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Lou Dobbs Moneyline
Dow Falls 47.62 to 10,532.23; Nasdaq Tumbles 104.09 to 2,059.32; Bush Administration to Defer Sale of Advanced Destroyers to Taiwan
Aired April 23, 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: A triple-digit tumble for the Nasdaq: Is the high-tech comeback already running out of steam?
The Nasdaq plunges nearly 5 percent after an unprecedented two- week run-up. Did battered tech stocks go too far, too fast?
In Washington, a crucial decision sure to test already damaged relations with China. What arms will the U.S. sell to Taiwan?
And, His Airness, out to reclaim his kingdom? What the return of Michael Jordan would mean for the business of basketball.
ANNOUNCER: This is MONEYLINE.
BAY: Good evening, everyone, and welcome to MONEYLINE. It was a busy day from Wall Street to Washington. Tonight, we have complete coverage of the sell-off in stocks, and, of course, of a major decision tonight from the White House. Allan Chernoff and Terry Keenan are both standing by, and so is our senior White House correspondent John King.
And that's where we begin, with a major policy move for the Bush administration: arms sales to Taiwan. It's an extremely delicate issue with widespread implications for U.S. relations with China, made more significant this year because it comes just weeks after the spy plane standoff escalated tensions between the two nations, and tonight's decision has corporate America watching very closely.
John King is standing by with the latest. John, what can you tell us?
JOHN KING, CNN SENIOR WHITE HOUSE CORRESPONDENT: Willow, new details tonight from senior administration officials and while the White House is saying no direct connection between recent tensions with China, including the EP-3 surveillance plane, this decision certainly, as you noted, will affect the overall tenor of U.S.-China relations.
Now, the president, CNN is told, has deferred for now -- he's saying no for now -- to Taiwan's request for four state-of-the-art Arleigh Burke destroyers with the Aegis radar system. The president instead approving the sale of four Kidd-class destroyers. Those are 1970s vintage destroyers, although they will be upgraded, we are told, with a relatively modern radar system.
The president also approving the sale of eight diesel submarines to Taiwan as well as 12 P-3 Orion aircraft. Those are surveillance planes that fly over water and can detect submarines in the waters below. A long list of additional weapons program being made to the Taiwan government. A Taiwanese delegation will be briefed at the Pentagon tomorrow morning, and get back to the United States in the weeks ahead with exactly what the U.S. will purchase.
Already some conservative rumblings on Capitol Hill. They say they will agree with president's decision to say no to the Aegis system for now, but they want the administration to make clear that if China continues its missile build-up, 300 missiles now aimed for mainland China toward the island of Taiwan, that if that build-up continues that the administration will indeed down the road look favorably on the Aegis system and a senior White House official telling CNN just moments ago, China has nothing to fear in the current package, but that the president certainly would revisit the issue if the security situation doesn't change for the better. The context there being if China continues to add missiles, the president, down the road, might look more favorably on the request for the Aegis, ship-based radar system -- Willow.
BAY: Now John, you just said that the White House said China has nothing to fear from this package, but what is the likely reaction from China? No Aegis destroyers, as you mentioned, but were there other controversial items that were included?
KING: Well, certainly, China has made clear the Aegis would have been the egregious step for the United States in the view of China. But China has also characterized submarines as offensive weapons, and said that the United States cannot provide those to Taiwan under the Taiwan Relations Act.
What the administration is saying, in deciding that it will help Taiwan purchase as many eight diesel-powered submarines, is that according to a Pentagon analysis, Taiwan would need those in the event of a Chinese naval blockade of Taiwan. The submarines and there's some other technology in there the administration making available to Taiwan, some of the most sophisticated U.S. anti-missile technology. Those things will be objected to by Beijing, no doubt.
BAY: John King, thank you for all the latest developments on the that story.
The White House decision comes at a time of major change in how Americans view China in the aftermath of the spy plane incident. This according to a new CNN/"USA Today"/Gallup poll. In a survey conducted over the weekend, nearly half of those surveyed think of China as unfriendly, and another quarter view China as an enemy.
Now, that is a huge increase from last year. Sixty-nine percent now look at China in more threatening terms; that's up from 43 percent in 2000. Today, just 27 percent think of China as an ally. But the incident may not change American spending habits. A majority said they would not be less likely to buy products made in China. Not much buying on Wall Street today. The Nasdaq composite suffering through a painful relapse. The index plunged nearly 5 percent, its second session in the red. Let's go to Allan Chernoff at the Nasdaq market site -- Allan.
ALLAN CHERNOFF, CNN CORRESPONDENT: Willow, let's put today's decline into perspective. It comes after big gains last week in response to the Federal Reserve's interest rate cuts, and consider, the Nasdaq composite is still up more than 400 points from its low hit earlier this month. That's 27 percent. So, traders said it was time for some give-back.
(BEGIN VIDEOTAPE)
CHERNOFF (voice-over): Traders say the Nasdaq was due to return some of its gains after an explosive rally in the past two weeks. In Wall Street terms, Nasdaq stocks had become overbought.
NICK ANGELITA, SALOMON SMITH BARNEY: There are a lot of people taking some profits here. The market rallied probably a little faster than some people anticipated. So, you see some profit taking, which is probably a normal event in this market.
CHERNOFF: The market was particularly sensitive to negative analyst comments. Merrill Lynch downgraded Intel, Applied Micro Circuits, PMC-Sierra and Vitesse Semiconductor, arguing company financials will continue deteriorating and the stocks could lose 40 percent by the time business bottoms out. Software-maker Oracle fell $2.60, that's 13 percent, on a Lehman Brothers downgrade.
Bank of America also recommended that investors slightly reduce their exposure to stocks. But some of the most prominent brokerage firm strategists telling investors to buy. Even Jeffrey Applegate of Lehman Brothers, who says the economy may be in recession.
JEFFREY APPLEGATE, LEHMAN BROTHERS: Typically, the stock market will bottom out in the recession. It doesn't wait for the recovery, basically, it begins to recover before the real economy and before profits recover.
CHERNOFF: Other bullish gurus encouraging clients today include Christine Callies of Merrill Lynch, argue a cyclical bull market is developing in the S&P 500; CS-First Boston's Tom Galvin advising cyclicals and tech are the biggest winners; and Ed Kerschner of UBS Warburg, asking the question, can we continue straight higher? Yes.
(END VIDEOTAPE)
CHERNOFF: Keep in mind, many of those gurus had been telling investors to buy stocks for months, even when the market was sinking. So after today's give-back, these gurus are still hoping for some payback later in the year -- Willow.
BAY: As are investors, Allan Chernoff, thanks.
Let's take a quick look at the closing numbers on Wall Street. The Dow did not emerged unscathed in today's high-tech sell-off, losing 47 points to close at 10532. Volume on the Big Board, about one billion shares traded. The Nasdaq plunged 104 points. As we've said, that was nearly 5 percent. It closed at 2059. Volume there over 1.8 billion shares. And the S&P lost 18, closing at 1224.
Terry Keenan joins us now from the New York Stock Exchange. So Terry, investors today were clearly having some second thoughts about the tech rally, right?
TERRY KEENAN, CNN CORRESPONDENT: They certainly were, Willow, and it impacted not just the Nasdaq, but the Dow. Forty of the 47 points that they Dow lost came from the four Dow tech components, all sharply lower. As Allan mentioned, strategists are bullish; individual analyst are not as bullish. As Allan mentioned, Merrill downgrading Intel.
That was a big drag on the Dow today, and it's a real change from the bullish sentiment about the chip stocks that we've seen in the last couple of weeks. You might remember, two weeks ago, Salomon Smith Barney turned bullish on the sector. Today, Merrill Lynch says it will be at least another quarter until the chip stocks see a bottom -- Willow.
BAY: At least another quarter, but Terry, let's start with tomorrow. What are traders going to be looking for?
KEENAN: Tomorrow's an important day because was get the consumer confidence numbers for April. This is probably the bellwether that the markets and economists are looking at, since consumer spending accounts for about two-thirds of economic growth. It seems that the consumer has been doing more than its fair share of keeping this economy above water.
The consumer confidence numbers have held up fairly well in the last month or so after a big plunge earlier in the year. We'll see what they do come tomorrow morning at 10:00 a.m.
BAY: All right, Terry, we'll check back in with you in the next half-hour. Thanks.
Helping keep the Dow losses in check today, strong gains from 3M, which reported earnings in-line with Wall Street estimates. Sales were actually up compared to last year, though not by much. The company also announced plans to cut 5,000 jobs, about 7 percent of its global work force.
3M's reduction is just the latest in a parade of blue chip layoffs. Last week, Nortel announced it plans to cut another 5,000 jobs on top of 15,000 already planned. Ericsson and Motorola have also recently upped their layoff totals to over 20,000. Cisco and Honeywell have plans to slash over 5,000 jobs each.
But it's news Wall Street likes to hear. Today, 3M shares gained nearly $4 to close at more than $116.
Next on MONEYLINE, a dismal quarter for Compaq Computer, and the next quarter may be just a challenging. We'll get the low down.
But Exxon Mobil enjoys a blow out quarter just as gas guzzlers face sticker shock at the pump.
And fans are rooting for a Michael Jordan comeback, but would it be a slam dunk for the NBA? Some actually say no.
(COMMERCIAL BREAK)
BAY: After the bell tonight, a less than stellar report from Compaq Computer. The PC giant fell short of lowered expectations, earning 12 cents a share when you take out special items. Revenue was down about 3 percent. Net income, which includes one time items, plunged 70 percent.
Taking a look at after hours action, Compaq shares were off $1.15. Bruce Francis has been crunching the numbers since they were released and he joins us now with what he's found -- Bruce.
BRUCE FRANCIS, CNN CORRESPONDENT: Willow, thanks. A disappointing number from Compaq was in line with the low end of its guidance issued last month of earnings per share, but Compaq made it clear tonight it is not lowering those expectation.
For the first quarter, big jumps in sales in Japan and the Asia- Pacific region offset a whopping 17 percent drop in North American sales. In fact, 61 percent of Compaq's revenues now come from international sales. CEO Michael Capellas calls the current quarter, the Q2, challenging, and that's an understatement.
For the second quarter, Compaq says that earnings per share will plummet to five cents a share. Analysts had been predicting 17 cents, according to first call. That's because a massive drive to reduce inventory now in stores and distributors will keep revenues flat. Compaq is now cutting another 2000 jobs, bringing the total to 7,000 as it consolidates some facilities, particularly in the PC business.
Just about everybody else and just like them, Capellas says that visibility remains quite limited. But he doesn't think it will be a hockey stick recovery for Compaq. A big problem for Compaq: it's PC business lost $82 million in the quarter, the biggest drag coming to consumers, who sharply pulled back their purchases in Q1 -- Willow
BAY: All right, Bruce, a grim report today. Thanks.
Just how challenging will the PC business be going forward? We'll get the inside look from Compaq CEO Michael Capellas in our next half hour.
Now, the latest salvo in the ongoing chip wars. Intel today introduced its fastest microprocessor yet at a bargain basement price designed to jolt the competition. But analysts say the market leader is just sparking a price war in which the only sure winner will be its customers. Steve Young reports.
(BEGIN VIDEOTAPE) STEVE YOUNG, CNN CORRESPONDENT (voice-over): Intel has always used pricing as a weapon, but now it is introducing its fastest microprocessor at one-third the price of some earlier speed demons, the steepest cut yet. Pentium IV can blaze through 1.7 billion calculations a second, yet it costs just $350 compared with $1,000 for previous high-end chips.
Intel touched off the price war because PC sales slowed for the first time ever in the first quarter of the year, and its competitor, Advanced Micro Devices, gained a few points of market share.
CHRISTOPHER CHANEY, A.G. EDWARDS: Intel does not want to see AMD gain any more market share first of all, and second of all, I think that Intel, being about 80 percent of all chips for PC's sold in the United States or abroad, has to stimulate worldwide PC sales somehow.
YOUNG: Analysts say while cratering prices are great for consumers, investors will feel some pain.
DAN NILES, LEHMAN BROTHERS: Last week, Intel, we all had to cut our numbers across the board for Intel based on profits, and honestly, it wouldn't surprise me if we have to cut our numbers again on Intel before this year is said and done, so it's going to hurt profitability across the industry for those two.
YOUNG: Some experts believe if chip companies try to ratchet up prices down the road, consumers will revolt.
DREW PECK, SG COWEN: Users are never going to be willing to pay $600 or $700 for a microprocessor. It will be considered highway robbery, which in fact some might argue it was. But in the future, you will see prices just steadily going down, and I think the average will be (UNINTELLIGIBLE) $50 to $100.
YOUNG: In the best of times, Intel was able to squeeze out profit margins as high as 80 percent or 90 percent. Because of high manufacturing costs, analysts say the profit on Pentium IV chips will be about 40 percent and Intel's overall profitability will be in the 55 percent to 60 percent range. That's down to be sure, but in most other industries, that wouldn't be bad.
Steve Young, CNN financial news, New York.
(END VIDEOTAPE)
BAY: The war between Intel and AMD played out today on Wall Street as well. And it looks like AMD won, but it was a bit of a hollow victory. Intel's stock fell: more than 2 or more than 6 percent, while AMD lost nearly 1 1/2 or nearly 5 percent.
In tonight's tech watch: the Nasdaq's direction. The index has posted some impressive gains over the past month, rising as much as 33 percent from its low. But we've seen two straight losing sessions, including today's nearly 5 percent drop. For some insight on where we are headed, we're joined from Detroit by Paul Cook, portfolio manager, at Munder Capital Management. Paul, welcome.
PAUL COOK, MUNDER CAPITAL MANAGEMENT: Good evening.
BAY: We clearly have a pullback in our hands, but at this point, looking ahead, do you think the run-up will continue?
COOK: I think the technology sector of the market has fallen precipitously and I think it's due for a sustained rally. We had a Fed rate cut as you recall last week, and that led investors to higher multiple stocks and I think they'll continue to move toward higher multiple stocks and we kind of anniversary some of the tremendous numbers the technology stocks had posted last year.
BAY: What happened in terms what we saw on the Nasdaq, up 33 percent or so, in ten trading days? Too far, too fast or does it indicate to you there's some froth left in this market that still needs to be rung out?
COOK: Well, this market is showing us that it's volatile both up and down. If you look at the last year, instead of just trend lining the last two weeks, the last year has been very difficult for technology investors. I think they've become a bit oversold, as a matter of fact, significantly sold. Investors are starting to look at technology stocks, as these stocks will tend to lead us out of what's been a short-term recessionary environment.
BAY: So, at this point, how are you looking at the market? Are you considering it a buying opportunity or are you considering it a wait and see moment?
COOK: Absolutely, I think it's a buying opportunity. I don't think it's prudent to try to bottom fish this market. If you try to do that, then you'll likely to be standing on the side of the road, as opposed to participating in what could be a sustained rally. So, we think these levels are attractive and have been attractive for some time. I think investors should take a look at these levels and add to their portfolios, technology stocks.
BAY: So, even though you yourself seen your own funds drop 28 percent, you're out there buying more?
COOK: Indeed. We're focusing the fund on companies that we know to be long-term survivors and companies that can sustain profitability for a very long run. We think...
BAY: For example?
COOK: I think this market shakes some companies out. You look at what happened with Dell taking market share and Compaq giving it up. I think there will be significant changes in technology companies, and there will be significant winners and losers. I think the Dell-Compaq story kind of paints that out for us.
BAY: Paul Cook, thanks for your perspective on this tonight.
COOK: Sure; thank you.
BAY: Just ahead: an oil powerhouse strikes it rich in the latest quarter, we'll check out the bottom line at ExxonMobil. That report comes as there's a record spike in gasoline prices at the pump. We'll tell you why drivers should brace for ever higher prices this summer.
(COMMERCIAL BREAK)
BAY: A blowout quarter. It's the kind of phrase that seems to have been banished during this brutal earnings season. But there is no other way to describe ExxonMobil's results. The company pulling in sales of nearly half a million dollars a minute during the first three months of the year.
The company earned a $1.44 a share, blowing past expectations, on colossal profits of more than $5 billion.
Helping results: higher natural gas prices and better refining margins. The stock gained nearly 3 on a down day in the market. It is up nearly 20 percent from its 52-week low.
One factor helping ExxonMobil, strong demand for gasoline, which has sent prices soaring. And over the past few weeks, drivers around the nation have been facing sticker shock at the gas pump.
Casey Wian looks at what has been driving prices higher and why it may not get better as summer driving season begins.
(BEGIN VIDEOTAPE)
CASEY WIAN, CNN CORRESPONDENT (voice-over): It's the biggest biweekly jump in gasoline prices in the 50-year history of the Lundberg Survey. The average national price at the pump spiked almost 13 cents a gallon, not adjusted for inflation, during the past two weeks to $1.67 for all grades.
But in many places, such as Chicago and San Francisco, prices are already over $2 a gallon, leaving motorists wondering what to do next.
UNIDENTIFIED FEMALE: I don't know. I've got to talk to my boss about a raise, I guess.
UNIDENTIFIED MALE: We've got to start catching the bus now, you know, for that price.
WIAN: Especially hard-hit, SUV owners.
UNIDENTIFIED FEMALE: I think the thing that I've done the most is try to take the train downtown more and try not to drive this car as much, unless I really need to.
WIAN: Gas station inflation is quickly taking a toll on the economy. From taxi drivers working overtime...
UNIDENTIFIED MALE: We have to work extra or else we have to leave this job and search for any other. WIAN: ... to this company with a fleet of vehicles that makes service calls on technical equipment. It's passing costs onto customers.
UNIDENTIFIED MALE: We've instituted a $3-per-visit fuel surcharge for our customers, which some of them don't feel too good about.
WIAN: Several forces are pushing prices higher. One dates back to last winter, when refineries produced as much heating oil as they could to avoid a shortage. That delayed their seasonal shift to gasoline production. Also, the additive MTBE, used to make gas burner cleaner and more efficiently, has shot up in price because it's made with natural gas, which is also at record levels.
Finally, Americans still love their cars.
PHIL FLYNN, ALARON TRADING: This economic slowdown that we've been talking about really hasn't hit the consumer on the road. Consumers are driving like crazy. In fact, gasoline demand actually jumped like 3 percent in the month of March, which is kind of unusual for this time of year.
You don't think of the summer driving season really starting toward Memorial Day.
WIAN: Analysts expect even higher prices once the summer driving season starts, and the U.S. Energy Department warns that anymore bottlenecks at refineries or pipelines could cause gas prices to skyrocket.
(END VIDEOTAPE)
WIAN: Perhaps the only people happy about rising gas prices are oil company shareholders. As you mentioned, Willow, ExxonMobil today began what's expected to be a string of record profit reports from big oil companies.
BAY: All right, let's get back to those rising gas prices. How much higher are they expected to go?
WIAN: Well, no one knows for certain, but a lot of people are predicting as high as $3 a gallon in particularly hard-hit places, like the Midwest.
BAY: That would be tough. Casey Wian, thanks.
Coming up, will Rupert Murdoch be able to win a hot satellite property? Stay with us.
(COMMERCIAL BREAK)
BAY: Coming up, Michael Capellas, chairman and CEO of Compaq Computer. They are out with earnings tonight, and he will join us in just a bit.
(COMMERCIAL BREAK)
BAY: One of the most powerful names in media, Rupert Murdoch, in Detroit today, meeting with General Motors in another bid to win control of GM's hottest property: Hughes Electronics.
Greg Clarkin has more -- Greg.
GREG CLARKIN, CNN CORRESPONDENT: And Willow, this was billed as something of a last-ditch effort, a chance for Rupert Murdoch of News Corp to make his best offer for Hughes Electronics in person to General Motors executives. Now, Hughes is the No. 1 satellite broadcaster in the U.S. It's owned by GM and Murdoch has been after if for months.
Now, Murdoch was scheduled to be joined today by Steve Ballmer, CEO of Microsoft. They are a potential partner in the deal. And Murdoch and GM were close to a deal about two months ago, but it stalled, that after Hughes CEO Michael Smith and some shareholders objected, saying it offered no premium.
Now, sources say today's sales pitch was not expected to include any surprises, but would stress the synergies of combining Hughes' DirecTV in the U.S. with Murdoch's satellite operations around the world. And that is a fit that many analysts believe makes a lot of sense.
(BEGIN VIDEO CLIP)
CHRIS DIXON, UBS WARBURG: The reality is that Mr. Murdoch is the natural media partner. Our focus has been that Hughes has got much too expensive costs, of acquisition costs for buying subscribers. They need to align with a media partner. There are not others -- a lot of others out there who would like to align with Hughes.
So clearly, this would be the path of least resistance.
(END VIDEOTAPE)
CLARKIN: Now, with the two sides stalemated over the last few weeks, at least, GM has been exploring other options for Hughes. And those include a spinoff, which would give GM the cash infusion it wants. And then there is the possibility that GM may just choose to do nothing at the moment.
Now, either way, analysts expect GM will make some decision on the fate of Hughes within the next few weeks, and possibly by next Tuesday. That's when their board meets -- Willow.
BAY: Greg, in the meantime, we will stay tuned. Greg Clarkin, thanks.
Checking today's stock movement, Hughes Electronics up fractionally today, but for such a hot property the stock has not done so well over the past year.
Coming up in the next half hour of MONEYLINE, a new challenge for a hard-hit tech firm. We'll check out why investors have filed suit against Cisco. Plus, the talk that has basketball fans holding their breath. Stay with us.
(COMMERCIAL BREAK)
BAY: In tonight's headlines: President George W. Bush has approved the sale of four destroyers to Taiwan, but decides against offering the advanced Aegis radar system for now, something China views as a serious threat.
And a pullback in tech stocks, as investors turn tail on the recent run-up in the Nasdaq.
And Compaq Computer misses already-lowered estimates, with sales down from a year ago. How will the PC maker get back on track? We'll ask the chairman and CEO, Mike Capellas.
But first, red arrows dominated Wall Street today with the Nasdaq taking the biggest hit on the session. Those cautious comments from Merrill Lynch weighed heavily on chips, and techs as a whole. The Nasdaq tanked: nearly 5 percent or 104 at 2059. Chips, software and the Internet especially hard hit.
A stellar earnings report out of Dow component ExxonMobil wasn't enough to push the Dow higher, the index closing down 47 points at 10,532. Checking out some of the big movers on the day: EMC, Broadcom and Qualcomm all fell more than 5.
Dow components IBM and Boeing both down on the session. As investors took money out of stocks, some funds moved back into bonds, the 10-year: up nearly 3 quarters of point. The 30-year more than a full point. The yield on that falling to 5.71 percent.
Several quarterly reports released after the closing bell, Jen Rogers is tracking the after hours action, and joins us from the Instinet trading floor -- Jen?
JEN ROGERS, CNN CORRESPONDENT: Willow, that's right. The drumbeat of earnings news picked up again here after a breather on Friday, let's start with Compaq.
Compaq moving lower in after hours, after the company missed lowered estimates by a penny. The company also cutting back forecasts for the next quarter, and upping total number of layoffs to 7,000. We saw the stock off more than a dollar; right now, though, down 90 cents at $19.75. We also saw weakness in Dell and Apple on that news.
Novellus Systems, though, moving to the upside here, up 36 cents after the company beat estimates by a penny. The chip equipment maker posted profits that were down from the last quarter. Still, it managed to eek out a gain here in after hours.
The most active stock here was JDS Uniphase. JDS Uniphase down more than a dollar in volume of 850,000 shares. Now, the fiber optics component maker came out after the bell, saying tomorrow morning it will hold a special conference call to discuss important developments. And the stock sold off on that news.
The second most active stock and the No. 1 percentage gainer was Lucent. Lucent will be one to watch tomorrow morning, it is scheduled to report financial results. It rallied here ahead of the news, up 42 cents, we did see it up in the double digits, as high as $10, but it paired back those gains. Still, a nice percentage move for Lucent here after the bell -- Willow.
BAY: All right, Jen Rogers, thanks for all the after hours action.
Techs are still a difficult read for investors. Is it safe to jump back in? Well, it depends on who you talk to. Terry Keenan takes a look at the problems remaining for the sector, in tonight's behind the numbers -- Terry.
TERRY KEENAN, CNN CORRESPONDENT: Well, Willow, with the Nasdaq putting in its best two-week performance ever through the period ending Thursday, most market strategists were eager to jump on board the bullish bandwagon, but not everyone. The technology team at Merrill Lynch for one is decidedly cautious on the group.
Today, the firm's chip analyst Joe Osha downgraded four big chip stocks, including Intel to neutral, saying that a bottom in the sector is at least a quarter away. More broadly, the Merrill folks believe tech remains expensive, with the average price on the Merrill Lynch 100, now back up over 40 times earnings.
And, according to Merrill, those earnings won't be growing strongly again anytime soon. While many believe that technology profits will hit bottom this summer, Merrill Lynch continues to see negative earnings for the rest of this year, with the likelihood of significant gains before the summer of 2002, very low.
What's more, Merrill's top tech guru Steve Milunovich doesn't think that the Fed rate cuts will do much good.
(BEGIN VIDEO CLIP)
STEVE MILUNOVICH, MERRILL LYNCH: The history is that rate cuts are bullish on technology on average. But we think that the euphoria that the overcapacity built up in the last couple of years will take time to be worked out. I'm not convinced that the Fed can get us out of a major capital spending downturn, or at least it will take I think 12 months probably to do that. The Fed tends to be much better at getting us out of financial crises, but this capital spending downturn was I think years in the making and probably take 12 to 24 months to get out of.
(END VIDEO CLIP)
KEENAN: Milunovich also notes that while tech stocks rallied 33 percent in early April, the tech bolted ahead by 30 percent in January, only to have those gains eviscerated in February and March. And while the folks at Merrill do think the likelihood we've seen a bottom is rising, they expect the tech stocks to trade in this range, until time works its magic to restore demand -- Willow.
BAY: All right, Terry, we'll talk to you in just a bit.
A group of Cisco shareholders have slapped the company with a class action lawsuit, the claim top executives deliberately mislead investors. Allan Dodds Frank has the story.
(BEGIN VIDEOTAPE)
ALLAN DODDS FRANK, CNN CORRESPONDENT (voice-over): A plumbers union pension fund claims top executives at Cisco Systems deliberately misled investors. The class action lawsuit accuses Cisco's fraudulently concealed its troubles.
SUSAN KALLA, TRADE.COM: When the stock goes down, there is always shareholder lawsuits. Some of them are frivolous and some of them are not. But I think management has always been very careful about its forecasts and it has been very forthright with what the risks are.
FRANK: A company spokesman said the suit has absolutely no merit. Among the allegations: Cisco inflated revenues and income figures during the last seven quarters to pump up its stock.
Cisco overstated sales, often financing them 100 percent.
Cisco increased inventories despite knowing demand was slipping.
Cisco insiders sold $595 million in stock before disclosing company's actual results.
Indeed, securities law experts say in this case, despite Cisco's drop in market value, it may be exceedingly difficult to prove fraudulent intent.
JOHN COFFEE, COLUMBIA UNIV. LAW SCHOOL: You need to show that management wasn't just omitting materiel information. It was also acting to benefit itself at the expense of shareholders. That is not easy to do, and I think they are still a little bit short.
FRANK: From its high of $80 a share in March 2000, Cisco dropped below $14 earlier this month. That is a loss of market cap of more than $400 billion, more than 80 percent.
In complex cases like this one, filing the complaint is merely the opening gun. Further allegations are common as class action lawyers try to unearth evidence to prove the company deliberately misled investors.
Allan Dodds Frank, CNN financial news, New York.
(END VIDEOTAPE)
BAY: Shares of Cisco took a hit today, dropping $1.82, to finish at $17.33.
Coming up on MONEYLINE: today's most important profit reports and a look how corporate America as a whole is stacking up.
Plus, sinking sales and a profit shortfall at Compaq. We'll get the details from CEO Michael Capellas. He's next.
(COMMERCIAL BREAK)
BAY: Wrapping some of today's major earnings, American Express edged past lowered estimates, but profits sank nearly 20 percent. Amex blames deteriorating markets and sluggish corporate spending for the decline.
SBC met lowered estimates. Profits there were down as well. And the company is not in the clear yet, warning today that it will miss full-year targets.
Soft drink giant Pepsico beat the Street by a penny. Pepsi also out with an upbeat outlook, describing current performance as exceptional, and projecting a solid 12-13 percent growth in earnings for the full year.
Checking investor reaction, American Express and SBC both slipped fractionally, while Pepsico added over a dollar on its positive outlook.
And taking a tally of the earnings out so far, just over half of the S&P 500 have reported, and nearly 60 percent have beat expectations. Twenty-nine percent have matched the Street, while only a mere 14 percent have fallen short. Still, those numbers are somewhat deceiving. The vast majority of companies are being measured against lowered expectations, and average earnings are down about 5 percent.
In tonight's "MONEYLINE Focus": Compaq computer. A weak quarterly report from the box maker, the company missing already- lowered Street estimates by a penny, on sales that fell from the year- ago quarter.
Joining us now from Houston, Compaq's chairman and CEO, Michael Capellas.
Michael, welcome.
MICHAEL CAPELLAS, CHAIRMAN & CEO, COMPAQ COMPUTER: Thank you.
BAY: You were not making money from your PC business this quarter, Where were you making money?
CAPELLAS: Well, one of the real bright spots for us was the service side of the business. We saw some real growth there. And that was true both in the U.S., but more importantly, internationally. So the strongest overall sector was the service sector.
The second segment, in our enterprise platforms, but it was a particularly difficult quarter on the PC side.
BAY: So does that mean that you're seeing some signs that while consumers aren't spending on PCs, businesses are?
CAPELLAS: I think you have to look a little bit globally. What the real strength for us was internationally. Outside the U.S., our revenue was up 17 percent. So that's pretty strong performance, which was really offsetting some real weakness on the consumer PC side in the U.S.
So what we're seeing is, internationally, still pretty strong. The enterprise side are the major customers hanging in there. But the U.S. market, particularly in consumers, being a real weak point.
BAY: Now, globally, I know your sales in Asia were strong. What about Europe? Were they strong as well? Because some folks are seeing some signs of the slowdown spreading there.
CAPELLAS: We really had an outstanding quarter virtually everywhere outside the U.S. Every region we had was up in double digits. Europe, we had a 14 percent growth rate. And so what we saw in Europe was -- not only did we see some pretty particularly good growth in our high-end products, but we actually gained share in all four key segments in the market we operate in.
BAY: What can you tell us about the upcoming quarter? You reduced your earnings-per-share by quite a bit. Why? What's going on?
CAPELLAS: What we've done, is we actually think that this is the best possible time to take some real tough actions to improve your business model. So we are going to dramatically reduce our inventory position, particularly the inventory we carry our with our distributors and our channel partners.
So what is really affecting inventory is really sort of a nonrecurring time to dramatically reduce our inventory, to really position our business model so we can really drive velocity in the second half of the year. And so we're taking that tough medicine right now because we think no better time to take it.
BAY: OK, so you're reducing your inventories, and you've increased the number of layoffs. Will that be enough, or should we expect some more adjustments?
CAPELLAS: No, I think what you're really seeing us do, and that's part of our messaging, here, is that we really are taking the tough actions. We've gone ahead, not only with the structural cost reduction we have to do, in terms of layoff. Not only the numbers, but also getting it out of the way right away. And we're repositioning our inventory, taking about a half a billion dollars worth of inventory out.
The combination of the two not only allows you to be much more price aggressive, but it really sets you up for some real improvement over on your model so that as the market turns, you'll catch it.
BAY: What about that, "as the market turns"? You're positioning yourself for the second half, but are you seeing any signs of recovery in the second half? What you could tell us?
CAPELLAS: What we're really seeing, and I would first always add is, if you talk to virtually -- CEOs in any industry right now, visibility is pretty tough. But what we do say we're seeing is consistent with all the reports that you're hearing, is we do believe we're starting to see the bottom starting to roll out. We do think that the effect of interest rate hikes, some increases in consumer confidence, and really, pretty good activity outside the U.S., should lead to, as the market continues to evolve with the macroeconomics, some real pick up.
Now, are we so bold as to go out there and say, hey, it's absolutely going to blow away in the second quarter, or that we're going to see a hockey spike? No, but we are seeing signs of the market stabilizing.
BAY: I'm sure investors would welcome all of those signs. Michael Capellas, thank you for joining us tonight.
CAPELLAS: Thank you.
BAY: Coming up on MONEYLINE: basketball's most famous face is pondering a return to the court, but can Michael Jordan jump-start the NBA?
And in the tech world, the bears score another victory in the great chip debate.
We'll be right back.
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BAY: In our "Sector Report" tonight: more on the great chip debate. Over the past two weeks, analysts have battled over this question: Have chips finally hit bottom?
Their answers are widely divergent, but the bears scored a victory today, as we mentioned, from influential Merrill Lynch analyst Joe Osha. Now, Osha says there is no evidence of a near-term sector recovery and chips remain overvalued.
And as far as when to buy, Osha says wait at least until summer. Osha downgraded Intel, PMC-Sierra, Applied Micro Circuits, and Vitesse, sending the stocks tumbling. But even including today's sell-off, their recent rally is impressive. The Philadelphia semiconductor index is up 36 percent since hitting a low on April 4. That compares to the Nasdaq's 26 percent gain.
Still to come, the hottest talk of basketball's playoff season: Will Air Jordan fly again next year?
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BAY: The buzz has swirled through the sports world for weeks that Michael Jordan, widely recognized as the greatest player in NBA history, may be primed for another comeback. And that speculation grew more intense after an interview this past weekend, timed to coincide with the start of the NBA playoffs.
Peter Viles on the basketball superstar whose economic impact was once estimated at $10 billion.
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PETER VILES, CNN CORRESPONDENT (voice-over): It began as the story no one would confirm, that this would not be Michael Jordan's last shot, that he would come out of retirement next fall.
RICK REILLY, "SPORTS ILLUSTRATED": They are going to deny, deny, deny, and we really are not going to know until September.
VILES: But finally, over the weekend, Jordan himself said the rumors are true. He really is thinking about a comeback.
MICHAEL JORDAN, FORMER NBA PLAYER: The challenge of getting out there to prove a point, to myself or to the basketball enthusiasts or whatever that I can play this game of basketball at the age of 38 and still win.
VILES: Ratings for the NBA finals are off 37 percent since Jordan last played; regular season ratings down 34 percent; a Jordan comeback would certainly help those numbers.
NEAL PILSON, SPORTS CONSULTANT: The good news: Michael's back, the media relations are terrific, the ratings go up.
VILES: But sports consultant Neal Pilson sees some risk in a Jordan comeback.
PILSON: I don't think it's good for the league. It sets back their program, which is under way, to refocus on the younger players, to talk about team rivalries, and to get on with life after Michael retired.
VILES: NBA commissioner David Stern says the league does not need a savior. Attendance held steady this year, and the league has a year left on contracts with NBC and the Turner Broadcasting Division of CNN parent AOL Time Warner, and the NBA has enough perceived value that Disney's ESPN is expected to bid against AOL for those cable rights.
RICK HORROW, HORROW SPORTS VENTURES: The NBA has some issues, but the last five franchise sales have been no less than $150 million. They're still doing OK for investors. A Michael Jordan, of course, would help in the short-term, even if he's not around for the long- term.
VILES (on camera): Now, if Jordan does decide to play again, first he'll have to make two business deals. Under NBA rules, he'll have to sell-off his ownership stake in the Washington Wizards and then the fun part, he'll have to decide which team he wants to play for.
Peter Viles, CNN Financial News, New York. (END VIDEOTAPE)
BAY: Up next, our roundtable of reporters on today's market and a preview of what could move stocks tomorrow. "Ahead of the Curve" is next.
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BAY: Taking a look at some of what could move the markets tomorrow, watch for earnings from Lucent Technologies, AT&T and its spin-off, AT&T Wireless, Amazon.com and Dow component DuPont. Plus, a look at consumer confidence for April, expected to dip from March's rally inducing number. And six months after the regulation fair disclosure was put into place, the FCC will hold a roundtable to review the regulation. That's tomorrow morning in New York City.
The crucial question after today's Nasdaq relapse, has the high tech comeback lost its momentum. Joining us now, financial editor Myron Kandel, Allan Chernoff at the Nasdaq and Terry Keenan at the New York Stock Exchange.
Myron, as usual, we'll start with you. Is this April rally for real or what?
MYRON KANDEL, CNN FINANCIAL EDITOR: I think so, Willow. If you think about it, look at the Dow. The Dow gained 1500 points in four weeks from its intraday low on March 22nd. It's now, in two days, given back 151 points. That's only 10 percent. Nasdaq has given back a little more of that sensational rally. It's given back 22 percent of the rally that took it up 33 percent in just two weeks.
So, I'm not worried by the pullback Friday and today. I think there are better times ahead, and the market isn't going to go on a straight line, but it's going up, Willow.
BAY: So Terry, what are folks there saying? I mean, clearly that's the big debate. Is the rally for real?
KEENAN: Yes, of course, and there's so much concern here because we've had several huge run-ups since the bear market in technology started 13 months ago, particularly the run-up in the month of January. We had a great start to month of January after the surprise Fed rate cut.
We got another Fed rate cut at the end of the month, and by then, the gains started to evaporate and they did over the next couple of weeks. So, a lot of concerns about that, particularly the chip stocks. Joe Osha, as we've been telling you in the last half-hour, negative on that group and they have to led the techs out of this. many people believe.
BAY: And Terry, as you noted earlier, with those analysts so negative and not looking for a pick up in earnings until way, way out, Myron, don't you think at least in the case of techs that that's going to hold them back? KANDEL: Well, I think it will, obviously. I mean, we're not going to see 33 percent in 11 more days, that's for sure. But this rally was much stronger than the one Terry mentioned in January, and that's why I think it has legs. It's going to hobble once in a while, but it does have legs and it is going to go higher.
BAY: Allan, over there at the Nasdaq, which voices are the loudest in terms of whether this rally is for real?
CHERNOFF: Well, Willow, there's really a critical debate, and you've got a lot of people on both sides of this debate. The question is to what degree has the market discounted the bad news that is still coming up. Keep in mind that a lot of people expecting the second quarter of this year, the quarter we're in right now, will really provide some awful earnings numbers. So, the question is the market truly looking past all of that bad news, and some people are not quite sure that it is ready to do so.
BAY: And that's what investors should be looking for in the days and weeks ahead, right Allan?
CHERNOFF: Very important to see if a company has bad news, does the stock keep on falling or does it not fall?
BAY: Allan, thank you. Allan, Terry, Myron, good night from all of us at MONEYLINE for this Monday, April 23rd. "CROSSFIRE" is next.
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