Motley Fool Money - Motley Fool Money: 09.25.2009

Episode Date: September 25, 2009

A former Fed Chairman has some tough love for "too big to fail." Twitter has a new round of financing.  Google has some cheaper options.  And an unemployed metal-detecting enthusiast has a new lease on life.  We'll tackle those topics, talk about the latest handheld gadget news, and share three stock ideas. Learn more about your ad choices. Visit megaphone.fm/adchoices

If you're a small business owner, you already know what it takes to keep everything moving. You're juggling customers, invoices, and about 100 decisions every day. Thankfully, taxes don't have to be one more thing on that list. With Intuit TurboTax, you can get your business taxes done for you with a full service expert. TurboTax matches you with your dedicated tax expert, who knows your industry understands your business write-offs, and gives you the personalized advice your business deserves. upload your documents right in the app, hand everything off, and still feel like you're in the

loop the whole way through. You can even get real-time updates on your expert's progress right in the app, which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. Welcome to Motley Full Money. I'm Chris Hill. I'm joined in the studio by Motley Fool Senior Analyst, Seth Jason, James Early, and Shannon Zerring. Guys, happy Friday. Happy Friday, Chris. On today's show, we'll look at Google's options, Twitter's valuation, and get a sneak preview of Too Big to Fail, the sequel. And as always, we'll share three stock ideas on our radar. But we begin with this week's G20 meeting in Pittsburgh. We didn't want to, but the G20 is made up of countries representing roughly 90% of the

the world's output, so we kind of felt obliged. In advance of this serious gathering of world leaders, U.S. Treasury Secretary Tim Geithner went for laughs when he said America's days of spending too much and saving too little are over and that other countries shouldn't count on American consumers to buy their exports to drive growth. Or at least I... He didn't really say that. You're making that up. I think he was going for laughs, wasn't he? Does he know what the United States is? Can he find it on a map? So are we buying Secretary Geithner's statements? If you have an opportunity to talk tough, then why not talk tough?

I think that that's what he's doing. You know, right now American consumers are de-leveraging. They're saving more than they have in quite a long while. How long that's going to last? I don't think it's going to last very long. If and when things return to some semblance of normalcy, consumers will do what they do, which is spend out the wazoo. And the irony here is that we're sort of conflicted.

We're supposed to save because we've been spending like there's no tomorrow, but yet consumer spending is such a huge part of the GDP. We're supposed to borrow more and spend more now to get the economy kickstart it again. So, you know, I'm not sure what to do as an American here. Let me point out one thing. China, you know, everybody bashes China, but China only actually owns 5% of U.S. Treasury. So, yes, it is funneling us a lot of money,

but it's not maybe as much as some people think. I have a couple of points on this. The first is that I'm not sure Americans can stop spending, And the reason for that is a little bit complex. I don't know if I can distill it. And I'm kind of paraphrasing a thesis that Bruce Greenwald delivered here at a talk of full HQ, which is that there are all these countries like China, Korea, Germany, that have these huge savings in them. And they have to put that savings into something.

It tends to be things like U.S. treasuries. So long as that happens, that is going to keep the yields on those instruments low, which will keep borrowing costs low here. and so it almost is inevitable that Americans will continue to borrow and spend because that's just the way it goes. It's sort of the world economy is kind of a zero-sum game in that way. And the other thing I want to point out is that I'm not sure all consumers are deleverging, and I think Shannon will probably agree. A lot of consumers are toast, and they probably deserve to be.

They screwed up. But everybody else, including people in this room, we all kind of flinched, and businesses did the same thing. And so once we come out of our shells, there will be some spending, and it may not be the same thing that we saw before. But I don't think it's wise to base extrapolations of what the new normal will look like on sort of the panic reaction. And we're still in that. What will it take for us to learn our lesson, though? I mean, how bad would things have to get? And things weren't that bad this time.

I mean, it seemed like the recession was over pretty quickly. That one's above my pay grade, as they say. Well, and Seth's right to say that, you know, selectively people are going to be able to continue to spend because they did flinch and pull back. But in the aggregate, it's hard to see how the consumer does come back when unemployment is still within spitting distance of 10%. And with an economy that is powered to the tune of 70% by consumer activity, you know, how does that happen if people are still worried about their jobs, worried about home equity wealth that's evaporated? Yeah, it won't happen for a while. Seth, you bought a house recently. I mean, any chance you could like flip that house and buy another?

Just to get things cooking? I really ought to. You know, oddly enough in my neighborhood houses move when they're priced correctly. But there are a couple more that have been sitting on the market for months because the people, they have no idea that they're 20% overpriced. You should let them know, just knock on the door there. Anonymous note. Former Fed Chief Paul Volker told Congress this week that the president's plan to overhaul the financial system would preserve the policy of too big to fail and could lead to future bailouts.

Volker wants a stricter separation between banks that hold deposits and investment banks and said that any safety net should be limited to commercial banks and not include investment banks. Seth, is this a good plan? I like it, but it ain't going to happen. Really? You can't wave a magic wand and get it done? It's already ain't happening, I guess. It's the way to put it.

The commercial banks and the investment banks are all mixed together, too big to fail, has been codified. In some ways, it's inevitable. Nobody is going, no matter how tough anyone talks, nobody in a position to make policy or be reelected, is going to let another layman situation happen. I really keep hoping that we will circle back to it once things have been stable for a while.

I don't know if that'll happen. To quote Hermann's Hermit's second verse, same as the first. And so Volker was right before. He's right now, but it's not going to happen. Yeah, the idea of not bailing out an institution that is definitionally too big to fail is kind of like an oxymoron. I mean, if you, I guess, by analogy, build a building,

and the fire escapes are a certain size, and then somebody comes into the building who's maybe a little too portly to make it out the escape. I mean, you have to pull them aside and just have a talk. I think we have to nip the problem in the butt and if an entity is too big for us to bail out,

it's too big in general if it's going to be able to cause problems of that magnitude. I seem to recall when I was in my secure undisclosed location that we call Montreal. We had a similar conversation about Lehman, and I thought my colleagues here were in favor of Jim Rogers' position, which was, oh, we were right to let it fail.

That's the one thing we got right. Lehman was not too big to fail, I would say. Yeah, that's the thing. And there are others that aren't, but they've let some of these that weren't too big to fail combine into entities that are now too big to fail. And this idea I had right before the podcast, which is maybe this pay cap thing makes some sense. And here's how I'm looking at it. If you are on this special list and you were our CEO of a bank that is considered too big to fail,

Jamie Diamond, all you other guys, you get paid a couple hundred Gs a year. And that's it. And here's the reasoning behind that. See if this makes any sense. It might not. The argument against pay caps is that these guys are so talented that you'll lose them to other places if you don't pay them enough. I say, good. If you're too big to fail, take these great talents that you claim to have, put them to work somewhere else.

You gather up all the business, and then these banks that are too big to fail can naturally shrink on their own. Let's see if you really can walk the walk. But then what you have, like, the least competent, lowest paid employees running the best best. How much a 14-year-old driving a Mac truck or something? Yeah, I don't know. I think there's people who'd be willing to run those things for a few hundred Gs or maybe a million a year. This is obviously just a thought exercise, but I really believe that these people do not deserve what they're getting. They're part of a club, and that's just the way it is.

How much less competent could they possibly be? It's the same perverse logic of the retention bonus as an AIG. I mean, give me a break. Who wants to retain those guys? The Wall Street Journal reported this week that Google repriced 7.6 million employee stock options back in March, three days before the shares hit their low point. The average strike price was around $522 a share. The options were repriced at around 308, Google's share price at the time. The company said the move was important for employee retention. Google's trading back up

around $500 these days, so if you do the math, as the journal did, this move is going to cost shareholders around $1.5 billion. James, this just doesn't smell right. You know, a lot of companies do this. It's not as bad, let's say, as backdating options, but it has a similar effect. I mean, Google happened to do this at the worst possible time. Let me point out two things. First of all, I mean, the negative thing, obviously, is that this is pure dilution for investors, or the delta is, excuse me, between the cash received and the option price, you know, what's commonly called dilution bit is not is when companies just issue shares. And this is kind of a tangent, but it's an important tangent. I think this brings up. Because they get to use that money.

Yeah, they get the cash. If I issue shares for $100 a share for, you know, how many shares, I mean, I get that money. But if I give it away in options, and if I'm getting $20 per share that's really worth $100 the stock price, then I've got $80 of dilution. So what Google just did is fairly dramatically increased the amount of dilution to its existing owners. And is it worth it? I mean, probably not. Absolutely odious practice to reprise options, and it sort of underscores the way in which Google really is a story stock. And so people want to be invested in Google in the same way that people want to be invested in Apple, but there's not, at least relative to Apple, any there.

Google is an ad sales company and gets, what, 95, 96 percent of its revenue from ad sales, which is a cyclical market. So they have to be constantly innovating to attract the eyeballs. And by innovating, you mean buying other innovative companies? Well, they have some interesting products. I use them a million times of theirs. I bet you do as well.

But yeah, the story just got vaguely nasty with this latest repricing. Let's call it evil. Let's do call it evil. Let's call it not not evil. But this is part of a pattern of Google Insiders, especially the huge insiders. If you go to SEC form4.com and type gog up on top,

You get a graph, and this is podcasting, so I'm just going to have to describe it. It is nothing but red bars down, and there's so many of them. It's a bit like that scene in the untouchables where Al Capone beats that guy to death with a bat, and the blood just comes flowing out over the rug. It's $11 billion worth of shared dumping by high-level insiders since October of 2004. Eric Schmidt is responsible for something like $1.5 billion worth of dumping on his own. The people who run Google, they don't care about the people who buy the shares of Google. And the people who are being bludgeon with the bat, the shareholders.

I blame it on that mantra. If you say don't think of a white polar bear, you can't help but think of a white polar bear, right? So they're going to be evil if they keep that up. So just how much is Twitter worth? The Wall Street Journal reported this week that Twitter is nearing a deal for as much as $100 million in new funding from seven investors, including T-Roe Price. Our colleague Dan Dazambach covered this story. and said he sees two possibilities for why investors would pay up for Twitter. One, Twitter has a business model but is keeping it secret.

Two, there is no business model. Investors want Twitter's assets, it's users, it's real-time search, and they want the company to be acquired. So the question is, what is the likely scenario for Twitter? I'm sorry, to that first point, that they have a business model but the keeping it secret, is that like Nixon's secret plan to end the Vietnam War? It very well may be just like that. What they should do is they should...

Except that people. might believe the Twitter one. They should go out back with some two-by-fours and some hammers and some nails and build a stand, get a container of country time powder, mix it with some water, and then they have a business model. And it's

100% better than the one that they don't have right now. More seriously, there's a way in which they could have a business model, but they would have to fundamentally change what it is that they do. Seth and I were talking about this before the podcast. They could hire a bunch of folks to come in and help businesses aggregate the information that is provided for them and then have

sophisticated analytics that are better than what people can have in an off-the-shelf kind of way right now. And then serve that up to businesses. As a retail model, I just don't see how they are profitable ever. And the irony is that that journal article, or at least if it's the same on I read, said that this $100 million is to give them time to figure out what their business model is. I think there's a third possibility here, and it could be that even investors with a lot of money can act like morons with that money. What are they doing? I mean, are they that big of an that they burn through money this quickly? That's the question.

I guess we don't know if they're going to burn that money or what it's for. Is it actually for capital spending along the lines of investing in a business model? Everything I've seen proposed seems to be stuff they've already given away, sort of aggregating search, all of these other things.

Since Twitter is so open and third parties have gobbled up pieces of what could be a value chain, I have a hard time seeing how Twitter could recapture all of that in order to have a business model. I've just got to say to you naysairs, you know, I'm a little bit

bit of one, but how hard would it be, really, to just put some ads on? You know, either at the top or at the bottom, you know, if you send somebody hot mail Yahoo mail, there's a little blurb at the bottom. I mean, granted, they have sidebar ads, too, but, you know, maybe if a short twit gets away with no ads, but if you go, you know, beyond 50 characters, then you have an obligatory ad. And to James's point, we are talking about a service with close to 55 million people on it. And you're talking about people who've registered to use it like me. I'm one of those people who registered and just to see what it was about way before it was cool, by the way,

and I figured out it wasn't cool and quit. But it is quite a special. Wait, wait, wait. Is it possible that you're just a cranky old man? Possible? What do you mean possible? You're not following the right Twitter piece. Honestly, honestly, what do you tweet to people? I started doing stuff like, you know, heading for the can. I'll send you an update in a minute, you know?

On the can. Everything came out just fine. But there's, to Twitter's appeal. I mean, if you have an audience that includes teenage girls and then senior citizen senators who have latched onto your product, that says something. I'm just not sure what it says. Staffers of senior citizens, though,

are senior citizen senators in a lot of cases. Some of those guys tend to be there. Whatever it's a gaff, it was a staffer who did the twit. Okay, exit question. That's what you have staffers. Exit question. You got a million dollars to invest in one of these privately held companies, and you have to leave your money there for the next five years.

Craigslist, Twitter, or Facebook. That's easy, Craigslist. Wow. Facebook. Really? Why? I just see it being huge. I mean, everybody's on Facebook. I think it's actually making money.

I mean, it's more transparent to my knowledge than Craigslist, so I'm going with it. Why Craigslist for you? So Craigslist can have the eBay model and out eBay ebays in terms of local sales and taking a cut of the transactions that are conducted over Craig Bay listing. Craig Bay. Craig Bay. Craig Bay, there we go. Seth, you go on my Twitter.

I hate all three of them so much. As investment ideas, I would go to Facebook because I think you'll be able to fool people for five years that Facebook's worth something and then you can get the heck out. All right. One more point in Craigslist's favor? Discrete encounters. Well, I thought that's the only business they had. Send those emails to Shannon C. at fool.com. Some of the men and murder, by the way.

This week in handheld gadgets. Shares of research in motion plummeted on Friday after the black. Braymaker issued a lower than expected third quarter earnings forecast. Well, that's not a surprise. I mean, in some way, in some way, in a major way, they are tethered to the economic cycle as well with business spending. And so as that ebbs and flows, so we'll research in motion. Yeah, how many businesses are buying new blackberries across the board?

The Zune HD Media Player is getting rave reviews from PC Magazine. One of the writers there says the Zune could beat the iPod by adding TV AM radio. and launching a Zune app creation. Ahead Radio being the competition. A Multimixer. Only James Early wants AM Radio on an iPod type player. Did they really say that? Yeah.

They're nuts. See, don't listen. Don't listen to PC Magazine. Go to Wall Street Journal because they actually hate Microsoft and they have a hard time hating on the Zune, which is interesting. The new one. It looks fairly nice. I won't be buying one. I still have the Zune mostly for the subscription service, which I really have.

prefer to the regular model. And I have to say that one place they've done an excellent, excellent job is the front-end software is a great way to discover music, do all this stuff, is much better than iTunes. And if they can, and they've actually transferred some of that experience to the Zune HD itself. And so I guess some of that is what people like, but it's never going to be a player just because people like their iPods, and that's how it is now. Oh, what I know, all 10 people who have the Zune love it. I mean, it's, well, yeah, well, no one's going to switch.

You know how the switch switching costs are high, and nobody's, just no one's going to switch. No, but nor should they switch. I mean, so the Zoom App Store has, what, 10 applications, all of which were written in-house by Microsoft. And that's, that's, I think, going to be the story of the iPhone and I-Touch on down the road. Well, you know, Apple on Microsoft at them at that point. They opened up the platform, and that was absolutely the right thing to do. And it's kind of a brave business decision, because they've been the most, closed ecosystem of any sort of corporate entity, and they did the reverse and look at us

what has happened. Their product became infinitely more valuable overnight. And so nobody is going to switch. Like beta to VHS. Yeah. And finally, an unemployed amateur treasure hunter named Terry Herbert found the largest ever haul of Anglo-Saxon gold and silver artifacts while searching a friend's farm in England. No way. Herbert spent five days searching the field alone before realizing that he needed help. He found the stash using a 14-year-old metal detector. The gold alone weighs 11 pounds. Herbert and his friend will split it 50-50

and each could be in line for a reported seven-figure sum. Guys, what's the best treasure you've ever stumbled upon? Wow. I've been watching a lot of history channel. I just watched the Dark Ages. That is really cool. I hope they don't sell it

for it to be melted down. This better go to real collectors or something. I found a 20 outside of bar once and went back inside and bought a pitcher beard. That was pretty good. Yeah, that is, that is inspirational. That's what that is. I once booted a GPS unit. I found in a mud puddle. And I actually figured out how to find where the guy lives. So I feel so guilty. I want to go find him and give it back. It's like a four hour drive from here. But one day I will. Do you feel guilty? I don't know. Don't you feel creepy? You booted up a GPS and found out where the guy

lives? Well, it was on there. And I, you know, I can see his travel history. You know, he's quite a world traveler. I mean, I feel this intimate connection with him, including his home location. Maybe a discreet encounter is in order. I'll post it on Craigslist. Wow. When my brother and I were walking home from grade school to our new house by some railroad tracks near where the big kids used to walk, we found like a halls cough drop plastic container full of weed. And we were like six and you immediately brought it to a police station? Actually, we did. And they put it in a little thing and did a test and said, oh, yeah, you guys are good. This was marijuana.

And so we were like, oh, we're such good citizens, you know. Oh, how times have changed. Steve, you want to jump on mic here? What greatest treasury you've ever stumbled on? As a newly married man, I should probably say my wife. Oh, I hope you're listening, honey. There's one other one other. I remember being about 12 and with my next door neighbor walking down the street and finding

an adult magazine on the road. And that was the ultimate jackback. That is a score. 12. Wow. Nothing better than that. Wow. So your two finalists were your new bride and a porn magazine.

This is definitely an R-rated podcast this time around. I think it is. All right, guys, as we head into the next week and close out September, give me one stock that is on your radar. Shannon, we'll start with you. Procter & Gamble, ticker symbol is PG, in case you've not heard of it. To me, it's the kind of stock that's going to do quite well, irrespective of the direction of the economy.

It won't race as far ahead during robust growth periods as maybe some of the raced your socks that have, held sway since March, but I think for the long haul, it's a great company trading at a very attractive valuation. James? I think Shannon's company just reminded me that I forgot to put on the deodorant today. I've been looking at retail reits. I've been bearish on reeds for a good while, but I have seen some dramatic operating improvement in at least one particular read. I won't name its name in case I go with it for my income investor newsletter, but at some point, the tide is going to turn for reits. It might be next year, and you want to be on

before that happens. So you're not going to give us anything? Wow. My hands are tied, Chris. I would if I could. A reet ETF, perhaps. A reed ETF. There you go.

Spread it around. Well, your hands being tied certainly explains the lack of deodorant. Yeah. I was actually alerted to that by the cloud of flies around James here. I biked in today, too. Wow.

Just a metric. Unfortunately, I have to pick on a stock that we have over at Hidden Gems, American Oriental Bioengineering. They've had yet another, Some people might call it a gaff. I call it a major screw-up of disclosure if everything we've seen is true and have every reason to believe it is, which is that they've got a director who has this company who is getting not huge amounts of money from the company where he's a director,

but none of this was properly disclosed in the annual filings. And it's just sort of one in the history of suboptimal disclosures from this Chinese-based company. If you hold it, you need to take a leg at whether or not you want to stay up at not. wondering what's next. That's currently what I'm wondering, and I do hold it. Fair enough. Seth Jason, James Early, Shannon Zerring. Guys, thanks for being here. Thank you, Chris. Thanks for listening to this edition of Motley Fool Money. As always, people on the program may have interests in the stocks they talk about. Don't buy ourselves 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.