Moneyline News Hour

Dow Rises 6.16 to 10,887.36; Nasdaq Falls 65.62 to 2,772.73; Fed Cuts Interest Rates 50 Basis Points

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

STUART VARNEY, CNN ANCHOR: Tonight, the news flash investors have been waiting for: The Fed slashes interest rates again, acting more aggressively than it did in the last recession.

WILLOW BAY, CNN ANCHOR: But Wall Street has a defiant two-word response: not enough. Stocks retreat in the wake of the decision.

VARNEY: Is history's longest boom going bust? The latest evidence of economic peril, and a look at how Main Street businesses and consumers are weathering the storm.

BAY: And direct from Switzerland: life on the run for the trader caught in a political firestorm. The scenic town where Marc Rich set up shop after fleeing the U.S.

ANNOUNCER: Live from coast to coast, this is MONEYLINE.

BAY: Welcome to MONEYLINE. I'm Willow Bay in Los Angeles.

VARNEY: Good evening, Willow. Good evening, everyone. I'm Stuart Varney in New York.

And we begin tonight with the Fed taking a bold step to avert a recession. One year after we celebrated history's longest boom, Alan Greenspan today once again slashed interest rates, hoping to prevent that boom from going bust. Fed policy-makers cut the benchmark federal funds rate by a half point, moving it down to 5 1/2 percent after shocking the world with a surprise cut back on January 3rd.

But today, Wall Street seemed to want even more, hoping that the Fed chairman might do something that he's never done before: cut interest rates by three-quarters of a point. No such luck. And investors were quick to voice their disappointment.

The Dow, up solidly early in the session, ended up just six points on the day at 10,887. The Nasdaq fell more than 65 points, closing at 2,772. It's the first decline in nearly a week there.

As for the S&P 500, yes, it was down two, off nearly eight points to close at 1,366.

One factor fueling hope for a giant rate cut today: the latest snapshot on economic growth. GDP in the last quarter of 2000 grew at an annual rate of only 1.4 percent, the worse reading in more than five years.

We have extensive coverage of today's decision and the market reaction with Terry Keenan, John Metaxas, and beginning with Peter Viles outside the Fed -- Pete.

PETER VILES, CNN CORRESPONDENT: Stuart, facing an economy that is clearly very close to stalling out, fresh evidence that the economy is very close to stalling out, consumer confidence dropping very rapidly, the Federal Reserve is waging an uncharacteristically aggressive battle, hoping to prolong an economic expansion that began nearly 10 years ago.

(BEGIN VIDEOTAPE)

VILES (voice-over): Determined to head off a recession, the Greenspan Fed took dramatic action, slashing short-term interest rates for the second time this month. Explaining the move, the Fed cited further erosion in business and consumer confidence, weakening retail sales and capital spending, rising energy costs, and sharp cutbacks in manufacturing.

"These circumstances," the Fed said, "have called for a rapid and forceful response of monetary policy."

BRUCE STEINBERG, MERRILL LYNCH: The Fed also implied that it didn't see the economy contracting. I don't either. That remains to be seen, but I think what the Fed was saying to us is that yes, the economy has slowed sharply, yes, we realize a monetary policy response is necessary, and yes, we are going to give you more going forward.

VILES: The moves mark a reversal of Fed policy in 1999 and 2000, when the Fed raised rates six times to head off inflation. Now, the Fed is rapidly taking back those hikes.

LARA RHAME, BROWN BROTHERS HARRIMAN: The Fed by really saying, listen, we're going to do almost everything we can to avoid a recession, may have upped the ante a little too high. I mean, a 50 basis point cut on January 3rd was extremely aggressive. Another 50 points less than a month later is again a very aggressive move.

VILES: Hoping to boost consumer and business confidence, the Fed cut its target for the federal funds rate, the rate banks charge each other for overnight loans, by half a percentage point, to 5 1/2 percent. Also cut, the largely symbolic discount rate by half a point, to 5 percent. Major banks followed suit, cutting their prime lending rates by half a point.

(END VIDEOTAPE)

VILES: President Bush had no comment today on the Fed rate cuts. He said yesterday that he would not comment on the Fed during his administration, said he had learned his lesson during the transition and would keep his own counsel on the Fed. That would continue the policy of the Clinton administration to keep quiet on the Fed, and that is what Wall Street likes: a Fed with no overt political pressures -- Willow. BAY: Peter Viles reporting. Thanks, Pete.

Today closes out the month of January, and while the weather in some parts of the country was remarkably cold this month, there was a distinct thaw on Wall Street, especially for tech stocks. The Nasdaq, it's up 12 percent so far in 2001 -- welcome news after the worst annual performance ever in 2000. And since the Fed delivered that surprise rate cut on January 3rd, it's up more than 20 percent.

So far, there has not been much action on the Dow, which should benefit more quickly from rate cuts. It's up about 1 percent in 2001.

Now, since that January 3rd move, it's up more than 2 percent. But today, at least, the Dow fared better than the Nasdaq.

Terry Keenan joins us now from the New York Stock Exchange with a look at the blue chip movers and more -- Terry.

TERRY KEENAN, CNN CORRESPONDENT: Well, Willow, it did fare a little better, though, we sold off 70 points from our high after the Fed announcement. And given the speed and scope of the Federal Reserve's rate-cutting activity in the month of January, the stock market today took it pretty much all in stride. The Dow, of course, had all the fireworks yesterday when the index had its best day since January 3rd.

Today, any enthusiasm faded as the central bank cut rates exactly as expected. Still, combined with the half-point cut on January 3rd, the Fed hasn't cut rates this aggressively in at least a decade -- that's if you measure it by the discount rate. The last time the Fed cut a full point there in one month was in December of 1991.

If you look at the Fed funds rate, you'd have to go all the way back to 1982 to find rate cuts as aggressively -- as aggressive as we've seen this month.

Of course, both of those years -- 1991 and 1982 -- marked the start of remarkable bull markets.

As for today, the only real buying among the Dow 30 was in the retailing stocks, with Home Depot and Wal-Mark up 4 and 5 percent respectively.

We also saw some selling in the financial sector just one day after the bank stock index hit a new all-time high. Here a classic by the rumor, sell the news scenario. There you see Bank of America down $1.65. Also heavy selling in Goldman Sachs. That stock down nearly $5. Lehman Brothers down almost $3.

As for the market breadth, it continues to be positive here, 17 to 13 in favor of advancers today. And volume at 1.3 billion shares was rather heavy.

And those volume and breadth numbers greeted here with some smiles, because technically the health of this market has been improving all year. Even though, as you mentioned, Willow, the Dow only up 1 percent year to date, the buying does seem to be broadening out.

BAY: All right, Terry. But we'll take those smiles any way. Terry Keenan reporting, thanks.

On the Nasdaq today, it seemed to be a classic case of buy on the rumor, sell on the news.

John Metaxas joins us now from the Nasdaq marketsite with a look at a few stocks that couldn't quite maintain early gains, could they, John?

JOHN METAXAS, CNN CORRESPONDENT: That's right, Willow. And some say it was disappointment in not getting a bigger rate cut out of the Fed. But the prevailing view is that this was just routine selling on the news: Nasdaq giving something back after what was a 15 percent advance in the early part of this month.

2:15 announcement from the Fed was the defining moment of the day. We headed lower and finished toward the close at the lows of the session. Some of the leading stocks turned around from gains, including Cisco System, the most active today. Cisco Systems at its high of the session was up $1.50. It finished down 56 cents. Intel, for its part, up $1.59 at one point, finished unchanged on the day.

Yesterday's after-the-bell warning stocks also finishing lower today. Amazon was up but finished down sharply on the day. Adobe Systems, a big loser as well. Applied Materials in the chip equipment space was down after its warning.

But a curious warning in some of the other chip equipment stocks. Deutsche Bank cut earnings estimates on several, including Novellus, Lam Research and Teradyne. They were all gainers on the day.

CIBC actually upgraded several others, including ASM Lithography and ASM International.

Ron Hill of Brown Brothers Harriman told me that "If the Fed is cutting rates, the chip equipment stocks are likely to be the first group within technology to start turning higher." And in fact, many analysts are now saying this may be the time to start buying technology if you're in it for the long term. You've got the Fed in your corner.

But today, however, the sentiment was sell on the news: Nasdaq finished lower -- Stuart.

VARNEY: Why should the chip equipment makers, John, move up at first when rates start coming down? What's the rationale there?

METAXAS: Ron Hill called them the plankton of the technology food chain. They sell to the chipmakers, the chipmakers sell to the boxmakers, and so on down the line.

VARNEY: Plankton, that's a good world.

(LAUGHTER) John Metaxas, thank you.

Here's what's coming up on MONEYLINE: taking the pulse of the economy. Just how bad is it for businesses and consumers? We'll have an in-depth look at that one for you.

Plus, two days after his company announced massive layoffs, Chrysler's chief speaks out. We'll tell you what he had to say. And later, a verdict in the Lockerbie bombing: Wolf Blitzer joins us for the "MONEYLINE News Digest."

(COMMERCIAL BREAK)

VARNEY: In the wake of the Fed's decision, we're taking the pulse of the economy. A string of reports out today show just how much the economy needs jumpstarting. The Chicago Purchasing Managers Index for January came in just above 40, the lowest level in more than 18 years. Anything lower than 50 means factory activity is contracting.

New home sales soared in December, but it's misleading, because November figures were revised to show a sharp decline. And as we mentioned, GDP for the fourth quarter of 2000 came in at an anemic 1.4 percent, lower than expected.

We have two reports tonight taking the pulse of the economy. We'll look at the problems through the lens of consumers. And we begin with Fred Katayama, looking through the lens of one business.

(BEGIN VIDEOTAPE)

FRED KATAYAMA, CNN CORRESPONDENT (voice-over): Dealer lots full of unsold vehicles jam Detroit Motor Mall in Troy, Michigan, giving the auto parts maker across the street, Arvinmeritor, a strong signal that the economy is slowing down.

Heavy-duty truck production hit the skids in the summer; car production followed in the last quarter.

TOM MADDEN, CFO, ARVINMERITOR: When we look at the truck side of it and if we look at it in historic terms, the speed of the reduction and how far the markets went down are probably more severe than what we've seen in recent history.

KATAYAMA (on camera): Sales of big rigs and other heavy trucks reflect the health of the nation's economy. Just about everything that's produced in some way or another is delivered by truck. The vehicle manufacturers and the 8,000 firms in North America that supply parts to them are among the first industries to feel the impact of an economic slowdown.

(voice-over): One of Arvinmeritor's customers, Chrysler, has ordered its suppliers to cut costs by 5 percent. Arvinmeritor's CFO, Tom Madden, visited New York this week to brief analysts on the company's condition.

MADDEN: We've always had some degree of pressure, and I think the pressure now is a little bit more intense

KATAYAMA: The government reported today that economic growth slowed, partly because businesses curtailed spending. And inventories, already high, continued piling up in the fourth quarter by another $67 billion as businesses like Arvinmeritor scale back production.

JOHN LISPKY, J.P. MORGAN: The core of the slowdown so far has been in the manufacturing sector. That's not surprising, for two reasons: That's where the boom has been concentrated in the last few years -- huge strength in the purchases of autos and the consumer durables. And so the slowdown is going to be concentrated there.

KATAYAMA: Companies like Arvinmeritor, faced with falling profits, are trying to turn inventory over more often and implement lean manufacturing methods. The auto parts maker plans to slash $100 million in costs, close one plant, cut 4 percent of its global workforce, and trim capital spending by 30 percent.

And like many companies, Arvinmeritor is hoping that lower interest rates and maybe even a tax cut will stoke the economy enough to ignite growth in the summer.

Fred Katayama, CNN Financial News, Secaucus, New Jersey.

(END VIDEOTAPE)

(BEGIN VIDEOTAPE)

LISA LEITER, CNN CORRESPONDENT (voice-over): This is Lisa Leiter in Chicago. A year ago, consumers never felt better. Confidence hit a record and people were spending at a pace not seen in 17 years.

What a difference a year makes: Consumer confidence has plunged at a rate not seen since the last recession. And today a report showed spending between October and December rose just 2.9 percent, the worst showing in 3 1/2 years.

DIANE SWONK, BANK ONE: We saw a president-elect and now a president using the "r" word to talk about (UNINTELLIGIBLE) the reason for tax cuts. There's no question that that combined with headlines of layoffs have taken their toll on consumer attitudes.

LEITER: That "r" word: recession. And whether there will be one depends on the health of the consumer, says economist Bill Dudley.

BILL DUDLEY, GOLDMAN SACHS: If the consumer doesn't bounce back, what will happen is you'll have more job layoffs, you'll have a rise in the unemployment rate. As the unemployment rate rises, confidence will decline further, and it will be sort of a self-fulfilling prophecy.

LEITER: Layoff announcements were at their highest level on record in December. Montgomery Ward here in Chicago was partly to blame. And this month, the pink slips continue piling up even as demand for just about everything is slowing down. (voice-over): There was fear of layoffs at this Carmax outside Chicago. Tracey Galvin is looking for a cheaper car in case he loses his job.

TERRY GALVIN: We're being kind of smarter with our money. We're trying to cut down on our credit cards and everything like that.

LEITER: Cautious optimism also defined the mood at this New Jersey mall.

UNIDENTIFIED FEMALE: We're cutting back on our spending.

UNIDENTIFIED MALE: I'm being conservative right now, holding back on spending and just kind of waiting to see how the market's going to go.

LEITER: The stock market's worst year in decades further damaged confidence, dampening the so-called "wealth effect."

UNIDENTIFIED MALE: I deferred some decisions. There were a couple of large expenditures, when my portfolio dropped substantially, I was less inclined to make those purchases. In fact, didn't do it.

LEITER: But interest rate cuts are already helping. Mortgage refinancings are booming, retail sales are picking up, and economists predict more rate cuts to come.

I think we'll be surprised at the end of the year by the resilience of the U.S. consumer. Never bet against consumers who have got money in their pocket to burn.

LEITER: Lisa Leiter, CNN Financial News, Chicago.

(END VIDEOTAPE)

VARNEY: The raft of weak economic reports and the Fed's move on interest rates was actually good news for the bond market today. Treasuries added to huge gains racked up yesterday going into the Fed decision. The 10-year note was up more than 3/4 of a point. The 30- year bond, which soared more than a full point yesterday, gained nearly 1 1/2 points today.

Bond traders today also had to sort out an array of important changes. The Treasury Department is planning to phase out the 1-year bill. And an advisory committee on bonds informally recommended phasing out the 30-year issue, phasing it out. This idea has been floating around for quite sometime since America's long-term borrowing needs have decreased because of all those big government surpluses -- Willow.

BAY: Stuart, coming up, from Bill Gates' nemesis to media big- wig, Joel Klein leaves bureaucracy for Bertelsmann. We'll give you the details. Stay with us.

(COMMERCIAL BREAK) BAY: The man who spearheaded the Justice Department's suit against Microsoft has found himself a new job. Former U.S. antitrust prosecutor Joel Klein has been tapped to head up the U.S. corporate services division of German media giant Bertelsmann.

As chairman and chief executive, Klein will advise the company on strategic and legal issues, including the controversial issue of music file sharing on the Internet.

Before joining the Justice Department in 1996, Klein served as the White House deputy counsel from 1993 to 1995.

VARNEY: Dow component Coca-Cola managed to meet Street expectations for the fourth quarter, but it watched its revenues slip by 1 percent. For the fourth quarter, Coke earned $943.5 million, 38 cents a share. Revenue dropped to 4.9 billion.

Dow component Philip Morris missed Street estimates, just by a penny. It will made a profit of $2 billion in this quarter, though. Revenue rose to 19.4 billion. The company blamed the earnings shortfall on a negative currency impact.

On those earnings reports, shares of Coke finished up 9 cents at 58. Philip Morris, though, ended the day down, just about a dollar.

BAY: Pointed debate on Capitol Hill this morning at a Senate hearing on California's energy crisis. Executives from the state's largest utilities, energy experts and a Wall Street analyst sounded off about the state's continuing power problems.

Today shares of California's largest utilities all closed lower amid renewed fears that the crisis is not coming to an end.

VARNEY: One big factor behind the power crisis has been the sharp rise in natural gas prices, and now the high price of natural gas is hitting homes back East. State regulators in Massachusetts today approved price hikes of between 7 and 35 percent for that -- for those companies that distribute natural gas in the state. And there is no reason to expect demand will taper off.

February is typically the coldest month of the year in Massachusetts -- Willow.

BAY: In tonight's "Tech Watch," Stuart, videogame battle is heating up. So far, Electronic Arts is a winner, posting earnings in line with Street estimates, today at 66 cents a share. The company is the No. 1 videogame software maker for the Playstation 2 entertainment system.

Today's report was welcome news to investors, who suffered through a volatile year. The stock jumped nearly six to close just under $46.

Meanwhile, embattled rival Sega conceded defeat today, announcing it will stop making its Dreamcast videogame machines at the end of March. Instead, the company will focus on developing games for other console makers.

VARNEY: And coming up, we're going to take you to the small Swiss town where the recently pardoned fugitive banker Marc Rich set up shop. We'll tell you what the locals have to say about him. Plus, a verdict in the Lockerbie bombing. Wolf Blitzer joins us with the details in the "MONEYLINE News Digest," and that is next.

(COMMERCIAL BREAK)

BAY: Since the Fed cut rates on January 3rd, tech stocks have taken off. We'll take an in-depth look at which stock sectors historically perform very well after the Fed lowers rates. But first, let's check in with Wolf Blitzer for the "MONEYLINE News Digest" -- Wolf.

WOLF BLITZER, CNN ANCHOR: Thank you, Willow. A split verdict was delivered today in the trial of two Libyans in the Lockerbie bombing case. A panel of three Scottish judges, sitting in a special court in the Netherlands, convicted one defendant, a Libyan intelligence officer, of murder and sentenced him to life in prison. The second defendant, however, was found not guilty and is now free to return to Libya.

Attending those proceedings today: relatives of the 270 people who were killed in the bombing of Pan Am Flight 103 over Lockerbie, Scotland in 1988. Some of the relatives said they believed the guilty verdict proved the bombing was state-sponsored terrorism.

In Washington, President George W. Bush said Libya should pay damages to the families.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Nothing could change the suffering and loss of this terrible act, but I hope the families do find some solace that a guilty verdict was rendered. I want to assure the families and victims the United States government will continue to pressure Libya to accept responsibility for this act and to compensate the families.

(END VIDEO CLIP)

BLITZER: The White House said sanctions on Libya should remain in place. In Washington today, John Ashcroft's nomination as attorney general was hotly debated in the Senate. Republicans defended Ashcroft, while many Democrats questioned his positions on issues such as civil rights, gun control and abortion.

The full Senate is expected to vote on the nomination tomorrow.

And those are some of today's top stories. Join me for more later on "WOLF BLITZER REPORTS." I'll also have an interview with Senator John McCain. That's at 8:00 p.m. Eastern, 5:00 p.m. Pacific.

And stay with CNN for more MONEYLINE, right after the break.

(COMMERCIAL BREAK)

ANNOUNCER: The MONEYLINE NEWS HOUR continues. Here again, Willow Bay in Los Angeles and Stuart Varney in New York.

VARNEY: In tonight's headlines, Mr. Greenspan delivers, slashing rates for the second time this month. Will it be enough to head off a hard landing?

Adding fuel to the fears, this morning's GDP number: the weakest growth in five years. Plus, media stocks on a roll, but we'll talk to one influential Wall Street pro worried about the sector in this slowing economy.

BAY: But first, more on our top story: The Fed slashes rates again. At just about 2:15 Eastern Time this afternoon, Alan Greenspan ended the suspense. The Fed cut two key interest rates by a half point. The Fed fund's overnight bank lending rate was lowered to 5.5 percent, and the discount rate to 5 percent. The Fed followed up those cuts with a statement, saying:

"These circumstances have called for a rapid and forceful response of monetary policy. The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."

Today's soft GDP number and the Fed's move sent treasuries higher for the second straight day: the ten-year note moved up more than 3/4 of a point. 30-year bond; that surged nearly a point and a half.

VARNEY: Well, treasuries got a bounce, but Wall Street was left wanting more. No surprises here. Mr. Greenspan's highly anticipated move just confirmed investor's speculation. After a modest rally in the morning, the Dow ended up just 6 points in the wake of the decision to 10,887. The volume on the Big Board, though: 1.3 billion shares.

Techs sold off sharply after the Fed's move. Internet and Biotech pressure the Nasdaq down more than 2 percent -- it lost 65 points, down to 2,772. The volume there, though, was strong: more than 2.3 billion shares.

While techs certainly took it on the chin today, that may not be a sign of things to come, as Allan Chernoff reports.

(BEGIN VIDEOTAPE)

ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): If history holds true, investing in technology stocks will prove to be one of the best ways to profit from the Federal Reserve's interest rate cuts. Tech stocks had a spectacular January; in part, a response to the central bank's half point rate drop at the beginning of the month.

AL GOLDMAN, AG EDWARDS: I think the bear market in the Nasdaq ended January 3rd, when the Federal Reserve Board lowered interest rates 50 basis points and I think that's been proven by the action of techs. CHERNOFF: The performance is impressive. Since the Fed's first easing at the beginning of January, semiconductor equipment stocks have soared 50 percent. Semiconductor shares up 41 percent. Internet companies jumped 39 percent from depressed levels. And Communications Equipment up 37 percent, while the S&P 500 was up 6 percent during the same period.

ROBERT STOVALL, PRUDENTIAL SECURITIES: That's what's happened in January so far -- I think technology will continue to be strong, as well as retailers that sell technological products like Radio Shack.

CHERNOFF: The ride may have only just begun, because historically, technology out-performs the market as Federal Reserve easing cycles progress. The last time the Federal Reserve began lowering rates in late September 1998, tech stocks, as measured by the Merrill Lynch Tech 100 Index, jumped 43 percent in the three months after the first cut, compared to a gain of 15 percent for the S&P 500. 12 months later, technology was up 109 percent, while the S&P had risen a relatively meager 22 percent.

Technology also out-performed during the 1995-96 easing cycle; though, the numbers are less dramatic. Three months after the first rate cut in July of 1995, tech shares were up 10 percent, while the S&P 500 was up 5 percent. Twelve months after the rate cutting started, tech shares had climbed 26 percent, topping the S&P 500's 19 percent gain.

(END VIDEOTAPE)

CHERNOFF: Of course, there is no guarantee that technology will continue out- performing. Even tech bulls can see, there could easily be a pull back in the coming days, since tech shares climbed so rapidly in January. But the averages, going back 20 years -- that's 10 Fed easing cycles -- indicate that technology shares perk up when the Fed is trying to revive the economy -- Stuart.

VARNEY: How reliable is historical data for projecting into the future?

CHERNOFF: Very reliable. However, not always, because in 1984, it did not work at all. The Fed was easing; tech shares actually fell.

VARNEY: Allan Chernoff, thanks. While the stock market and the bond market have been rocked by the Federal Reserve's bold rate cuts this year, the currency markets have been surprisingly quiet; that may not continue. Terry Keenan takes a look behind the numbers at why stock market investors should keep a very close eye at the value of the U.S. dollar -- Terry.

KEENAN: Well, Stuart, one surprise in this already remarkable year on Wall Street has been the resilience of the U.S. dollar, particularly in the face of plunging interest rates and the slumping economy. While we have all learned in Econ 101 that falling interest rates usually hurt a currency, the Fed's rate cutting campaign has done little to dampen the dollar's purchasing power. Rather than rallying, the Euro has continued its plunge against the greenback in 2001. The Euro is now down 1.4 percent for the year; this after 2 years of dismal decline.

Why the strength in the U.S. Dollar? Economists say, it is, in part, because of the continued allure of the U.S. stock market.

(BEGIN VIDEO CLIP)

BRUCE STEINBERG, MERRILL LYNCH: What foreign investors just like domestic investors, is that when the Fed is on an aggressive easing campaign, the U.S. stock market almost always goes up double-digits. So, I think we will get fairly strong equity inflows into our market from overseas.

(END VIDEO CLIP)

KEENAN: It is a trend that bears watching. For years now, foreign investor's appetite for U.S. stocks has financed our huge trade deficits, and has prevented a dollar crisis. The strong green back has also kept inflation low by keeping import prices under control. Remarkably, the virtuous cycle remains intact even now as U.S. interest rates fall close to the levels we see in Europe. At 5 1/2 percent, the U.S. Fed Funds rate is just 3/4 of a point higher than the benchmark European rate. But economists say, keep an eye on the dollar in the months to come. If U.S. investments start to look less attractive to overseas investors, the cycle could quickly reverse, bringing down the U.S. dollar and the U.S. stock market along with it -- Willow.

BAY: Terry, OK, a trend we will watch.

Just weeks after closing the world's largest media merger, AOL Time Warner -- parent of CNN -- filed its first joint financials, promising to mark its turf as a "one of a kind" company. The stock fell 1 3/4 on the earnings news, but it's up an impressive 50 percent just this month. Steve Young has been following the numbers and Wall Street's reaction, and he has this report.

(BEGIN VIDEOTAPE)

STEVE YOUNG, CNN CORRESPONDENT (voice-over): Content may be king, but in an economic slowdown it looks like the business of getting people on-line will be what gives AOL Time Warner some added oomph. In the tough December quarter, the last in which the companies will report earnings separately, Time Warner reported earnings of 18 cents a share on sales just over $8 billion, up 4 percent.

But AOL earned 15 cents a share on $2 billion, a 27 percent gain.

TOM WOLZIEN, SANFORD C. BERNSTEIN: AOL is what's driving this company. But what's nice about AOL is it does provide a platform for marketing, for providing ways that the product of Time Warner divisions can get out to the public.

GERALD LEVIN, CEO, AOL TIME WARNER: We're taking direct- marketing relationships that AOL has. And then you're going to see a lot of advertising flowing into Time Warner media properties.

YOUNG: On a performer basis, the companies hit $2.4 billion in cash flow, or EBITDA in the December quarter. The new company projects $11 billion EBITDA for the full year and wants that to be the benchmark for future comparisons.

HOLLY BECKER, LEHMAN BROTHERS: I'm a little bit surprised how completely confident the company is that the executional challenges here are not significant. They basically said, in so many words, today, that the culture has already been changed in the past year since the deal was announced.

YOUNG: And what happens if the economic slowdown deepens?

ROBERT PITTMAN, AOL TIME WARNER: Any time, as you know, there's any sort of economic downturn or a lack of consumer confidence, they tend to stay home a little more, cut back going out of home activities. And, again, we do extraordinarily well in those environments.

YOUNG: Ahead of the analyst meeting, there were reports AOL might hike the price of its on-line service $2 a month. Both chairman Steve Case and CEO Jerry Levin said no, not never, but not now. Steve Young, CNN Financial News, New York.

(END VIDEOTAPE)

BAY: Media stocks, the focus of our sector report tonight. Today, Merrill Lynch's Jessica Reif Cohen said broadcast advertising may be significantly weaker than expected this year, with the biggest blow coming from auto makers. General Motors, the nation's number one ad buyer, has canceled half of its prime time spots, a move Cohen calls unprecedented.

The upshot of these ad cutbacks? Declining revenues for the media giants. But, so far, its been a good year for the stocks: Clear Channel's up 34 percent, News Corp, Viacom, and Infinity all up more than 15 percent, and Walt Disney higher as well. Here to discuss the future, Jessica Reif Cohen of Merrill Lynch.

Jessica, good to see you.

JESSICA REIF COHEN, MERRILL LYNCH: Thank you.

BAY: You sounded the alarm bell on the weakening advertising environment a while ago. Now it seems the picture's bleak, and getting bleaker. With that discovery that you made about GM, can we expect the other auto makers to follow, particularly with the DaimlerChrysler news this week?

REIF COHEN: Exactly. We are very concerned. We put another note out this morning. GM took its maximum cancellation options and now, with the DaimlerChrysler news, they can only cut, they won't add to their advertising spending. The two biggest categories of advertising are autos and retailers, and both sectors are in trouble. So, our concern: we already know the first and second quarters will be weak. I think the market respects that. What will impact the stocks is, will there be weakness in the second half or will it pick up? These stocks tend to be leading indicators.

BAY: Can you quantify the impact on advertising revenue? I mean, how much lower do you expect it to be, first half of the year and the full year?

REIF COHEN: Well, we're looking for very sluggish trends in the first half of the year. National Spot Advertising, which is roughly half of a TV station's revenue is down 20 percent in the first quarter. We think that, overall, local TV station revenue, which is the biggest profit driver, will be flat-ish, up or down a little, depending if its CBS -- with the Super Bowl, or ABC -- who had the Super Bowl last year. So, very tough comparisons.

Having said that, I think what investors are looking at is what will happen in the second half. Each company is affected by different factors. For example, Time Warner -- AOL Time Warner has a lot content -- music and movies -- that come out in the second half. Viacom has TV syndication, as does Fox. So, our recommendation is, avoid the pure play broadcasters, go into the diversified media companies.

BAY: What about the cable companies? Isn't the conventional wisdom that cable companies do better in a slow growth economic environment?

REIF COHEN: Absolutely. As you just mentioned on the program, many sectors benefit. When rates go down, cable has an inverse relationship with interest rates, so we recommend investors ride this wave.

BAY: Can you give us a couple of cable names that you think investors should take a look at?

REIF COHEN: Cablevision is our favorite name, followed by Comcast and Cox. And cable is recession resistant.

BAY: All right, Jessica, we'll let that be the last word, "recession resistant." Thanks for joining us.

REIF COHEN: Thank you.

BAY: Stuart?

VARNEY: Willow, coming up -- the $64,000 question: will today's rate cut be enough to the head off a recession? We'll ask top economists Brian Wesbury and Robert Brusca next on MONEYLINE.

(COMMERCIAL BREAK)

VARNEY: In tonight's MONEYLINE focus: the state of the economy, and where is it going inlight of Mr. Greenspan's healthy interest rate cuts this month? We are joined now by two economists, who joined us on Monday night with their picks as to what was going to happen with the Federal Reserve today. We're joined by Brian Wesbury of Griffin, Kubik, and Robert Brusca from Ecobest Consulting. Gentlemen, welcome back to MONEYLINE.

Robert, if I can start with you. You got it right, so did Brian, as a matter of fact. Both called for a 50 basis point cut in interest rates. When does that cut start to directly affect the economy? When will it have impact?

ROBERT BRUSCA, ECOBEST CONSULTING: You know, the Fed gave us a cut at the beginning of the month. These cuts are in the same month, but they're really about a month apart. So, we already have a bit of space. It usually will take 3 or 4 months before you start to see the effects, maybe 6 months before you get the full impact after the Fed cuts rates, unless it has its expectational effects on markets. And we have not seen much of that. We have seen the stock markets pick up after the first one, but, of course, not much reaction to the second one.

VARNEY: You think we've got more rate cuts to come, do you?

BRUSCA: Oh, I hope we have more to come. I think the economy desperately needs them, yes.

VARNEY: Brian, let's turn to you. On Monday evening, you said this economy is virtually in recession as we speak. What kind of recession? Is it a V shape -- it comes sharply down, and bounce back? Is it a U shape, with a nice bottom? What's going to happen?

BRIAN WESBURY, GRIFFIN, KUBIK, STEPHENS & THOMPSON: I don't know if anybody who lost their job cares. But, I think it's more of a U- shaped recession. I think we're going slide down about a half percent in real GDP growth in the first quarter, 3/10 of a percent decline in the second quarter, and then we will come out of it, just slightly, in the third and fourth. So, I think it's more U-shaped rather than a real sharp decline. Again, it depends on the sector. Manufacturing has dropped sharply. That will look more like a V, but the overall economy will look like a U.

VARNEY: Robert Brusca, what do you say to that?

BRUSCA: I'm concerned that manufacturing has slipped so sharply. We are getting some of the inventories being redressed. It was not quite so strong in this last quarter.

Another thing I'm concerned about: what's going to happen with California? And how that will hit services and other parts of the economy when GDP has printed for their first quarter? Because, we have a very weak manufacturing sector. If this spills into the services sector, we already see consumer confidence down sharply. See, the Fed hasn't done anything to turn the confidence around. So, I'm concerned it's going to spread, that you can't just rely on the fact that services have been OK, that the unemployment rate is low, there is a lot of joblessness that is in the pipeline that we haven't seen yet, hasn't hit the numbers -- maybe we'll see it next Friday.

VARNEY: I want to get a forecast. Brian -- because we a federal funds right now at 5 1/2 percent. Will it go down to, say, 4 1/2 percent or below?

WESBURY: I think it's going down to 4 3/4, possibly 4 1/2 in this cycle. A lot of it will depend -- Bob is right -- about this deteriorating further. If we go much below my forecast, the Fed will cut a lot more. In fact, you can make the case with inflation where it is, that the Fed may go down toward 4 percent. Right now, that's not in my forecast. I think the Fed will stop at 4 3/4, maybe 4 1/2.

VARNEY: Real fast, Bob -- what do you say?

BRUSCA: I think in order to see 4 1/2 percent, the Fed needs to cut rates more to save this economy, Stuart.

VARNEY: Fair enough, Robert Brusca and Brian Wesbury. Gentlemen, thanks for coming back to us tonight. Many thanks indeed.

Next on MONEYLINE, somewhere in scenic Switzerland lives the man who has created an uproar for the Clintons. We'll take you to the town where he spent years on the run. In search of pardoned trader Marc Rich. That's next.

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BAY: A special report now on the furor that erupted in the final hours of the Clinton administration: the pardoning of Marc Rich. Tonight, his life on the run. The billionaire commodities trader fled to Switzerland in the early '80s, avoiding trial on tax and fraud charges. And he continued to build his fortune in a town known for its scenic beauty, and its wealthy residents who sought out low taxes, and in Rich's case, a low profile. Susan Lisovicz recently traveled to Zug, Switzerland and she filed this report in search of Marc Rich.

(BEGIN VIDEOTAPE)

SUSAN LISOVICZ, CNN CORRESPONDENT (voice-over): It is easy to see why people come to Zug. From its Gothic architecture, quaint shops, relaxed lifestyle, and pristine lake are not why many of the world's richest people choose to stay.

The 12th-century city of Zug is the capital of Switzerland's smallest canton, or state. Yet it boasts more than 19,000 businesses, including the commodities trading firm: The Marc Rich Group. The firm generates about 7 1/2 billion dollars in annual trading volume. Its transactions include buying oil from Iran and Iraq and selling zinc, nickel and copper to the U.S. government.

(on camera): Zug is where Marc Rich came to live when he left the United States. But it wasn't just the natural beauty and the historical charm that brought him here. Zug has the lowest tax rate in all of Switzerland.

(voice-over): And for an industrialized country, Switzerland already boasts among the lowest tax rates in the world for individuals as well as corporations.

THOMAS MUELLER, ZUG MINISTRY OF PUBLIC ECONOMY: Zug authorities, especially the tax authorities, are very human. You are in Zug treated as client. You're always treated as a client and not as a simple money bringer, as a simple tax payer.

LISOVICZ: Another attraction, Switzerland's well-known respect for privacy. Evelyne Herzog once worked for Marc Rich, and she says he comes and goes as he pleases.

EVELYNE HERZOG, ZUG TOURISM: We have a lot of famous people from Zug living in Zug in total anonymity. People don't care about them. They just live here. They enjoy it here and they don't care about their neighbors, what they do, if they have more than everyone else.

LISOVICZ: Marc Rich now lives on this private road in an exclusive community just outside Lucerne, where security is taken very seriously. But Marc Rich's two charitable foundations are still based in Zug, and have given away more than $100 million since their creation in the mid-80s. Favorite beneficiaries include hospitals and museums in Israel as well as Swiss arts and sports programs.

With his presidential pardon, Marc Rich can now leave his long- time sanctuary and resume living in the U.S. But people here wonder why anyone would.

UNIDENTIFIED MALE: You have a quiet, nice life.

LISOVICZ: Susan Lisovicz, CNN Financial News, Zug, Switzerland.

(END VIDEOTAPE)

BAY: The Rich uproar has brought an unexpected dividend for one journalist. Back in the mid-'80s, A. Craig Copetas penned a book called "Metal Men: Marc Rich and the $10 Billion Scam." It's since fallen out of print, but Copetas tells MONEYLINE that several publishers this past week fought to reprint it in bidding that he calls "extremely robust." The winner was Harper Collins, which isn't saying how much it is paying. How will the book do? Well, that's hard to say. But we tried to get a copy from a top business library and their only copy today was already checked out -- Stuart.

VARNEY: Oh, you just missed it

Up next, three things that go together: Alan Greenspan, interest rates, and Myron Kandel -- his assessment on the Fed's long-awaited move is next.

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VARNEY: Tonight, our financial editor wants to return to a difficult subject. Yes, that's right, his forecast of 12000 on the Dow by the end of January. He has a quotation from a great American writer to help him make his point. Here is Myron Kandel.

Mike, what's the quote?

MYRON KANDEL, CNNFN FINANCIAL EDITOR: Well, Stuart, first, I'm only 1,100 points off, right. So, it's not the end of the world. But I'm reminded every time I make a prediction that doesn't carry true, I'm reminded of the quotation from Ralph Waldo Emerson, who said "foolish consistency is the hobgoblin of little minds."

So, now, I don't want to be foolishly consistent, right? On the other hand, I was really waylaid on the way to 12000. First, by the long delay over who won the presidency and in the middle of that the fact that the economy really softened and tumbled much more than I expected, even much more than Alan Greenspan expected.

And that's really knocked the market for a loop. However, the Fed is our friend. And the Fed, by easing today on top of the previous 50 basis point cut, and further cuts that we're going to see in the next few months will get the market rolling again.

VARNEY: Just don't put a time frame on it, that's all.

KANDEL: Right.

VARNEY: Thanks, Mike.

Up next, "Ahead of the Curve": What you need to know tonight before they open up again those markets tomorrow. Stay with us please.

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BAY: Taking a look at some of the top news to look out for tomorrow, the Senate will vote at 1:45 p.m. Eastern on President Bush's most controversial Cabinet choice, John Ashcroft for attorney general. CNN will carry it live.

And some news that could move the markets. Expect more clues on where the economy is headed with the NAPM Index, personal income and spending, auto sales and construction spending. Plus, earnings from Verizon Communications, Sprint, and Sprint PCS, as well as Reebok and Colgate-Palmolive.

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

VARNEY: And I'm Stuart Varney. Good night from New York. "CROSSFIRE" is next.

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