Moneyline News Hour

Dow Rises 154.51 to 10635.98; Nasdaq Climbs 62.63 to 4023.20; Job Creation Drops in June

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

WILLOW BAY, CNN ANCHOR: Tonight on MONEYLINE, Wall Street closes the week with a bang, lifting the Nasdaq back above 4,000 as investors take heart that the Fed will refrain from another rate hike. Setting the stage for today's rally, a big drop in new jobs created. But is the real story a shortage of workers? And after a few earnings blowups, we look ahead to next week's profit picture. How will Yahoo!, Motorola and Gateway perform?

Plus we're hours away from learning whether the new "Harry Potter" book was worth the build-up, but is stock in the publisher -- Scholastic -- worth a read? We check out "The Bottom Line" at Scholastic,

ANNOUNCER: This is MONEYLINE. Reporting tonight from New York, Willow Bay.

BAY: Good evening, everyone. Stuart is off tonight.

Surprising weakness on Main Street today was applauded on Wall Street, the Dow industrials posting their best showing since the end of May. Stocks took off in a broad rally sparked by the June employment report. It showed job growth slowing down, and that could keep the Fed from raising interest rates again next month.

After a week filled with disappointing profit warnings, investors were looking for some good news, and today, they found some.

Allan Chernoff has more on the Friday firepower.

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ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): It's Wall Street logic: The economy turns down and investors celebrate, toasting the idea that the Federal Reserve may no longer need to raise interest rates.

LARRY RICE, JOSEPHTHAL & COMPANY: Investors are coming back with more confidence that perhaps the Fed is gone for the rest of the year and there won't be any surprises.

CHERNOFF: That thought is a tonic for bank stocks, whose profits depend on interest rates. FRED PRICE, SANDLER O'NEILL: Financials have been beaten up so bad people for the last two years that people are finally, the value investors are finally taking a hard look and then saying, this really is a cheap sector, you can see that nibbling going on.

CHERNOFF: Financials led the Dow to 154-point gain. For the week, up nearly 2 percent.

The Nasdaq composite leaped over 4,000 for the first time in two weeks, delivering a 1 1/2 percent gain on the week.

Investors continued scrambling back into semiconductor stocks, especially capital equipment names, as the list of brokerage firms supporting the sector grew. Semiconductors had a roller-coaster week, tumbling on Wednesday when Salomon Smith Barney downgraded the stocks.

TIMOTHY GHRISKEY, DREYFUS CORPORATION: The demand for technology products remains extremely strong. This is an economy being driven by the demand for technology.

CHERNOFF: But tech troubles remain. Yahoo! fell on a downgrade, pointing to slowing revenue and profit growth. And Compuware became the latest software company to disappoint, warning earnings for the quarter could be only half of what "The Street" was expecting.

(END VIDEOTAPE)

CHERNOFF: But wait a minute. There's a potential hole in Wall Street's logic. If the economy is definitely slowing, won't that be bad for corporate profits? Earnings for the second quarter should look good, but more soft economic data could very quickly end Wall Street's celebration -- Willow.

BAY: And then the logic would change again.

CHERNOFF: And the attitude on Wall Street. It can shift back and forth very rapidly.

BAY: Now today, folks are in a good mood, a good Friday rally, a decent week for all the indexes. Any sense of optimism now heading into the second half of the year, the third and fourth quarters?

CHERNOFF: Well, certainly going into earning season, because we're now just about finished with the preannouncement season. That's usually when bad news comes out. Second-quarter earnings should be very good, setting a positive tone for the Street. We'll have to see, though, how much the economy slows down. That's the key question going forward.

BAY: In the meantime, we'll take the goods news on a Friday.

Thanks, Allan.

Checking some of the other big winners on Wall Street today, the Dow industrials powered ahead, led by strong gains in Hewlett-Packard, up nearly 6 1/2. Two retailers, Home Depot and Wal-Mart, jumped more than four. IBM, up nearly three after a recent slump. And Intel gained more than 2 1/2.

Over on the Nasdaq, Sycamore Networks rocketed 16 3/4. Redback gained more than nine.

Other big tech movers: Millennium Pharmaceuticals, Veritas Software and Sun Microsystems.

That tamer-than-expected employment report showed a significant slowdown in job growth last month. Businesses created fewer jobs in June than at any time during the last four years. Nonfarm payrolls increased by just 11,000, down significantly from the revised 171,000 jobs created in May.

Bob Beard has more from Washington.

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BOB BEARD, CNN CORRESPONDENT (voice-over): June's overall nonfarm job growth, way below market predictions -- the smallest since a nasty blizzard battered the East Coast in January 1996.

While corporate America added 206,000 jobs in June, that was offset by government layoffs, including the loss of 190,000 temporary census jobs. Most experts agree the economy is showing signs of a second-quarter retreat.

WILLIAM DICKENS, BROOKING INSTITUTION: It's one more piece of evidence that there's been a slowdown in what had been a very rapid rate of growth in the economy in the last quarter of last year and the first quarter of this year.

BEARD: Services added the most jobs in June, 148,000. Retail added 49,000 jobs. Manufacturing, 19,000. Job losses, though, came in a key sector for economic growth, real estate. But 4 percent unemployment was enough to keep the administration crowing.

ALEXIS HERMAN, U.S. SECRETARY OF LABOR: This report is actually very reassuring. I think it tells us that this economy continues to perform at a very solid and steady pace, and I think it further indicates that this economy probably did take a breather last month.

BEARD: U.S. workers enjoyed a little more in their paychecks, too. Average hourly earnings grew a nickel to $13.71 last month. And so far, wage inflation remains fairly tame, up 3.6 percent from a year ago.

DICKENS: Wage growth is moderate, but not so hot that it has to be inflationary is again good news for most people.

BEARD: But the available pool of workers, a favorite indicator of Fed Chairman Alan Greenspan, fell 3 1/2 percent.

(on camera): That shrinking pool of workers means employers are having a tough time filling open positions, forcing many to boost wages.

Bob Beard, CNN Financial News, Washington.

(END VIDEOTAPE)

BAY: And that very issue -- the tight labor market -- is something Fed policy-makers will be watching closely.

Ceci Rodgers picks up the story from Chicago.

(BEGIN VIDEOTAPE)

CECI RODGERS, CNN CORRESPONDENT (voice-over): Job growth is slowing, and the labor market is easing up? Try telling that to small-business owners like Bill D'Ambrosio. He has three job openings, and his starting pay is about $2 over minimum wage.

BILL D'AMBROSIO, MAIL BOXES ETC.: We normally get a lot of referrals, but they've been hard to come by lately. Everybody seems to be looking.

RODGERS: Looking for qualified workers. Still, the numbers show that private-sector job growth has slowed. Average monthly payroll gains in the private sector were a blistering 244,000 in the first quarter. In the second quarter, those gains were nearly cut in half.

Economists say there may be more than one reason for dwindling job growth.

ANTHONY CHAN, BANK ONE INVESTMENT ADVISORS: One way to interpret this is that there is some slowing coming on. Another way of interpreting is maybe there are not a lot of potential employees, so therefore employers don't bother.

RODGERS: One indication that it could be the latter: the shrinking pool of available workers and its potential for pushing wages higher. Economists say the Fed will remain on the alert for signs of creeping wage inflation. The question is, will inflation continue to be a threat as the economy slows?

LYLE GRAMLEY, MORTGAGE BANKERS ASSOCIATION: I don't think anyone knows the answer to that question. I don't, and I don't think the Fed does either. So there's -- because inflation is creeping, not more than that, there's no reason for the Fed to continue to tighten until the answer to that question becomes clearer.

(END VIDEOTAPE)

RODGERS: Gramley says there's now less than a 50-50 chance the Fed will raise interest rates at its next policy meeting in late August. Still, with labor markets remaining tight, it may be many months before the Fed signals an all-clear on its credit-tightening campaign -- Willow.

BAY: Thanks, Ceci.

Both stock and bond investors today were betting that the jobs report will help convince the Fed to keep interest rates right where they are. Economists say the possibility of a rate increase at the next policy meeting in August is now below 50 percent.

Checking the Treasury action today, the 10-year bond up 7/32. The 30-year gained more than a half point, pushing the yield down to 5.87 percent.

Our next guest says it may be too early to tell what the Fed will do. Joining us now from Boston: Allen Sinai, the chief global economist at Primark Decision Economics.

Allen, welcome back.

ALLEN SINAI, PRIMARK DECISION ECONOMICS: How are you?

BAY: Good. Give us your take on today's labor numbers: a slowdown in demand, a slowdown in supply, a shortage of workers.

SINAI: It's going to make it very tough for the Federal Reserve, and the hawks and doves factions on the Federal Reserve to decide what to do on August 22nd, pending on the data between now and then. Job growth definitely is slowing down in the private sector. There's lots of weakness in demand in the second quarter that says that's why job growth slowed down. At the same time, we have a very tight labor market, indicated by the 4 percent unemployment rate and declines in labor force growth and the available supply of workers.

At the Fed, the hawks are going to say low unemployment rate, inflation risk ahead, let's buy insurance with a quarter-point hike. The doves, perhaps led by Chairman Greenspan, will say let's wait and see.

BAY: Now, this statistic, the available pool of labor, is an indicator that apparently Alan Greenspan watches very carefully. Is it a better indicator of the labor market and potential inflationary pressures?

SINAI: It's an interesting indicator. I don't think I would say it's a better indicator. The sequence of events normally is the economy slows down and responds to higher interest rates, and in this case, higher oil and energy inflation. Then the demand for workers eases off. That appears to be happening. And regardless of the supply side, in the aftermath of that with the lag, the unemployment rate goes up and the inflation prospect improves. And I would go with that scenario, and I think you see the bond market and the expectations in the fixed-income market going with that scenario as well.

BAY: Now, one of the concerns on the horizon is this notion of a rebound, that we'll see an uptick in the economic indicators. How common is this in the process of a slowdown?

SINAI: In the last five years it's been quite common to have one or two weak quarters in a sea of strength. But conditions are different now. Interest rates are almost two percentage points higher in the front end of the yield curve. The stock market's gone nowhere for years, so the wealth effect isn't happening. And we do have a bite out of purchasing power coming from higher oil and energy costs. So I think we really do have a slowdown that's going to be permanent. But remember slowdown is not such a big thing anymore, because we're slowing down from big numbers and our potential rate of growth is 3 1/2 percent a year.

BAY: Allen, briefly, is the Fed going to pull off, pull this off? Are we headed for the perfect soft landing?

SINAI: Well, over the next quarter or two, things are looking very good for that. I think next year we're going to be softer -- (UNINTELLIGIBLE) harder than a soft landing. And after a summer rally in the stock market, which started today, I think the stock market will correct further, but after we get that summer rally. The stock market looks good right now.

BAY: Allen Sinai, thanks for joining us tonight on MONEYLINE.

SINAI: Thank you.

BAY: Still to come, another blow to Qualcomm. South Korea's biggest wireless carriers snub the telecom pioneer and turn to its rivals. A similar disappointment for Broadvision sent investors running for cover. The software company gets the losing end in a bid for a high-profile contract. And its sure to be a blockbuster hit at your local bookstore, but can Harry Potter help Scholastic become a bestseller on Wall Street? "The Bottom Line" still to come tonight on MONEYLINE."

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BAY: Checking tonight's "MONEYLINE Movers," Orchid Biosciences jumped 9 1/2, hitting a new 52-week high. The biotech company said today that Celera Genomics will use its patented gene-analysis techniques in its research. Peoplesoft gained 2 1/2 after Lehman Brothers upgraded it to an outperform rating. Lehman said that meetings with the software company's management indicated that business is improving. And Starbucks gained 3 3/4 after reporting a 9 percent increase in same-store sales late yesterday. The coffee retailer said that sales have jumped 32 percent so far this year, which has helped boost the stock. It's up 72 percent year-to-date.

Broadvision plummeted today after American Airlines chose rival Internet software provider Art Technology Group as its Web site provider. Both companies make software that personalize what viewers see on Internet sites. American selected Art Technology's "Dynamo" software package to develop its new "aa.com" Web site. American had been a longtime Brodvision client.

While AMR -- parent of American Airlines -- fell fractionally today, Broadvision plunged more than 13 1/2, or 25 percent, the most active stock on the Nasdaq. Art Technology Group gained 17. The stock is up nearly 2,000 percent from its 52-week low that it hit last August. Meanwhile, Broadvision is down more than 54 percent from its 52-week high.

Another big Nasdaq loser today: Qualcomm. The stock plunged after it appeared that South Korea will not choose to use Qualcomm technology. An official decision won't come until next week, but investors weren't willing to wait. Qualcomm stock tumbling more than 5 to 56 5/8.

For the details we're joined by Casey Wian in our Los Angeles bureau -- Casey.

CASEY WIAN, CNN CORRESPONDENT: Willow, Qualcomm's stock was hammered by another blow to its future business prospects in Asia. Three large South Korean mobile phone companies have decided they prefer a technology designed by Ericsson and Nokia for their next generation wireless phone service. Right now, Qualcomm's technology dominates the lucrative Korean mobile-phone market. But it appears that may not be the case when so-called third generation chips allowing wireless Internet access become available there in 2002.

This is the latest in a series of setbacks for Qualcomm. Its chip business has already been hurt by the Korean government's decision to stop subsidizing cell phone sales, and two weeks ago, the company announced layoffs.

Last year Qualcomm's stock soared. This year it has fallen almost as fast, losing more than 70 percent of its value.

(BEGIN VIDEO CLIP)

EDWARD SNYDER, CHASE H&Q: I mean, the good news for Qualcomm is that the core business is intact. They're in no danger of insolvency or problems with the basic business. The bad news, of course, is all the announcements in the last quarter or so have basically dampened any prospects of rapid growth. And I think the run-up last year was based on the assumption that the company's technology would spread throughout the world, and they would get revenues, whether royalties or equipment sales, from that technology.

(END VIDEO CLIP)

WIAN: Qualcomm says the Korean government has still not made a final decision, and it believes both standards will be used. Qualcomm also claims it will collect royalties no matter which system is adopted, because the competing standard is based on Qualcomm-patented technology.

And separately, Qualcomm is fighting another battle, this one against computer hackers. According to a published report, the FBI is investigating a former University of Wisconsin graduate student for penetrating Qualcomm's electronic defenses and compromising proprietary information -- Willow.

WIAN: Casey Wian from Los Angeles, thanks.

Coming up on MONEYLINE, the Pentagon prepares its latest test of a disputed missile defense system. Will tonight's outcome determine whether the program lives or dies? We'll have that story and more just ahead in our "News Digest."

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BAY: As you might imagine, several stocks hit a 52-week high today, including Brocade Communications, Cigna, Genzyme, Marriott International, and MedImmune.

Saudi Arabia's promise to increase oil supply by 500,000 barrels a day is -- quote -- "coming very soon": that according to a Persian Gulf oil official who also said today that intense discussions are ongoing. No details yet as to which other countries will cooperate or just how much extra oil supply will hit the market. But the official did say that non-OPEC member Mexico also plans to boost output.

Since Saudi Arabia's surprise announcement on Monday, oil prices have fallen more than $2, but today, light sweet crude closed up 29 cents at 30.28.

Turning now to the day's top stories outside the world of business, Joie Chen in Atlanta has that in the "MONEYLINE News Digest" -- Joie.

JOIE CHEN, CNN ANCHOR: Willow, thanks.

The White House taking action tonight regarding the first planned execution under federal law in 40 years. President Clinton will postpone the execution of Juan Raul Garza, scheduled for next month. Garza was convicted of ordering the murders of three men. The White House spokesman says the president wants Garza to have a full opportunity to apply for clemency under new Justice Department guidelines, which are coming out soon.

Mr. Clinton supports the death penalty but says he wants it carried out fairly.

Just hours from now the launch window opens for the third test of a controversial anti-missile program. The president is expected to decide within months whether to deploy the national missile defense system. It has already flunked one test.

The White House says the program's future doesn't hinge on tonight's outcome.

(BEGIN VIDEO CLIP)

P.J. CROWLEY, NSC SPOKESMAN: I would say a hit doesn't automatically suggest success nor does a failure automatically come with a miss tonight.

(END VIDEO CLIP)

CHEN: Also today, Florida police say they have identified a body found in a car at the bottom of a pond as Cory Erving, the son of basketball star Julius Erving. Cory was missing for over a month. Foul play is not suspected in this case.

Stock car driver Kenny Irwin died today in a crash while practicing for Sunday's New England 300 race. Adam Petty, the fourth generation in the NASCAR dynasty, was killed at almost the same spot in May.

We'll have more ahead on "THE WORLD TODAY." It's coming up at 8:00 p.m. Eastern, 5:00 Pacific. We hope you join us then -- Willow.

BAY: Thanks, Joie.

Still to come on MONEYLINE, some of America's richest corporate executives are bailing out of their company stocks at a rapid pace: the list of who's selling when MONEYLINE continues.

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BAY: Despite today's rally, several stocks hit a 52-week low today, including Alcoa, Ask Jeeves, Compuware, GoTo.com, and Unisys.

Some U.S. executives are dumping out of their company stock. According to the Washington Service Research Firm, insider selling surged 68 percent to a record, $36 1/2 billion in the first half of the year. Leading the way, Microsoft co-founder Paul Allen. He shed $4 billion worth of Microsoft shares. Bill Gates sold $153 million worth of Microsoft stock. Together the two made up 12 percent of all insider selling in the first half.

Other big sellers included Michael Dell, who sold $755 million worth of Dell stock; Gateway founder Ted Waitt' John Chambers of Cisco Systems; and Jeff Bezos of Amazon.com.

Coming up in our next half hour, full coverage of today's market action. We'll check out what drove the Dow to its best showing in five weeks. But can tech stocks keep up the pace? We'll ask money manager David Alger. And a Web powerhouse gets a thumbs-down from one Wall Street analyst. The lowdown on how Yahoo! stock reacted. Plus job cuts hit one of the top dogs on Wall Street: We'll check out why Merrill Lynch is trimming its staff even while business is growing.

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ANNOUNCER: MONEYLINE continues. Here again, Willow Bay.

BAY: In tonight's headlines, a surprising slowdown in the number of jobs added to the U.S. economy: Will it be enough to stop the Fed from pulling the trigger on another rate hike?

And we'll take a look at profits coming down the pike: Will next week's batch of tech earnings live up to billing after a few big-time disappointments in recent days?

Plus, while millions can't wait to get their hands on Harry Potter's new adventures, we check out whether you might want to get a piece of the publisher: "The Bottom Line" on Scholastic.

But first, more on tonight's top story, a Friday rally on Wall Street that carried all the major markets into positive territory for the week. Blue chip stocks posted their strongest showing since May 30th, as the Dow bolted higher from the opening bell, closing up 154 to 10635, up nearly 2 percent for the week. Tech and retail shares drove the move. Hewlett Packard jumped nearly 6 1/2, Home Depot surged 4, Wal-Mart rose nearly 4 3/4, IBM and Intel up more than 2 1/2. Those Intel gains also helped power the Nasdaq back above 4000 for the first time in two weeks. The index gained 62, to 4023, up nearly 1.5 percent for the week.

Checking some other Nasdaq movers, Applied Materials and Sun Microsystems rose more than 2 1/2. Dell Computers surged nearly 3. Gateway up nearly 5 1/2 and Apple Computer gained more than 2 1/2.

Planting the seeds for today's rally, another sign the economy may be cooling off, as U.S. businesses added only 11,000 jobs in June, far less than expected and a huge drop from previous months. The Treasury market welcomed the news on hopes the Fed would hold pat on interest rates at its next meeting. The 10-year issue gaining nearly one-quarter, its yield dropping 6 percent while the 30-year jumped more than half a point.

But the equity markets were the scene of most of the Friday fireworks. For more on the day, we go to Fred Katayama at the New York Stock Exchange -- Fred.

FRED KATAYAMA, CNN CORRESPONDENT: Well, Willow, investors couldn't seem to get enough out of that surprisingly weak job creation number. With the triple-digit gains today, stock strategists say they now expect to see a summer rally in the third quarter. They argue the prospects for corporate profits are bright. Earnings tracker IBES predicts overall gains of 18 to 19 percent in the third quarter.

This could spark enough momentum for stocks to break out of the current trading range and into a summer rally, but a mild one at best. And traders and strategists warn that any rally may not last long.

Bill Meehan of Cantor Fitzgerald says he's advising his clients to use any rallies at the end of earnings season to sell and raise cash. He just doesn't see any catalysts for pushing stocks higher once the upcoming earnings season nears an end.

And some strategists say there's still room for the Federal Reserve to raise interest rates in August. They note that the average hourly earnings figure in today's report still hints that a tight labor market is applying upward pressure on wages. And that figure, they say, is one stat Fed Chairman Alan Greenspan likes to monitor.

And one of his other favorites, the Economic Cycle Research Institute's future inflation gauge, is close to an 11-year high -- Willow.

BAY: Fred, still a nice way to end the week. Fred Katayama at the New York Stock Exchange.

One loser today in an otherwise up market: Yahoo!. It took a hit on a grim prognosis from Deutsche Banc Alex Brown. The brokerage house cut its rating for Yahoo!, this based on concerns of slower- than-expected growth in revenues, as well as worries over the stock's valuation. (BEGIN VIDEO CLIP)

ANDREA WILLIAMS RICE, DEUTSCHE BANC ALEX BROWN: So it gets to be much more difficult to generate the revenue and EPS growth that investors have come to expect from Yahoo!.

(END VIDEO CLIP)

BAY: The stock dropped today, down nearly six ahead of next Tuesday's earnings report.

Compuware prepared investors for its own profit report, and the stock got hammered today. The software maker warned that first quarter earnings will be well below Wall Street estimates due to weak revenues. Compuware expects to post a profit of seven to nine cents a share. Analysts expected 15 cents. Today its stock lost 11 percent, down more than a point to a 52-week low.

Compuware is only the latest in a list of tech firms to alert investors to disappointing results. But Bruce Francis reports warnings may be up, but surprisingly, so are projections for the tech sector.

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BRUCE FRANCIS, CNN CORRESPONDENT (voice-over): Compuware, Computer Associates, Unisys, all recently warned of worse-than- expected results, part of a rising tide of negative preannouncements. In fact, according to First Call, negative preannouncements as a percentage of the total are at 59 percent, significantly higher than last quarter and ahead of the same period last year as well as the historical average.

But tech investors are hoping that the worst is over.

DENNIS MCKECHNIE, PIMCO: This week was the week of confessions, preannouncements. Companies had finished their three-month quarters just so they know what they're going to print, they feel confident about their numbers. Once they didn't have confidence, had to let that out to the public. And so right now we go from bad to good.

FRANCIS: Despite the wave of negative preannouncements, expectations for tech earnings overall have been rising, not falling. A month ago, analysts expected tech earnings on average to rise a healthy 29 percent. But now the overall expectation has soared to an average gain of 37 percent, partly due to Intel's preannouncement of a big investment gain.

Intel's preannouncements supercharged an already strong outlook for semiconducters, on top of the very strong gain last year. Profits for software makers are expected to grow 22 percent, slightly off last year's levels. Despite concerns about mainframes, computer company earnings are expected to edge out '99's results, but dragged down by laggards like 3Com and Cabletron.

Communications technology companies are expected to post just 8 percent growth, way behind last year's results.

CHUCK HILL, FIRST CALL: Technology in the aggregate is going to have a terrific quarter in terms of earnings growth. It's just this one area over here and part of the software area that's having a little bit of a problem.

FRANCIS: The data storm starts with a trickle next week, as Yahoo!, Motorola and Gateway report results.

(END VIDEOTAPE)

FRANCIS: The question for investors: Will strong tech results be enough to lift tech stocks? Last quarter's mostly stellar results failed to stop the Nasdaq correction, as investors reconsidered those high valuations. Right now, the Nasdaq is just about where it stood at the beginning of the first quarter reporting period.

So, Willow, investors get to decide.

BAY: So when you look at the sectors, Bruce, the barn burner here?

FRANCIS: Semiconductors, far and away. Yes...

BAY: Despite the debate we saw this week, the verdict is in.

FRANCIS: The debate this week is more really about the future. This quarter, I think, there's very, very little discussion of whether this should be great. They've got pricing pressure, everybody is constrained. Let's see, though, how that affects other people, like the computer systems makers. Maybe they won't get all the parts they need, and you could see hits to revenue there.

BAY: Bruce Francis, thanks.

Coming up, should we expect tech stocks to turn it around for the third quarter? We'll put the question to David Alger, one of the top tech-fund managers over the past decade.

That's next on MONEYLINE.

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BAY: Tonight's "MONEYLINE Movers," Hotjobs.com jumped more than 3, or 24 percent. Deutsche Banc raised it to a strong buy based on considerable momentum and attractive valuation.

Brio Technology plunged nearly 11 1/2, or 57 percent, hitting a new low. The software maker reported a first-quarter loss of 16 cents a share. Analysts were looking for it to earn eight cents.

And Millennium Pharmaceuticals gained nearly six. Several brokerages making comments following the biotech firm's $53 million purchase of Cambridge Discovery Chemistry. Since falling dramatically earlier in the year, the stock has rebounded, up 114 percent year to date. Just a few months ago, our next guest was named one of three top fund managers. At the time, his Spectra Fund, with nearly 70 percent of holdings in tech stocks, had the best returns over 10 years. So far this year, Spectra is Down more than 9 percent compared to the S&P 500's slight gain. Still, over the last decade, Spectra boasts an annualized return of nearly 27 percent against the S&P 500's near 18 percent return.

Overall, he manages 20 different funds. Four of his top five holdings are tech stocks, including Microsoft and Cisco. The exception: Home Depot.

Joining us now for tonight's "MONEYLINE Focus" is David Alger of Alger Funds.

David, welcome.

DAVID ALGER, ALGER FUNDS: Wonderful to be here.

BAY: Given what you saw today, decent week, good Friday rally, a sign of that strong second half that you expect?

ALGER: I think so. I mean, I think what's happening is exactly predictable. The economy is slowing. You've had about 15 different signals that that's happening. The National Association of Purchasing Managers' numbers, housing numbers, are down. Car sales are down, retail sales are lousy, and now, of course, we've got the second employment data, which is lower. And so, consequently, I think it's very, very clear that the economy is slowing, and I think the Fed should logically get off our back.

BAY: Well take the good news today, because the market has been rattled quite a bit this week by some warnings. Today, an analyst commented on Yahoo!. I'd like your take on that. Do you think we're going to see slowing revenues for Yahoo!?

ALGER: I don't think we're going to see slowing revenues for Yahoo!. I mean, I think there may be some constraint on the dot.com advertising front, but I think Yahoo!'s going to grow very, very rapidly over the next five years.

BAY: But some constraint on the dot.com advertising revenue is potentially a big deal for Yahoo! and for the Internet sector in general.

ALGER: Well, I think over time there's going to be a lot of advertising on Yahoo!, I mean, which is not necessarily going to be dot.com in nature. I think conventional advertisers, or conventional retailers are going to advertise as well. So...

BAY: You think they're learning the value of that highly targeted market?

ALGER: Exactly so. That's exactly right. And I think the comments that were made today, I mean, you know, you can play with those numbers any which way. I mean, one of the, I think, errors that was made is the terminal valuation of 30 times earnings. And if you put a terminal valuation on 30 times earnings, of course you're not going to get 30 percent stock gain for five years. I mean, that's, of course, preposterous.

BAY: One of the concerns today also was valuations. At 116, was Yahoo! expensive in this market?

ALGER: No, I don't think it is. I think because once you get a strong market in general in the second half with technology stocks doing very well, which I think they will, I think Yahoo!'s growing extremely fast. It's certainly one of the two or three leaders in the Internet sector, and I think it will do well this year. How it does five years from now I think is anyone's conjecture. And I think this is just a call, a dramatic call, perhaps, but based on numbers, which anyone can cast in any which was five years out.

BAY: Now one of your funds, your midcap fund, is up more than 17 percent. We've been hearing a lot of talk about the midcaps lately. Are they going to keep up the growth throughout the year?

ALGER: I think they will. I think midcap is a wonderful sector because the companies are large enough to withstand any kind of downturn in the economy, and yet they're small enough to grow really rapidly. And I think that's why we've always liked midcap, and that's why we're doing well there this year.

BAY: David Alger, as always, thanks.

ALGER: Wonderful to be here.

BAY: Still to come, the world's largest brokerage trims the fat to boost its bottom line. The story, when MONEYLINE continues.

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BAY: Another dot.com delay: Divine Interventures was expected to go public this week between $13 and $15 per share, but sources close to the deal say the IPO will now price lower than anticipated. And now it's scheduled to start trading Tuesday. The reason: concern from the Securities and Exchange Commission over pre-offering publicity by the company, an issue that forced the postponement of Webvan's IPO last year.

Merrill Lynch is doing something it hasn't done in two years. It's trying to cut costs by cutting its payroll. The last time it slimmed down, the cutbacks were due to big bond market losses. This time, the move is a pre-emptive strike to protect profits.

The stock plunged early in the session

Allan Dodds Frank has more.

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ALLAN DODDS FRANK, CNN CORRESPONDENT (voice-over): Merrill Lynch has started to trim operations, determined to cut costs even while business is strong.

MARK CONSTANT, LEHMAN BROTHERS: Some of the revenue elements are out of their control. This is what they can control. Stan O'Neal, who's now running the private client group at Merrill Lynch, you know, this is his opportunity to really make his mark, put his stamp on the franchise and achieve a very visible target. And I think he's going at it pretty aggressively.

FRANK: Last month, Merrill Lynch reduced its regional office structure to 19 districts from 26. And over the next three years, the firm is expected to lay off several thousand back-office workers, as well as executives, but none of its 14,600 brokers.

Merrill Lynch had no comment, but insiders tell MONEYLINE the 28,000 workers in marketing, technology and strategic planning will bear the brunt of the cuts.

Analysts say Stanley O'Neal, the new boss of Merrill's brokerage force, telegraphed his intentions two months ago. He told institutional investors:

"We're focused on rationalizing the use of our resources, which will produce even greater efficiencies. We believe we can increase the pre-tax profit margin in this business from 16 percent currently to 20 percent over the next three to four years."

AMY BUTTE, BEAR STEARNS: Merrill's in the process of changing its strategy. It's becoming more technology-oriented, going from normal commissions or traditional commissions to $29.95 a trade. And in order to do that and be profitable for shareholders, you have to be lean and you have to be mean. And that's what we're seeing.

FRANK: And to stay on track, Merrill vows to reduce the 52 percent of net revenue it spends on pay and benefits. That's a higher ratio than that of any of its rivals.

(on camera): The rest of Wall Street is sure to note Merrill's moves, and some analysts predict other firms may consider cutbacks, too.

Allan Dodds Frank, CNN Financial News, New York.

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BAY: Shares of Merrill Lynch have been on a tear over the past year. They're up 58 percent, trading just under their 52-week high, reached yesterday.

Microsoft has bowed to European regulators and agreed to scale back its plan to take joint control in British cable operator Telewest Communications. The software giant has agreed to break all structural links with its partner, Liberty Media, and it will now only buy a 23.7 percent stake in Telewest.

The European Commission had feared that Microsoft would dominate the market for digital television software. Shares of Microsoft rose more than a point today to close at 82.

In other corporate news, Cisco on a tear. The company continued its buying spree today, snapping up the 80 percent of Netiverse it doesn't already own for $210 million in stock. Privately held Netiverse develops hardware and software technology for speeding delivery of Web content. It is Cisco's 13th acquisition this year.

Just ahead, the wait for Harry Potter's "Goblet of Fire" is nearly over. But does the frenzy over a teenage wizard mean you should rush out to buy the publisher's stock? The story, when MONEYLINE returns.

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BAY: Now for our regular Friday feature, "The Bottom Line," an in-depth look at a company making news. This week, Scholastic, the publishing house that's riding a tidal wave of publicity over the fourth book in the "Harry Potter" series. Unless you live in a place with no television, no newspapers, no bookstores and no Internet access, you've probably heard a lot, maybe more than you wanted to hear, about the new book. But when a single product commands that much attention, should you buy the stock behind it?

Peter Viles goes behind the hype and gives us "The Bottom Line," on Scholastic.

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PETER VILES, CNN CORRESPONDENT (voice-over): Each of those beeps represents another copy of the new Harry Potter book sold and labeled for delivery tomorrow. The book's American publisher, Scholastic, has shipped 3.8 million copies, a British publisher another million and a half, making it the biggest first-run printing of a book in history.

Today, Amazon was selling a copy every three seconds, and investors are taking note. Shares of Scholastic have rallied more than 40 percent since early May.

(on camera): Scholastic has already succeeded in creating a huge marketing event that combines secrecy and hype. In all likelihood, tomorrow this will be the best-selling book in America. But tonight, it's a mystery. Millions of copies are locked up in back rooms like this one...

(voice-over): ... with strict instructions: do not touch until July 8th. The question for investors is, what happens to Scholastic stock after the latest round of Harry hype dies down?

Analyst Rudy Hokanson believes the spotlight will reveal a well- run company trading at an attractive price.

RUDOLF HOKANSON, CIBC WORLD MARKETS: We think Scholastic stock is undervalued as it is. So if you believe that value is eventually recognized, which I'm a big believer in, whatever it takes, you know, and who knows why, as attention is drawn to a company, if other investors see the value, the stock can get the bounce. VILES: But to understand Wall Street's relationship with Scholastic, you need to know about "Goosebumps" and the "Goosebumps" nightmare of 1997. "Goosebumps" was a huge hit, a best-selling monthly paperback series. But Scholastic printed too many copies and was forced to take a huge charge to cover returns. The stock fell 40 percent in one day in 1997, and, as you can see, has never fully recovered. So what if the same thing happens to Harry Potter?

RICHARD ROBINSON, CEO, SCHOLASTIC: "Goosebumps" and Harry Potter are really apples and oranges. "Goosebumps" was a paperback series with one book published every month. Here, we're talking about only four books, and longer, hardback, literary classics, really, that are going to be around for 100, 150 years.

VILES: Still, anyone who buys this stock for the Harry factor needs to consider the Harry risks: This fourth book might not sell as well as the first three. The author, J.K. Rowling, might take books five, six and seven to another American publisher. Scholastic does not own the lucrative movie and licensing rights -- those went to Warner Brothers, which, like CNN, is owned by Time Warner. And there's the risk the Harry bounce is already priced into the stock.

But the ultimate caution is this: Harry may be magic, but he's not the be-all, end-all for Scholastic.

ED HATCH, S.G. COWEN: The Harry Potter books might be 5 percent of sales or 5 percent of profits. It's certainly become a big franchise, but not necessarily the reason to go out and buy Scholastic stock.

VILES: If you do your homework on Scholastic, you'll find it is a family business that makes its money helping kids do their homework. It has been a leader in educational publishing since the 1920s, when Richard Robinson's father started the company.

HOFKANSON: If you want to think children and you want to think reading, we think Scholastic is the brand name.

VILES: Its highest-margin businesses are book fairs and book clubs. It recently published reference publisher Grolier and has posted solid earnings gains. First Call consensus is for $3.18 in fiscal 2000, more than double earnings from 1998.

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VILES: One last note on Harry Potter. Analysts do not believe this was a fluke or a lucky find for Scholastic. The company has a long history of coming up with children's best sellers. In fact, its series called "Clifford the Big Red Dog," has sold more than twice as many copies as the Harry Potter series -- Willow.

BAY: Pete, what are the chances, what are the odds, they printed a few copies too many here?

VILES: It's possible, but with the Internet giving them a read on early demand, unlikely. BAY: Peter Viles, thanks.

Up next, "Ahead of the Curve," some of what you need to know tonight before the markets open again on Monday.

You are watching MONEYLINE.

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BAY: The markets liked what the June employment report showed them today. Next week will bring another round of economic news, including an important inflation report: the Producer Price Index for June. That's due out on Friday.

Also due out, industrial production, retail sales and international trade.

The earnings floodgates open again next week. Leading the way, Motorola, Yahoo! and Dow components J.P. Morgan, ALCOA and International Paper.

And we'll talk to Michael Bonsignore, chairman and CEO of Honeywell International on Monday, the day the company hold its annual shareholder meeting, which could get interesting considering the company's recent profit warning.

And to stay a step ahead of the markets tune into "AHEAD OF THE CURVE" every day at 5 a.m. Eastern on CNN.

That is MONEYLINE for this Friday. I'm Willow Bay.

Good night from New York.

"CROSSFIRE" is next.

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