Motley Fool Hidden Gems Investing - Motley Fool Money: 06.19.2009

Episode Date: June 19, 2009

President Obama proposes far-reaching financial reform. What would the new regulations mean for investors? NewsCorp’s MySpace lays off 30% of its staff. Do social media sites like MySpace, Facebook, Twitter and YouTube have real money-making potential or are they just really expensive hobbies? In this installment of Motley Fool Money, we tackle those questions, offer up some Father’s Day financial advice, and share three stocks on our radar. Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Welcome to Motley Fool Money. I'm Chris Hill, and I'm joined by Motley Fool Senior Analyst Seth Jason, James Early, and Shannon Zimmerman. Guys, happy Friday. Happy Friday to you, Chris. Happy Friday to you, Father's Day. We've got some tasty items on the menu today, including President Obama's plan to overhaul financial regulation and the quest for profitability in the world of social media. Plus, we'll

share three stock ideas and a few pearls of financial wisdom just in time for Father's day. But we start with the financial commander in chief. This week, President Obama proposed a host of new financial regulatory reforms that touched on everything from mortgages to derivatives to the banks. But the big buzz is focused on the president's proposal to increase the power of the Federal Reserve. Shannon, what was the headline of this whole legislation for you? Well, I think that it's revealing about Obama. Before you get into the weeds of the regulations that have been proposed, this is very revealing about him. And I think that what it is suggesting is that he is a conservative in the most traditional sense of that word. He's not likely

and not inclined to upend existing institutions. And like a non-activist judge, he's very deferential to tradition and to precedent. We're seeing that in the health care reform approach where, you know, he's a Democratic president. The holy grail for Democrats around health care reform has always been a single payer plan. He's not arguing for that. He's arguing for an option that would be alongside private industry. And so for me, it feels a bit toothless. I think that earlier on In this podcast, we talked about what seemed like the inevitability of nationalization. George Packer, the New Yorker, had an interesting point that even if that kind of radical approach had been the best way to reform the financial industry, Obama is temperamentally unsuited to pursue it.

James? I'm going to channel my inner Shannon Zimmerman for a minute and say I think what's going on here is political theater. I think I was actually blown away. First of all, I never like it when politics and business mix. They inevitably have to. I expected much worse from this, maybe some stupidly punitive rules. But I think Obama is starting negotiations on the soft side, knowing that this is going to go to Congress next, and they're going to be bloodthirsty and trying to go to the extreme on the other end. You know, I think what I do like about this is, in general, we're trying to reduce the systemic risk.

Didn't go too far. I like a couple of things, but there are a lot of missing pieces here, I think. There's no real regulation of the credit rating agencies, and those guys were a big piece of what went wrong here. You know, what's really going to actually stop the bad guys from doing things again in the future? I'm not sure that I see that here, but, again, I'm not sure that Obama entirely meant to leave that out. I think it will get in there one way or another. Seth, what was the headline for you? The headline is the one that we haven't seen much of for me, which is the unintended consequences that are likely to arise,

not just from this, but from any time you do this. I mean, part of the reason it's strange that the rating agencies haven't been taken to task as a part of this legislation is because the whole problem with the rating agencies is they got much more power because of the unintended consequences of legislation decades ago. So I don't think we'll know how this all shakes out. I'm really sympathetic to the pleas of some of the smaller financial institutions that say, hey, basically, this is going to cost us on a percentage of revenue basis a lot more money than it costs the big ones. And so what you're essentially doing is making these big banks, which caused most of the problems, you're giving them an advantage over the rest of us. And I'm sympathetic to the folks who just don't want government mixing with business too much. But we need something like this to happen, and this is as good a start as I've seen.

What do you guys think about putting the Fed in charge of more systemic risk? Kudlow said last night it's like letting the fox guard the henhouse. But then Jack Welch said on CNBC that he thinks Bernanke is a national hero. So you've kind of got mixed reviews. Well, they don't have Greenspan anymore, at least. So he was more the Fox. I'm just going to say I would trust Bernanke more with this than Greenspan. Yeah, but the problem is it's a moving target.

You want to always have Bernanke, right? So the next guy may not be as appropriate for that level of power as the current Fed chair. I think it's all the Fed can do is monetary policy, personally. I think I'm skeptical. One U.S. senator said that giving the Fed more power is like giving your son a bigger, faster car right after he crashed the family station wagon. I mean, is that a fair point? I mean, it's a cute line, but is that a fair point?

Speaking of someone who was the beneficiary of that dynamic, what's wrong with that? As was I. All right, exit question. On a scale of 1 to 10, 10 being in terms of impact for investors, this is huge. This is landing on the moon.

This is creation of fire. This is the invention of the submarine. Or 1 being it's the Segway. What do you think? I think maybe it's a Rubik's Cube kind of invention. I think James' point is exactly right. This is the beginning of the conversation, not the end. Obama is playing it right down the middle, so I'm going to give it a five.

Yeah, I'd say a two now. It's not a Segway, it's a Vespa, but maybe a five or a six after Congress gets done with it. Isn't the zero the Puma, the Segway GM thing we talked about a while back? A Segway is a lot better than that. I'm going to give it the I or imaginary or something. I don't think we know because we don't have enough details, And even if we knew every detail, we would not be able to predict those unintended consequences. All right, let's dig into the world of social media.

This week, MySpace announced layoffs of... Wait a minute, sorry, I'm twittering over here. What were you saying? MySpace announced layoffs of 30% of its staff. I'm updating my Facebook. I'm removing earwax right now, everyone. Google is reportedly losing between $150 and $400 million on YouTube. And if any of you can explain Twitter's actual business model to me, I'll buy your next cup

of coffee. What do we think of social media? Seth, I mean, is there a way to create shareholder value, or are these just really expensive toys for the parent companies? And in the case of MySpace, it's News Corp., and obviously with YouTube, it's Google. I don't know that anyone knows the answer to that, because I don't think either one of these companies breaks out exactly what the profit and loss is on these various bits. To me, Web 2.0, which is what, are we calling it Web 3.0 yet,

which is what all the social media is, is really a little bit web or internet bubble 2.0. Everyone rushed into this. Facebook's worth this much billion based on, you know, extrapolating a small investment from Microsoft. I don't think anybody knows if there's a way to make money from this stuff yet. It seems to me that it's still the old model,

which is, well, we'll just collect a lot of use and then hope that we can tack some kind of an ad structure onto it later. Because the idea of charging people for this stuff after it's been free is, of course, never going to work. Yeah, I think we all know as employees here of a web-based company, it's a lot easier to do cool stuff over the Internet than it is to actually monetize that cool stuff over the Internet.

I think in most industry or Internet industries. Kind of like this podcast. Exactly. It's fun and cool to do this podcast, but we're not really monetizing it. We're wearing burlap sacks in here, everyone. But if you're listening out there and you are interested in sponsorship opportunities, please call us. But let me say this. In the 1920s, I believe, Warren Buffett noted there were over 2,000 different automakers.

And now there are, what, you know, sort of two or three? Emphasis on the sort of. Exactly. You know, I think we're seeing a lot of the same thing here. You know, fortunately, these are otherwise well-heeled companies that are playing in this. But, you know, we're going to, I mean, look, we had, what, first Friendster, then MySpace, now Facebook. You know, it's like the latest cool radio station or cool bar. I mean, they come and go, and things will settle, but not yet.

Yeah, it's sort of interesting to sort of juxtapose the new media cachet these services have, Facebook, Twitter, MySpace, with the money they don't make. It's a vanity project. And, you know, the charm of that eventually wears off, even for the likes of News Corp and Google. So for me, it reminds me of the heady days of the late 1990s when all these guys with interesting ideas but no business plans were awash in VC money. The VCs this time around are the parent companies. But if eventually they don't turn a profit, the companies will be spun off or shuttered. It's the underpants gnomes all over again. Step one, collect underpants.

Step three, profit. And we're wondering what step two is. All right. This is normally the part of the podcast where we do What's My Beef? But you know what? We've got Father's Day coming up. Yes. So we're going to complain about our fathers.

All right. Shannon, you're a dad. James, you're a dad. I'm a dad. Seth is about to join the club. So let's just go around the table here. Just give me one great piece of advice you got from your dad or your grandfather. or, you know, maybe something that you've already shared with your kids.

Yeah, I guess the best piece of advice my dad ever gave me was to get started early. You know, time really is on your side, and youth is often wasted on the young. But as far as he was concerned, it wasn't going to be. If I had listened a little more closely, I would have been better off. But eventually I got around to it. You come to find out, my daughters, that your dad was right all along. And so the sooner you listen and the sooner you get started investing, the better off you'll be. And that's the advice I'm offering my children, one of whom is only five months old and looks at me curiously and drools.

But that's what I'm up to. First of all, every time my kid sees a credit card, I'm going to punch him. So he learns to associate pain with consumer credit. And he's five months old also. Nice. Just beating five-month-olds. That's what we do at The Motley Fool. Child Protective Services, contact James Hurley at The Motley Fool.

Seth? I actually, I looked to what happened to me and actually to my wife, what happened to us. It was very traumatic. Our parents expected us to pay some of our own way. So I don't think either one of us ever had to worry that there was no money. So that in itself is a great safety net. But on the other hand, we didn't get everything we wanted. I worked various busboy jobs and horrible things.

My wife had better jobs. But her mom told her when she was a kid, you want the fancy jeans? That's fine. I will give you the money that I would have spent on the less fancy jeans. You can make up the difference. And as a result, we both have sort of became savers and investors. And I think that giving your kids a stake in their own financial future and in their own consumption habits is probably the plan I'm going to go forward with starting sort of at the end of July. Shannon, as we head into the last week of June, give me one stock that's on your radar.

I'm not going to give you a stock, but I will give you an exchange-traded fund, an ETF. And it's one that I own and that Motley Fool owns shares of as well. It's a Vanguard small cap value, dirt cheap ETF that tracks that segment of the market. Interesting part of the market right now, out of the last seven recessions, small cap value stocks, which is, of course, what this ETF specializes in, have led the way. I think now is an interesting time to look at this one. James? I'm going to go with a wholly unsatisfying answer and say sometime in the next year,

it will be time to look at financials again, depending on how things shake up. If you are okay with the risk, U.S. Bancorp and BB&T are two of the first TARP repairs. They really didn't need the TARP to begin with money. I like them coming out of the gates. Seth? I was going to go the same direction as James, but to say to be careful. Maybe it is within a year that we find out. I think because of all the unintended consequences and because of some of the other restrictions,

the folks who are saying bank shares are really cheap right now, and I don't think James is saying that, by the way, but there are people saying that. I think they're wrong because they don't have enough information to make that determination. I think going forward, because of new capital requirements and new regulations, Banks are just going to be less profitable, so you can't tell if they're cheap right now. So I would say that the banks James mentioned are actually pretty strong. I own Santander over in Spain. I think you should take a look at some of the stronger international banks as well.

And so be really careful and very picky with your banks. And just because the street seems to have said over the last few months, hey, all is well, we don't really know what the future looks like. Yeah, when has the street ever been right and the problem of toxic assets has not gone away? Still there. Okay. Wait. Yeah. Yeah, they're still there.

Wait, wait. Update your Twitter on that, would you? Yeah, hang on a second. All right. Seth Jason, James Early, Shannon Zimmerman. Guys, thanks for being here. Good to be with you, Chris. Always fun. Thanks for listening to this edition of Motley Fool Money. You can check out past episodes at MotleyFoolMoney.com. As always, people on the program may have interest in the stocks they talk about. Don't buy or sell stocks based solely on what you hear. Do your homework

and make your own decisions. And remember, the conversation continues 24-7 at Fool.com. I'm Chris Hill. We'll see you next time. We'll be right back.