Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to the Friday Five.
A lot of recent decisions and issues in the market have created a host of PR problems for companies and government agencies alike. Here with me to offer the rundown is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for joining me.
Jeremy Glaser: You're welcome, Jason.
Stipp: So, what do you have for the Friday Five this week?
Glaser: Well, this week we're going to take a look at the debt-ceiling talks, at News Corp, at J.P. Morgan, Netflix, and finally, are we ready for QE3.
Stipp: Well, we'll find out.
For the first one, though, Jeremy, we can't escape the headlines on the debt-ceiling talks. It seems like they are making progress and then it's stalled. They are making progress, and then it's stalled. It's created quite a problem as far as communicating what's going on in Washington. What is the issue there? Have you untangled any of it?
Glaser: The United States does have a pretty big PR problem on their hands right now. This week Moody's came out with a warning that they would downgrade United States debt from its from AAA, gold-plated status if the debt ceiling wasn't raised. This didn't come as a huge surprise. S&P gave a similar warning in April, but it really underscores just how important these negotiations are.
We saw a couple of glimmers of hope this week that the debt ceiling will, in fact, be raised no matter what. Mitch McConnell, who is the Republican Minority leader in the Senate, really came up with a solution that would allow the president to raise the debt ceiling without actually voting out some of the underlying spending issues that they are trying to negotiate right now.
But there is still lot of heated discussions, and it's not a 100% clear that the Democrats will go along with McConnell's plan and that we really will be able to raise this ceiling before the United States gets into big trouble.
Right now the Treasury is still saying that early August is when they need to have the debt ceiling raised by before they run into the really big problems, but the credit markets could freak out at any point between now and that actual default day. So, it's something that we're obviously watching very closely. The United States, again, has to spin pretty well to convince creditors across the globe that they are going to make good on these debts. And I think that so far they do believe that, but who knows when that PR spin is going to run out?
Stipp: I am not a fortune teller, but I would predict that you are going to be talking about this in the weeks to come, Jeremy.
Glaser: I think it's a good bet.
Stipp: In corporate news, a scandal at a News Corp property actually was followed then by a real operational issue that they reported this week. What's the story there and why did it become a PR problem?
Glaser: News Corp is no stranger to PR problems. Rupert Murdoch is generally a lightening rod for criticism across the globe, but certainly the scandal at the News of the World in the U.K. has really taken it to the next level. The allegations that that paper hacked into the voicemails of a number of different people, a number of people's mobile phones, has really caused reverberations across the entire News Corp empire.
They closed the News of the World, which was one of the oldest tabloids in Great Britain. And even the closing of that paper doesn't have a huge impact on the bottom line. But it is impacting the regulatory environment and how people view other News Corp properties. News Corp was planning on buying the rest of BSkyB, which is a satellite television operator they don't already [fully] own. That looks like it's going to be blocked, and News Corps has had to pull out of that potential deal that could have been very accretive to shareholders.
There is going to be a lot of scrutiny, especially in the U.K., but probably across the globe as to the different ethical lapses they might have had elsewhere, to make sure that the other media properties that they own are not doing similar illegal activities, illegal spying on different sources in order to get the story.
It just underscores that these reputational risks can be much, much greater than just the small amount of revenue you're going to lose from News of the World. I think News Corp is going to have this problem on their hands for quite some time.
Stipp: In banking, Jeremy, we got earnings results from J.P. Morgan. As in the past, we are expecting that we might see some divergence in how some of the big banks are performing and what are the fundamentals there. It could create a little bit of a PR problem for the banks that aren't quite at that top level. What do you think the story is going to be there?
Glaser: Exactly. J.P. Morgan did not need to spin a lot from their quarterly results. They had a really great quarter. They exceeded the top-line results. They are doing well on that side. But also their credit quality looks pretty good. They had one of the lowest levels of credit write-offs in some time for one of the big banks. That really just underscores the difference between them and, say, Bank of America, which just has continuing problems with credit and continues to find new things that they have to write off from their books and new excuses for why they can't get their earnings power up.
So, I think that as J.P. Morgan and some of the other stronger banks, like Wells Fargo, continue to outperform, it's really going to create a bigger gap between them and some of the lesser performers, and I think we're going to see some divergence there and some of the lesser performers are really going to have to spin hard to convince investors that that's where they should put their money to work.
Stipp: Netflix had thousands of angry customer responses this week. What happened to them? What problem did it create? And what are the implications?
Glaser: Well, Netflix decided that they weren't charging nearly enough for their ... core streaming and DVD product; ... they are going to almost double the price effective in September for current customers. And believe it or not, customers did not love this news that they are going to be ... paying a lot more for their streaming and paying a lot more for their DVDs.
The outcry on ... Facebook and Twitter and on Netflix's blog was really overwhelming for the company. There were so many negative comments saying they didn't want to spend this much. They don't think the streaming or the DVDs alone are enough; they really want both of them. They liked the price. And it will be interesting to see how Netflix handles this.
They really seem to have committed to this pricing. It doesn't look like they are backing away and going to be offering any big discounts to current customers. Wall Street certainly thinks they are going to be able to pass these pricing increases along. I think that was one of the reasons that the stock has done so well is that there was a thought that they could increase prices because in some ways the prices were artificially low.
So, they have a bit of a customer problem on their hands, but we'll see how many people actually go ahead and cancel when the price increases. If people do just stick with streaming or they drop streaming and just do DVDs. I think people are going to have a lot of choices to make when it comes to their Netflix accounts, but we're not sure that Netflix really handled the situation in the most adept way possible.
Stipp: Lastly Jeremy, in government news, Bernanke had a statement this week, and then he had to step back from that a little bit--normally not considered the best PR situation. What's the story there? What did he say and what was the walk-back about?
Glaser: Bernanke was in front of Congress saying that the economy continues to be weak and weaker than many people in the Federal Reserve had originally expected. And he didn't rule out the possibility of another intervention from the Fed, a Quantitative Easing 3, another round of bond buying that would loosen monetary policy even more and try to keep the economy going and try to keep the recovery on track.
This is a very difficult move for the Fed. QE2 was incredibly controversial. They took a lot of criticism both from people inside the Fed and Congress, and really across the financial world, for continuing to pump more money [into the economy]. People were hoping that the Federal Reserve would start worrying more about inflation, or the potential for inflation would start bringing policy back a little bit.
Bernanke floating out the possibility of another one really sent shock waves through part of the financial community. The market rallied on the news because they were excited about the prospect of easier money. But then he had to ... walk that back a little bit and say that he has no plans to do it right now, that they really have to keep track of the situation, making it seem a little bit less likely than it did just the day before.
But certainly I think it shows just how difficult a job it is being the chairman of the Federal Reserve. Everything you say is going to be parsed incredibly closely--chose your words very carefully.
We'll see if the Federal Reserve really does decide to go with this QE3. The economy would have to weaken substantially from where we are in order for it to happen. But I guess it is somewhat comforting to know that they are watching it and that they are willing to make that choice even if it isn't popular.
Stipp: Well, Jeremy, always nice to hear your no-spin take on things. Thanks for joining me today.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.