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Getting the Picture

Jason Stipp
Jeremy Glaser

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five. Lots of pictures were emerging across the market and economy this week, so what were some of those developments?

Here with me to offer some insight is Morningstar markets editor, Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Always a pleasure, Jason.

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

Glaser: This week, we're going to talk about Facebook, Alcoa, e-book pricing, jobs momentum, and finally Best Buy.

Stipp: Facebook making a big splash this week with a big purchase. What's the story behind that?

Glaser: Facebook is spending $1 billion to buy Instagram, which is a photo sharing app that allows iPhone users, and now Android users, to take photos, apply different filters to it, and then share it with their friends either through the app or through Facebook or through Twitter, or any other social network that they want.

I think that this is an interesting deal for a couple of reasons. First, it really is Facebook's first foray into a big acquisition. It's by far their largest deal. In the past, they've acquired little companies here and there, but really they've just been buying the talent, they haven't been buying the products.

So, this is their first attempt at really trying to integrate someone else's network into their own, and I think they're doing this because they see that photos are a really important part of what people do on Facebook, and a lot that has been happening through Instagram. They want to make sure they continue to control that value.

I think that they also want to prove that they can do these acquisitions. They're going to have a lot of cash after this IPO. They don't have a lot of needs for that cash, as we saw through their S-1 filings. They're incredibly profitable. They're an incredibly efficient company. I think they want to see if they can make these acquisitions work for themselves. Particularly as there just are fewer and fewer people in the world who don't already have Facebook accounts, it's harder to get growth that way. They might have to start looking externally.

I think investors are interested in the IPO and even beyond are really going to be keeping an eye on how they integrate Instagram into the Facebook family, and if they're able to do that successfully. If they are, I think that could bode well for the future of the company.

Stipp: Also this week, we got a very early read on earnings as Alcoa kicked off the first quarter earnings season. Were those results as good as they looked? It certainly seemed to cheer the market.

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Glaser: Alcoa did have a good quarter. They operate in a challenging industry of course, but they really were able to post decent results, and the stock also looks cheap, which is nice in the marketplace right now given how fully valued a lot of other shares look. Our analyst really sees it as a good 5-star pick right now.

But I think in terms of kicking off the rest of earnings season, we really are going to have to wait and see if the rest of corporate America is able to turn in really better-than-expected results after the first quarter.

We got a lot of conflicting economic data about the first quarter. [We're] a little bit unsure if there was a big weather effect that was making some of that data look a little bit better. How much are people really spending? Where are they spending? Were companies able to keep up their higher levels of profitability through the quarter? We are going to be keeping a really close eye on earnings here to get a sense of what was really happening on the ground, and I think that it should be an interesting quarter in terms of earnings.

Stipp: A picture that's been developing for quite a while has to do with digital media and the move to electronic music and electronic books. There was an interesting development there this week. What's the story on that?

Glaser: The Justice Department is suing Apple and a lot of the major book publishers for allegations that they were price fixing in the e-book market. I think this is interesting for two big reasons. The first, is Apple going to face more regulatory scrutiny? Is this the first in a series of investigations into Apple's practices? Certainly, as companies get bigger and bigger and bigger, and tend to dominate more and more markets, a lot of government antitrust authorities might start to take a second look, and may try to take a look and see if Apple is abusing its position of power as they really start to dominate particularly the mobile landscape and also in the tablet space as well.

I think anyone who remembers the Microsoft days in late '90s [would say that] sometimes there can be a lot of bark, but not necessarily a lot of bite to a lot of those investigations, but that extra level of scrutiny maybe is something that Apple wasn’t expecting and something that might not be welcomed by many investors there.

The other thing to look at is, who’s really going to benefit here? And I think that Amazon could be a big beneficiary. Before Apple came in with their iBookstore and had these allegations of price-fixing, Amazon was able to sell books at $9.99. They were taking a loss because they were just trying to build up this Kindle ecosystem, and I think that if Apple loses the case, if they settle the case, and have to let the book publishers set prices a different way, and those prices come down, it could be another boon for Amazon in order to keep getting people into that Kindle ecosystem and keep building their lead there. So, I think it’s going to be an interesting story to watch and I think one that we are definitely going to hear more about.

Stipp: In economic news this week, Jeremy, the employment recovery picture got a little bit murkier. What do you think the story is there?

Glaser: After a few months of really almost uniformally good news on the jobs front, we’ve now had two pieces of not-so-good jobs news. The first was last week, we heard that the [government] jobs report--the unemployment rate and payroll data--was not quite as strong as people had expected. The economy instead of adding over that 200,000 level [in March instead] added more in the 100,000 level, a little bit more anemic growth [than expected]. Then this week, initial unemployment claims crept up for the first time in a very long time, the largest increase in almost a year, which makes us a little bit worried or maybe a little bit questioning as to if this job momentum is totally stalled out, and is the employment market not going to improve very much.

I think that it's very difficult to take from one or two data points and try to draw a big trend. Obviously, there’s always noise in the data; there's always going to be some movement around. I think it’s probably too early to panic on the jobs front, but I think certainly investors should keep an eye on it and see if that slowdown is real, and I think as we get some more data over the coming weeks on the claims and we get more payroll data, we should have a clearer picture of what's happening in the employment market.

Stipp: For Best Buy, Jeremy, number five, they may be increasingly desperate after news this week for you to buy your camera at a Best Buy big-box store. What’s the story there, and what does it mean for that struggling retailer?

GlaserWe talked about Best Buy recently, saying that they are going to close a bunch of stores, they are going to try to re-concept into different formats. We were wondering if that was going to be successful or not.

Then, in a surprise this week, their CEO Brian Dunn stepped down under allegations of inappropriate personal relations. They didn't elaborate too far from that, but he was out kind of suddenly.

Certainly this is a big inflection point for Best Buy. We already talked about their having all of those problems, and now, they’re without a serious leader, and they're really going to have to go out and find a really good CEO, probably external from Best Buy, who’s going to be able to come in and really re-imagine exactly what a big-box retailer means in the age of people going on Amazon just to get the absolute best price.

I think finding that right leader is going to be crucial for Best Buy. Hopefully, they can turn this into an opportunity, but certainly it creates even more near-term uncertainty for the stock.

Stipp: Jeremy, thank you as always for your very focused analysis this week.

Glaser: You're welcome, Jason.

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