velveeta, having some problems keeping it on the shelves, and if you were planning to make some Velveeta dip for the Super Bowl, you might want to start looking now in order to get that in your pantry. Don't worry I think it will probably last the couple of weeks before the big game.
Kraft has described Velveeta as "liquid gold" before, and maybe if it continues to be scarce we'll start to think of it in that way. The value will come up. We'll start seeing all sorts of new products trying to securitize Velveeta--maybe some physical Velveeta ETFs will hit the market sooner rather than later.
Hopefully this is just a short-term issue for Kraft, but it's always interesting to see how these supply chains actually work and when they don't work.
Stipp: The Friday Five is never cheesy, Jeremy. Thanks for joining me again.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.