Motley Fool Money - Motley Fool Money: 09.20.2013

Episode Date: September 20, 2013

Bernanke surprises.  Microsoft makes a big buy.  And Tesla accelerates.   Plus,  producer Jim Bruce discusses his new film, Money for Nothing:  Inside the Federal Reserve. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Motley Fool Money. Thanks for being here. I'm your host Grisill, joining me in studio this week from Motley Fool Inside Value all the way from Sydney, Australia, Mr. Joe Maker. From Motley Fool Supernova, Matt Argusinger, and from a million-dollar portfolio, Ron Gross. How you doing? Good to see you, guys.

Yeah. Good to be here. Joe, one travel tip for the folks at home. It's good to have you back in studio when you're making the trip from Sydney, Australia, all the way to Fool HQ. Any tips? Yeah, don't sleep at all. So that way, when you get here, you can sleep the first night that you're here. You'll be awake for about 33 hours. Sleep over that. Jetwag, conquered. Is business class essential or higher? The Fool didn't...

Okay. Let's move on. Not this time. We're not paying our bills in case you don't know. This week, we've got the latest from big banks, big tech and big fines. We will go inside one of the most powerful and secretive institutions in the world. And as always, we will share a few stock ideas to put on your watch list. But we begin this week with the Fed chief.

On Wednesday, Ben Bernanke stunned the investing world by announcing the Fed's bond buying program will continue as is. The news sent both the Dow and S&P 500 to all-time record highs. And Ron Gross, I'll start with you. He had the green light from Wall Street. We had CEOs coming out saying we're expecting the taper to begin, going from 85 billion. to 75 billion. Some saying he made the wrong call. What do you think? I think based on the economic data that we have in front of us, I think he did the right thing. The fact that the media had convinced us all that he was going to taper, I think, is what caused the surprise.

If you look at unemployment, if you look at GDP growth, things are not that strong. He could maybe start. Taper is an interesting word. You can cut back by one billion, and that's a taper. He could certainly start. slow, and I do expect when he starts, it'll be five or a $10 billion taper. And I think I'm going to trust him to do it when he think it's right to do. It's going to happen. It's coming. The question is, what do you want to do about it? And yet, Matt, in terms of the window of opportunity, again, some people are saying, look, he had the window right there. He's not going to get that again in three months. Right. Well, my question is, what is Bernanke see? And part of it might be the sluggish economy,

as Ron said, but also, he might be looking ahead to October. over here, and we've got sort of this, we've got this debt ceiling debate coming again. We've got Congress who's going to come to some kind of budget agreement here, which we know is going to be almost impossible. And maybe he sees that and says, gosh, you know, if the U.S. gets another credit ding, if Treasury sell off because of that, rates are going to go higher, you know, on the monetary side, I don't want to, I got to stay ahead of that. And so maybe it's a little bit of caution on his part because of that. What do you think, too?

I think the bigger story is just how people are or are not getting ready for higher interest rates. So, REITs and MLPs are still very expensive here in America. I think they're going to get absolutely crushed when rates do start to rise. As a value investor, were you at all disappointed because it's got to be harder to find value stocks when the market is hitting all-time highs, and it was already at an all-time high, and he sent it even higher? Yes. Yes, I am. I mean, it's a tough market to find cheap stocks. It absolutely is. And I hear a lot from people, you know, so what should we do about it?

If tapering is coming, if interest rates are going higher, what should we do about it? And I don't think you want to become a market timer because my experience is that that kind of never works out. You never get it right. But with so many stocks hitting highs, I think you can look at your portfolio and you can selectively maybe sell some or all of these stocks that have kind of run their course and have limited upside left. And just organically, by doing that, you should really be doing that always. You'll move into some cash and maybe insulate yourself a little bit if we see. a correction.

Here are some of the stocks that hit all-time highs this week. 3M, Amazon, Boeing, FedEx, General Motors, MasterCard, Nike, Starbucks, and Visa. That is a pretty nice cross-section of the U.S. economy. Joel, start with you. Of those nine, is there one you're particularly drawn to? Well, I own most of them. So I'm thrilled. Bunch is on Gilles.

I'm thrilled. Not business class, though. My favorite of the bunch, and I think all those companies are doing very well, I think that companies are doing very well, and they should be at all-time highest. My favorite is probably Amazon. It's classically expensive, but if you buy a Ferrari at a 30% discount, you're still getting a bargain, and that's the kind of business I think of this as. Still the biggest, baddest player in online retail, which is still sub-6% of U.S. retail. So there's still a long runway here, and I think that, again, shares book expensive, but I think over the long term

you'll be very happy. Mattie, what about you? I like the Amazon call. I will just say, though, that GM, all-time high. I mean, I'm surprised Joe didn't bring this up. I mean, this is a company that was dead, or it was almost dead, going back about five years ago. And to see the business hitting an all-time high and to see what auto sales have done so far this year, it's an incredible turnaround. Yeah, I was a couple years early on that thesis, unfortunately. But as we've talked about previously, you look at Europe maybe starting to turn the corner

for the big automakers, Ford and GM, maybe even brighter days ahead for General Motors. Ron, what about you? I like to keep an eye on FedEx because of its bellwetherness. word. Can we use that word? Can we coin that? It really tells me a lot about when I hear them speak about where we're going in the economy. And they had been struggling on the express side. The ground business has been okay. But internationally, a lot of competition. And they were struggling. They put some cost cuts in place. Now they say they think they're going to be able to raise rates in the future. They recently reported earnings that were solid. So they are

indicating that things are looking up. So I like to keep an eye on what they have to say. It is not quite as big as the companies we just discussed, but another stock hitting a new all-time high this week is Tesla Motors. Maddie, up more than 400 percent year-to-date. The market cap, this is what caught my eye. The market cap is now over $22 billion, which is nearly half the market cap of General Motors. Is that justified? Well, it's, I do this.

I mean, bear with me here. Take a breath. I want to compare this. I mean, I like to say, I like to compare this. is going to sell about 21,000 cars this year. You know, GM, BMW, Ford, these companies sell millions of cars every year. And it's interesting to make those comparisons and see where Tesla's valuation is. At the same time, we have to remember that this is an altogether, a little bit of a different company. The gross margins, for example, for Tesla, are probably going to approach

30% this year. Elon Musk wants to get those up to 35%. A GM, a BMW, usually happy to be in the 10% to 15% range on the gross margin. So it's a much more profitable company. It's a much more profitable company. The gross margins are certainly approaching Porsche-like levels. That's a little bit of a differentiator. At the same time, there's a lot going on with this company. It's a lot more than just cars. At the same time, it is up 5x over the past year. It's high.

Joe, it's obviously not a value stock, but you just got done talking about Amazon and how the stock has really never looked cheap. Is Tesla at all attractive to you as a value investor if you have a long enough runway? if you think this is a company that can execute. So obviously, not cheap today, but maybe over the next 10 years, it pays for itself. No. I could see Tesla going on to do great things. Obviously, it's got great leadership team. They're making great products. But at this valuation, probabilistically, you are deeply unlikely to deliver strong results in terms of the share price. I mean, it's selling at 16 times

sales. GM's at .3 times sales. Obviously, there are different things to account for there, but a very high level. This is a super premium price, and I think people are probably just going to be disappointed that it doesn't grow into that. Microsoft is spending billions on something other than buying other companies. The tech giant announced a plan this week to buy back $40 billion worth of stock. Ron, they are also increasing the dividend by 22%. You like these moves? Yeah, I think they're pretty good. Forty billion is 15% of the market cap. We think the stock is undervalued here.

that's a good capital allocation. 3.4% dividend yield. I like that, especially in a company like Microsoft. That isn't a huge grower in the future. It's obviously a very mature company. Some would say a company in decline. Some would say. We've recently moved the stock to hold, having had it to buy for quite some time.

They're looking for a new CEO. They're changing strategies. They're buying Nokia. There's a lot of changes going on that make the execution risk relatively significant, much more than we thought beforehand. So we've moved the stock down to hold, and we're actually looking at the allocation to see if we're properly invested there. Steve Bomber is going to step down at some point in the next 12 months. What does Microsoft need if you're putting the, you know, if you're Bill Gates and you're putting together the job description, what do you need

out of your next CEO? Because we go back in time and we have the benefit of hindsight. It seemed at the time when Balmer rose to become CEO. He was a guy who was a great operator, and it made sense. What does Microsoft need now? Well, since they've laid out where they want to go to basically move more towards devices, you have to get someone that is strong there. So you can't get someone that would have loved to run the old Microsoft, for example. They've kind of made their bed, and now they've got to find someone to sleep in it. And I think that actually makes it more difficult. You've got to find someone that really buys into it because you can't have someone new come

in and then all start restructuring the other way. It's extremely disruptive. So I think it's going going to be a hard thing to find, but obviously there's many talented people out there. They'll get it done. But as I said before, there's a lot of execution risk here. I was going to say, that sounds increasingly hard to find when you put it that way, if their attitude really is, no, no, no. We need you not just to be a great CEO. We need you to run the company in a certain way. I don't know, Maddie. Who's going to sign up for that? I know. It doesn't sound like a good gig to me. And I just have to say, why such this focus on hardware and devices? There's a lot of things Microsoft does really well, operating

software, tools that help office productivity. It's just that they're, we've seen what's happened with the surface. I don't know. Well, and we were talking earlier this week about Grand Staffd Auto, so I know you're also including Xbox. Oh, sure. Coming up, advice for young investors. You're listening to Motley Full Money. Hey, it's Chris here. Is your business protected from data loss? If it isn't, it should be. Join the 100,000 businesses who trust Mosy to protect their critical business files.

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Chris Hill here in studio with Joe Mager, Matt Argusinger, and Ron Gross. This week, J.P. Morgan agreed to pay $920 million in penalties over its 2012 London whale trade that went badly. The company also admitted that it violated regulations as part of the settlement. So I turn now to shareholder of J.P. Morgan stock, Joe Maker. Happy shareholder. Do you want every stock? No, about 35. Okay. This was a slap on the wrist for them, wasn't it? Yeah, it's just a slap on the wrist. I mean, the real cost here was the actual trade. And I think that's as it should be.

I mean, they got completely hammered on the trade. And it was a huge mistake. And obviously, there were poor internal controls around it. And then they could have been more forthright about internally and externally about the handling. That said, this isn't any sort of deal breaker. And, you know, are the shares a great buy today? No. The time to buy was when the bad news was actually happening.

This is just, you know, a small scale ripple effect. And it is a real amount of capital. like JPM could have done something with that money. That said, in the grand scheme of things, this isn't going to be a huge deal. This is fine. Jamie Diamond, the CEO, sent out a memo to employees where, among other things, he stated, we're not out of the woods yet. There are still some outstanding... Well, he's got to say that. What's going to be like, pop the champagne?

I'm not saying he says, let's pop the champagne, but I guess my question is, how worried are you that this is not the end for them? That, to your point about the internal controls, that we're only going to see more of this type of incident for J.P. Morgan. I think we're kind of in the realm of controlling the story and spin at this point because there's been more rumbling about new controls on capital levels of banks here in the U.S., which had kind of died away for a while, but that would come back. And more or less, more regulation here would mean lower returns for the banks. And so they'd like to avoid that.

So, you know, Diamond and the other bankers are putting the best foot forward and demonstrating a lot of weirdness, and we'll see how it goes. Ron, let's pull back from J.P. Morgan. Last question on this topic. Instead of finding the firm and essentially hitting the shareholders to the tune of $900 million, what about finding the CEO? What about finding the executives? Not that amount of money, but saying to them, you know what? This was on your watch that this happened. We are finding you, in this case, Jamie Diamond. We're finding you $5 million and it's coming out of your pocket. You certainly would expect people to be more careful, I guess, if that happens. But then you'd

probably start seeing contracts where the CEOs insist that they get indemnified for potential fines like that. Otherwise, you would have, you know, there wouldn't be people willing to take those positions if they were going to be on the hook personally. It's like we need a commissioner. It's like the NFL or, you know, it's some guy who literally says, oh, no, Jamie Diamond, saw what you did last week. Five million dollar fine. Yeah, I mean, practically speaking, you get an organization with tens of thousands of people dealing with financial contracts, trades every day. Mistakes do happen. In this case, it was, a massive mistake, a London whale-sized mistake, but they do ultimately happen. And I'm not sure

that that's always necessarily, it should be a financial backbreaker for a CEO. Last week, we talked about Pandora's new CEO. This week shares up another 12% on the news that a secondary offering of 10 million shares is coming to raise $235 million. What is going on with this stock? Well, it's the same thing we saw with LinkedIn a couple weeks ago. Issued stock initially sold off, but then actually hit a new all-time high. And I think with Pandora, I think the excitement here is about Pandora. The new CEO is kind of an interesting story, but mainly it's about, I think, the emergence of internet radio. And I think iTunes Radio, which a lot of people think is going to compete with Pandora, is more or less legitimizing internet

radio as a platform. And Pandora's got the biggest platform. It's got 75 million listeners. It's out there. So the raising this capital to do what with it. It's a good time to raise capital. The stock, the company, the stock is very expensive. And so it is a positive sign, in my view. It's a good use of, good, Use of capital, I guess. You can follow the show on Twitter. At Motley Full Money is our handle. Got a question on Twitter from Logan Zuber in Fort Wayne, Indiana. He writes, can you give advice for young investors?

I'm 18 years old and a business econ finance major at Indiana Tech. Go Warriors. What should I focus on studying? Is there anything I should read with a $500 portfolio? What should I invest in? There's a lot to chew on there, Ron. Let's start with advice in terms of reading. I'm assuming he's got plenty of textbooks. What else can he read to make him a better investor?

There's obviously so many good books for beginners out there, but I'm a big fan of the collection of essays of Warren Buffett, all his former shareholder. The annual letter? Annual letters. Study those. You really can't get any better advice than reading through the Oracle's words. Matt? I, that's a great one. I would think I'd go with Peter Lynch. His book, One Up on Wall Street, Peter Lynch for me, pound for pound, year for year is the best investor we ever saw. And one thing that, you know, one of the big things with with Peter Lynch is that he bought a lot about what he knows, you know, things that he had interactions with on a daily basis. And as a young, 18-year-old in college, you know, you're, I don't know, you're playing video games, you're going to Starbucks. You're experiencing products. No, no, no, he's a hardworking student. Oh, besides, yeah, after all that.

No, no. Logan's hitting the books. That's right. But he's experiencing products and brands all day. And take another look at those companies and see if those are companies you might want investment. Joe, reading advice? The little book that builds wealth by Pat Dorsey. It's the best discussion of competitive advantage of moats out there. All right. Let's move to the stock angle here. We can't tell him what to invest in, but

we can give him some stocks for a watch list. What do you think, Ron? I think Maddie nailed it on the head where the kind of the Peter Lynch model of you should invest in and things you're familiar with, things you like. If he's a sports fan, if he likes ESPN, Disney's a great choice. If him and his buddies are going out for burritos, Chipotle is a great choice, something that he cares about and can really watch from a business perspective. Matt? Yeah, and if you like playing Call of Duty,

a World Warcraft, which you might. Activision Blizzard, to me, is the best company in the video game space, and to me it's the most attractive in terms of valuation as well. So take a look. Joe? Yeah, and if you're buying stuff you don't need, check out Amazon. Let's bring in our man Steve Brodo from the other side of the glass.

Steve, whether it's reading advice or a stock idea or, frankly, just life advice, because once upon a time you were a young college student, what do you say to our man in Indiana? I would say figure out how you like spending your time and try to figure that out as early as possible in your life. Because if you can figure that out, you're 10 steps ahead of just about everybody else. You're talking about free time here? Yes, all your free time. Where do you like spending your free time? Because that's going to really decide what you're going to end up doing the rest of your life. Steve is so deep. Deep thoughts. I missed that. That's how I roll. Do you have, because you're also a very avid investor as well, do you have a stock idea that he can put on his watch list?

A stock idea. You know, I bought some Sirius Satellite Radio a long time ago. Around 30-some cents. It's at $3.80-some now. I still think Sirius satellite radio is going to be around for a long time. Oh, bigger than Internet radio? Much bigger than Internet radio. Did Steve just use the stock idea as an opportunity to take a victory lap? He may have. He's not a victory lap. He just dumped on all of us.

He's 10x on his serious XM stock. All right. Ron Gross, Matt Argusinger, Joe Maeger. Guys, thanks for being here. We'll see a little bit later in the show. Coming up, some have called it more secretive than the CIA. But next, filmmaker Jim Bruce is going to take us inside the Federal Reserve. Stay right here.

This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. Henry Ford once said it's good people don't understand our banking and monetary system, for if they did, there would be a revolution before tomorrow morning. At the heart of that system is the Federal Reserve, a subject tackled by writer-director Jim Bruce in his new documentary film, Money for Nothing, inside the Federal Reserve. Jim, thanks for being here. Thanks for having me. I want to get to your film in a second, but first, there were not a lot of investors, professional or otherwise. who really saw the 2008 financial crisis coming, but it does seem like you were one of them.

So if you can, take me back to 2002. You just finished working on a horror movie. You're in Hawaii with your family and friends. Everyone's looking to hit the surf and relax. And for some reason, you seem pretty intensely focused on the stock market. I mean, my interest in the Fed does go back and trying to sort of piece together the post in 2000, 2001 problems. and just started paying attention myself and thinking about, they'll make all these crazy. But at the time, seem to look at.

For those who don't follow the Federal Reserve all that closely, what is the primary purpose of the Fed and how is it changed over the years? I mean, at the 2000s. Well, among other things, the Federal Reserve is known for being a secretive institution. How did you gain access to the Fed and, as importantly, it's key players? Not easily. You're listening to Motley Full Money talking with Jim Bruce, his new documentary film is Money for Nothing inside the Federal Reserve. You mentioned Janet Yellen, the vice chairman.

She is widely thought at the moment to be the successor to Ben Bernanke. I am curious, though, because when I think about the Federal Reserve, I think about the chairman. I know there are a lot of people who work there. There are different people sitting on the board of governors. But it really does seem to me as an institution where the person, person who is at the top, Paul Volker, Alan Greenspan, Ben Bernanke wields an inordinate amount of power. Now, is that my getting the wrong image, or does the chairman of the Federal Reserve really have an outsized amount of power within the institution?

Let's go back to Alan Greenspan for a second, because at one point in time, when he was chairman of the Fed, he really had rock star status helping to oversee the nation's longest expansion, but he also helped, as you pointed out, lay the groundwork for the financial crisis of 2008. How should history remember Alan Greenspan? I mean, you know, I think of him to imagine if you were, you know, as it happened, you know, in the late 90s, the stock, and decided Kant going to resist the bubble in any way, which we're making pretty badly. And I think, you know, I think you could argue he's almost a mythological character. He flew too close.

And maybe, you know, it might not have when he wasn't viewed as let's be. people know that that you're listening to motley full money talking with jim bruce his new documentary film is money for nothing inside the federal reserve you taped 70 80 hours worth of interviews for this film what surprised you the most when you were working on it i was just happy surprised me you know how now this is a documentary film that to a large degree you have self-financed but you have also worked on big budget films like the incredible hulk and a couple of the x-men movies compared to those experiences. What is the best thing about making your own documentary and what is the worst thing? The independence is, but it's funny, to dumb it down. Money for Nothing inside the Federal Reserve

opens in select cities across America this month, including Boston, Los Angeles, Houston, and right across the Potomac River in Washington, D.C. And for more information, you can check out the film's website, Money for Nothing, themovie.org. Jim Bruce, good luck with the film. Thanks for being here. Thanks so much for having me. Coming up, we'll give you an inside look at the stocks on our radar. This is Motley Fool money. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for organs. So don't buy ourselves stocks based solely on what you hear. I'm Chris Hill, joining me in studio once again, Joe Maker, Matt Argusinger, and Ron Gross.

Time once again for the stocks on our radar. Ron Gross, what do you got? I got Titan International, TWA, manufacturer of wheels and tires for industrial uses. Now, on Friday, they withdrew their guidance for fiscal 2013, which is a little scary. Stock got smacked, but we believe in the long-term thesis quite a bit. We think this is just a short-term problem. It's an opportunity to pick the stock up cheap. I think you can make 50, 60 percent on your money here.

Wow. Let's bring an our man Steve from the other side of the glass. Steve, question about Titan? How would I come across an opportunity like this as a layperson? You listen to this show. They actually publish on the intranet or even in the old-fashioned newspapers. stocks that fall quite a bit on any given day, and you can check out, and then you can go see why. And if you think the why is a short-term problem, then that could be a long-term opportunity.

And is that how you found this opportunity? We happen to actually own this, and we're recommending it, so we keep a close eye on it. Maddie, what are you going? I got Take-2 interactive. T-T-W-O is the ticker. Sticking with the video game space. Take-2 owns Rockstar Games, which is the owner of the Grand Theft Auto franchise. Grand Theft Auto 5 came out this past week. First day, 800 million in sales. fastest-selling video game of all time, fastest-selling entertainment product of all time. Probably has already hit a billion by now.

It did, yeah. Okay, there you go. So, Joe's already up today. Interestingly enough, though, this is usually the time you want to sell Take-Two, because it's had a tremendous run. And years where it comes out with a Grand Theft Auto, which is every three to four or five years. The stock gets really bit up. But after that happens, there's a little bit of vacuum in Take-Two franchise portfolio. So I'm watching the stock only because I feel like this might be one.

One, it's near a year high. It might be one to fall off. Steve, question about Take 2 interactive? This is a pretty violent video game, Grand Theft Auto 5. Should I let my son play this game? How old is your son? He's two. I'd say maybe, you know, within a year. No, no, definitely not. I'd say this is rated MA, which is, I think, 18 and over.

Make sure he's at least in first grade. Joe Mager, we've got about a minute left. What do you got this week? TD Ameritrade tickers AMTD. That's one of the few companies that will actually make more money when interest rates rise, and I think it's one of the cheap ways for you get exposure to that. It's a nice hedge if you have a lot of bonds in your portfolio. You do well when rates rise. It's incredibly profitable, and they're paying a nice little dividend that's about to get raised in a big way. I think it's a great natural hedge and a great stock to own in its own right.

That's another Omaha company, isn't it? It is. Do you ever go visit them when you go out to Berkshire? No, I'm usually pretty busy. You're knee-deep in the seas candy. Steve, question about TD Ameritrade? They are a product of a merger, and probably a merger before that. Will they emerging again? Good question. They are likely to buy E-trade, which I own both of these. They're likely to buy E-trade at some point down the line, but probably not until E-trade gets all its mortgage issues behind it. So maybe a couple years ago. Joe owns every stock.

Just throwing it out there. Not Tesla. Any of those three attractive to you, Steve? I don't know. I have some free time this weekend. I may like to shoot something. So we're going to take two interactive. All right. Joe Magist, Matt Argusinger, Ron Gross. Guys, thanks for being here. Thanks, Chris. That's going to do it for this edition of Motley Full Money. The show is Mixed by Rick Engdahl. Our engineer is Steve Bordo. Our producer is Matt Greer.

I'm Chris L. Thanks for listening. We will see you next week.