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Deja Vu All Over Again?

Christine Benz

Christine Benz: Hi, I am Christine Benz for Morningstar.com and welcome to the Friday Five. Normally on the Friday Five we like to discuss the past week's new news. But some of the past week's headlines have felt a little bit same old, same old recently. Here to discuss some of them is markets editor Jeremy Glaser. Jeremy, thanks for joining me.

Jeremy Glaser: It's never the same old with you Christine. Thanks for having me.

Benz: So what you want to talk about this week?

Glaser: This week we'll talk about Warren Buffett's investment into Bank of America, bank layoffs, Steve Jobs' leaving Apple, housing data, and finally share repurchases.

Benz: So, Jeremy, Buffett's Berkshire Hathaway is sinking $5 billion into some BofA preferred shares. What feels familiar about that you?

Glaser: This really has all the hallmarks of a classic Warren Buffett deal written all over it. He's able to use the incredible amount of cash flow that comes off from the firm's insurance businesses and other businesses. He's able to invest in a company that he believes in very strongly and that he thinks has a strong franchise. He thinks Bank of America is going to do very well over time as he said in his statement when he made the investment, and he's able to get some incredibly favorable terms. He's getting a really nice yield on these preferred shares, much more than he was getting from that cash that was just sitting around earning basically nothing on his balance sheet.

He's able to get some warrants to buy shares at what he thinks are depressed prices for up to 10 years in the future. So he thinks that gives plenty of time for BofA to work out some of its mortgage problems and plenty of time for the bank to really get back to its core earnings. He thinks he's going to make a lot of money there. It just shows that even when we think that he doesn't have an another trick up his sleeves he finds another place to put that money to work, which has really been the hallmark of his entire career.

Benz: And for BofA, in addition to that capital infusion, it seems like it's probably a little bit of the seal of approval that if Buffett likes it maybe other investors should like it, too. Did Wall Street respond?

Glaser: Yeah, absolutely. It's a nice vote of confidence for the bank. We saw that during the financial crisis when Buffet made similar deals with General Electric and Goldman Sachs. It is really seen as a backstop and says that this man, who has had such a great track record, is really staking quite a bit of money on it. And we saw the stock pop quite nicely after the news.

Benz: Meanwhile, another familiar headline, banks are laying off more people both UBS and BofA coming out this week with news that they planned pretty big layoffs in the foreseeable future.

Glaser: Yeah, bank layoffs shouldn't be anything that would be too surprising to investors right now. Banking is a cyclical business, and it looks like we're entering a downcycle. The economy is certainly not growing at a hugely robust rate, and banks maybe hired hoping that the recovery would be a little bit stronger and that there'd be more demand for some of their services. But that demand just isn't materializing.

So these layoffs are going to hurt. I think that certainly when we're in an economy that's not producing a lot of jobs, losing these jobs is not going to be a net positive. But again, it's a story we've seen before that as the economy starts to slow down, the banking sector slows down. Banks are very quick to lay people off to try to align their costs with their revenue that's going to be coming in the door. And I think that once things start to get a little bit better all those people will get hired back because fortunately banks are also quick to hire people back when they see an opportunity.

Benz: Jeremy, that leads to the next point. One of the things that has been weighing on banks is the housing market. This week we've seen some data on housing that's a little bit mixed, some good, some bad. What's going on there?

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Glaser: Yeah, although we've been getting mixed housing data for a while, we used to get only terrible housing data. Then we moved to mixed, so maybe that's a slight improvement. But yes, sales of new homes just looked awful. I mean, really people are not out there buying new homes, which I guess isn't shocking given the number of homes that are on the market right now and that are available for sale. We saw the sale price go up a little bit, but for a lot of those price indexes, it's hard to know how much you should trust them and how you can really read into that too much. But it just really goes to show that housing is having a lot of trouble and continues to have a lot of trouble.

As we said before, and hopefully this won't be too much deja vu for our viewers, without housing really making a good recovery, it's going to be harder to see an incredible robust recovery in a broader economy. The housing market really helps drive employment. It really helps drive gross domestic product. It creates a lot of new jobs when people are buying new homes and when they are even buying existing homes. As the market continues to kind of languish, it could mean continued trouble and continued slow growth throughout the broader economy.

Benz: So, we've just been hearing recent rumblings about maybe a new program to help aid struggling homeowners with their mortgages. What are you hearing on that front, Jeremy?

Glaser: There is lot of talk and rumors about different types of programs that the federal government or the banks themselves could implement to try to move us through this process faster, and to get people who are going to lose their homes, get them out of their homes and into rental properties, and then kind of convert those properties into a more useful state than they're in now. I think it's going to be difficult to know exactly which of these programs there is political will to implement. Giving new low rate mortgages to people could be seen as kind of an election-year giveaway and I think something that could be difficult to get through Congress. I think finding money to kind of help shore up homeowners is going to be difficult; I think we've seen that there is a lot of appetite to increase spending. So I think it's hard to say exactly what impact any of these programs could have, but I think that we're going to continue probably to hear about them because I think even during the next couple of years, this is going to continue to be a major problem and one that we really do need a policy response to.

Benz: Right. So, Jeremy, in tech-related news, obviously the biggie this week was Steve Jobs' announcement that he's stepping off Apple as CEO, but he'll stay on as chairman of the board, with Tim Cook succeeding him. What's your take on that news?

Glaser: I think we're all somewhat surprised to see that press release come out with his letter saying that he was going to resign. He's obviously been in poor health for some time and has been on a medical leave absence for a few months now, and Tim Cook has been acting CEO, but certainly to actually see him step down is really the end of an era from his second coming to Apple and to making it into one of the largest companies in the world. I think it's very impressive feat, probably across all of American capitalism.

But I think for Apple, the story is going to remain pretty much the same. I think even though Steve Jobs is stepping down from day-to-day responsibilities, he really hasn't been doing that for a few months now. We've seen Apple continue to execute at a very high level. Tim Cook has been there for a long time. He understands Apple; it's in his DNA. And I don't think that he's going to be making any radical changes into the way the business operates or that any of the employees there going to make any radical changes in the way that they're going to be designing products.

I think some of that long-term vision might be more difficult to recapture and that's the one thing that investors are going to have to kind of be focused on going forward. But certainly in the short to medium term, I think Apple will continue to be extremely successful.

Benz: It seems like kind of conventional wisdom at this point that Cook is a good operator and a good controller of businesses. The vision question is the open one?

Glaser: Yeah, exactly.

Benz: Last but not least, Jeremy, you want to talk about share repurchases. It sounds like with the troubled market recently, we have started to see some of them pick up. What's new but maybe familiar about some of this news?

Glaser: Yeah, it shouldn't be shocking that share repurchases are back on the radar for a lot of companies. When share prices come down a lot, and you have companies sitting on giant piles of cash, it's kind of natural for them to think of repurchasing their shares, thus reducing their share base. It helps them boost earnings, particularly in a time when we could be seeing some slowing economic growth. We saw announcements from Lowe's and from CVS to that effect of repurchasing of shares. So, that's kind of more of the same, and we'll have to see if these are well-timed.

We've seen over time that sometime share repurchases happen at the worst moment that people end up buying shares toward the top of the market or what they think is kind of the bottom but is really just path to even lower share prices. I think that as we've talked with Josh Peters, who is the editor of Morningstar DividendInvestor, that sometimes dividends can be seen as a better way to use that cash and lets investors kind of make the decision. If they want to repurchase shares, they can go ahead and plow that back into owning more shares. If not, if they want to redeploy their capital anywhere, it kind of gives the investor that choice. So, I think we wouldn't mind seeing some of this happening as dividend increases versus share repurchases, but we'll have to see if these are timed well or not.

Benz: You think there could be more on the way?

Glaser: I think absolutely. I think if share prices continue to be depressed, and given the strong financial position that many companies are in now, I would expect to see more.

Benz: Well, thanks Jeremy for sharing your insights, we always appreciate it.

Glaser: You're very welcome, Christine.

Benz: Thanks for watching, I'm Christine Benz for Morningstar.com.