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Is It Working?

Jason Stipp
Jeremy Glaser

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.

From the government to the corporate level, lots of plans have been hatched in recent times, but the question is, are they working?

Here to offer some insights is Morningstar markets editor, Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Jason, always a pleasure.

Stipp: What do you have for The Friday Five this week?

Glaser: We're going to talk about Microsoft, BP, Berkshire Hathaway, Ben Bernanke, and finally the eurozone.

Stipp: A management shakeup at Microsoft calls into question whether the Windows 8 launch is happening as they expected. What's you're insight on that?

Glaser: It was just a few weeks ago we were talking about the launch of Windows 8, and Microsoft obviously launched it with great fanfare. But this week when we heard that Steve Sinofsky, who is the head of the Windows division, was leaving Microsoft, I think we're seeing signs that maybe Microsoft isn't quite as happy with the launch as they had initially said.

This was a difficult one for Microsoft. Unlike their previous operating systems that were really designed to work on Intel chips on the desktop, Windows 8 was a much broader product. It was meant to be very touch friendly, to work on tablets, to work on convertible machines, to work on really almost any kind of device that they could their hands on, and also on ARM architecture processors, which was the big departure for the software giant.

I think getting this all right and getting all of those different players happy, it was something that was extremely challenging, and [Microsoft CEO Steve] Ballmer obviously thinks that with new management, Windows will be able to do that better in the future.

We'll have to see if they're able to handle this. Coming up with one unified operating system is something that's very, very difficult. You haven't seen Apple do it. There is still a very strong divide between iOS and OS X. Most people have wanted a dedicated tablet operating system, a dedicated desktop operating system. Trying to merge it certainly is a risk, and we'll have to see if that was a risk worth taking for Microsoft.

Stipp: BP settled some charges with the government related to the big oil spill in the Gulf. Are their efforts to get past this debacle working?

Glaser: Well, this is what BP has been trying to do for a number of years now. Since 2010, they've had this cloud over them, because there were these very uncertain liabilities that are going to come along with the 2010 oil spill. And certainly this agreement this week to spend $4.5 billion to settle some criminal charges isn't the end of the story.

There are other charges that could be coming, and there could be more expenses in the future, but it's a concrete step to putting this behind them and to really focusing on what they can do in the future.

Our analyst Steve Simko, who covers the company, thinks that they, even beyond all of these blemishes on their record, are still going to be a giant in the oil industry, are still going to have the scale and the capability to potentially produce good profitability in the future. But definitely they will have to get past this, and the agreement this week was certainly a step in that direction.

Stipp: We got more information about Berkshire Hathaway's investments in their 13-F, which was filed this week. As part of potentially a succession plan, Buffett has been pushing some investment responsibility to some higher-profile lieutenants. Is that plan working out?

Glaser: This has been going pretty well. One of the big concerns that a lot of investors had about Berkshire Hathaway is what happens after Warren Buffett leaves. And over the years, he is starting to give us a few more hints of exactly how he expects the company to be run. And one of the big changes has been the handing over a part of the investment portfolio to two managers, Weschler and Combs, who would get to continue to manage larger and larger pools [of money] as Buffett continued to reduce his stakes, the amount of money that he was managing personally.

And we saw that very much on display in this report. We saw the sale of things like Johnson & Johnson, almost to nothing, which was a big Buffett purchase. Other positions, like Kraft, were greatly reduced, and you could see Buffett pulling back, and that money then being handed over to the other managers who are going into a lot more stocks and making a less concentrated portfolio than maybe some Berkshire investors would be used to--names like DaVita and General Motors--and putting some money to work there.

And I think the fact that this is happening gracefully so far shows that Buffett really has thought about what happens after he leaves. He has thought about how he can give this gargantuan cash stake over to some new lieutenants without totally overwhelming them at once.

Certainly, we want to know exactly who is going to take over that CEO position, who is going to run those operating business. I think that's an important part of the plan as well. But it's good to see this transition happening smoothly. And just so you think Buffett's not totally out of the picture, he did add to Wells Fargo again. He really sees that as his highest-conviction, idea it seems. So, he is not completely checking out yet.

Stipp: The housing market has been a focus of Ben Bernanke and the Fed for a while. He made some comments this week, though, that seemed to suggest there could be some hurdles in their plans to stimulate the housing market ahead. What were those comments?

Glaser: He made a really fascinating speech about what he sees as the big problems in the housing industry right now. And one of the things that he identified was tight lending standards.

I think he appreciates, and he mentioned several times, that there really is a true decline in demand for housing. Given the uncertainty in the job market, the uncertainty in the housing market itself, people don't really want to take out big mortgages, don't want to restrict their job mobility, [and that] is attributing to some of the lack of loans being made for housing.

Part of it is also that banks are tightening their credit standards, and he thinks that pendulum has just swung too far. [Lending standards were] way too loose before the crisis happened, and now it's just too difficult to get a loan for too many people.

And this is particularly problematic for him because a big part of his third round of quantitative easing is to try to stimulate the housing market and then hope that the housing market will then help add jobs or help add that economic activity. He sees that as a vector to be able to take get the economy going again through low rates, but those rates are only going to work if the banks are actually willing to lend out at those rates, and there are people who will qualify for those mortgages and are going to take them.

So, I think until we see that lending pick up, until people feel more comfortable about the housing market, it's difficult for that monetary policy to work exactly the way that he wants. So, his frustration is understandable.

Stipp: We got some GDP data on the eurozone this week. The area is obviously facing some economic issues. Can we expect that those economies, though, will at least be able to work to some degree during this very difficult time?

Glaser: Well, the eurozone is now officially in recession. I don't think this comes as a giant shock to anyone who has been looking at the numbers for a while, but we've now had two quarters of consecutive GDP declines in the eurozone as a whole.

But I think what's interesting is … that Germany in particular, remains at fairly robust growth, and that France is actually still growing as well. So, you have the two really core countries of the eurozone still doing pretty well economically, while the rest of the eurozone is in a much sharper decline, and you are seeing unemployment get much worse.

So, I think one of the big questions is, can this continue? Can Germany and France continue to defy gravity unlike the rest of Europe, and continue to grow, continue to be strong enough to really provide the support that the rest of the eurozone will need to get over this hump and to paper over some of the eurozone crisis issues and get us closer to a resolution? Or will they get dragged down as well?

There is no sign that that slowdown is happening yet, but I think certainly market watchers are going to have their eyes on Germany and France, in particular, just to make sure that they have that economic strength to keep everything on track.

Stipp: Jeremy, The Friday Five is always working for investors. Thanks for joining me again this week.

Glaser: You're welcome, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.