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Lou Dobbs Moneyline
Dow Climbs 58.17 to 10,216.73; Nasdaq Rises 13.65 to 1,923.22; Intel Hits Profit Target
Aired April 17, 2001 - 18:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
WILLOW BAY, CNN ANCHOR: Profits plunge at the world's largest chipmaker. This is MONEYLINE for April 17th, 2001.
The top chipmaker reports sharply lower earnings, but still narrowly beats lowered expectations. We'll get the view going forward from the CFO.
A Yahoo! veteran makes way for a Hollywood hotshot: Can the new CEO revive one of the Internet's best-known brands?
On Wall Street a seesaw session that ends well. Stocks finish higher despite last night's warning from Cisco.
One positive for the markets: A surprise rebound in American factories. Have we seen the worst of the manufacturing recession?
Welcome to MONEYLINE.
We begin tonight with after-the-bell profits from high-tech bellwether Intel. The chip giant beat expectations that had already been lowered, and only by a hair. But that headline failed to capture just how brutal a quarter it was. Profits plummeted and sales took a double-digit decline from a year ago.
Investors, however, seemed encouraged by reassurement from the company that the core chip business isn't getting worse. And in late action the stock is up more than 2 1/2 at $28.70. So, what's the outlook for Intel in upcoming quarters?
Bruce Francis has been crunching the numbers since they were released and he joins us now -- Bruce.
BRUCE FRANCIS, CNN CORRESPONDENT: Willow, an interesting report. Well, the tech recession may not be over, but Intel tonight is providing one of the more encouraging signs in a while. From microprocessors, at least, the worst declines may be behind us.
(BEGIN VIDEOTAPE)
FRANCIS (voice-over): Intel says that its microprocessor business has stabilized after a harrowing freefall that start last fall. Business is still tough to predict, but normal seasonal patterns should now kick in. That took some of the sting out of a disastrous quarter, excluding special items, earnings at 16 cents a share were just slightly ahead of expectations that had been slashed twice.
Revenue declined 16 percent, but not as much as Intel warned a month ago. Income was down an astonishing 64 percent from a year ago. But including all charges and items, Intel's results were even worse. Earnings were just 7 cents a share, down to 82 percent. And the declines may not be over for Intel. Revenues are expected to be up slightly to down 7 percent sequentially in the second quarter.
Intel will continue to spend a record $7.5 billion dollars on new plants and equipment. But gross margins will plummet below 50 percent for the first time since the Asian economic crisis of 1998. That will cut into Intel's bottom line, but it means cheaper chips and bargain PCs for consumers. Still, some analysts think "B" word -- bottom -- for this unusually rough economic cycle for the chip business.
ANDREW BARRETT, SALOMON SMITH BARNEY: In the case with all semiconductors, we think this will mark probably the bottom. This is going to be the last revision downward that we're going to have to go through. We think the second half of the year will yield some recovery in semiconductors.
(END VIDEOTAPE)
FRANCIS: Intel executives say that while patterns are going to start looking normal going forward, growth does not yet show signs of returning to historical patterns. And you'd like to see some growth here.
BAY: So, I mean, what's your sense of this, is this a bottom for Intel, or is it wishful thinking?
FRANCIS: I think that we're seeing the signs, but remember Q2, this quarter that we're in right now, never a big barnburner, so it's hard to make really meaningful prediction. It's the Q3 and Q4 that are really going to be the proof for this industry. I'm going to hold off.
BAY: But as you said earlier, interesting report today. Bruce, thank you.
Checking after hours trading on Intel and other companies reporting results after the bell, we are joined by Amanda Lang at Instinet -- Amanda.
AMANDA LANG, CNN CORRESPONDENT: Willow, it may not be a barnburner quarter, but it's certainly barnburner trading. Intel shares are up more than 10 percent. And since those results were released, the stock off its highs, but certainly being well received by investors here. And despite some of the negative commentary from that call, more than a 275 gain to 2,885.
And elsewhere we're seeing a nice increase in Texas Instruments. The company beating the Street by two cents a share, earnings of 18 cents, this is despite the fact that its revenue declined in the quarter to 2 1/2 billion.
And it also said that next quarter's revenue could be down up to 20 percent on a sequential basis. Texas Instruments wasn't gaining nearly as much until after Intel posted its results. That helped give the stock a boost. It's up now more than a dollar at 35.40.
We're seeing nice activity right across the chip sector. In fact, Applied Materials, Advance Micro, and Micron all up more than 6 percent each. It looks like it could be a good morning for the Nasdaq -- back to you.
BAY: All right. And that would be good news. Amanda Lang, thanks.
The issue of earnings visibility, the latest catch phrase to invade corporate America, continues to weigh on companies, particularly technology companies. Predicting the future, always an uncertain science, seems to be more uncertain now than ever.
Allan Chernoff reports.
(BEGIN VIDEOTAPE)
ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): A vicious cycle of uncertainty is shredding profits at technology companies. Because so many businesses are uncertain about their prospects, they're cutting back spending on new technology. Technology suppliers don't know when the trend will turn. So, they're warning that they have poor earnings visibility.
LARRY SEIBERT, BARRETT ASSOCIATES: Many more companies have started using the term as a way of describing their inability to forecast anything at all, given the collapsing economic environment.
CHERNOFF: The latest tech companies pointing to economic uncertainty: Intel, Texas Instruments, Vitesse Semiconductor and Unisys.
JANET HAUGEN, CFO, UNISYS: Where we see the spending cut back, and this is consistent across all the industries, are in the bigger projects, the capital spends and the large systems integration projects, which include some of the e-business spending.
CHERNOFF: Unisys stock collapsed today in response, losing one- fifth of its value. The visibility problem is concentrated in technology, the only sector within the S&P 500 where first quarter earnings are falling off a cliff.
With one-fifth of the S&P 500 companies having reported results, technology earnings are down 46 percent from the same period last year. Other sectors with lesser declines include basic materials like paper and chemicals, consumer cyclicals, which includes retailers and financials.
The earnings drop comes after powerful gains last year which only began to taper off in the fourth quarter. Uncertainty about the earnings outlook still weighs on the stock market.
ARTHUR CASHIN, UBS PAINEWEBBER: I think you won't get absolutely clear visibility, you rarely do. But I think if it is not the idea that you are looking into a dark abyss, people may become a little bit more sanguine about this.
(END VIDEOTAPE)
CHERNOFF: Investors are hoping the earnings clouds will soon lift, so they can see improving profits later in the year. While Intel warned of poor visibility, the chief financial officer right after the bell did say he sees some good signs at the end of the March, offering a glimmer of hope. But few companies are being even that optimistic.
Willow, I know you'll be talking to the CFO in just a few minutes.
BAY: And we're anxious to hear about all of the signs, of course, good and bad. Allan Chernoff, thanks.
Turning to today's action on Wall Street, stocks edged higher today, shaking off the effect of a troubling report late yesterday from tech powerhouse Cisco Systems. The Dow slipped at the outset, but soon rebounded, and closed a volatile day up 58 points to 10216. More than a billion shares changed hands.
A similar showing on the Nasdaq, which ended up 13 points to 1923 on volume of more than 1.8 billion shares. In the broader market, the S&P 500 gained nearly 12 points to close at 1191.
Cisco, which warned last night of a weaker-than-expected quarter, slipped more than half a point. Computer Associates jumped after saying last night it would beat expectations. Veritas Software gained after beating the Street with its results. IBM was up ahead of its profit report tomorrow and eBay rallied as well.
Let's go to Terry Keenan, who joins us now from the New York Stock Exchange. Terry, it seems like the market is taking that earnings news in stride.
TERRY KEENAN, CNN CORRESPONDENT: Yes, it pretty much is, Willow. It kind of reminds us of the good old days of the bull market when companies were able to beat by penny or two, and that's exactly what we had today. You're mentioned Computer Associates. We also had Johnson & Johnson beating by two cents. Fannie Mae also beat the Street, and that was ahead of the Intel announcement that it beat by a penny and Texas Instruments, of course, beating by two cents.
Of course, in the technology sector, these are very lower expectations, but the markets still reacting rather well. We also saw some buying on the close again today. We saw that yesterday. Traders here are telling me that may indicate that big institutions, particularly mutual fund managers, are doing some bargain hunting and buying at the close. We'll have to see if that means that the small investor is stepping back in to some mutual funds -- Willow. BAY: So Terry, looking ahead to tomorrow, what do you think the market will be focusing on?
KEENAN: Well, tomorrow's going to be an interesting day because we'll get earnings numbers from IBM after-the-bell. IBM is only -- is really the only big technology stock that has held up in this market. It's down 25 percent from its highs, which were set in late 1999, but the stock has held up rather well. Not a peep about an earnings warning out of that company. We'll see if they can meet expectations tomorrow.
BAY: We'll be looking for that tomorrow. Thanks Terry, we'll check back with you in the next half hour.
Tracking high tech's continued fall from grace, Fidelity's Magellan Fund, the world's largest mutual fund, has cut its high tech holdings to their lowest level in more than four years.
Taking a look, financial stocks have taken over as the number one sector at 20 percent of the total. Consumer and health care stocks are close behind, while information technology, long the fund's front- runner, has fallen to fourth place at less than 12 percent of the portfolio. Now, that's down a mammoth 33 percent just a year ago.
Next on MONEYLINE, hopeful signs from the factory floor. Is the worst over for hard-hit manufacturers?
Plus, a Hollywood honcho lands at the top of a struggling Internet giant. Where will Terry Semel take Yahoo!
And businesses getting the hard sell to leave California and the power crisis behind them. Rival states on the prowl.
ANNOUNCER: From CNN's New York headquarters, this is the MONEYLINE NEWS HOUR.
(COMMERCIAL BREAK)
BAY: Wall Street today received mixed signals about the pace of the economic downturn as a slowdown in housing was offset by a surprising uptick in manufacturing. The bottom line: Investors may have put to rest any hope for an immediate move from the Fed.
Lisa Leiter has a look from Chicago at the latest numbers.
(BEGIN VIDEOTAPE)
LISA LEITER, CNN CORRESPONDENT (voice-over): Industrial output plunged in the first quarter at its most dramatic pace since 1991 during the economy's last recession. But a surprising new report reveals that the worst could be over for the nation's factories.
In March, industrial production actually jumped 4/10 of a percent, the first rise in six months. Leading the manufacturing rebound, the sector that led its retreat, auto and auto parts makers, whose output last month surged 7 percent. DIANE SWONK, BANK ONE: We've seen an extraordinary drawdown in inventories in autos, and we already have the schedules in the second quarter. And even if they're only partially met, it's the first increase in vehicle production for a quarter in a full year. And so by no means is the March number a one-time blip for the auto sector.
LEITER: Even the manufacturing industry itself sees better times ahead.
JERRY JASINOWSKI, NATIONAL ASSOCIATION OF MANUFACTURERS: In general, the inventory correction that's been going on in manufacturing is moving ahead promptly, and that's laying the basis for recovery.
LEITER: Weak demand for goods has hurt factories, but it also has helped contain inflation. Consumer prices edged up one-tenth of a percent in March, as expected.
Falling prices at the pumps offset rising prices for prescription drugs, food and housing.
Another report shows that the resilient housing market weakened a bit last month. New home construction slipped as did building permits, a gauge of future activity.
BILL CHENEY, JOHN HANCOCK FINANCIAL SERVICES: The housing numbers down a bit, but it's still strong. The permits number is down, but it's still just as high as the starts. So it doesn't suggest that anything is going to slow down there. So the Fed has some grounds to be cautious.
LEITER: Cautious, that is, about cutting interest rates too much, too fast.
(END VIDEOTAPE)
LEITER: And that potential cautiousness has gripped the bond market here at the Chicago Board of Trade over the past week as traders lower their expectations for aggressive rate cuts. They are now betting that there is virtually no chance of a rate cut before the Fed's next policy meeting on May 15th -- Willow.
BAY: Lisa Leiter in Chicago -- thanks, Lisa.
Checking the bond market, the 10-year gained more than a half point, the yield at 5.19 percent. The long bond gained just under half a point, snapping a five-day losing streak.
Wrapping some of today's major Dow earnings, Johnson & Johnson surprised to the upside, beating the Street by 2 cents a share, due in part to strong sales of its blockbuster drugs Risperdal and Procrit. J&J also upped full-year forecasts.
Philip Morris edged past estimates on revenues of over $22 billion. The tobacco giant plans to complete the IPO of Kraft Foods by the end of July. Troubled filmmaker Eastman Kodak managed to outpace the Street, but sales sank, and profits plunged more than 40 percent. No surprise then Kodak's also announced plans to slash up to 3,500 jobs.
And profits fell at Caterpillar, down nearly 40 percent and a penny short of forecasts. Caterpillar did, however, confirm its full- year targets.
In trading today, Johnson & Johnson and Philip Morris up more than 1 1/2 while Kodak and Caterpillar both ended down a dollar.
Ahead on MONEYLINE, can a new CEO return Yahoo! to its dot-com glory days? Terry Semel goes from Hollywood to cyberspace. But first, inside Intel's profit report: We'll talk with CFO Andy Bryant about the chipmaker's results and what they say about the rest of the tech business. Stay with us.
(COMMERCIAL BREAK)
BAY: In tonight's "Tech Watch": Intel. Quarterly results and the crucial outlook. As we told you earlier, the world's biggest chipmaker barely beat expectations after warning last month that business was slowing sharply.
Taking a look at Intel's stock over the past year: not an encouraging sight. It's down more than 60 percent from its 52-week high, wiping out hundreds of billions in market value.
Joining us now from Santa Clara, California with more on the outlook, Intel CFO Andy Bryant.
Andy, welcome.
ANDY BRYANT, CFO, INTEL: Thanks.
BAY: In your earnings report, you noted that microprocessor demand has stabilized. It's not getting worse. Do you see any signs that it's getting better? Should investors be encouraged?
BRYANT: Well, certainly what we saw in the first quarter was, you know, a sharp decline. Revenues down $2 billion. The bright spot out of the first quarter was in the month of March we actually saw a return to times when customers to call and ask for orders to be shipped quickly, to be shipped immediately.
We also saw our distribution channel, which is where customers come for quick shipments, actually near record levels and above the fourth quarter. So two pretty positive signs toward the end of the quarter.
BAY: What kind of customers are you hearing from?
BRYANT: Actually broad range. The distribution channel typically talks, sells to (UNINTELLIGIBLE) manufacturers. However, we also were getting calls from original equipment manufacturers, our major customers, again asking for the orders to be shipped instead of asking for the orders to be pushed out.
BAY: So what's your outlook for the upcoming quarter and for the rest of the year then?
BRYANT: Well, if you look for the second quarter, what we've said is we expect revenue to be in the range between 6.2 and 6.8 billion dollars. It's a wide range, but it's pretty normal for what would be a new seasonal effect.
So if you look at the fourth quarter, you look at the first quarter, you're seeing a macroeconomic effect depressing the business.
What we think you start to see now in the second quarter and the back half of the year is a seasonal effect off of this new lower level.
BAY: One of the concerns that analysts have in looking over your numbers is your margins. How badly are you getting squeezed, on one hand with price cuts and on the other hand with depreciation expenses on these new plants of yours?
BRYANT: In the second quarter, we said growth margin percentage will be down from 52 to 49 percent. That's primarily due to microprocessor prices (UNINTELLIGIBLE).
BAY: And after that?
BRYANT: If you look at the full year, it's about 50 percent growth margin for the year which says things at least for the year pretty much stabilize.
BAY: As you know, there's a chip debate raging right now on Wall Street between folks we think that hit the bottom and others who think, that the bottom, like Dan Niles, will be hit towards the end of the year. How do you weigh in on this? First of all, do you think Intel has hit the bottom?
BRYANT: Well, we think it will be different for different parts of our business. If you look at our microprocessor business, our core business, and you look at the signs we saw towards the end of the first quarter, we actually think we'll see a seasonal effect, which means you would expect Q2 to be down a little, maybe flat, and you expect to see growth in the back half the year.
If you look at our communications business, the business we're trying to grow, we still see a lot of volatility. We don't see any kind of normal ordering pattern. I think that business will take a while to get stable and then go again sometime later this year.
BAY: Dan Niles is saying that this is the worst year in chip history. Would you agree?
BRYANT: Certainly, the first quarter is the first worst first quarter we've ever had. Maybe the first quarter to quarter comparisons we've ever had. But again, it's different than it used to be. The last bad quarter we've had a number of years ago, we didn't have the financial strength, the market position to do some of the things what we're doing now.
So, even in this downturn, we can invest in the new manufacturing processes, we can drive cost down, we can bring new products out. It is a situation where a company like Intel absolutely could invest in the long-term and should get pretty good rewards when the economy bounces back.
BAY: OK, I'm sure investors would welcome that news. Andy Bryant of Intel, thanks for joining us.
BRYANT: Your welcome.
BAY: Just ahead, we'll be talking to an Internet legend about his IPO Loud Cloud.
And a troubled Web giant looks to Hollywood for help, but will a new boss put Yahoo! back on track?
(COMMERCIAL BREAK)
BAY: Beleaguered Yahoo! is turning to a Hollywood veteran to help it find a way out of its troubles. The hard-hit Internet portal and media company today announced it's hired former studio executive Terry Semel to be its new chairman and CEO.
As Steve Young reports, Semel has his work cut out for him.
(BEGIN VIDEOTAPE)
STEVE YOUNG, CNN CORRESPONDENT (voice-over): Yahoo!, now struggling like most Internet companies, has found a singular solution. It's hired an ex-movie mogul to diversify its revenue stream. Terry Semel, Yahoo!'s new chairman and CEO was co-head of Warner Brothers studios for two dozen years. Then for the last 14 months, he became what he calls "a student of the Internet."
FREDERICK MORAN, JEFFERIES & COMPANY: I don't think Terry Semel has the magic to solve the problems of the dot-com advertising bust. He clearly has the ability to harness content and drive viewership, which he did very successfully at Warner Brothers.
YOUNG: Semel's compensation largely will be in shares of a stock now a shadow of its former self.
His longtime studio partner, Bob Daley, told MONEYLINE Semel didn't join the senior ranks of so-called "Yahoos" to engineer the sale of the company. That could be why the stock took a small hit on news of Semel's hiring.
The chief Yahoo!, co-founder Jerry Yang, said Semel was the only one offered the job. Some are wondering if he'll hit a cultural speed bump considering his history of giving and getting lavish Hollywood- sized perks?
PAUL NOGLOWS, J.P. MORGAN CHASE: I don't think you are going to find the Yahoo! corporate jet. You are not going to find the corporate yacht. It's not focused that way, but I would think a proven manager like Terry Semel should be able to make the transition.
YOUNG: After all, the movie mogul could always hail the Yahoo! taxi.
(on camera): Former CEO Tim Koogle had been expected to remain Yahoo!'s chairman. But he becomes vice chairman, and after August, he'll only be a member of the board. Koogle said that's so it will be clear that Semel's in charge.
Steve Young, CNN Financial News, New York.
(END VIDEOTAPE)
BAY: Yahoo!'s stock ended up getting no bounce from the CEO shuffle, closing down fractionally. Clearly, it needs more than just a bounce, and this chart shows the challenge Semel is facing: at the beginning of 2000, Yahoo! was a $200 stock. Now, it's in the teens.
Coming up in the next half-hour of MONEYLINE: he was there when the boon began. What does one of the founders of Netscape say now about the future of the Internet. We'll talk to Marc Andreessen.
And one household name thriving in the slowing economy: Fannie Mae profits on the rise. We'll go over the numbers with CEO Franklin Raines.
Plus, a special report on the corporate consequences of California's power crunch.
(COMMERCIAL BREAK)
ANNOUNCER: MONEYLINE continues. Here again, Willow Bay.
BAY: In tonight's headlines, Intel's profits slump a whopping 64 percent in the latest quarter. But the chip-maker says the second half of the year looks to be, quote, "seasonally strong."
Also a difficult quarter for its competitor, Texas Instruments, posting a 45 percent drop in earnings. The company plans to cut 6 percent of its work force, saying the industry is in, quote, "one of its sharpest deceleration."
And businesses in California are gearing up for major blackouts this summer. We'll take a look at how the state plans to cope.
For those of you just joining us, a quick check on the markets. Wall Street pushed higher today, gaining ground on the strength of some blue chip profit reports. The Dow slipped early on, but soon rebounded to finish 58 points higher to 10216.
Checking the main movers, IBM gained almost 3. Johnson & Johnson and Philip Morris both gained after beating street forecasts. But Caterpillar slipped after missing forecasts, and Eastman Kodak was off after warning of future weakness.
The Nasdaq, despite last night's warning from tech bellwether Cisco, also ended in the plus column, gaining 13 points to 1923. In the broader market, the S&P 500 gained just under 12 points. And turning to after-hours activity, Intel and Texas Instruments both are higher as investors bet that this is the bottom for these chip-makers.
As quarterly results continue to flood Wall Street, the practice of companies reporting pro forma earnings results is becoming more common. But many Wall Street watchdogs say the practice is deceptive.
Greg Clarkin takes a look.
(BEGIN VIDEOTAPE)
GREG CLARKIN, CNN CORRESPONDENT (voice-over): When Yahoo! reported earnings last week, it was lauded for slightly topping estimates. But Wall Street watchdogs say the earnings figures Yahoo! used are deceiving. Like hundreds of other companies, Yahoo! reports earnings on a pro forma basis, a widely criticized but popular practice. Pro forma allows companies to strip away expenses it says don't reflect operational strength. Critics say the companies are abusing the system.
ROBERT OLSTEIN, OLSTEIN FINANCIAL ALERT: Basically, they like to eliminate what they believe are nonrecurring charges or non-comparable charges, but it's getting worse and worse in terms of them just eliminating expenses that I believe are regular operating expenses.
CLARKIN: In Yahoo!'s case, there were eight items the company excluded. Include them, and Yahoo! lost $11.5 million. Strip them away, and Yahoo! had profits of more than $7 million. Yahoo! executives defended the company's reporting style.
TIM KOOGLE, FORMER, CEO, YAHOO!: We report both, as you know, pro forma and gap earnings, and on the pro forma basis, there's a number of items, many of which are nonoperational and non-cash related, and we believe that it's really to give investors both views, so that, in fact, they get a sense for what the real cash operating performance of the company is.
CLARKIN: Even the chief accountant of the Securities and Exchange Commission weighed in, labeling some earnings releases EBS, or everything but bad stuff releases. Many believe the Wall Street analysts who follow the companies need to be more aggressive.
CHUCK HILL, THOMPSON FINANCIAL/FIRST CALL: Whether it's that the analysts are going along with this, sort of in cahoots with the company, or whether they're just naive or not thinking about it, I don't know. But it certainly is a growing problem.
CLARKIN: But analysts say pro forma earnings are necessary.
LISA HAAS, WIT SOUNDVIEW: What the pro forma income statement allows us to do is first of all get a better assessment of the ongoing operations of a business. And also, it allows us to do comparables to prior periods.
CLARKIN: Pro forma supporters say investors really are not being shortchanged by the focus on pro forma earnings. They point out full earnings reports are readily available on dozens of financial Web sites.
Greg Clarkin, CNN Financial News, New York.
(END VIDEOTAPE)
BAY: Weak corporate profits, a slowing economy, but where is the Fed? Terry Keenan looks for some answers in tonight's "Behind the Numbers."
Terry, what have you discovered?
KEENAN: Well, Willow, it's April 17th, the daffodils are out, the trees are in bloom, and by all accounts, the Federal Reserve should have already delivered an inter-meeting cut in interest rates. At least, that's what most of the pundits and Wall Street economists predicted when the Fed failed to deliver a super-sized rate cut that the market wanted last month.
But a funny thing has happened in the way to that expected Fed easing. Several economic indicators, including today's report on industrial production, have come in modestly better than expected. Consumer sentiment numbers seem to have stabilized, and the stock market has been able to absorb some real earnings shockers, including that bombshell from Cisco last night.
That resilience is one reason that traders in Chicago are now betting that the Fed won't act until its next meeting in mid-May.
(BEGIN VIDEO CLIP)
JIM BIANCO, BIANCORESEARCH.COM: The stock market has been the thing that has been driving the perceptions of Fed policy. It has for months. It was very obvious last week when the market rallied we dashed all the hopes of meeting move, and since the stock market is driving Fed policy and the Fed rarely surprises the market, with transitory logic, it looks like the stock market is driving Fed policy. As much as they don't want to admit it, that is de facto is what's happening here.
(END VIDEO CLIP)
KEENAN: Well, Bianco says that he still expects that the Fed will cut rates by half a percentage point at the next meeting, but he adds there is now an outside point that Fed could pare rates by a paltry 25 basis points or a quarter of a percent. It's not likely, but the fact that it's even being discussed shows a big shift in sentiment over the last couple of weeks, and I guess we can thank the stock market for that -- Willow.
BAY: That's right, Terry, thanks.
Our next guest has been one of Wall Street's biggest bulls, and even this painful market downturn could not shake this man's long-term confidence, Tom Galvin. His aggressive targets illustrate his optimism. He is forecasting the S&P to reach 1520 by the end of the year, up 27 percent from its current level. He sees the Dow reaching 12000 and for the Nasdaq, he sees a gain of over 50 percent to 3000.
Tom Galvin of Credit Suisse First Boston joins us now. Tom, welcome back.
TOM GALVIN, CREDIT SUISSE FIRST BOSTON: Thanks, Willow.
BAY: My goodness, those are rosy forecasts.
GALVIN: To be honest with you, it's sort of a classic bear market recovery. Part of it is realizing the pain has largely been accomplished, I think, in the first half of this year, that the economy is strong. But by the end of this year, people will start discount 2002 earnings, and that will look considerable better than the pain we've seen.
BAY: Now, you have been optimistic for a very long time, and you've actually been wrong for a long time. So, why are so convinced now? Is it just that the time has come or do you have actual data that you're not pointing to?
GALVIN: Well, we've been wrong, certainly, for the last nine months. We were dead right for three out of the four years, and I think the keys to those successful years were recognizing that inflation is going to remain low, that the Fed is going to be on your side, and we're continuing to gain on the productivity path out there, and I think we're going through currently a cyclically depressed period for profits.
But I think ultimately, we can recover to 10 to 12 percent kind of earnings growth for the S&P, which in a low inflation world, I think, makes financial assets and stocks very attractive.
BAY: But that recovery is still a ways off.
GALVIN: Well, I think the most negative point is here in the first quarter. I think we'll probably see on balance maybe 3 percent growth for earnings this year, 10 to 12 percent next year. Just like a year ago, we had 23 percent earnings growth in the first quarter of 2000. That was unsustainable. I think that minus 8 or 10 percent here in the first quarter is also extreme on that pendulum.
BAY: Walk us through some of the things we've seen in the past couple of days. How positive a sign is it that the market was able to shrug off that Cisco news of yesterday?
GALVIN: It was definitely critical. I mean, investors and analysts, quite honestly, have been beaten into submission with all these earnings preannouncements. But where in the first four months of this year, when it appeared that we were in a plane out of control in a nose dive with no one at the controls, we have seen gradually over the past few days people taking control of their actions. Cisco writing that inventory probably puts a signature on the inventory correction right now. Mergers are starting to take place. AIG making a hostile offer for American General. The bank mergers announced just yesterday.
BAY: You think we're going to more -- you think we're going to see a pick up in activity?
GALVIN: I think we're going to see considerable activity in the next few months.
BAY: Who leads this recovery? Is it, at least in terms of tech, is it the folks who led the decline or is it some of the last to fall?
GALVIN: Well, I think you've got to realize we've often had rolling bull markets and bear markets simultaneously over the last couple of years, and sort of the non-tech world went into a bear market 2 1/2 years ago and they began to recover, and many of those stocks, frankly, in the past 12 months are actually up about 15 to 20 percent. It's the tech world that's been decimated and that will be a very selective process on the recovery round.
But my guess is between now and year end, I think it's going to be technology, financials and I'd also say health care. While it's not a cyclical play, it really has lost ground considerably this year, and I think you're going to see substantial positive news over the next month and a half or so.
BAY: So technology, financials and health care -- investors should look to those to lead the way?
GALVIN: You have to move from being defensive to being aggressive because that's where the big payoff is going to be.
BAY: All right, Tom Galvin, I'm sure investors, your optimism...
GALVIN: Thank you.
BAY: Coming up on MONEYLINE, as summer fast approaches, companies in California are facing a grim power situation, and the temptations to leave.
And we'll talk to one of the pioneers of the Internet, Marc Andreessen, on the dot-com future and his own.
MONEYLINE will be back.
(COMMERCIAL BREAK)
BAY: Our next guest was once an icon of the Internet age who is now sharing in the Web's hard times. Mark Andreessen, a founder of Netscape, took his latest venture, Loudcloud, public last month. And unlike Netscape's trading debut, Loudcloud has met a decidedly colder audience. The stock made its debut on March 9th at $6, but has failed to generate any serious momentum, closing today at 5.25.
We're now joined by the chairman on Loudcloud, Marc Andreessen. Marc, welcome.
MARK ANDREESSEN, CO-FOUNDER & CHAIRMAN, LOUDCLOUD: Thank you. BAY: "Business Week" hailed your IPO as the end of the dot-com boom. Is it?
ANDREESSEN: I don't think so. I mean, we treat it as a stand- alone event. We're running our company. We don't really care that much what other companies are doing, and we're not a dot-com. So we're pretty happy with what happened in the IPO, actually.
BAY: You postponed your IPO, and then finally went through with it. Why did you decide, given the climate, how difficult it is, to go ahead with your IPO, and are you sorry you did?
ANDREESSEN: Sure. Not at all. We're very, very happy. We put $162 million, net, in the bank, in a very, very difficult fund-raising environment. And that got us to the point where we're fully funded. And it made a lot of sense for us to do that.
BAY: How difficult? You described it as being -- this IPO's, like, going through a war zone. What was it like?
ANDREESSEN: Oh, yeah. Well, I mean, the people we meet with, you know, we'd go talk to them and they'd be -- they would be very, very upset because in general they've gotten hammered on a lot in the last 12 months, anywhere they've been investing in technology. So in general, there's a high level of skepticism.
But we went out, we made our case. We told our story, we talked about our customers, and we got it done.
BAY: Quite a different -- dramatically different environment from the Netscape era.
ANDREESSEN: Yeah, pros and cons. The pro is, in this case, they're actually paying attention to us as a company. In the dot-com era people were using these stocks as trading vehicles, and so they weren't really paying attention to the businesses, which is why they (UNINTELLIGIBLE).
BAY: And I hate to be skeptical, but were they paying attention to you as a company, or was it the marquee value of your name attached to the company?
ANDREESSEN: At this point, marquee value at $3.50 will get you a cup of coffee at Starbucks, so...
(LAUGHTER)
ANDREESSEN: It doesn't count for anything at this point. They were paying a lot of attention, asking very detailed questions.
BAY: In this kind of environment, how fast do you to have to move to generate revenues and profits?
ANDREESSEN: Yeah, it's very difficult, and customers are taking a very, very pragmatic look at what they're doing with their spending. But we save our customers money, so Ford and News Corp and Fannie Mae, the blockbuster in the companies -- they use us because we save them money. So we directly address one of their huge pain points.
BAY: Now, it's interesting. The companies that you just mentioned are what we'd call "old economy" companies. But some of your companies are Internet startups. What's the percentage, and are you watching those companies fall by the wayside?
ANDREESSEN: Sure. Some of those are having very. very difficult times, and we've incorporated a pretty aggressive set of churn assumptions into our model.
Now, others are doing well, but in general, our overwhelming focus is on very large customers, as you'd expect in times like these. We've had, like I said, huge success with companies like Ford and News Corporation recently, so...
BAY: Looking at the new economy, at the Internet economy, give us a sense of what survives. Will it require a different business model to survive in the future?
ANDREESSEN: Oh, sure. First of all, it's going to require a huge amount of staying power, so do you even have the cash in the bank?
BAY: Do you?
ANDREESSEN: We do now, yeah. We have over $220 million of cash in the bank. We feel very good about that. We're running the business based on that.
In general, it requires huge customer loyalty and in general, it requires customers who are actually willing to pay you money for your services. And it's just gotten harder. There just aren't more of those around for most companies out there.
In our case, we feel very good about our ability to go generate that business, and we've been pretty successful so far, so we'll keep at it.
BAY: And, Marc Andreessen, we wish you the best of luck.
ANDREESSEN: Thank you.
BAY: Thanks for joining us.
Straight ahead on MONEYLINE: Fannie Mae, the company churning out big profits on home mortgages. I'll talk to CEO Franklin Raines next.
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BAY: Financial services: that is in our "Sector Report" tonight. Profit reports are flowing in from the sector, and today giants like Bank One and FleetBoston followed the trend among financials this earning season by posting lower profits from a year ago.
But Fannie Mae today bucked the trend. Profits at the mortgage financing firm jumped nearly 17 percent, and sales surged 20 percent to over $2 billion. The stock gained more than 2 on the news, and it's up almost 30 percent over the past year.
Joining us now, CEO, Franklin Raines.
Frank, welcome to MONEYLINE.
FRANKLIN RAINES, CEO, FANNIE MAE: Thank you.
BAY: You buy home loans from lenders. Is it fair to say that your business is booming right now?
RAINES: Our business is booming. As you mentioned, our revenue is up. Our costs are rising about half the rate as our revenue, and we're booming because housing's booming America. It's about 23 percent of the economy, and housing's doing very well.
BAY: You've said that you would like to double your earnings per share in five years, that time period ending in 2003. Are you on track to do that?
RAINES: We're ahead of track. The first year -- we need to grow at about 14.9 percent a year to do that. The first year we -- we grew over 15 percent, the second year, over 15 percent, and we're on track this year to exceed that number as well. So we're in very good shape against what, in 1999, looked like a very daunting goal. We look to be right on track.
BAY: Now, the notes that accompany President Bush's budget say you could face challenges to sustaining your high rates of profit growth. What is the OMB so worried about, and what kind of challenges are you facing?
RAINES: Well, as you know, I used to be a director of OMB. And the honest truth is I don't know what they're talking about. I've rarely seen the government try to do profit forecasts for a company. Housing is going to be growing. It's grown every year since the Fed began to keep track of these numbers, back in the early 1950s. And Mortgage Outstanding is growing, and we expect it to continue to grow, because we're going to see increasing formations of households in the United States as our population continues to rise.
In 2050, the United States will be the only developed country among the largest countries in the world. We're still growing while other developed countries are seeing their population growth stagnate. So that's a wonderful time to be in the housing business. And financing the kind of mortgages that Americans love, long-term fixed- rate mortgages, puts us in a wonderful position.
BAY: Fannie Mae has become the source of a great deal of controversy, from Wall Street to Washington. Why is Fannie Mae facing such hostility from the banking industry and, frankly, from Washington?
RAINES: Well, actually, we've got tremendous support in Washington, on both sides of the aisle, for which we're very grateful, because they recognize how we are fulfilling the mission tat we've been given. And also, we have tremendous support among our customers. Remember, we don't originate mortgages, so the only way we have any business is if banks and mortgage banks and credit unions and thrifts sell us the loans voluntarily.
But there are some large institutions who have been saying things about us that -- they wish we didn't exist.
BAY: The criticism is very pointed. They say things like you bully -- you bully your competitors. Is that the case? Have you threatened to take away business from other banking institutions if they oppose you?
RAINES: No, we haven't. Indeed, each of the people who said that they've been bullied or threatened is actually doing more business with us today than when they formed an association, that we call the Coalition for Higher Mortgage Costs, to oppose us.
Just imagine. Do you think of Jack Welch or Hank Greenberg being bullied by anybody? That's the accusation. I think anyone really finds it very plausible. But it is an effort to do in Washington what people have been unable to do in the marketplace, which is how can you compete if you're not offering the best product? Well, you try to get the regulators to raise the cost of the other guy to make it easier to compete.
BAY: Franklin Raines from Fannie Mae. Thanks for joining us. Interesting times in your business.
RAINES: Thank you.
BAY: Coming up on MONEYLINE: Manufacturing could take a hit in California this summer, if rolling blackouts plague the state. How will companies cope? How long will they stay? We take a look when MONEYLINE continues.
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BAY: Tomorrow on MONEYLINE: could a summer heat wave bring a blackout to the Big Apple. New York scrambles to avoid a California style power crunch. Can it happen here? That's tomorrow on MONEYLINE.
A bit of positive news today on the California power crunch. Californians reduced their electricity usage by more than 9 percent last month. But the state's power problems are far from over. Blackouts are expected this summer, and several states are attempting to use that threat to lure companies away from the West Coast. Casey Wian has the story.
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CASEY WIAN, CNN CORRESPONDENT (voice-over): Fabric and craft retailer Jo-Ann Stores this month opened a new center in central California. Plans for the massive facility were made before the state's power crises. Now it's too late to turn back. From battery-powered fork lifts to conveyer belts and computers, virtually the entire facility runs on electricity, connected by 118 miles of electrical wires.
BRUCE NICOTERO, JO-ANN STORES: There has not been any immediate impact at this point, in terms we have not had any outages here. But we do have concerns about summer coming, and the shortage of available electricity this summer. We're looking at the possibility of maybe purchasing or leasing a generator as a stand-by system in the event that we do have blackouts..
WIAN: Blackouts seem inevitable. California's power grid operator predicts 34 days of rolling blackouts this summer. Now, perhaps the toughest job in California belongs to these people, local economic development officials responsible for attracting new businesses and keeping established ones.
BARRY SEDLIK, CALIFORNIA ASSOCIATION FOR LOCAL ECONOMIC DEVELOPMENT: The state is facing for the first time in a decade the prospects of industry shutdown and migration from an out-of-control energy system.
PAUL SALDANA, TULARE ECONOMIC DEVELOPMENT CORPORATION: I think it certainly had an impact on our attraction efforts to some degree. I think people are hesitant about making decisions without having a full sense of what the cost and the reliability are.
WIAN: At a recent annual meeting, local economic developers heard a grim warning from one of the state's most important companies.
RICH HALL, INTEL: If we end up having to send thousands of people home several day in a row, our senior management's tolerance for that is going to run out very, very quickly. One summer, we will put up with that. I would not place bets on how many Intel employees will be here in the summer 2002 if we are faced with the same situation.
WIAN: Butler Manufacturing spends $250,000 on electricity. It is anticipating a 30-percent hike, and leasing a generator to get through blackouts. Despite those added costs, the company plans to stay, because it expects California's power crises to ease within a year or two.
GREG STOLZE, BUTLER MANUFACTURING: It takes a fair amount of time to move a manufacturing facility. I would think by the time we would get our facility moved, the cost differentials will largely be gone, and the cost of the move would be unjustifiable.
WIAN: Still, other states are trying to capitalize on California's problems. For example, Tennessee has sent flashlights to California businesses with the message: "The lights are on there."
California officials say those efforts have had little impact so far.
LEE HARRINGTON, LOS ANGELES ECONOMIC DEVELOPMENT CORPORATION: There are plenty of other businesses looking for opportunities in L.A. right now. We seem to grow them faster than anyone can pick them off.
WIAN: California is banking on its strengths: a diverse economy, a huge consumer market and access to the Pacific Rim to get through the crisis, and it's savoring every victory, such as this corrugated box factory Washington-based warehouser announced it's building only a week after California's most recent rolling blackouts.
(on camera): California may have a shortage of electric power, but manpower remains plentiful. That labor force is one of reason many companies continue to expand here despite the energy crisis.
Casey Wian, CNN Financial News, Visalia, California.
(END VIDEOTAPE)
BAY: And tomorrow night, we'll turn from California to New York, as the Big Apple scrambles to avoid a power crunch of its own this summer. That's on MONEYLINE tomorrow.
Up next: "Ahead of the Curve," what you need to know tonight before those markets open tomorrow.
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BAY: Taking a look at what could move the markets tomorrow. Keep an eye on Intel. After today's closing bell, the company lowered estimates by a penny. Expect more earnings tomorrow from heavy hitters like IBM, Apple Computer, AOL/Time Warner, J.P. Morgan Chase and General Motors.
Plus, Advanced Micro Devices, several airlines report, including UAL and AMR, as well as Pfeizer and Gillette.
And on the economic front, watch for the trade gap to narrow for March.
That is MONEYLINE for this Tuesday. I'm Willow Way. Good night from New York. "CROSSFIRE" is next.
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