Transcript: Tuesday, November 19, 2013

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you in part by —

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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: End of an era. Steve Ballmer, Microsoft (NASDAQ:MSFT) CEO and chief salesman, hosts his final shareholder meeting. Bill Gates gets emotional. What’s next for the software maker and who will lead it?

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Do it yourself. More people are and Home Depot (NYSE:HD) is reaping rewards, raising its full year outlook for the third time this year. But it’s not the only company profiting from the trends.

MATHISEN: Pinched by pensions. The City of Big Shoulders staggers under a huge pension burden. Tonight, we head to Chicago to see just how deep the problems run.

All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, November 19th.

GHARIB: Good evening, everyone.

Topping our news: three corporate giants, JPMorgan (NYSE:JPM) Chase, Home Depot (NYSE:HD), and Microsoft (NASDAQ:MSFT) — all members of the Dow index and each making news today for very different reasons.

We begin with Microsoft (NASDAQ:MSFT) and shareholders meeting today. But it wasn’t a typical shareholders meeting. This was the final one for Steve Ballmer who steps down as CEO next year and it marks the beginning of a historic management changeover at the legendary software company. As Microsoft’s board narrows its search for a new leader, the company will soon end a 38-year stretch where only Ballmer and cofounder Bill Gates had led Microsoft (NASDAQ:MSFT).

Josh Lipton takes a look back at Ballmer’s legacy and a look ahead of who might be next in charge.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was a historic day at Microsoft’s annual shareholder meeting, the last such meeting with Steve Ballmer as CEO.

STEVE BALLMER, MICROSOFT OUTGOING CEO: I’m confident that we have the right strategy in place.

LIPTON (voice-over): It’s unclear who will replace Ballmer, who became CEO in January 2000. He grew the company by leaps and bounds, with revenue tripling to $78 billion during his tenure. But Ballmer also had his critics, who say he missed big tech trends like smartphones and social networking.

Microsoft (NASDAQ:MSFT) stock is up sharply this year, but it’s down about 25 percent under his watch.

BILL GATES, MICROSOFT CHAIRMAN: Even this week is going —

LIPTON: Bill Gates at the shareholder meeting today gave no guidance for when a new CEO would be picked, but he did speak with emotion about his friend, Steve Ballmer.

GATES: We’ve got a commitment to make sure that the next CEO is the right person for the right time for the company we both love, and we shared commitment that Microsoft (NASDAQ:MSFT) will succeed as a company that makes the world a better place. So, thank you for your support.

LIPTON: Top picks to replace Ballmer include Ford’s CEO Alan Mulally who reported helped Ballmer reorganize Microsoft (NASDAQ:MSFT), and former Nokia (NYSE:NOK) CEO Steve Elop is also discussed as a candidate. Today, shareholders approved Microsoft (NASDAQ:MSFT) deal to buy that smartphone maker.

There are possible internal candidates such as Kevin Turner, the COO, who could make sense if the company wants a capable manager who understands the company’s culture.

Satya Nadella, the executive vice president of Cloud and Enterprise, is also talked about as a potential successor. At the shareholder meeting today, Microsoft (NASDAQ:MSFT) did make a point of emphasizing its Cloud products.

Analysts on Wall Street have different views on what Ballmer’s replacement should do.

Rick Sherlund at Nomura argues Microsoft (NASDAQ:MSFT) should sell what he calls its money-losing consumer products like the Xbox and instead focus on the commercial side of the business.

Colin Gillis of BGC says Microsoft (NASDAQ:MSFT) needs to put more resources into mobile devices.

COLLIN GILLIS, BGC FINANCIAL: Double down on mobile, because there are north of 7 billion people on this planet and the way people are going to access the Internet is going to be via their phone.

LIPTON (on camera): Regardless who replaces Ballmer or their strategy for the company, Microsoft (NASDAQ:MSFT) does face real challenges as it repositions itself for this post-PC era.

Josh Lipton, NIGHTLY BUSINESS REPORT, Bellevue, Washington.

(END VIDEOTAPE)

MATHISEN: As Josh as said, whoever the next CEO, Microsoft (NASDAQ:MSFT) faces some big challenges. And here to discuss them and who might best tackle them, is Bill George. He’s the former CEO of Medtronic (NYSE:MDT) and a professor of management at Harvard Business School.

Professor, welcome back. Good as always, Bill, to see you.

So, how big a fix is required at Microsoft (NASDAQ:MSFT) and what’s the first thing the new CEO needs to do there?

BILL GEORGE, HARVARD BUSINESS SCHOOL, PROFESSOR: Well, Tyler, I think it’s substantial. Steve has been there 14 years. I think it’s timely that he move on. Maybe it could have happened sooner. It’s the end of an era clearly and the first person really from the outside.

I think it is time to go outside. I don’t think the internal candidates are going to be selected, and I think the first thing they need to do is take a complete look at the enterprise, decide: are they going to be an enterprise software, or are they going to be consumer and mobile?

I but personally think they have to be a very broadly based company and really get into the game. They missed out on so much of the game, so many opportunities, Tyler, and I think they need someone who’s a visionary and lead them where they want to go, and where they need to go to be a full up competitor in this business. Otherwise, with Windows and Office, that business could be at risk in the future, just like IBM’s business was 20 years ago.

GHARIB: So, you say that the next CEO should be a visionary, Bill. What do you think of Alan Mulally of Ford? Is he the right man for the job? And I’m sure you have your own list of candidates. Who do you think should be the CEO?

GEORGE: Well, first of all, I had my short list. My first choice was Sheryl Sandburg and second choice is John Donahoe of eBay (NASDAQ:EBAY). It doesn’t sound like it’s going that way. I thought Sheryl would be terrific.

I think Alan is arguably the best CEO in the United States today. What he’s done with Ford is amazing. The job is not done. I hate to see him leave Ford.

But he does live in Seattle and he — I don’t like the idea of some pundits have said he can be a caretaker CEO. They don’t need that. They need somebody to be there and I hope that the board and Alan make a commitment to do this for the long term. It’s a long-term transformation.

But I think Alan can do it. He’s a visionary. He’s a great team leader and he will use his technical team very, very well. He’s not so arrogant to think he knows all the answers.

And so, I think he would be a fantastic leader and have Bill’s confidence. I think Bill will probably be more involved going forward and I think the leader needs to have that level of confidence and to bring people together. It’s way too political the same way Ford was when Alan went in and I think Alan won’t tolerate that and he’ll get the team together, the right people on the bus so to speak and people will fade away and –

MATHISEN: You’re talking, Bill, as though —

GEORGE: Go ahead.

MATHISEN: — as though Mulally has the job. Would it shock you if he doesn’t get it? I mean, you made the point very early on. The first thing you said was, it needs to be an outsider. They’ve only two leaders in their whole lifetime and both were really there at the inception of the company.

GEORGE: Yes. And, frankly, Tyler, if you want to do a transformation, you need to go to the outside. I’m a great believer in the inside. I’m disappointed there are no inside candidate. I think shame on the whole team there for not grooming people.

Elop is kind of an inside/outsider but I’m not sure whether he can pull it off. I would say Mulally has the strength to pull it off, in spite of not being a techie. And he has (ph) to pair up with techie, that’s so I think Bill would probably be more involved in some of the visionary work.

No, he doesn’t have the job for sure, but he hadn’t turned it down yet, either.

GHARIB: Real quickly, just half a minute left, look forward like five, 10 years, what will Microsoft (NASDAQ:MSFT) be like, in your crystal ball?

GEORGE: Well, there will either be an enterprise company that’s just focusing on the business B2B and they’ll be in a state of decline, or they’ll be a very innovative company that’s going after all aspects, everything they missed and trying to get in the game with Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) into the device game and particularly into the mobile game, as well. They got to be there and they’ve got to put their stamp on it.

They’ve got to get innovative. They’ve got to get ahead of the game. They always come in right now a day late and a dollar short, and that’s not good, like they did with Bing and some of these other things. I think they’ve got to move forward aggressively and turn their talent loose on where they need to go.

So, I’m hopeful this will be a major transformation because they’re a great American enterprise and we need them to do well globally.

MATHISEN: Right. Bill George, thank you very much. It’s always great to see you.

GEORGE: Thank you.

MATHISEN: Bill is a former CEO of Medtronic (NYSE:MDT) and a professor at Harvard’s Business School.

GHARIB: Well, on Wall Street today, Microsoft (NASDAQ:MSFT) shares slipped and so did the Dow, ending a four-session winning streak of record closes. Stocks wavered between gains and losses, staying at a very narrow trading range all session long after a mixed bag of retailer earnings and outlooks.

The blue chip Dow lost nine points, the NASDAQ was down 17, and S&P off by three points.

MATHISEN: One of biggest gainers in the Dow today, Home Depot (NYSE:HD) shares rising nearly 1 percent to touch an all-time high. The companies profits zoomed as remodeling projects caught fire. Net income last quarter rose to one and a third billion dollars and the world’s largest do-it-yourself chain now expects full year earnings to be about 24 percent higher than in 2012.

Home Depot (NYSE:HD), of course, is not the only company benefiting from the rush to remodel. Later in the program, we’ll tell you how some small businesses are also getting in on the action.

GHARIB: Now, the other Dow stock making news today, JPMorgan (NYSE:JPM) Chase, the nation’s biggest bank reached a record $13 billion settlement with federal and state authorities for misleading investors about bad mortgage-backed securities that it sold ahead of the housing crisis. Now, this payout covers fraudulent conduct both by Bear Stearns and Washington Mutual. Both were acquired by JPMorgan (NYSE:JPM) back in 2008.

U.S. Attorney General Eric Holder said JPMorgan’s conduct helped, quote, “sow the seeds of the mortgage meltdown”, and that there’s no excuse for the firm’s behavior.

(BEGIN VIDEO CLIP)

ERIC HOLDER, U.S. ATTORNEY GENERAL: This was something that was hard fought. It was something that we decided in terms of the amount, had to be met, otherwise we would have simply filed our lawsuit. This was not something that JPMorgan (NYSE:JPM) simply signed a check and smilingly said, this is a good deal for us. This inflicts pain on that institution.

(END VIDEO CLIP)

GHARIB: The deal is the largest settlement ever between the Department of Justice with one company.

MATHISEN: So, what will this record-breaking settlement mean for JPMorgan (NYSE:JPM) Chase and for its shareholders? And what about the possibility of criminal charges for the bank?

Kayla Tausche joins us now with more.

So, Kyla, is the worst over for JPMorgan (NYSE:JPM)? Do they have other issues that they must face? And what about the matter of criminal charges?

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Tyler, this was the biggest elephant in the room for JPMorgan (NYSE:JPM). Executives on investor call that ended just moments ago said this was eliminating the biggest piece of outstanding litigation but Attorney General Eric Holder did say earlier today in an interview with NBC News that you just clipped, that the criminal charges, the criminal probe is still ongoing. That probe isn’t over.

This only settled civil charges. (INAUDIBLE) of other issues, an inquiry into hiring practices in China, potential manipulation of the energy markets, and a whole host of other things that the bank is still being investigated.

GHARIB: They threw everything at JPMorgan (NYSE:JPM).

But, you know, over the last couple years of the financial crisis, we’ve been reporting on so many other banks, there’s Bank of America (NYSE:BAC) or others, that had charges brought against them. Are there going to be more charges against other banks?

TAUSCHE: So, this is the first big culmination of the mortgage fraud working group that the president set up in 2012. This is the tip of iceberg. Jamie Dimon on that investor call said he didn’t know why JPMorgan (NYSE:JPM) went first, but there had to be a first mover.

Bu, currently, there are at least nine other banks that are being investigated across the country. Attorneys general and prosecutors in California, New York, Georgia, New Jersey, all looking to this matter to figure out exactly what went wrong and what banks were on the hook for a lot of these activities.

MATHISEN: This is $13 billion. There had been other settlements that have run into the billions, as well.

Where does this money go?

TAUSCHE: You know, it’s interesting. If you look at the settlements related to financial crisis activities, so far, banks have paid a total of $85 billion. That’s according to SNL Financial and that’s adding to today’s settlement and a couple of other from the last couple of weeks from JPMorgan (NYSE:JPM) and other banks.

If you look at that, just about a third go to consumers in the form of mortgage modifications or other type of consumer relief. But then there is a sizable chunk, about $10 billion, that goes straight to the regulators. That goes straight to the Treasury. And we never really see where exactly that goes.

GHARIB: You know, Kayla, I don’t know if you’re going to answer this question. But, you know, a lot of the charges brought against JPMorgan (NYSE:JPM) are a direct result of this acquisition made from Washington Mutual, which, you know, they were forced — JPMorgan (NYSE:JPM) was forced by the government to buy it.

So, how fair is this whole allegation?

TAUSCHE: Well, Washington Mutual, as well as Bear Stearns, it’s been a politically sensitive issue. The bank still reserves the right to purse some litigation against the FDIC, where Washington Mutual is concerned, and they might still do that.

Now, of course, the attorney general in California who led this settlement said the bulk of the wrongdoing came from legacy JPMorgan (NYSE:JPM) mortgage banking activities.

GHARIB: Fascinating.

TAUSCHE: But if you look at what JPMorgan (NYSE:JPM) is actually paying Fannie and Freddie, $3 billion out of the $3 billion there is related to Bear Stearns and Washington Mutual. So, it really depends how you slice this pie and what side you’re choosing to believe on this.

MATHISEN: Kayla Tausche, thank you very much. Appreciate it.

TAUSCHE: Thank you.

GHARIB: Well, still ahead on the program, how much of the health care exchange system is left to be developed and the official answer to that question during a hearing today.

(MUSIC)

MATHISEN: As lawmakers in Washington prepare to hammer out a federal budget, the treasury secretary says a big spending agreement is unlikely, unless Congress agrees to raise taxes. Speaking to a business panel in Washington, Jack Lew said that unless Republicans embrace an overall of the nation’s tax code and agree to increase revenues, a comprehensive multi-year fiscal deal is not likely.

GHARIB: There wasn’t a lot of agreement today at another House hearing on the botched rollout of the Healthcare.gov website. Several experts testified about security flaws in the online marketplace. But Henry Chao, he’s the administration’s top technology official for the site, assured lawmakers that the site was secure and mostly complete, but that his team had not yet finish the payment system for consumers to buy insurance.

(BEGIN VIDEO CLIP)

HENRY CHAO, CMS DEPUTY CHIEF INFORMATION OFFICER: Thirty percent of the systems are left to be developed, not 70 percent. And that 30 percent represents the payment aspect and accounting aspects of making payments in the marketplace for all marketplaces, not just facilitated marketplaces and that functionality has to be in place for the January 1st effective date enrollments.

(END VIDEO CLIP)

GHARIB: In other words, no one has to pay for new insurance policies bought on the Web site until coverage actually begins on the first day of the year.

From health care woes to a healthy housing market. As you mentioned earlier in the program, big gains on home sales and remodeling project helped sales and profits soar at Home Depot (NYSE:HD) last quarter. But it’s not the only company profiting from those trends.

Diana Olick has the details on the newcomer to the market.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Before most homeowners get started on this, they probably would like to do this, peek inside their neighbor’s renovation. It would help them decide what to do and whom to hire to do it. Now, they can.

MATT EHRLICHMAN, PORCH.COM CEO: We really know what your neighbors specifically have used and we can even show you and surf (ph) the projects that have happened near you. So, you’re not viewing projects that happen around the country. You view projects that are millions of dollars, that are completely out of your price range.

OLICK: Porch.com is about three months old, the brain child of dotcom entrepreneur Matt Ehrlichman, who’s busy building his own house. You put in your zip code and the site shows you what contractors, architects, even plumbers are working in your area and you can also see inside some of the projects. Homeowners have to give their consent but they don’t give their names or addresses.

It’s like getting neighborhood word of mouth without have to your neighbors.

EHRLICHMAN: The only things that really have existed in the past are review sites that are out there. Some are paid, some are free where consumers go in and they read third party reviews. Sometimes they are real, sometimes they’re not real.

OLICK: Porch is going up against sites like House, Pinterest and DIY, which have taken remodeling research to a new level. Remodeling professionals are still trying to catch up.

BRUCE WENTWORTH, WENTWORTH, INC: Right now, it can be very frustrating because we don’t know which social media sites are the best ones to be using.

OLICK: Architects Bruce Wentworth are on several sites, including Facebook (NASDAQ:FB). He says they give current and potential customers more confidence in his services.

WENTWORTH: Social media worked well with the Web site, in terms of validating your expertise and your company’s experience level and if other homeowners are recommending us or using us for their home remodeling, it reinforces the whole reputation of the company.

OLICK: And it’s especially timely. Home remodeling jumped 14 percent in September from a year ago and projects are more extensive and expansive.

(on camera): There is, of course, a downside to taking a home renovation out onto the front porch or Internet — a bad renovation can get just as much traffic as a good one.

For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.

(END VIDEOTAPE)

MATHISEN: A tough holiday outlook weighed heavily on shares of Best Buy (NYSE:BBY) today. And that is where we begin tonight’s “Market Focus”.

The electronics retailer warned that competitive holiday promotions could hurt its fourth quarter margins. The chain reported a return to profit in the third quarter and beat Wall Street estimates, but investors just couldn’t get past that weak outlook, and the stock had its worst day of the year, down 11 percent to $38.78.

T.J. Maxx and Marshalls owner TJX said its holiday season is off to a good start. The discount retailer saw a 35 percent increase in earnings driven by same store sales growth. More value conscious consumers help beat Wall Street estimates last quarter. Shares up 1 percent, $63.12 the close there.

Weak consumer demand weighed on profits at Dick’s Sporting Goods. The athletics supplies chain saw better than expected sales but profit came in flat because the company had to cut profit and spend more on marketing. Still, results slightly beat estimates, but shares fell a fraction to $56.14.

GHARIB: Americans are making a shifting towards fresh foods which isn’t helping Campbell Soup’s bottom line. The can soup maker said its quarterly profit fell 30 percent as the soup and V8 beverage sales declined. Now, on top of those weak results, the company also cut its full year outlook. Campbell’s stock plunged more than 6 percent, to $39.20.

Sales at Medtronic (NYSE:MDT) got a boost, thanks to an improving heart device market. The medical device maker said earnings beat estimates as its business units performed in line or better than the overall market. But the stocks fell slightly to $57.94.

Office Depot (NYSE:ODP) shares fell sharply after big investor Starboard Value cut its stake in the company. According to an SEC filing, the activist fund reduced its original positions of around 14.5 percent to about 8 percent. So, Office Depot (NYSE:ODP) stock tumbled 3 percent to $5.23.

And United Continental Airlines announced today that it plans to cut costs by $2 billion a year by the year 2017. No furloughs have been reported yet as part of the cost-cutting plan. United CEO says the company aims to burn less fuel, increase productivity and raise revenue.

(BEGIN VIDEO CLIP)

JEFF SMISEK, UNITED AIRLINES CEO: With this $2 billion annual cost savings program and we also announced a minimum $700 million of additional ancillary revenue that we’ll be generating, plus our growth in our passenger revenue, we’re very confident that we will be performing well financially. We expect to earn multiple of what we’re earning today.

(END VIDEO CLIP)

GHARIB: Shares popped almost 4 percent to $37.80.

MATHISEN: Another Dow component out with news late tonight. A unit of Johnson & Johnson (NYSE:JNJ) has agreed to pay about $2.5 billion to settle thousands of lawsuits from individuals allegedly injured by artificial hip implants. The settlement would compensate an estimated 8,000 patients.

And coming up, Chicago’s finances are being pushed to the breaking point by pensions. Find out what officials are doing about it as our series mission critical, fixing America’s cities, continues.

(MUSIC)

MATHISEN: An international economic group cuts it forecast for global growth through next year and says the U.S. would get much of the blame if the recovery derails. The organization for economic cooperation and developments says the threat of another round of brinksmanship in Washington over the federal budget and raising the debt ceiling could hamper growth around the globe.

GHARIB: China’s economy is growing fast. And now, Chinese officials’ problem (ph) is faster reform for its currency, widely criticized as undervalued. China’s central bank vowed to speed up the process of converting the yuan into comparable currencies, allowing for freer movement of capital across China’s borders. That’s something many of China’s major trading partners have been demanding.

MATHISEN: The city of Detroit can probably use some yuan or just about another currency right now. The bankrupt city could end up paying nearly twice as much in interest on a $350 million loan from Barclays Capital than was previously disclosed. The higher fee was revealed in a letter made public this week after a judge ordered terms of the Barclays emergency financial deal unsealed.

GHARIB: Meanwhile, officials in another bankrupt municipality, Jefferson County, Alabama, have approved a deal to help the country exit Chapter 9 receivership. The county home to Birmingham agreed to increase the interest rate out of portion of a 40-year, $1.8 billion bond in order to attract more investors after initial demand was weak.

MATHISEN: And, finally tonight, the second in NBR’s week-long series, looking at the tough economic issues facing some of the American cities, which accounts for 85 percent of the nation’s GDP. Tonight, a proud city on the Great Lakes is being pushed to the breaking point by pensions and we’re not talking about Detroit.

Scott Cohn has more from Chicago.

(BEGIN VIDEOTAPE)

SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Chicago likes to think of itself as a world class city, but it also has a world of problems.

TV ANCHOR: The big story, the mass shootings in Chicago.

COHN: Chicago is the murder capital of America, 500 last year and this year isn’t turning out much better.

UNIDENTIFIED FEMALE: She was fine and who was you to take her from me?

COHN: Gun violence is epidemic.

TV ANCHOR: It has happened again. An innocent child is shot, this time at a park while celebrating the 4th of July.

COHN: It doesn’t help that there are 1,700 fewer police officers on the street than there were five years ago.

MAYOR RAHM EMANUEL (D), CHICAGO: We all know the problem.

COHN: That’s the mayor, the former White House chief of staff, last month unveiling his latest budget, with a $338 million shortfall. That’s an improvement from a year ago.

But from every step forward, one thing keeps tugging Chicago’s sleeve, pensions.

EMANUEL: We cannot allow the future to become a stark choice between a pension payment or a police officer, a pension payment or a parks program, a pension payment or a school principal.

COHN: The city and state have been scrimping on their payments to Chicago six pension funds for years. Now, the funds are $27 billion until the red, that’s nearly eight times as bad as Detroit.

The teachers union says the city owes its fund $400 million by June and members are in no mood for more concessions.

JESSE CHARKEY, CHICAGO TEACHERS UNION VP: We’re not interested in having a conversation first about, you know, us making sacrifices and by us, I mean, people who work their entire life to be promised a particular mention and now, we’re going to have it cut by a third.

COHN (on camera): The mayor’s office estimates Chicago has half the funding it needs to meet its pension obligations. Some private estimates are far lower than that. But in some cities where things don’t seem so dire, they may not be as good as they seem.

Our next report, Miami. We’ll take a close look at the municipal bond market, a market renowned for its safety may not be so safe after all.

Scott Cohn, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

MATHISEN: And Chicago is not alone. Pension problems plague other cities, as well. To read more and see if your city is one of them, head to our Web site, NBR.com.

GHARIB: And that’s it for us, NIGHTLY BUSINESS REPORT for tonight. I’m Susie Gharib. Thanks so much for watching.

MATHISEN: And I’m Tyler Mathisen, thanks so much from me as well. Have a great evening, everybody. We’ll see you right back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2013 CNBC, Inc.

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