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The Buzz on Berkshire's B Shares, Bank Regs, and Tablet Talk

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to the Friday Five. This is our look back at some notable headlines of the week for investors. Here with me, as always, with the Friday Five is Morningstar markets editor, Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: Thanks Jason.

Stipp: So, what have you got for the Five this week?

Glaser: Health-care reform took a potentially fatal blow. Berkshire decided to split their stock. We saw the Apple Tablet hype reach an almost unbelievable frenzy. Bank earnings started to come out. And finally, we got a first glimpse into what banking regulation might actually look like.

Stipp: So, the first set of reforms--the health-care reforms--let's start there for number one.

Glaser: It looked like health-care reform was essentially a done deal, but the voters of Massachusetts had another idea. They elected a Republican to the Senate for the first time since the '70s allowing the Republicans to essentially block any potential legislation that is going to come out.

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Now, the House could potentially pass the Senate version unchanged, and Obama could sign it. But it seems like he is not particularly attuned to doing that, and speaker Pelosi doesn't even think she has the votes to get it done. So, it looks like health-care reform, at least in its current form, is pretty much dead.

There might be some other, smaller bills that might come out in the future, but the idea of the sweeping reform happening in 2010 looks like it's become a pretty remote possibility. Something we've been talking about for a long time, it looks like we're going to keep talking about it for at least another year or two.

Stipp: So for number two, a change that happened on the stock front, Berkshire shares actually split. Is that meaningful at all?

Glaser: Berkshire talked about this a while ago, when they decided to buy Burlington Northern and they announced that they were going to have a pretty big stock split with their B shares that are going to put the price under $100. This will make it easier to give Burlington Northern shareholders their portion through shares. It just made the transaction happen a little bit easier.

It doesn't have a big economic impact. It shouldn't really have any change. You're just reducing the amount of economic ownership you have. But, I think it is going to change who is in the shareholder base for Berkshire. Right now, they have an incredibly stable, low-turnover shareholder base--people who want to be long-term owners of the business.

And when you make the shares so much cheaper and potentially that will allow it to be included in the S&P 500 or other major indices, you're going to get a lot more people who are trading in and out of the stock. So, I'd expect to see a lot more short-term noise and speculation in the shares, instead of the long-term, steady pattern that we had seen before.

Stipp: So just be prepared for a little bit of noise there in the short to intermediate?

Glaser: Yeah. The short-term; long-term, the value should still be there.

Stipp: OK. Well, good to know. Also, speaking of noise, there's a lot of noise this week on Apple's new Tablet device. What do you see on that front?

Glaser: It's almost unbelievable how many people are talking and creating new business models around a product that hasn't been released yet. It appears, to me at least, that Apple is very strategically leaking little bits and pieces of their Tablet announcement ahead of their press conference on Wednesday. Who knows what this device is going to look like?

If they're trying to sell a thousand-dollar device that's going to need a $60 a month data plan I don't think the market is going to be that big. If it turns out that the price is actually much lower than that or the data plan is somehow included or it's WiFi only, maybe they'll get a little bit more traction. But, either way, it seems like they're making a big push into the media space: Getting people to do their eBooks and their movies and TV shows on this tablet device.

I'm not sure if it is going to be successful. I think that people continue to want to watch TV shows on their actual TV. I think people like listening to music on their iPods. It seems like it's going to be squeezed between the iPhone and the notebook line that they have.

Could it be successful? Absolutely. Steve Jobs touches anything, it tends to turn into gold. But, I think we really should wait to see it before we anoint this the next big new product.

Stipp: Certainly looking forward to at least seeing what it looks like next week.

Glaser: Yeah.

Stipp: Also in the news this week, bank earnings started to come out. So, what's your take and your wrap on what we saw from the banking industry?

Glaser: Bank earnings looked pretty good all in all. Goldman Sachs had an unbelievable quarter. They really just blew it out of the water. A lot of other banks maybe didn't do as well as everyone would have expected, but did pretty well considering how bad the banking sector has been beaten down for a while.

We saw that consumer loan losses have not quite peaked. There's a lot of talk from Wells Fargo, for example, that they could peak in the first half of 2010 with commercial losses following the second half. Generally, we seem to continue to see the stabilization. We see the strong banks being able to exploit their position. Unfortunately, we see that the weak economic activity means that the banks are not going to see a robust recovery until the economy comes back.

Stipp: Essentially another cloud on the horizon for some banks is the new talk of extreme bank regulation or, at least, heightened bank regulation from Obama this week. What are you seeing on the front there?

Glaser: Well, first I have to say I'm very glad that President Obama is watching the Friday Five. Because, last week we said, with the new bank tax, that this needs to be coupled with regulation, you can't just tax them and say, "I hope this is going to fix it." You also need to have comprehensive legislation like the one that he introduced this week.

The idea would be to keep banks from getting too big to fail. So, restrict the amount of proprietary trading you can do, the amount of bets that the bank uses its own capital in the stock market, and make anyone who is getting FDIC-insured capital, make sure that they're not using it to take risks that could harm the entire economy.

I think a lot of this really hearkens back to a lot of the regulations that we did after the Great Depression, the idea of separating the riskier parts of the business from the more stable banking and deposit institutions. We'll see how the machinations are going to happen as it goes through Congress and it goes through all the lobbying.

I don't think it's going to look anything like what is introduced now, but Obama says he's ready for a fight with the banks. Now that health care has faded, I think we're going to see the push to regulate the banks as being a very popular place for politicians to go. And I think we're going to be hearing a lot more about this in the coming months.

Stipp: So maybe the most critical thing here is the tone that it's setting, even if we don't' know exactly what it might look like in the future.

Glaser: Exactly.

Stipp: Well Jeremy, thanks for joining me.

Glaser: You're welcome.

Stipp: And President Obama, we want to thank you, of course, for watching and everyone else. So, thanks for joining us on the Friday Five, and we'll see you next week. I'm Jason Stipp for Morningstar.