Fri, 11 Apr 2014
This week: A Greek revival, a new frontier, easing Fed concerns, and an artistically volatile stock.
Adam Zoll: I'm Adam Zoll, and welcome to the Friday Five. Here to tell us about five important stories in the financial news this week is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: Thanks for having me, Adam.
Zoll: Your first story involves a country that has fallen on some economic hard times in recent years, but things maybe starting to turn around there?
Glaser: It's certainly been a difficult time in Greece, and we had really a remarkable event in many ways this week, where Greece sold EUR 3 billion of long-term bonds, the first time they've done so in four years. Rates are under 5%, which if given recent past, really is pretty spectacular that they're able to get back to that level so quickly.
And I think this really represents the market's view that the eurozone crisis is, if not totally over, is very, very much on the backburner and that Greece has been able to make some of those necessary reforms. They unexpectedly had a primary budget surplus--that's a budget surplus excluding the costs that country has to service its debt. That was viewed very favorably.
I think there was also more of a view that the European Central Bank with Mario Draghi truly is going to do whatever they need in order to keep the eurozone together and that Angela Merkel and Germany will be there to backstop and to provide there some emergency loans that are needed. And I think given all that's going on and that the emergency loans they gave to the EU are due after these long-term bonds that are being sold, investors felt confident enough to invest in Greece. I think it's a good sign for Europe and a sign that we're getting back on the road to normalcy even if we're not quite there yet.
Zoll: Elsewhere overseas this week another country made waves by dramatically revising its GDP.
Glaser: That was a really interesting story this week out of Nigeria. They've been spending the last couple of years trying to rebase their GDP. The last time they did this was in 1990, and obviously there've been some big changes to the economy since then. And by adding in things like small businesses, making sure there are appropriate weightings to telecom and to film and to also the industries that have been doing well in Nigeria, they realize that they've been understating their GDP by a pretty remarkable 89%.
And with that revision, Nigeria became the largest economy in Africa, surpassing South Africa. It should be noted there's about 3 times as many people in Nigeria than South Africa, so it's a pretty remarkable move. And I think it shows to a lot of frontier investors, that these official statistics generally need to be taken with a grain of salt.
It could be difficult to truly understand what's happening on the ground, particularly if lot of the economy is happening kind of in the gray market and is not necessarily being picked up by documentation or being picked up outside of that government oversight or outside of the government statistics. So just looking at the growth that the government is reporting maybe isn't the best stick to figure out which emerging markets or which frontier markets in particular are doing really well.
And I think that this uncertainty is just another reason that for investors who're interested in frontier markets, it should probably remain a relatively small slice of their portfolio. There are some great opportunities, and there is some great growth in the future. But it can be difficult to really know exactly where that growth's going to come, which firms are going to benefit, and exactly how that's going to play out. And probably, again, as I said, it should remain a relatively small size [in your portfolio].
Zoll: Closer to home, the Fed released the minutes of its most recent meeting, the first under new chair Janet Yellen, and the market seemed to like what it heard.
Glaser: It did. This was the meeting that there was some concern afterward about the kind of communication that came after it. Janet Yellen mentioned that it could be six months after quantitative easing has been phased out that we could see interest rates rise. The market really took that to mean that interest rates were going to rise potentially in mid-2015, which was a bit earlier than many had expected.
And the meeting minutes showed that this was a concern that the Fed had that that would be misinterpreted, and they were in fact correct to be concerned as it was. I think the fact the Fed was concerned about it, that they mentioned that, they want to make sure the market knows that they're not on a pre-determined path. That it's really going to depend on what happens to the economy did soothe some fears that they haven't all of a sudden become much more hawkish than expected, that they are going to keep monetary policy very loose.
There was also some interesting discussion about inflation, how it remains low both in the United States but also across the entire world, even in some emerging markets that you might expect to see some higher inflation numbers and some concerns about what that could mean for the economy, if it's a sign of a lot of malaise just across the world and what they need to do about it, if they need to be taking more extensive action, or at least having more extensive communication about it. No big moves there yet, but it's definitely on the radar. And I think if inflation stays low, it's something we'll be hearing about for some time.
Zoll: Also on the news this week, another large penalty for one of the nation's largest banks.
Glaser: Bank of America seems to just kind of roll from penalty to penalty. In this week, it was an over-$700 million settlement for the way that they sold some credit- and identity-protection services to some of their customers. And I think this really just fits the pattern. It's not that this particular settlement is so large that it really impairs Bank of America in any way or they don't have the capital cushion in order to pay out this money. But at the same time it shows they really do have this heightened regulatory risk and these heightened legal costs that don't seem to be going away anytime soon.
When you have these heightened costs, even if you kind of think of them as one-time items, it turns out that they really aren't. This seems like it might just be a cost of doing business for them, which means it's going to be harder for them to really get to their core earnings power. And our big-bank analyst Jim Sinegal, who covers Bank of America, just thinks the shares are just too pricey right now given some of these regulatory headwinds that they're going to face because it could be some time before they're really able to emerge from that shadow.
Zoll: Last but not least, a medical-device company also making some headlines this week. What can you tell us about that?
Glaser: Yes, Intuitive Surgical has really had a wild ride over the last couple of weeks. Earlier, they said the Food and Drug Administration had approved its next-generation robotic surgery platform, the da Vinci Xi. This was very well-received by the market. The shares rallied quite sharply. And then this week when Intuitive announced some preliminary quarterly results, it basically gave back the entire increase, as they really had very disappointing results. They had a 25% revenue decline year over year and they had a lot of difficulty selling new systems. And part of this is due to the transition to the new system, but a part of it is that hospitals are really being a little bit stingy right now, that hospital spending is relatively low and these are pretty expensive systems and they're really kind of taking a very close look at this.
But Alex Morozov, who covers Intuitive Surgical for us, really sees this as very much a short-term issue. Given that there are so many moving parts in the company, you're going to expect to have a lot of volatility, and we've seen that volatility in the stock for some time. But he sees with the long-term growth opportunities and the way that they really have a big economic moat around a lot of these products that make it difficult for anyone to compete with them, even over a decades-long period, they're going to be able to earn economic profits, and they're going to look pretty good.
Then for investors who have an iron stomach, it could be a really interesting one, but only at a pretty big discount to fair value estimate. The firm has a high amount of uncertainty, which means that you want a big discount. The discount is not there right now, but given the volatility, I think we could see that it might appear at some point, and if there is a further sell-off, if the shares get a little bit cheaper, it could be a holding that makes a lot of sense for the long term.
Zoll: Jeremy, we always feel better after hearing your thoughts on the week's top stories. Thanks for joining us today.
Glaser: You're welcome Adam.
Zoll: For Morningstar, I'm Adam Zoll. Thanks for watching.