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Five Presidential Parallels in the Market

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to the Friday Five.

Ahead of Monday's market holiday, Morningstar markets editor Jeremy Glaser is feeling especially in the spirit. He is here today with five presidential tales from the market.

Jeremy thanks for joining me.

Jeremy Glaser: You are welcome Jason.

Stipp: So what do you have for the Friday Five this week?

Glaser: We'll take a look at what would happen if George Washington cut down the apple tree. Why presidential biographies aren't flying of the shelf anymore. What Woodrow Wilson would think of the Federal Reserve. At Obama's budget. And a sneak peak at who could be our future president.

Stipp: So Jeremy, George Washington famously cut down that cheery tree. If it had been an apple tree there might have been some repercussions for him based on some news this week.

Glaser: Well, he may have had to give 30% of whatever he could make from chopping down that tree to Steve Jobs.

Apple announced this week that they're changing some of the terms and conditions of their App Store. So before, someone like Amazon could sell Kindle books through the mobile browser and Safari and not have to give a cut of those proceeds to Apple, they're now going to have to give 30% of all those sales of things that are sold through the App Store in App purchases directly to Apple.

This is a big change and could be a potential problem for Apple in the future if a lot of content providers decide that they don't want to give this big cut to them. If you are the publisher of a big magazine, you necessarily probably want to sell electronic editions, but you don't want to give up so much of that revenue and give up so much control of your subscriber base.

Google came out and is probably going to offer a very similar service on the Android platform, but not take that big cut. I think certainly to tell the truth, like George Washington always did, this could be a big problem for them coming forward.

Stipp: So more and more people, when they are getting things on their mobile devices, books are one of those things that they are getting. We saw some repercussions of that today in the brick and mortar business.

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Glaser: Borders filed for Chapter 11 bankruptcy protection. This is not a big surprise to anybody who has been in a Borders store recently or has been following the news.

Certainly they have seen a lot of problems. They have seen their sales really decline. People can order either physical books through Amazon and increasingly eBooks through a number of sellers, and it has just been too difficult for them with their higher costs of having these big brick and mortar stores to really stay competitive.

Now they're going to try to slim down from their Taft-like proportions now maybe to a slimmer Lincoln-like physique, but certainly it's going to be difficult for them to maintain a lot of profitability, to maintain the kind of presence that they had before. In the short-term, Barnes & Noble might be able to pick up some of this business, but the physical booksellers, I think, could be in a lot of trouble.

Stipp: So, Jeremy, we heard from the Fed this week. The Federal Reserve a creation of Woodrow Wilson back in the day. Would he have been happy with what Bernanke had to say?

Glaser: I think that he would have been.

Woodrow Wilson created the Fed in an attempt to smooth out the economic cycles and to get rid of the panics of the time, and I think that the Federal Reserve maybe didn't do a very good job at preventing this panic, if they had an opportunity to do so, but they seem to be doing a pretty good job in making sure that the economy stays on the right track.

They, this week, came out and said that they have upgraded their economic outlook for 2011. They think we could have up to 3.9% GDP growth, which is a pretty big change from the mid-3% growth that they were looking at before. Certainly, it shows that quantitative easing and the loose monetary policy have been pretty successful so far. With fiscal stimulus basically off the table at this point, that monetary stimulus is really all that there is. It is helping the economy get over that hump and really make that sure that recovery sustains. I think it's exactly what the Federal Reserve is there to do, and hopefully it won't run into too many problems, such as extended inflation or the inability to really get us in that sustained fashion.

Stipp: Today's president, Obama, released a budget this week. Is there anything concrete in there that investors should really be paying attention to?

Glaser: I don't think so. These budgets are really the first shot in what's going to be a really long process, and I think in this year a particularly long process in coming up with a way to solve the fiscal problems that the government is having right now.

I think almost everyone agrees that at some point we're going to need to tackle the budget deficits and tackle some of the issues that we have in the country right now, but that's probably going to take a lot of really serious cuts to entitlements or serious changes to entitlement programs. It's going to change the way that we look at discretionary programs, and it really needs to be a holistic view.

This budget doesn't really do a lot of that; it cuts some discretionary programs, it leaves non-discretionary spending like entitlements basically completely unchanged. There are a few things in the tax code that may change here or there, but I don't think investors should focus too much on specifics right now. I think they should keep an eye on Washington and see what some of the future proposals look like. I don't think the budget that's going to be passed is really going to look a lot like the budget that was proposed this week.

Stipp: Well, Jeremy, we all know that presidents have to answer some tough questions, but there is a new upstart candidate out there that's earning some high marks in that regard.

Glaser: Watson, which is an IBM supercomputer, managed to beat two very good Jeopardy players at their own game this week, which is something that was maybe a little bit surprising, but I think showed us two important things: The first is that it's just cool that you can develop this new technology and that you can create something that has such great natural search and is able to play a game that's as complex as Jeopardy, but the second thing is it shows the value of IBM's wide moat.

We often talk at Morningstar about competitive advantage, and it shows up in a lot of different ways. But one way that can [show up is] that if you're a big incumbent player, you often have the money to spend on research and development, the money to spend on these interesting initiatives that can really help throughout the entire business.

Will Watson itself make a lot of money? Almost certainly it won't. I don't think anyone has a lot of need for a giant Jeopardy-playing computer, but a lot of the technologies they developed have commercialization opportunities across a lot of different sectors. I think that over the years as they refine the technology, IBM can make a lot of money from it, because they're able to invest in that basic science that wasn't going to have an immediate return.

It shows the value of the moat, which is I think... one of the more interesting things that came out of this match.

Stipp: So, do you think Watson for president?

Glaser: We'll see. I don't know if he's quite there yet, but maybe with some fine-tuning, someday we could have a new Robot Overlord.

Stipp: All right. Well, Jeremy, thanks for joining me.

Glaser: You're welcome, Jason.

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