fallout on the fed and the focus on their moves, what they said, what they did and why it spooked the market. when optimism could return to the economy. there's no business like shoe business. how one ceo is trying to reinvent retail, keep his employees happy and make money at the same time. and the best places in the u.s. to live and work for the next ten years. and some places on the list that may surprise you. . >> this is america's number one financial news program "the wall street journal report." now maria bartiromo. hello, everyone. i'm sue herera. maria will be along with more of the show in just a few minutes. here's a look at what's making

news as we head into a new week on wall street. the focus was on the fed this week. the federal reserve's open market committee held a one-day meeting and released a statement essentially saying the economic recovery was slowing. since interest rates are about as low as they can go, the fed reached into its tool kit for another way to help stimulate the economy. the fed will take proceeds from a portfolio of mortgage bonds that it holds and use that to buy treasury bonds and that should help keep interest rates low on treasurys which, in turn, will push down rates on mortgages and corporate loans. the fed hopes that that will increase borrowing and help the economy grow. the fed's move, though, spooked the markets, perhaps signaling the economy is in worse shape than investors thought. the dow with its worst three-day drop since early july. the marks fell again on friday and general motors posted first-quarter profits of $1.3 billion, the best quarterly performance since 2004. the company announced ceo ed whitaker will be stepping down on september 1st to be replaced

by dan akerson. gm is expected to announce the terms of the initial public offering soon. it downgrade its outlook on the economy and also said it would not shrink its balance sheet, but is the market misinterpreting what the fed did and said. joining me now is michelle degirard, rbs senior economist and jim paulson, chief investment strategist. welcome to you both. michelle, i'll start with you if i could, the fed made a decision to reinvest its holdings back into treasurys. can you explain what the fed actually did and why he did it. >> what's happening now is they're allowing the mortgage and agency portfolio to shrink as he matured, as these securities matured and in effect, what that's doing is taking reserves out of the banking system and it isn't tighteninging, but in a way that's sort of what happened with the fed just not doing anything. if they re-invest those proceeds they're going to basically keep

that money in the banking system. so it's a very neutral posture for the fed, and i think that they felt it was probably the best way to be positioned given that they are so uncertain about the outlook for the economy. >> jim, what's the effect on the average investor of what the fed did? it certainly spooked the markets on wednesday and then the fed said the pace of recovery has slowed in recent months. put it together for us, what do you make of all of it? >> well, i think the main impact of this move is on the confidence level or fear that it created, sue, more than anything else. i don't think what the fed says or does is that important for where we're headed in the future right now. i don't think it did anything dramatic that will change that, but it certainly elevated fears that the fed seems compelled to maintain the balance sheet where it's at. i think there are more important forces at work beyond the fed that probably slowed us down here in the second quarter in

terms of growth that are now likely to speed us up maybe by the fourth quarter. we've had a big drop in interest rates issue the ten-year treasury has gone from four to under three. mortgage rates are falling to 4.5%. you've got oil prices that dropped from 90 back into the 70s. you've got a dollar which is now weakening and coming off. the european crisis seems to be winding down and the chinese government which had been tightening over the last year has stopped tightening, and i think these positive forces are likely to be more important for driving the growth in the second half this year than what the fed announced here this week. >> weigh in on that, michelle, where do you think we are in the economic cycle? there's a lot of talk that we're at risk for a double dip. do you agree with that or do the fed's actions make you reconsider that at all? >> i'm actually not in the double dip camp at all and i much agree they think the outlook for the economy is improving. i really don't think that the pessimism that's sort of become so pervasive in the marketplace

is warranted by the underlying data. the data aren't strong, but they're not deteriorating such that they suggest that the economy is sliding toward a double dip, but i will say, i do think the fed's actions give some pause. when bernanke testified in late july he was very clear that they didn't feel that they were going to need to take any action to support the recovery in the near term and 21 days later the fed makes this announcement that they're going to be re-investing in treasurys, and i think that caught people by surprise, and exactly as has been said, the impact on confidence could be somewhat risky in that it forces businesses and consumers to say, oh, maybe i should hold off. i'm not sure about the fed is worried and it could have dampening impact on the economy. >> so jim, what changes that psychology and returns the market to a more optimistic tone? >> well, there are three things that i like about the market when i look ahead.

one, is i like the fact that there's pessimism right now and high levels of fear because that tells me you have everybody hunkered down and prepared for the worst. you've got side line cash and they're holding on to for a rainy day. if it turns out better than expected they could turn on values. i like the metrics we have right now, sue. we have them selling at 13 times earnings and a sub-3% ten-year treasury and rising profits and that kind of metric is fine if we're headed for a double dip or depression, but that will look awful ridiculous a few months down the road if in fact, we find out we're still in a sustained recovery and the thing that i think changes this, sue, is as i said, we do have a policy stimulus now in the last three or four months with lower rates, lower dollar, lower energy prices that are likely to cause the economic reports to get better that could start to change this confidence thing that michelle and i were talking

about. >> in other words, the table is set for economic recovery if what jim is saying is indeed going to play out, but michelle, one of the issues is people are worried about whether they'll keep their job or if they're out of work, whether they can get a job. what about the issue of job creation? >> it is so important, but just as jim has been saying. firms are in a position to hire and they've been hesitant to do so because they're uncertain themselves about the outlook, but they laid off 8.5 million workers during the recession. they're just not in a position really to continue to increase output without hiring new workers. all of the productivity that you can get from a worker has been exhausted. so i really am pretty confident that the job situation will improve as we move ahead through the second half of the year. >> so, jim, what you laid out for us sounds very good and hopefully for those who are bullish on the economy it plays

out and if that is the case, where do you commit money right now? where do you invest? >> well, i think you'll want to always stay diversified, sue, so you want to have a little of everything. conservative investments and aggressive investments and right now it's a great time to lean that portfolio a little bit more toward the more aggressive areas. the areas that are most impacted by re-acceleration in economic growth and the areas i find interesting right now, i do like the industrial manufacturing areas and the industrials and the basic materials. i like the fact that the dollar is coming off and that's a really good stimulant for that entire industry. the two areas that i particularly look at right now, one of them is the consumer discretionary and retail names, they have just been trashed here over the last three or four month, and i think if we do have a sustained recovery and as michelle said jobs do show up, then consumer stocks will get a lot of interest. those are the areas i would

focus on. >> thank you both. appreciate it very much, jim and michelle. >> thanks. >> thank you. coming up next on "the wall street journal report," the online shoe store where customer service is more important to the bottom line than sales figures. the ceo of zappos.com and is opportunity coming to a street where you live? a look at the ten best cities for the next ten years and you'll be surprised at which ones made the list. as we go to the break, a look at how the stock market ended the week.

does going to work make you happy? one innovative ceo says his employees should be as content as his customers and together they can drive profits up. online shoe retailer zappos.com sells thousands of shoes and maria spoke to the man with the

mission of delivering happiness. tony shea, ceo of online retailer zappos.com, abauthor of delivering happiness, a path to profits, passion and purpose. so nice to have you on the program. welcome. >> thanks for having me. >> zappos was purchased by amazon.com last year for just over $1 billion. that's the state of the online consumer market today from your standpoint. >> i don't know about the market overall, but for us we've always focused a lot on customer service and most of the growth growing from nothing to now doing over $1 billion a year in gross merchandise sales and most of that has been driven by repeat customers and word of mouth. so because of our focus customer service, our customers have remained loyal to us and even though in the past 24 months we've continued to grow year over year. in pack for q1 of this year we were up almost 50% year over year. >> how is it being part of the internet's largest online retailer? were you able to boost the number of vendors or improve the

shopper experience in any way. what does amazon.com bring to the company? >> well, the acquisition of zappos close in november of last year is actually very different from most other acquisitions that amazon has done, as a pre-condition for even exploring the scenario. we let them know that we wanted zappos to turn independent. so we've continued to grow our brand and our culture and our way of doing business independently and it's as if we swapped out the board of directors with a new one. they've remained true to their word. they left us alone and we continue to operate independently. our book is the about the development of the company over the last ten years. why did you write the book? you have over $1 million in growth merchandise sales and excellent reputation for customer service, as you mentioned and how are these two connected and what did you want to communicate in the book? >> a couple of things. from the outside it may seem

that zappos was this overnight success, but the reality is we've made a lot of mistakes along the way and prior to zappos i made a lot of mistakes and learned a lot of lessons. so part of the goal is to share the lessons and mistakes with other entrepreneurs and business owners and hopefully help them make fewer mistakes and the other reason for writing the book is because i think 50 years ago businesses felt like they had to choose between maximizing profits or making employees happy or making customers happy when we're living just at the beginning of living in a very special time where because everyone is hyperconnected and information travels so quickly through twitter, blogs and facebook and so on, that it's actually possible to have it all, to really focus customer service, to make customers happy, to make the culture a high priority and to have that drive business growth and profits. >> you wrote about the call center. what was the longest customer phone call logged at the zappos call center. >> we run our call center very

differently from most call centers and the reason for that is because we actually view the telephone as one of the best branding devices out there because usually we have the customers' undivided attention for five to ten minutes and we found out if we get the interaction right they remember that for a very long time and tell their friends and family about us, but in terms of the longest phone call we've had it was almost six hours long, and that's because we don't have scripts and we don't try to get customers off the phone. in fact, we have our 1-800 number at the top of every single page of our website because we actually want to talk to our customers. >> you talk about corporate culture and fostering happiness among your employees. you housed employees who were short on cash cash in the company's early days. you have a corporate lending library. what role does the active corporate culture play in the firm's success? >> for us it's the number one priority. our belief is if we get the culture right and most of the other stuff like delivering great customer service and the

brand will happen naturally on its own. the big part of it is our core values. a lot of companies have, they might call them core values or guiding principles especially bigger corporations and they're lofty sounding and they read like a press release and maybe you learn about it on day one of orientation and then it becomes this meaningless plaque on the wall and for us we wanted to have committable core values and we wanted to hire and fire people based on the individual job performance. when you use the criteria it's a tough list to come up with and that made the company that much stronger and it drove employee engagement and passion and employee productivity has gone up and it's really driven a lot of our growth over the years. >> what a great and refreshing culture. great to have you on the program. >> thank you. >> tony shea, zappos.com. up next on "the wall street journal report," the best places to live and work in the next decade and they might not include the usual suspects. see the list that calls topeka

tops. and become a fan on facebook. you'll findous facebook at wsjr with maria. any vacation we want? with our chase ultimate rewards, we can go anywhere. how about snorkeling? how about camping? welcome to ultimate rewards. maybe skiing? the rewards program that lets you go anywhere... let's go there. anyt

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is your hometown on the fast track to a vibrant decade? kiplinger's personal finance has taken a look at the ten american cities poiseded for ten years for increased growth and job

opportunities. joining me is kiplinger's senior editor. bob, great to have you on the program. >> good to be here. >> you looked at the unemployment rate and income per capita. what else do you take into account when you look at cities that will drive future growth in the country and be good places to live. >> the innovation which is the key thing right now in the economy. what places will be able to create jobs and not just add on to corporations that are already there and ones that are calderons for innovation and for the quality of life because who wants to move to a place where it's no fun to live? >> let's talk about the list. a surprise is number ten on the list, right? topeka, kansas. >> the bottom two, topeka and west harbor, connecticut, are outliars because they don't follow the thesis which is high tech and education. they have found different ways of being successful. topeka has put together a really nice economy based on being where it is in the country and

getting a lot of, you know, shipping and corporations who want to be sent really located. >> 25% of the population works for the government? >> well, state and local government, right. because it's the state capital. >> health care is an industry that's offering real growth in terms of job creation, right? and rochester, minnesota. >> it's like a big hospital and hospitality is one of the big industries. so you go to rochester you'll find the mayo clinic and you'll find great treatment and you'll find another calderon for innovation. they are not just on the mayo clinic, they have all kinds of good stuff going on there in medical innovation and medical equipment. it's really quite a portfolio. >> i thought it was fascinating that coming in at number three was washington, d.c.. >> right. >> it gained more new residents in 2008 and 2009 than in any one-year period since world war ii. i can guess why that is the case, of course, with the

attention around president obama. it's the city with a lot of urban challenges, though, right? >> you would think so, but only one in ten people in the whole metro area work for the federal government, but you have all of these corporations that are moving there. the hospitality business and defense contractors and the urban corps are in d.c., kiplinger's is based in d.c. they have beautiful neighborhoods in the rest of d.c. and wonderful suburbs which are filled with, you know, biotech communications. just wonderful universities and it's really a booming area outside of all of the federal spending. >> how about the boom in austin, texas, coming in at number one. you say it provides a great home for entrepreneurs and small business owners? >> yeah, i think austin is the proto typical business going in the next decade. it's got education and it's got a lot of public, private

partnerships. the government does play a role, but it's very judicious. so the government, for example, has a capital funds and so they'll fund things, but they're not going to get their fingers in because they know that austin is this tremendous place for innovation. also, it's like the music capital of the country, and that actually spurs innovation among businesses. >> that's fascinating. why is that? >> well, programs. the same kind of thought process that goes into creating music, melding music is the same kind of thing that you do when you do programming. >> any city that wasn't on the list that surprised you because of not being on the list? >> well, both raleigh and durham. i have to make sure that keep them separate, in north carolina, also have a lot of these elements. i think north carolina has had a particularly hard time in the recession. statistically, they didn't land on the list, but those are great places and they've been on the list in the past and i'm sure

they'll be on the list in the future. >> thank you for being on the program. for the full list of the ten best cities for the next ten years as well as more information, check out the website wsjr.cnbc.com. up next on "the wall street journal report," a look at the news this week that will have an impact on your money and the money one kid is making from art work that you probably won't see hanging on the refrigerator, cornering the art market before recess. did the little piggy cry wee wee wee all the way home? piggy: weeeeeee, weeeeeee, weeeeeee, weeeee weeeeeeee. mom: max. ...maxwell! piggy: yeah? mom: you're home. piggy: oh,cool, thanks mrs. a. anncr: geico. 15 minutes could save you 15% or more. and i wondered what it was.

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here are the stories coming up that may move the market and impact your money this week. among the earnings reports we'll hear from dow companies home depot, walmart and final results from hewlett-packard as well as lowe's and dell computer. on tuesday we'll find out the total number of new residential units that began construction last month and the producer price index is released. ppi tracks inflation on the cost of goods at the wholesale level. on thursday, philadelphia's federal reserve issues its monthly business outlook survey and this offers a glimpse at the health of the economy in the mid-atlantic region. finally, a little talent can make a big splash. 8-year-old painting phenom kieran williamson has been dubbed the mini monet. two of his pieces are currently available in an online auction where suggested prices are near $10,000 each.

at just his third exhibit last month, all 33 works sold in less than half an hour. the young impressionist pulled in $200,000 from international art lovers, but those who want a painting from this child prodigy should settle in because there are 2,000 people on kieran's waiting list. that's our show for today. thanks so much for joining me. maria will be back next week and still be talking about summertime's biggest crop, corn, on your plate and in your portfolio. each week, keep it here where wall street meets main street. have a great weekend. [ male announcer ] when meg whitman arrived at ebay,

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