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SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Executive encore. Procter & Gamble (NYSE:PG) puts its chief execute officer back in the corner office. But are shareholders better off when CEOs return?
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Ageing infrastructure. What needs to keep our roads and bridges safe again?
GHARIB: And sticker shock. Beef prices soar. As summer grilling season arrives, and you`ll be paying the price at your -- backyard barbecue.
We have all that and more tonight on NIGHTLY BUSINESS REPORT for Friday, May 24th.
MATHISEN: Good evening, everyone.
An executive shakeup at Dow component, Procter & Gamble (NYSE:PG), had all of Wall Street and the world of business buzzing today but the new boss is same as the old boss, as The Who song used to go.
After just four years at the helm, CEO Bob McDonald has resigned. The man who held the job before him, A.G. Lafley, again takes over the company as president, CEO and chairman.
Investors liked what they heard, sending the Dow component stock higher by 4 percent today at $81.88.
So, will bringing back the former chief executive make P&G a better company and a better investment? And does the strategy of bringing back the old boss ever work?
Jackie DeAngelis has our report.
JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Procter & Gamble (NYSE:PG), the largest consumer brand in the world, the maker of products we know and love like Pampers diapers, Tide detergent, Downey fabric softener and Crest toothpaste, replacing CEO Bob McDonald with former CEO, A.G. Lafley.
Lafley ran the company from June of 2000 to June of 2009. He`s not just a legend at P&G, but his career is a material upon which Harvard Business School case studies are based. Under Lafley`s watch as CEO, the company stock price soared. It led its peers in terms of performance and it outperformed the S&P.
AG LAFLEY, PROCTER & GAMBLE CHAIRMAN & CEO: One of the definitions that I use of leadership is the ability to continually transform the mission, the strategy, the organization, whatever needs to be transformed to keep pace with and stay ahead of the unrelenting change that I believe is the reality in a global and incredibly competitive marketplace.
DEANGELIS: Under Bob McDonald, however, who took over in 2009, the company stock price has suffered on a relative basis. P&G has seen a 54 percent rise, but it`s now one of the laggards in its peer group and its return is lackluster when compared to the S&P.
McDonald`s (NYSE:MCD) was A.G. Lafley`s handpicked successor when he left the company in June of 2009. But McDonald faced many challenges when he took over, leading the consumer products giant through the economic downturn.
McDonald was criticized by investors, including Bill Ackman, for not doing enough to cut costs and improve manufacturing productivity. He was scrutinized last quarter when the company missed expectations on revenue and its earnings outlook.
But can P&G`s problems be blamed entirely on McDonald?
Some skeptics argue that Lafley himself maybe partially at fault for strategies that predated McDonald`s tenure, like the more than $50 billion Gillette acquisition in 2005. And this type of move raises a point about former CEO come back to run companies.
When Paul Allaire came back to Xerox (NYSE:XRX), the stock fell more than 60 percent. When William Stavropoulos came back to Dow Chemical (NYSE:DOW), the stocks down near 60 percent left (ph).
So, former CEOs coming back doesn`t always guarantee a home run.
Meantime, analysts are generally positive on the change. They couldn`t have predicted the timing but they do say that they weren`t totally surprised. The staple analyst who has the hold on the stock said that while the move was constructive, it`s going to take some time for the fundamentals to change, though he`s not changing his rating.
For NIGHTLY BUSINESS REPORT, I`m Jackie DeAngelis.
GHARIB: Our guest is in the business of advising executives and students about leadership.
Robert Kaplan is a senior associate dean at Harvard Business School. He`s a former head of investment banking at Goldman Sachs (NYSE:GS). That firm did business with Procter & Gamble (NYSE:PG).
And Kaplan is also the author of a new book, "What You`re Really Meant to Do."
Rob, I don`t know if this P&G case will become a Harvard Business School case study. Maybe it will be. But you do you do believe that P&G did do the right thing to bring Lafley back. And, you know, tell us why you think that is. What can he do to fix the company and the stock maybe?
ROBERT KAPLAN, HARVARD BUSINESS SCHOOL: Well, A.G. Lafley is one of the great CEOs that this country`s ever had and he was a great CEO at P&G. He is -- as he talked about, he articulates a very clear vision, how they add value, what their competencies are. But in particular, that vision is always driven by the needs of the customer.
And so, he talked about the need to adapt, to change, to keep moving forward, and I think that takes real decisiveness. And so, what I think he`ll bring to this company, he`ll finish the restructuring, the cost- cutting but I think you`ll see him focus very heavily on the customer, and on innovation and adapting to better serve the needs of the customer.
MATHISEN: Mr. Kaplan, this feels a little bit like Phil Jackson coming back to coach the Lakers one more time.
I wonder what it says, though -- P&G always had this reputation of being a place that minted the next generation of business leaders. Number one, do you agree with that? And number two, does the fact that they went back to the former CEO suggests that they had no one on their bench to step up if the board wasn`t happy with Mr. McDonald?
KAPLAN: I think given the timing of the decision with McDonald, I think it was -- it was a good decision to go to A.G. Lafley.
I still think they have successors and lots of talent in this company, and I think what you`ll see A.G. Lafley do is cultivate a number of those up and coming executives and he will pick from that group, the next CEO. So, I still think you`ll see -- they have a real competence of developing people. I think at this moment, they`re probably was no one that they felt was quite up to this job and it made more sense to bring in Lafley right now.
GHARIB: I wonder if we can get some more specifics from you on what kind of changes to expect, because Lafley sent a memo to employees today and he said in there, "The consumer is boss." Those are his words. "Innovation is our life blood."
What kind of changes can we expect at P&G?
KAPLAN: So, under Lafley, the company went from being more of a housewares company to a personal care and beauty company. The U.S. consumers changed a lot though in the last five years and they are more price sensitive.
So, I think you`ll see him look very hard in the United State. For starters, how to better serve the consumer given, they are more price sensitive. I think he`ll also look at their product offering in emerging markets, fast growing markets. But it wouldn`t surprise me to see them make some more bold decisions about innovating, introducing new products that serve the customer need and if necessary, he`ll make acquisitions too.
MATHISEN: You know, there`s probably no company in the world that knows more about what women want, that`s their business, that`s what they say they want to know. What do women want from that company right now?
KAPLAN: Well, they`ve got 25 business lines that generate a billion dollars or more, and that includes products for women, but also includes diapers for babies and a whole range of other products in between, toothbrushes, Oral-B, you name it.
So what women want it sound like from all the research I`ve read at least in the United States, they are a little more price sensitive, household sector has been beaten up in this country over the last number of years. There`s a lot of competition. And they are more -- they want more value.
GHARIB: We can go on for hours with you. Rob, thanks so much. This was great.
Robert Kaplan from Harvard Business School.
KAPLAN: Good to talk to you.
MATHISEN: All right. On Wall Street today, stocks wrapped up a quite volatile week with a whimper. Lingering worries about when the Federal Reserve may begin pulling back on its stimulus program led the major averages to post their first weekly loss in over a month. That happened despite that jump in shares of Procter & Gamble (NYSE:PG) and some good news about manufacturing.
Orders for long-lasting or durable goods shot up more than 3 percent in April led by strong demand for new aircraft. After an up-and-down session, the Dow closed eight points higher, but ended lower for the week. Both the NASDAQ and the S&P 500 were essentially unchanged, each closing a fraction lower.
GHARIB: The nation`s crumbling infrastructure was a big topic today for Americans all across the country. The Washington state bridge collapse last night is a stark reminder of the troubling condition of the nation`s roads, bridges and tunnels.
So what needs to be done to make them safe again?
Michelle Caruso-Cabrera reports.
MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT (voiceover): The collapse occurred around 7:00 p.m. last night on the stretch of Interstate 5 in Mount Vernon, Washington. Three people and two cars plunged into the icy waters below.
DAN SLIGH, BRIDGE COLLAPSE SURVIVOR: When you looked at the carnage of the metal and stuff around here, I assumed that was it at that point. There was no hope. That`s what I was thinking.
CARUSO-CABRERA: However, all three people were rescued. Washington state police told reporters an oversized truck hit one of the overhead spans. The tractor-trailer made it all the away cross before the span fell into the river.
The driver stayed and cooperated with investigators. The bridge was inspected twice last year and received a score of 47 out of a possible 100.
LYNN PETERSON, WASHINGTON STATE DOT SECRETARY: It`s an older bridge that needs a lot of work.
CARUSO-CABRERA: More than anything, the bridge collapse highlights the ageing state of the nation`s roads and bridges. Constructed in 1955, this bridge is labeled by the Federal Highway Administration as functionally obsolete.
CASEY DINGES, AMERICAN SOCIETY OF CIVIL ENGINEERS: Those are bridges that have design features like there are no shoulders on the bridge, the width of the lanes are too
narrow. There could be other aspects of the bridge that you just wouldn`t design into a bridge in this day and age. So, that`s why they are considered functionally obsolete.
CARUSO-CABRERA: This bridge had a clearance of 14 1/2 feet, while the current standard is 16 feet.
In Washington state, 20 percent of all bridges fall into this category. Across the United States, the number is 13 percent or 80,000.
The American Society of Civil Engineers which assesses the nation`s infrastructure every four years gives the United States a grade of D-plus. That`s an improvement from last time but still lagging. The nation`s bridges get a slightly better grade of C-plus.
DINGES: I think the big picture lesson here is that the nation needs to continue focusing on investing in bridges, improving their condition, and not just bridges but transportation in general.
CARUSO-CABRERA: Figuring out how to pay for it will be the next challenge.
For NIGHTLY BUSINESS REPORT, I`m Michelle Caruso-Cabrera.
MATHISEN: Still ahead, lobbyists are doing what they can do to influence lawmakers and soften any new financial regulations. But you may be surprised just how cozy they are getting.
But, first, how the international market closed today.
GHARIB: Tens of thousands of federal government workers got the day off today but not for fan. It`s because of federal budget cuts known as the sequester. About 5 percent of the total government workforce were furloughed, completely shutting down the IRS, the Environmental Protection Agency, Housing and Urban Development, and the Office of Management and Budget.
More furloughs will kick in after July 4th. That`s when Uncle Sam looks to keep 650,000 workers home, without pay every week.
MATHISEN: Another group of employees in the nation`s capital are working harder than ever right now: lobbyists. Three years after the Dodd- Frank law overhauling regulation of the financial industry, lobbyists working for nation`s biggest banks are the ones drafting those new financial rules. And guess who is benefiting?
John Harwood joins us from Washington with more.
John, how common is it for lobbyists to play such a big role in writing legislation or regulations?
JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s pretty common, Tyler, and the reason is that the industries, of course, have a lot of expertise and many industries hire as their lobbyists people who worked on the very committees that are doing the legislation in question. So, it`s a very cozy relationship. This is why they call it Washington`s revolving door.
It`s been going on for quite a long time. And it works both ways to the benefit of business which is something especially when Republicans are in control of the House, is an aid to business. And, of course, campaign
contributions help with that. But it also helps in the other direction -organized labor, environmental groups, people who are more aligned with the Democratic Party do precisely the same thing.
GHARIB: This is news for most Americans. I mean, how should we respond to this? Should we be angry or should we be pleased that they are all working together?
HARWOOD: Well, there is something to be said for the expertise that they bring to the table. But I think the important thing is disclosure and transparency so that people know what`s going on and my colleagues in "The New York Times (NYSE:NYT)" came out with a report today showing how closely Wall Street representatives had worked with the House of Representatives committee on this and the more people know about it the more they know what sort of laws that they are going get.
MATHISEN: That article was fascinating, John. It said in one place that a big passage in the proposed legislation was word for word what Citibank had proposed except for two changes., changes of a couple of words from singular to plural.
How likely are these changes to the Dodd-Frank law bill likely to become law?
HARWOOD: Well, the fact that the drafting of those pieces of legislation is now known is going to help opponents and consumer representatives who want more regulation of those derivative trades pushed back. The one thing we know is that when you got a Republican House and Democratic Senate, both sides are going to have their views aired.
So, as much progress as those lobbyists may be able to make in the House, controlled by Republicans, the Senate controlled by Democrats is going to have its say as well and there will be lobbyists on the other side trying to push back.
MATHISEN: John Harwood, thank you very much. Have a great weekend.
HARWOOD: You bet.
GHARIB: Let`s turn now to "Market Focus".
And we begin with a market moving verdict for Intuitive Surgical (NASDAQ:ISRG). A jury ruled that the company was not intelligent in the case of a man who died after surgery using Intuitive`s robotic Da Vinci machines. Investors made Intuitive the top gainer in the S&P 500 today, up more than 4 1/2 percent, closing at $500 and change.
MATHISEN: Valeant Pharmaceutical also a big gainer today on reports it will buy Bausch & Lomb from the private equity firm Warburg Pincus for about $9 billion. The deal could be announced as soon as next week. Shares of Valeant up more than 13 percent to close at $84.47.
Abercrombie & Fitch (NYSE:ANF) CEO Mike Jeffries promised things would get better by back-to-school season. Nevertheless, he lowered guidance for the full year today after reporting a 15 percent drop in comp store sales and a deeper profit decline than expected.
The stock closed off its low at $50.02, but it was down 8 percent on the day.
GHARIB: And Sears (NASDAQ:SHLD) CEO Eddie Lampert says his company`s performance, quote, "has not been acceptable." He was reacting to the loss we told you about last night, more than doubled Wall Street estimates.
Shares of Sears (NASDAQ:SHLD) down double digits all day long, closing at $50.25 a top of 13 1/2 percent.
MATHISEN: Our market monitor today says investors who are really long term owners of stocks should not be scared of a little market volatility.
He`s Marty Leclerc, chief investment officer at Barrack Yard Advisors.
Mr. Leclerc, welcome. Good to have you with us.
MARTIN LECLERC, BARRACK YARD ADVISORS: Thanks, Tyler.
MATHISEN: How can I insulate myself against the natural fear of volatility? When things go up and down a lot as they have this past week, it starts to feel a little risky.
LECLERC: Well, the thing that people have to realize is that volatility and risk are not the same thing, as the market will tell you that your shares are worth a certain amount of money on any given day.
But the key is time horizon. If you have a long term time horizon, it just becomes noise.
MATHISEN: All right.
GHARIB: You are a big proponent of buying stocks and you are again putting out warning that not a good idea to be in bonds or anything that`s tied to the interest rate world.
Now, a lot of our viewers still think that bonds are a safe place to be. Give us your case of not to own bonds.
LECLERC: Investing -- investing has so many paradoxes associated with it. And right now, because of the zero interest policy of the Fed, safe investments or investments that are traditionally thought of as being safe are paradoxically not safe.
The Congressional Budget Office, the CBO, estimates by the year 2019, that we`ll probably be back in a normalized interest rate environment. If that`s the case, then 10-year Treasury bonds will being yielding 5 percent and those of us who lived for a while don`t think that 5 percent is a high interest rate. If that were to indeed come true, then people who currently
own long-dated assets tied to the cost of money like REITs, and preferred stocks, and long term bonds would see somewhere between a 30 percent to 40 percent decline in the principal value of their investment. It`s a simple math.
MATHISEN: Boy, that really nails it right there. It tells you how much you lose if interest rates go up by that much to your point that what seems safe sometimes can be very risky.
Let`s go to some stocks now, Marty, quickly, beginning with one you like that has not been doing much over the past decade. That`s Cisco (NASDAQ:CSCO).
Why do you like it now?
LECLERC: Valuations. First of all, we like their business. They are entrenched, incumbent participant in the global IT infrastructure, which is a very good business. The business has a decent and high return on invested capital.
But it`s valuations, Tyler. Cisco (NASDAQ:CSCO) right now is trading on a free cash flow yield of about 10 percent, and in addition to that, they are very, very strong financially. They have $5.60 of net cash per share so really the global economy can throw a lot at them and they`ll still be OK.
GHARIB: Marty, let`s move along with your next one. You like DuPont, "DD" on the big board. What do you like about it? The stock has had a nice move so far this year.
LECLERC: Right. I don`t know I`d be chasing DuPont at these levels. We`re not particularly, I would say, bullish on the stock market right now, where we are a little bit wary. The thing that`s great about DuPont is that it`s a way to participate in two major themes that we see. One is the rise of the global middle class, and the accompanying boom that that will be for global agricultural companies.
And not very many people know this, but DuPont owns the largest seed company on the planet. It`s called Pioneer Hybrid. And the seed business is the wonderful business. It has
enormous barriers to entry. And there are only four major companies who basically control the market.
The other way -- the other trend that one gets exposure to by owning DuPont is America`s energy independence that`s being -- as a result of the shale revolution and the important thing is that companies like DuPont which are big consumers of energy for their American business will have a competitive cost advantage relative to our trading partners.
MATHISEN: Little short on time, Marty. Thank you so much. Have a great weekend.
Do you have any disclosures to make on those two stocks you mentioned?
LECLERC: Yes, I own both of them.
MATHISEN: Well, that`s a clear disclosure.
LECLERC: As do my clients.
MATHISEN: All right. Thank you. Marty Leclerc, chief investment officer at Barrack Yard Advisors.
GHARIB: And coming up on the program, summer sizzle takes on a whole new meaning this season as the cost your cookout climbs.
But, first, a check on commodities, treasuries and currencies.
GHARIB: Despite all the good news on housing lately, millions of Americans still owe more on their mortgages and their homes are worth. And when those homeowners move out, more and more of these under your borrowers are becoming landlords. Not because they want to, but because many of them have to.
Diana Olick has the story.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Florida native Maria Wells never ever wanted to be landlord.
MARIA WELLS, ACCIDENTAL LANDLORD: I would be really happy when I`m not in these situations.
OLICK: Maria owned two homes, one hers, one for her mother. As the housing recession dragged on, her life changed. Maria got married and moved in with her new husband. Her mother fell and had to go assisted living.
Suddenly, Maria was saddled with unwanted real estate.
WELLS: I wasn`t happy about it, but I was so upside down, did not want to do a short sale or a foreclosure. So I decided that I needed to rent them.
OLICK: Even as home prices slowly improve, 13 million homeowners are still under water on their mortgages and another 9 million likely don`t have enough equity to move. That`s according to Zillow.
Inevitably, life circumstances, be it job changes, marriage or divorce force people to move. That has created a new breed of accidental landlords.
STAN HUMPHRIES, ZILLOW CHIEF ECONOMIST: People of some means are able to avail themselves and become accidental landlords, actually move out of the house and move into another one and rent out their old house. So, it`s definitely something that we see in a lot of markets that have been hard hit.
OLICK (on camera): While some underwater borrowers choose to walk away from their homes and take the credit hit, those who want to protect their scores are staying to face the music, which isn`t always pretty.
WELLS: One of the tenants certainly surprised me. They decided to change a water filter and left for a holiday weekend and I got the call that 500 gallons of water had gone into my home. And $50,000 later in repairs, I had to fix it and then re-rent it again.
OLICK (voice-over): While there are no hard numbers on how many accidental landlords are out there today, realtors say the phenomenon is contributing to the lack of for sale inventory, because many people are now buying without selling.
(on camera): In some of the hardest hit markets, it may take years for these homeowners to rise above water and sell their way out of the rental business.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.
MATHISEN: Finally, tonight, as we kick off the unofficial start of summer, I`d say we just have to make it official. Come on, guys.
Millions of Americans may be planning to grill up some steaks or burgers, maybe even some hot dogs this holiday weekend. But before you do, brace yourself for some sticker shock at the butcher shop, he said.
Jane Wells tells us what`s cooking with beef prices.
UNIDENTIFIED MALE: Come on, baby!
JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): A funny thing happens to your barbecue from here to here. The price sizzles.
ALAN ARZOIAN, HANDY MARKET OWNER: Beef prices have gone up around close to 20 percent.
WELLS: Alan Arzoian owns the Handy Market in Burbank, California. He says demand for beef always jumps heading into summer barbecue season, which affects prices. But these prices?
ARZOIAN: There has to be more than demand.
WELLS: Nearly all cuts of meat cost more, many hitting records. Ground beef prices have jumped the most, up 9 percent in a year. Lean ground beef up 21 percent.
(on camera): Here`s something you`re going to see a lot of in California this week in Santa Maria Style Barbecue tri-tip. They`re selling up for about $12.98 a pound. Here at the Green Acres Market in Simi Valley, they are having to pay 15 percent to 20 percent more for beef just over the last two months. They`re passing along about a third of that new cost.
(voice-over): What`s going on? It`s all supply and demand. Exports are up especially to Japan affecting demand. Meantime, the nation`s cattle herd is at an all time low after last year`s drought make feeding cattle too expensive.
In California, where ranchers are just as likely to drive golf carts as ride horses, Bud Sloan says dry weather has left him with too little range land. He`s having to buy feed. He`s already cut the size of his herd almost in half and he may not be done.
BUD SLOAN, CA (NASDAQ:CA) CATTLE RANCHER: If these cows are not in calf, if they are not pregnant then I`m going to have to cull (ph) them and they will go hamburger. I`ll save the ones that are bred and feed them and maintain an economic unit.
WELLS: High beef prices should encourage ranchers to begin rebuilding their herds but that hasn`t happened. Meantime, cattle futures are falling, as traders predict more Americans will switch from beef to chicken.
For NIGHTLY BUSINESS REPORT, Jane Wells, Simi Valley, California.
GHARIB: And that`s NIGHTLY BUSINESS REPORT for tonight. Have a great weekend. I`m Susie Gharib.
MATHISEN: And you have a great weekend, too, Susie.
GHARIB: Thanks, Tyler.
MATHISEN: I`m Tyler Mathisen. Thanks for watching. Have a great weekend.
We`ll see you back here on Monday for a special NIGHTLY BUSINESS REPORT.
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