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Five Tales of Independence

Jason Stipp

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

In the spirit of July 4th weekend, we have five tales of independence in the market.

Joining me with the stories is Morningstar's most patriotic markets editor, Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Jason, thanks for having me.

Stipp: So I hope you have five fire cracker tales for us. What have you got?

Glaser: I do. This week, we're going to take a look at Facebook versus Google, to see if there was overpeformance last quarter, at bank swipe fees at Bank of America, and finally, at Greece.

Stipp: So Jeremy the first story evolves the most popular social media platform, Facebook. Some people might be looking for alternatives from that behemoth. Do they have one now?

Glaser: Jason, I really think that users that are looking to declare their independence from Facebook are going to find a good choice in Google+. Google+ was the service that Google launched this week in order to really compete in the social networking space. This is an area where Google historically has been very weak; some of their other entries in this space like Buzz, have really completely failed.

I think that they have winner on their hands here. I've had a chance to use it a little bit this week and play around with it. It's very user-friendly. I think it respects your privacy in a way that maybe is a little bit easier to understand than Facebook, easier to understand than some of their previous products, and I think people are going to be excited about this.

I think it's going to be a while before we'll know if they're going to be able to build that critical user base and build up that mass to really compete against Facebook in the long term. But I think Google made a wise investment here, and I think it's a case where people are going to really have a choice there and be able to leave Facebook if they feel like it.

Stipp: So Jeremy, this week we wrapped up the second quarter. There were a lot of ups and downs, but at the end of the day, do investors have anything to celebrate this weekend?

Glaser: Last quarter really granted investors freedom from overperformance. They didn't have to worry too much about having their portfolios just zooming out of control and for them to just make too much money over the last three months.

Essentially the stock market was pretty much flat. There were some down areas. There were some up areas especially towards the end of the quarter, but for the most part people ended the quarter basically where they started it.

This isn't a terribly surprising quarter for this to happen. We saw that stocks were really more than fully valued starting off. We've got a lot of bad economic news, a lot of sovereign debt news that was not so rosy over the last three months. So we shouldn't be too shocked that investors weren't terribly excited to bid up the prices of stock even further, and I think the real question now is, looking forward, looking to the second half of the year, if economic growth doesn't pick up, if we continue to hear more about some of the woes in Greece and possibly in the United States over the next couple of weeks, where stocks are going to go from here.

Stipp: In stock news, Jeremy, the credit card companies got some news about freedom from a certain kind of oversight. The stocks were up on that. What's the story there?

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Glaser: Banks are finally trying to get rid of the tyranny of regulation. They've been railing against Dodd-Frank ever since it has passed, and one of the things that has really rankled [the industry] is the Durbin Amendment, and basically what this did is reduce the amount of money that banks could make every time somebody swipes a debit card at a retailer, and cap that at $0.12 per swipe, which is much, much less than the banks were charging before.

The Federal Reserve looked set to go ahead and implement this rule, and a lot of companies, Visa, in particular, their stocks really got hammered because people were afraid it was going to take a big bite out of their profitability--and kind of out of nowhere, the Fed comes out and says, "Actually, we're not going to implement it there. We're going to raise the potential of how much you can charge for the swipe. We're going to give you a couple extra other fees that you can charge," and it's really going to hurt a lot less than people thought.

Now, I think that this could very well change again. We saw how quickly it changed the first time. I think that after it's implemented or even before it's implemented, there could be some more changes down the road. But this shows you how flexible a lot of these banking regulations are and how it's really too early to say exactly what the impact of Dodd-Frank is as they continue to write these rules, and it just adds even more uncertainty to a lot of these banking stocks.

Stipp: Sticking with the banks, Jeremy, Bank of America this week, hoping to seal its independence from the financial crisis. Will they be successful with that endeavor?

Glaser: They've been fighting a bit of a war of independence against the financial crisis for a long time now. More than a lot of the other banks, Bank of America has had the most trouble really putting the mortgage crisis in particular behind them. Granted, their purchase of Countrywide makes it hard. Countrywide was a huge player in a lot of the mortgage mess, and Bank of America this week agreed to a big settlement with Bank of New York Mellon and some others to help pay for some of the non-performing loans that were foisted off upon them in the residential mortgage-backed security market, and they are really going to pay this money out.

Now, you might say, "Okay, well they have some provisions for this, so this is not going to be end of the world for them," which is true, but the problem is that Bank of America has not been very conservative with their provisioning. Whenever they say, "Okay this is over; this is behind us," the next quarter there is another surprise, there is another unsightly blemish on the balance sheet that we previously didn't hear about.

So, I think it's going to ... really be a show-me story where Bank of America really does need to prove to investors that this is truly behind them, that there is not going to be another big settlement, there are not going to be any more big fines, so they can really focus on building the earnings power over time.

Stipp: Jeremy, investors this week I think were hoping that Greece finally got some independence from all of its troubles. But is the story really over?

Glaser: I know that Friday Five viewers probably wish they'd get independence from me talking about Greece, but unfortunately I don't think it's going to happen anytime soon. The current austerity measures that were passed, and the next tranche of the bailout money really keeps Greece from defaulting for a few months. It's not a big deal. German banks are agreeing to extend maturities past 2014. Again, not a huge deal, it just kicks the can down the road.

I think until Greece really goes ahead and solves their fundamental competitiveness problems and figures out a way to get their incredible sovereign debt load under control, and reduce it probably through some sort of managed default, we are going to keep hearing about this forever. I think the appetite of German taxpayers to bail out Greece for the next 20 years probably isn't there. So, unfortunately I think we are going to be hearing about Greece for a long time in the future.

Stipp: Well, Jeremy. Thanks for a great five for the Fourth this week. Enjoy the holiday.

Glaser: Thanks. You, too Jason.

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