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Five Surprises and What They Mean for Investors

Jason Stipp

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

The market was full of surprises this week, and not all of them were good ones.

Here with me to dig into the details is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: Jason, thanks for having me.

Stipp: What you have for the Friday Five this week?

Glaser: This week, we'll take a look LinkedIn's IPO, at changes at the top of IMF, at the United States' hitting the debt ceiling, at HP's disappointing quarter, and finally, some movement on the New York Stock Exchange merger deal.

Stipp: So the IPO of LinkedIn, I don't think it was a big surprise there was a lot of interest in it, but there was a big surprise just how much interest there was. Can you tell me a little bit about your take on that?

Glaser: We were definitely expecting investors to be excited about this IPO. It's the first of the major social networks to go public. We've looked at private transactions for things like Facebook and Twitter that have seen just incredible valuations put on those businesses. And LinkedIn itself had raised its offering range from about $35 to $45, and people thought, there'd be some pop. But when it came to market on Thursday, there was actually a 130% rise in the share price at some points during the day, which is just really unbelievable for an IPO to have that kind of performance out of the gate. We haven't seen that since really the height of the tech boom, and it just shows how impatient investors are to get a piece of the action of these social networks. They see them as really important pieces of the web going forward. They think there's a lot of money to made there. We think the valuation is completely out of control. Our analyst Rick Summer comes up with a $27 fair value estimate, and that has some very explosive growth baked into it. We think it's quite overvalued at this point and just another sign that the Tech Bubble 2.0 is alive and well.

Stipp: Another big surprise this week are the details of the Dominique Strauss-Kahn case. Those details are grabbing a lot of headlines, but there could be some broader implications for the IMF and for Europe. What are you seeing there?

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Glaser: There certainly could be. Dominique Strauss-Kahn, other than being the former head of the IMF, was also a very prominent politician in France and was seen as a potential front-runner for the Socialist presidential nomination, as a potential future president of France. He had deep connections with many European leaders, and I think that those would have been really important in trying to get the European debt crisis under control.

Certainly, the situation in Greece and Portugal and Ireland, among other places that we've discussed before, may need the IMF to come in there to help restructure that debt. That's really the organization that has the expertise to do this. I think there's already been talk about ways to get them involved. I think having a leader who had those connections would have helped pave the way and allowed for those restructurings to occur.

Chances are by tradition, the new head of the IMF will also be a European, hopefully it will be someone who'll be able to smooth the way, but we don't know. It adds a lot of uncertainty to a situation that was already extremely uncertain, and I think it just makes that very difficult situation even more difficult.

Stipp: On this side of the pond, the debt ceiling, I don't think the fact that this ceiling exists is a big surprise, but how close we are getting to the ceiling in time, potentially a big surprise for some people.

Glaser: We knew we were going to hit it. We've been talking about it for a while, and on Monday, when we kind of blew through the ceiling without a whole lot of hoopla, well, it's kind of surprising to me. I really thought that Congress is going to act before that date in order to make sure that there was no chance of United States default on its debt.

Right now, the Treasury is doing some extraordinary measures, tapping its foreign exchange funds, not putting in as much money into pensions as they should, in order to have that money out there to pay interest and to issue new debt and to make sure that we meet our obligations, but that can't go on forever. It looks like the beginning of August is as far as those measures will take us, and it's not clear that Congress is ready to raise the debt ceiling quite yet. There's a lot of talk about coupling the raise with some sort of deficit reduction. The deficit reduction is important, and I think it's something we need to do, but we also need to raise the debt ceiling, and sooner rather than later. It's one of those things that you never know when the market is going get spooked. It hasn't yet, but if it seems like there's a real chance that it's not going to happen, and people feel like there's a non-zero chance that the United States could default on its debt, there could be a lot of very negative consequences for investors, and that would be an even worse surprise than the fact that we blew through it this week.

Stipp: At this point in the economic recovery, we might expect to see consumers going out there and buying gadgets and finally spending some money for themselves, but when you look at HP's results, you wouldn't know that we're in the middle of a recovery, potentially.

Glaser: They may be spending money on gadgets, but they're not buying HP's gadgets right now. We've seen some other makers like Apple have great sales, but HP has seen a lot of weakness in the consumer market, and particularly this quarter, they actually came out with their earnings a little bit early, there was a leaked internal memo, a warning that the quarter could be somewhat weaker than expected, and the results really did disappoint.

We saw consumer was weak; we saw enterprise spending was weak. Their printer business, which is a large portion of their sales, also didn't look very good.

HP is a company in transition. They still have relatively a new executive team that's trying to learn the ropes, that's trying to execute at a very high level. They're not quite there yet, and I think that it could take some time for them to really turn that ship around.

Stipp: Lastly, Jeremy, we saw a suitor for the New York Stock Exchange pull out this week. It was somewhat of a surprise and may have some broader implications.

Glaser: NASDAQ OMX and ICE, which had a joint hostile bid for the New York Stock Exchange Euronext, decided to pull out this week. They had launched this hostile bid after New York Stock Exchange had agreed to be acquired by Deutsche Boerse because they really saw it as a strategic fit for their companies, but after they talked to the regulators and had some discussions with people in the Justice Department, they decided that it wasn't ever going to pass regulatory muster and that it wasn't really worth their time to try to bid on this. It could be that they just decided the price was going to be too rich for them to do it, or there are other reasons they pulled out, but if we believe them, and that it really was the regulators that forced them to pull out, it certainly raises some interesting questions.

So far in the Obama administration and through the Bush administration as well, there wasn't a lot of impediments to mergers. We saw lots of big companies come together--most recently, NBC and Comcast in the media space--and it just seemed that [regulators would] ask for few things here, a few things there, but for the most part, the mergers would go on as the companies had planned, and I think as we look at some other megadeals that are coming down the pipeline, like AT&T and T-Mobile, and possibly others that could be announced in the future, we'll have to see if the regulators are going to be taking a harsher stance now.

So is this really a new doctrine that there's going to be more regulation and more oversight onto these mergers, or is this just one specific case they are really worried about it? We don't know, but certainly it raises some interesting questions.

Stipp: Jeremy, you never cease to surprise me with your great insights on the Friday Five. Thanks for joining me again this week.

Glaser: You're very welcome Jason.

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