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Lou Dobbs Moneyline

Dow Rises 170.86 to 10,494.10; Nasdaq Climbs 43.19 to 2,059.80; Report on Housing Sales Cheers Investors

Aired April 25, 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: Stocks snap a three-session losing streak on renewed optimism that the slowing economy is about to pick up steam.

What's behind the optimism? Red-hot reports from the housing market, and a surprising surge in demand for big-ticket goods.

John King's wide-ranging interview with the 43rd president, George W. Bush: the controversy over Taiwan, tax cuts and more.

And tips for Alan Greenspan on pulling off one very soft landing.

ANNOUNCER: This is MONEYLINE.

BAY: Welcome to MONEYLINE. We begin tonight with the running of the bulls on Wall Street. After three discouraging sessions, stocks took off today with strong economic reports from the housing market, convincing some that we're on the road to economic recovery. The Dow surged 170 points to close at 10,625. More than a billion shares traded on the big board.

And the Nasdaq jumped 43, or more than 2 percent, ending at 2,059. Nearly two billion shares changed hands on the Nasdaq.

Let's take a look at the S&P 500, that edging higher as well. It gained 19 to close at 1,228.

We have complete coverage tonight with Lisa Leiter on the housing numbers, and Allan Chernoff, following the market reaction from the New York Stock Exchange.

And that's where we begin -- Allan.

ALLAN CHERNOFF, CNN CORRESPONDENT: Willow, investors have been hunting for signs that the decline in corporate profits is going to stabilize, and even turn around. Today's bullish economic data, a better-than-expected gain in durable goods orders, and big home sales numbers provided just that hope.

(BEGIN VIDEOTAPE)

CHERNOFF (voice-over): Investors celebrated the latest signs that the economy can avoid recession by bidding up economically sensitive blue chip stocks. The Dow industrial is posting its best performance since the Federal Reserve's surprise interest rate cut last week.

SARAT SETHI, DOUGLAS C. LANE & ASSOCIATES: If the economy is going to start picking up because of the lower interest rates, you will see a positive response in stock prices.

CHERNOFF: The boom in home sales has terrific implications for the economy. Buyers typically furnish their new homes with new sofas, curtains, and refrigerators. While many consumers have been saying they're losing confidence in the economy, what they're doing is spending.

And investors are taking notice. Home building shares climbed, including Champion Enterprises, Ryland Group, Pulte, Del Webb and Toll Brothers. Furniture and appliance companies were sitting pretty, including furniture brands Laz-Y-Boy, Ethan Allen, and Whirlpool.

Auto sales are accelerating, thanks in part to declining interest rates. And retail sales figures have been holding up at many chains. Now the stocks are beginning to come back as well. Today's winners included Home Depot, Kohl's, Dillard's, J.C. Penny and Wal-Mart.

UNIDENTIFIED MALE: Consumer spending is not slowing down, and perhaps this will help us pull through the rest of the year.

CHERNOFF: If parts of the economy are picking up, corporate profits in those economically dependent sectors known as cyclicals should follow. That turn is precisely what investors have been looking for.

Right now, Wall Street is expecting a pick-up in profits to begin during the third quarter of the year in capital goods, like heavy equipment makers, and consumer cyclicals, like retailers. Basic material companies, including steel makers, are expected to see a turn in the fourth quarter.

(END VIDEOTAPE)

CHERNOFF: The big problem in the economy now is corporate spending, especially on technology. So Wall Street isn't looking for significant improvement in tech earnings until next year.

Even so, there is growing hope that earnings will soon stabilize and, at least today, that was enough to give the Nasdaq another 2 percent boost -- Willow?

BAY: And, Allan, some stability would certainly be a good thing and welcome news. Thanks, Allan.

Now, more on that surprisingly strong report from the housing market. Sales of new homes surged to a record in March, and previously-owned homes came close, an encouraging sign that we may avert a recession.

Lisa Leiter reports from Chicago. (BEGIN VIDEOTAPE)

LISA LEITER, CNN CORRESPONDENT (voice-over): From coast to coast, ask a realtor about the state of the housing market, and you'd think we were at the peak of the economic boom.

UNIDENTIFIED FEMALE: Just so many buyers out there.

UNIDENTIFIED FEMALE: The market seems to still be real good. Great properties are selling.

UNIDENTIFIED FEMALE: We have a lineup of buyers, that we can't seem to get them enough homes to look at.

LEITER: New home sales surged in March to a record level. Economists actually expected a decline. The strongest region: the Northeast, up almost 40 percent. Sales also jumped in the Midwest and South, but dropped out west.

But the West led the way for existing home sales. They surged 4.8 percent, to a near-record level. Resales also rose in the South and the Northeast.

JAMES SMITH, UNC CHAPEL HILL: That's a critically important pair of numbers for the economic outlook because if you go back to 1,854, the beginning of business cycle data for the United States, there has never -- repeat, never been a recession when the housing market was strong.

LEITER: The housing market has been a pillar of strength during a period of economic weakness, partly because of cheaper mortgages. A 30-year fixed rate loan now averages around 7 percent, sharply lower than last year's peak of 8.25 percent.

Some economists say those rates could drop even more, with the Federal Reserve still committed to its rate-cutting campaign, a major factor behind at least one home buyer's decision to move.

UNIDENTIFIED FEMALE: The interest rates were a big part of it. And now that it's been lowered 2 percentage points since January we feel more confident in buying another home.

(END VIDEOTAPE)

LEITER: Economists say that the nation's jobless rate matters just as much as mortgage rates. If unemployment continues to rise, home sales will likely begin to fall -- Willow.

BAY: And, Lisa, those realtors sounded pretty happy. Anything else that could rain on their parade?

LEITER: Well, Willow, they're complaining that they don't have enough homes to sell. And actually, the supply of homes on the market last month actually fell to a 2-1/2-year low. So that seems to be the major problem they're having right now.

BAY: Lisa Leiter, thanks.

The good economic news out today was not confined to the housing market. Orders for durable goods in March shot up 3 percent, the first advance this year. But the details are a bit less inspiring -- take out transportation orders, and the reading actually declined for the month.

Bonds today were affected more by the stock market rally than by economic reports. Money was lured out of the bond pits and onto Wall Street. The 10-Year lost more than 11 ticks, the yield at 5.25 percent. The 30-Year fell 6 ticks, the yield there at 5.77 percent.

Ahead on MONEYLINE, John King's extensive talk with the president: Where he really stands on a possible tax cut compromise and the tension over Taiwan.

One company asking workers to spend time in the Sun this summer to bolster the bottom line.

And, building a better mouse. The cordless wonder that is taking the tech world by storm.

(COMMERCIAL BREAK)

BAY: We're approaching an early milestone of the Bush administration, the end of the first 100 days. With that day, coming up on Sunday, President Bush has been reaching out to the press, speaking on domestic and international policy. In an extensive interview today with CNN, he made a number of headlines on China. We'll have more on that in just a moment.

The president also made a major concession about tax cuts. We begin our coverage with Greg Clarkin.

(BEGIN VIDEOTAPE)

GREG CLARKIN, CNN CORRESPONDENT (voice-over): President Bush is ready to compromise on taxes, admitting Americans won't see the $1.6 trillion tax cut he had been seeking. In an interview with CNN's senior White House correspondent John King, the president signaled a willingness to accept a lower figure.

BUSH: In the first 100 days, we got one bill out of the house at $1.6 trillion and one out of the Senate at $1.2. So, at least the parameters have been defined. The House has made its statement, the Senate has made its statement, and now it's time for the White House to help bring the parties together to get real, meaningful, substantive tax relief done.

CLARKIN: The question now is just where the final figure winds up. Some Senate Republicans have expressed confidence it could top $1.4 trillion, but Senate Democrats disagree.

SEN. TOM DASCHLE (D-SD), MINORITY LEADER: Well, $1.4 was not feasible two weeks ago. I think that it's going to be very difficult for them to arrive at a number of that magnitude. But, again, what I've said all along, it's not just the number, it's the makeup of the tax cut that we'll be looking at.

CLARKIN: House and Senate budget negotiators began the process of trying to bridge the gap in their tax cut plans today, and analysts say the real debate will focus not so much on the final dollar figure, but on other details.

ANDREW LAPERRIER, ISI: The battle shifts to what does the tax cut itself look like. I think the battle shifts to how big is the 2001 tax cut and what does it look like. What's the top rate going to be? Do we eliminate the estate tax or just raise the exemption significantly? Is there a trigger, and if so, what does it look like?

(END VIDEOTAPE)

CLARKIN: Now, the White House has indicated it would like to see the tax cut in place by June, but analysts say historically, first- term presidents see their tax plans approved in late July, just before the August recess, and they expect that will be the case this time as well -- Willow.

BAY: Greg, either way, they will be quite busy down there in Washington.

CLARKIN: Indeed they will.

BAY: Greg Clarkin, thanks.

Perhaps the most explosive development from the president today came from his comments on Taiwan and China. CNN chief White House correspondent John King sat down at length with the president, as we mentioned, this morning, and he joins us now -- John.

JOHN KING, CNN SENIOR WHITE HOUSE CORRESPONDENT: Willow, the president quite relaxed and confident in this issue, but as you mentioned, he has caused some concern for what he's saying about Taiwan. Now, for 20 years, it has been U.S. policy to be deliberately ambiguous, to not tell the Taiwanese exactly under what circumstance the United States might intervene militarily to help defend Taiwan if it was attacked by China and to not tell Chinese, either. This is called strategic ambiguity.

Officials from past administrations, including Mr. Bush's father, say it's a successful policy. All around Washington and all around Asia, people quite stunned today that the president has decided to speak out publicly and explicitly commit the United States to defending Taiwan.

(BEGIN VIDEO CLIP)

BUSH: Well, I think that the Chinese must hear that ours is an administration, like other administrations, that is willing to uphold the spirit of the Taiwan relations law, Taiwan Relations Act. And I'll do so.

However, I think it's important for people to also note that mine is an administration that strongly supports the one-China policy, that we expect any dispute to be resolved peacefully, and that's the message I really want people to hear.

But as people have seen, that I'm willing to help Taiwan defend herself, and that nothing has really changed in policy, as far as I'm concerned. This is what other presidents have said, and I will continue to say so.

KING: Other presidents have relayed that message privately, though. There's some consternation around town that you did this in a television interview, not a speech to the American people. We don't have a treaty with Taiwan, certainly.

BUSH: Well, I also said this during the course of the campaign, John. I mean, I've been very clear about my position. And that when pressed further, I said that's what -- the Chinese need to hear the message. And I think it's an important message to send.

I also want to send the message that this can be resolved peacefully. We've got a very important relationship with China. Obviously, it was tested recently. And one of the pieces of good news is that we were able to resolve an incident that could've turned out to be a breach of relations.

I've got some very tough decisions to make coming up about trade. I still think we ought to trade with China, because I think trade will not only help our economy and help people in our economy -- like farmers, for example -- I also know that by spreading trade in the marketplace, it will enhance freedom.

But I've got difficulties with some of the decisions China has made recently, such as the imprisonment of a Catholic bishop and other members of the Catholic faith in China, or how they're dealing with different citizens, and I will make those displeasures very clear.

KING: I want to ask you more about that, but I want to follow up a little bit more on the Taiwan issue. You have said publicly the U.S. would commit military forces if China attacked Taiwan. What if Taiwan declared independence first?

BUSH: First, I have said that I will do what it takes to help Taiwan defend herself, and the Chinese must understand that. Secondly, I certainly hope Taiwan adheres to the one-China policy. And a declaration of independence is not the one-China policy, and we will work with Taiwan to make sure that that doesn't happen. We need a peaceful resolution of this issue.

KING: But it sounded in your remarks, though, that you were being much more candid, much more open about the idea that the United States was prepared to militarily defend Taiwan. Would you consult with the Japanese or the South Koreans before saying this publicly?

BUSH: I am candid in my support of the Taiwan Relations Act. And I have said this during the course of the campaign appearance and I'll say it right now: That our nation will help Taiwan defend herself, at the same time that we support the one-China policy, where we expect and hope and believe there will be peaceful resolution to any differences of opinion. (END VIDEO CLIP)

KING: Now, senior administration officials insisting the president did not misspeak or speak out of school. They also say they don't view this as a major policy break. But they do concede that he is saying publicly what no previous U.S. president had said, and they also concede that they're expecting now quite a controversy, not only in the Congress, but from the Chinese as well -- Willow.

BAY: John, the surveillance plane, our surveillance plane, is still in China. What did President Bush have to say about that?

KING: Well, remarkably, he said the return of that plane is not a precondition for a continued productive relationship with China. Many in Congress want a tougher line, that debate continuing, but the president said he hoped to get the plane back, he was that confident he would, but the return of the plane was not a condition, that he was prepared to have a productive relationship with China, and he was very clear that he was not prepared to break off trade relations, as many conservatives in the Congress would like him to do -- Willow.

BAY: John, you alluded to the controversy likely to follow, but what was the reaction, what has been the reaction in Congress to the arms package that we offered to sell to Taiwan?

KING: Mostly a favorable reaction. Some conservatives wanted the president to give the Aegis radar system to Taiwan. What the president has said is not now, but the fact that the president did not flatly rule out selling that system has quieted most of the conservative criticism. This is, after all, the largest arms package given to Taiwan since the administration of the president's father.

The Chinese are objecting already. Most of the reaction in Congress quite favorable. Some Democrats have said the president should gone further, a sense there of the domestic political debate as the tense relationship with China continues.

BAY: John King, thank you, a very interesting interview with the president.

The president today also called for establishing a national energy policy, and took aim at an issue felt by millions of Americans: rising gasoline prices.

Casey Wian reports from Los Angeles.

(BEGIN VIDEOTAPE)

CASEY WIAN, CNN CORRESPONDENT (voice-over): President Bush used California's electricity crisis and recent spikes in gasoline prices to hammer home his point that the United States faces a critical power shortage. On gas prices, the former oil man lamented the nation's lack of oil refineries, which are operating at near full capacity.

BUSH: Let me talk about supply. There have been no refineries built in America in the last 10 years, and therefore, when you have increasing demand and limited supply, prices is going to go up. We've got to figure out who to bring more product in the marketplace.

WIAN: Actually, the American Petroleum Institute told Congress Wednesday there have been no new major refineries built in more than 20 years. The group also criticized what it call the Balkanization of the nation's fuel network. Because of varying local environmental requirements, 14 different types of gas are sold throughout the country. That makes regional shortages likely.

The Bush administration this week warned that any disruption to the nation's already-strained refinery and pipeline network would send gas prices skyrocketing further, a point underscored by Monday's big refinery fire in Southern California. But at a Senate hearing, Democrats accused oil companies, which are reporting record profits this week, of artificially inflating prices.

SEN. RON WYDEN (D), OREGON: The evidence indicates that communities up and down the West Coast are being red-lined by the major oil companies. Red-lining is about as anti-free enterprise as it gets.

WIAN: The president promised to punish anyone engaged in gas price-gouging. He also spoke of the need to generate more electricity in California.

BUSH: In terms of power plants and the California issue, much of it is driven by the fact that we're running out of energy supplies. We need more energy supplies, that's why we need an environmentally- friendly exploration program around the country, and we also need to conserve more.

WIAN: Bush didn't specifically mention the most controversial element of his emerging energy policy, drilling for oil in the Alaska National Wildlife Refuge.

(END VIDEOTAPE)

WIAN: One potential shift in White House energy policy could come as early as tonight. Federal regulators are meeting to consider wholesale price caps on electric power during power shortages. It's something California officials have pushed, but so far, White House officials have opposed -- Willow.

BAY: It will be interesting to see what decision comes out of that. Now, when will we get some sort of clear articulation of President's Bush energy strategy?

WIAN: Well, the president has appointed Vice President Dick Cheney to head a special task force on energy policy. It's conducting its deliberation, if you will, in secret, but they are expected to release the results next month.

BAY: And key on their agenda will be California, will be increased exploration, what else?

WIAN: Absolutely. Well, those are probably the two biggest issues, California and drilling for more oil. California is seen as a benchmark of the nation's economy. If the energy problems here continue to drag the state's economy down, it's bad news for the rest of the economy. So, California is very important, especially in relation to energy policy.

BAY: Casey Wian, thanks.

Next on MONEYLINE, one tech company's message to workers: Stay home, please, this 4th of July.

(COMMERCIAL BREAK)

BAY: In tonight's "Tech Watch," if you work at Sun Microsystems, you won't have to fight for vacation days over the 4th of July. The PC maker is shutting down worldwide operations for five days, including the nation's birthday, in an aggressive effort to cut costs. It's the first shutdown in Sun's 17-year history.

But the news, perhaps, is not surprising. Just last week, sun reported a 43 percent plunge in quarterly profits, and perhaps even more troubling, the company expects a continued decline in the current quarter. Today, Sun shares lost more than a dollar to $16.05. The stock is down 75 percent from its high of about $65 that it hit last September.

Next on MONEYLINE, the four-letter word on wall street among analysts afraid to ruffle feathers: sell.

And later, the U.S. and China in a rhetorical battle over Taiwan: Just where does the president stand? We'll have much more on the controversy.

(COMMERCIAL BREAK)

BAY: A new survey may shed light on why it is so hard to find any sell ratings on wall street. Reuters polled nearly 1,000 securities analysts and researchers, finding that the vast majority are worried about putting a "sell" on a stock. A whopping 88 percent of those surveyed said they fear companies would retaliate against negative recommendations by leaving their firms out of stock offerings and merger deals.

But it's a charge most companies deny. Less than one-third of companies polled by Reuters said they exclude securities firms based on a sell rating.

Still to come in the second half-hour in MONEYLINE, more on a turnaround in the market. Is Wall Street back on track after a shaky start to the week.

And the second time is the charm for two ship-builders in bid to merge: General Dynamics and Newport News.

Plus, what's in a mouse? Well, a lot of money for the high-tech firm that lets you go unplugged from the computer. Stay with us.

(COMMERCIAL BREAK) ANNOUNCER: MONEYLINE continues.

BAY: In tonight's headlines: A turnaround story on Wall Street. The markets snap a three-day losing streak to finish in the plus column.

And some surprisingly strong news on the economic front: New homes sales blow past forecasts to their highest level ever.

Plus, a sales slump for PCs, but not for the extras. One company hits it big supplying that latest in technology, the cordless mouse.

But first, a check of the markets. The bulls charged back on Wall Street today, lured by strong economic reports and solid corporate earnings. The gains came after three days of negative trading, and exactly a week after the Fed's surprise interest rate cut. The Dow Industrials got a boost from Disney, Philip Morris, and Microsoft. The index dipped briefly into the red very early on, but managed to close near session highs, up 170 points, at 10,635.

A couple of large cap techs finished in the red today: Intel, Cisco, and Sun Micro. But the index still managed to rally, evidence of broad strength on the Nasdaq. The index closed up 43 points, or over 2 percent at 2,059. The S&P 500, that also posted a solid rally climbing 19 points, to 12,028.

But the day's strength isn't carrying over into the after hours session. Jen Rogers has the latest from the Instinet trading floor -- Jen.

JEN ROGERS, CNN CORRESPONDENT: Willow, Qualcomm really taking it on the chin here in after hours. The wireless technology company was the most active issue here at Instinet with over 1.2 million shares changing hands. We've seen it as low as $52, right now it's down $8.18, at 54.80. The company coming out and meeting estimates for the second quarter at 20 cents, but warning for the third quarter and for the rest of the year.

So that stock getting hit hard. And we saw some collateral damage spill our of that into Nokia. 70,000 shares changing hands, down $1.15 right now, at $29.10. To the upside though, Peoplesoft, the e-business application maker came out the beating the Street by 2 cents, reporting 11 cents. The Street was looking for 9 cents. This stock moving up better than $3 to $33.10. It was one of the biggest percentage gainers here. The company also stuck to its guidance for the rest of the year, and that was certainly a nice change of pace after the Qualcomm news -- Willow.

BAY: Jen Rogers with all the after-hours action. Thanks.

After nearly 10 months, the FCC has finally approved Deutsche Telekom's $46 billion take over of Voicestream. The deal, now valued at about $30 billion was heavily scrutinized because of the German government's 58 percent steak in DT. Some U.S. lawmakers said the merger could impact U.S. national security and competition. Despite those concerns, the FCC approved the deal without conditions. On the news, shares of Voicestream climbed $2.28 to $106 and change. Shares of Deutsche Telekom close up 19 cents at $25.94.

Another merger hoping for government approval is in the defense sector. General Dynamics is trying, for the second time, to buy its rival, Newport News. The shipbuilder offering Newport $2.1 billion. On the news shares of General Dynamics down more than 1. Shares of Newport finished up just over 9 at 64.10.

Fred Katayama has the story.

(BEGIN VIDEOTAPE)

FRED KATAYAMA, CNN CORRESPONDENT (voice-over): A very generous offer from General Dynamics convinced Newport News Shipbuilding to say "yes" the second time around. The deal will make General Dynamics the sole producer of submarines and aircraft carriers for the Navy, and, the companies say, boost profits. Analysts applauded the purchase despite the price tag.

JOSEPH NADOL, JP MORGAN CHASE: It's a very strong strategic deal for General Dynamic shareholders, financially speaking. It's a little bit of a stretch, but I like the fact that it's going to be (UNINTELLIGIBLE) to cash earnings.

KATAYAMA: The deal is certainly sweet for Newport News shareholders. General Dynamics will pay $67.50 a share, a hefty 23 percent premium over Tuesday's close. That's also 75 percent higher than what it offered Newport in 1999. Newport News rejected that bid as too low, and Clinton Administration officials opposed it.

NICHOLAS CHABRAJA, CEO, GENERAL DYNAMICS: This business is much stronger than it was two and a half years ago -- much larger backlog, higher revenues, better earnings, and improved cash flow. So this is a business that, over the last two, two and a half years, has captured an awful lot of value and that's reflected in the purchase price.

KATAYAMA: The companies, analysts, and antitrust experts say they expect regulators will clear the merger this time. A new administration is in power, and this merger is friendly. And the companies say lack of competition isn't a factor since it doesn't exist now anyway.

WILLIAM FRICKS, CEO, NEWPORT NEWS: We haven't competed in a contract since 1991, and the future production rate is such that we won't compete forever, so there really isn't any competition.

KATAYAMA: General Dynamics says it expects the deal would help it save billions of dollars over 10 years.

(END VIDEOTAPE)

The Justice Department says it will look into the competitive effects of the proposed deal. General Dynamics vows it will neither slash hourly jobs nor close shipyards. That, antitrust experts say, should ensure the backing of key Congressional leaders, and help persuade defense and justice officials to approve the merger. Another good sign for GD: President Bush has just nominated one of its former executive vice presidents, Gordon England, for Secretary of the Navy -- Willow.

BAY: Fred, given all that, what do the companies expect the deal to close?

KATAYAMA: Well they're hoping to close the third quarter of this year.

BAY: Fred Katayama, thank you.

The combined company will make submarines, but not the diesel subs that the White House offered to sell to Taiwan yesterday. That offer came at a tense time for U.S. relations with China in the aftermath of the spy plane incident. And today President Bush said that the United States would defend Taiwan from a Chinese invasion. For some insight into U.S.-Chinese relations, we're joined by Robert Manning of the council on foreign relations. Robert, thanks for joining us.

ROBERT MANNING, COUNCIL ON FOREIGN RELATIONS: My pleasure.

BAY: President Bush says, look there's no change in U.S. policy. Yet how different does all of this sound to you? Does it sound like a shift, a change in policy, in direction, or tone?

MANNING: Well, there's always some problem with the president's (UNINTELLIGIBLE) of language it seems. But in terms of the substance of policy, I think what you're seeing is a firmer commitment, a renewed commitment to Taiwan security, but not a change in policy. If you look carefully at what he said, he reaffirmed the one-china policy. And I think, in a way, what he said was what the average Chinese military planner already assumes, which is if China launches an unprovoked attack on Taiwan, that the likelihood is they're going to have a U.S. intervention to worry about.

And I think the broad policy, which is best summed as no unilateral change in the status-quo by either side, and an emphasis on both of them finding a peaceful resolution. That's really the core and has been through five or six presidents of U.S.-Taiwan policy.

BAY: Now the president today, and I know you noticed -- noted his use of language, but he said the U.S. would do whatever it takes to defend Taiwan. Now some would are saying that that is a dangerous shift -- some members of Congress. Are they just misreading that statement?

MANNING: Yes, they are. I looked at the transcript. That was on one of the network interviews this morning. What he said was that he will do whatever it takes to help Taiwan defend itself, which is, of course what the Taiwan relations act says. I think that the tone, the way the question was phrased initially was, if China attacks Taiwan, would you defend them. And I think that was his answer.

So I think the Chinese know exactly what to expect and this is, I think, healthy in terms of stability and security, and is more likely to lead to diplomacy in terms of the cross-straights relationships than before. BAY: I'm sorry, when you say "this is healthy" in terms of diplomacy, you mean the president's statements, or do you mean the package of arms sales to Taiwan?

MANNING: Well, I think both. They're both designed for the same purpose, which is strengthening Taiwan's position in terms of stability, and trying to encourage China to resolve this thing through diplomacy. My view is if there's a military conflict, nobody's going to win. You know, Taiwan has got 40 to 50 billion dollars invested in the mainland. Trade is over $30 billion a year. China's dependent on Taiwan's investment.

If this thing goes -- at the bottom this is a political problem at the end of the day and it has to be resolved. And I think we've gotten too caught up in this kind of spiraling military arms race that's beginning to take off. And it's one thing to have a military balance, but I think the more firmer, the firmer the resolve of the U.S. is demonstrated to be, the more likely China is to rethink it's posture on Taiwan.

BAY: We have had these two incidents: The U.S. surveillance plane and now the arms package sort of coincidentally butted up against one another and the rhetoric been heated. But ultimately where are U.S.-Chinese relations, diplomatic relations, trade relations, heading?

MANNING: Well, I think we've had kind of a political roller- coaster ride with China really since June 4th, 1989. On top that there's a tendency for China to test new presidents and for new presidents to take a while to find a kind of equilibrium. And I think between now and October, when President Bush is due to go to China, we're going to see a very rocky road, but I think he will find an equilibrium.

He also very firmly supported permanent trade relation status for China, and China's entering the W.T.O. And, by the way, China and Taiwan will enter the W.T.O. pretty much simultaneously, which will open up new diplomatic possibilities, I believe, in cross-straights relations. So, I don't think it is as negative as it has been cast, necessarily.

BAY: Robert Manning from the Council on Foreign Relations. Thank you for joining us tonight.

Coming up on MONEYLINE, several drug companies out with quarterly results today. We'll check our the health of the sector. And we'll also take the pulse of the U.S. economy with some help from Diane Swonk. MONEYLINE will be right back.

(COMMERCIAL BREAK)

BAY: Taking a look at some other corporate headlines. Procter & Gamble is cleaning house, today confirming it may sell its well-known Crisco And Jif brands as part of its ongoing restructuring. Analysts applauded the decision, noting P&G's sagging food business is hurting the bottom line. Today, the stock gained fractionally, to $57.56. After the bell news from Philip Morris, will raise wholesale cigarette prices by 14 cents a pack, as effective tomorrow. CSFB says Philip Morris will use the proceeds to pay off its share of the industry's landmark $206 billion settlement agreement with 46 U.S. states.

The price hike was expected all day, sending Philip Morris up $2.75 in the regular session. And despite ongoing legal battles, the stock has soared over the past year, up more than 150 percent.

In tonight's MONEYLINE movers, BMC software fell after warning quarterly profits could be half what Wall Street expected. A different story for Goto.com. The Internet search engine gaining 3 3/4 or 33 percent, after topping sales estimates and posting a narrower-than-expected loss. Henry Blodget of Merrill Lynch upgraded the stock.

Checkfree up more than 6. Late yesterday, the online billing firm beat the Street by a penny. And subscriber growth hit the high end of expectations. That's good news for Checkfree investors. The stock is up more than 75 percent so far this month.

Mixed messages from the latest round of economic reports: do they point to a recovery or a recession? It depends on which ones you look at. Examples of an economic rebound: new home sales jumped 4.2 percent in March to the highest rate ever, and durable goods orders rose 3 percent.

On the flip side, consumer confidence fell in April well below forecasts. And last week, jobless claims climbed to a five-year high. Joining us now to sort it all out, Diane Swonk, chief economist at Bank One.

Diane, welcome.

DIANE SWONK, BANK ONE: Thank you.

BAY: Let's take a look at today's numbers. Housing numbers in particular, what do they suggest to you?

SWONK: Well, you don't buy a home unless you're pretty confident about the feature. And what we've been seeing is, frankly, consumer actions have been speaking louder than words anyways, and they've been willing to go buy out there and buy homes and cars in the first quarter, even though they said they were very pessimistic about the future.

So, I think we need to keep the context of the recent dip in confidence in that context. It did not include incidentally much of the rebound in stocks that we've seen since the Fed's historic intermeeting move -- another intermeeting move -- on April 18. So, I think that's important as well.

BAY: Right, so you're suggesting that that confidence number that we just got was calculated before the survey was taken before the news of that move, and would have been higher if it would have been calculated after?

SWONK: Much of it was and yes, it would have been.

BAY: In terms of housing numbers, any concern though, that these are a lagging indicator and we will in fact see declines later?

SWONK: I think it's important to keep in mind that housing numbers, even though they are actually an indicator that tends to peak out before an expansion peaks out, they also generate spending for almost a year after they surge. And so, the recent strength in home sales will be fueling spending for the next 12 months. That's very good for consumer spending out there.

At the same time, it's come against a backdrop of again another surge in mortgage refinancing, putting cash in people's pockets against again what is still an economy that I don't believe that's not only in recession, the consumer (UNINTELLIGIBLE), it's an economy that's well poised for reacceleration in growth very soon.

BAY: So, when do you expect this economy to recover and what will be the trigger?

SWONK: Well, I think we've already seen the trigger. Vehicle production, bottomed out in the month of February, surprised everybody by surging again in March. Vehicle industry is where the inventory problem has been one of the greatest, that and the high-tech sector.

The old industry, the old line economy is still bigger, believe it or not, than the new economy, despite the heights saw at one point in time, we got our views distorted on what the new economy impact was and vehicle production is scheduled for its first increase in a year in the second quarter. That's very important. That comes from my backyard in Chicago which I'm not right now.

But, we know in Chicago that we've hit an inflection point. We've put production coming back, because the shelves are bare. You don't need much consumer spending to support a stronger economy.

BAY: Now, Diane, there's another school of economic thought, which says we have hit an inflection point, and it's one that suggests a recession is unavoidable. Are those economists wrong? What kind of data are they weighing more heavily than you are, perhaps?

SWONK: Well, I'm not sure where they are coming from on it, because I've been consistently bullish in the fact we get a reacceleration in growth. But, where we're positioned right now, just adding up the numbers -- which I hate to stress too much, because economics is a study of human behavior and not that of numbers, but adding up where we are today, starting at the starting point are, we ended the last quarter on a high point.

It's just very hard to get a recession from here. You put on top of it, what I talked to in our own customer base, and even in areas where people are most concerned, things like capital investment. They are talking about that coming back, reallocating spending to where it frankly means the most, embracing the power of the Internet in old- line industries to actually create productivity growth.

BAY: So, Diane, what does mean you think we'll see in terms of the Fed?

SWONK: Well, in terms of the Fed, the Fed is more than showing it's willingness. They've been very clear on its message. Now, some on Wall Street are starting to figure the message out, and that is: we don't think there's a recession, but we'll hedge all risks of recession.

If recession is a 20 percent risk today, that means 80 percent of the time, the Fed is overshooting on rates, and willing to go further. I think we'll see another rate cut by this Federal Reserve. I also see as I've consistently seen, that this Fed will have to be retrenching its steps by year end.

BAY: And retrenching means what, precisely?

SWONK: Tightening again. We'll be seeing this Fed doing another 180 degree turnaround in policy over the next year, much like we did over the last year.

BAY: Diane Swonk, thanks as always for joining us.

SWONK: Thank you.

BAY: Straight ahead on MONEYLINE, the drug industry is churning out a solid dose of profits. We'll take a look at Wall Streets reaction when we come back.

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BAY: In our "Sector Report" tonight: pharmaceutical stocks. Today, Bristol-Myers Squibb beat the Street by a penny on sales of just under $5 billion. Bristol, which is selling its beauty-care business, Clairol, confirmed full-year forecasts.

American Home Products matched expectations. Sales of products like Advil declined, but prescription drug sales grew a healthy 11 percent. Pharmacia also posted profits in line with estimates, the company compensating for declining revenue at its agriculture unit, Monsanto, with a nearly 20 percent surge in U.S. drug sales. It's best-seller arthritis drug, Celebrex, raked in $650 million alone. Analysts characterized the results as steady, and some see good buying opportunities.

(BEGIN VIDEO CLIP)

ALEX ZISSON, J.P. MORGAN: For whatever reason, we're in a period right now where the PE's, the multiples of the drug group, are pretty compressed, by historical standards, and we actually think it will return to a more normal spread. And if that happens, which we think it will, you probably want to own the fastest-growth names, and that's Pfizer and Pharmacia.

(END VIDEO CLIP) BAY: Whatever your pick, the stocks all posted gains today: Bristol, AHP, Pharmacia, Merck, and Glaxo all up a dollar or more.

Next on MONEYLINE: a high-tech mouse with no strings attached. We'll tell you about the desktop dynamo that's giving Microsoft a run for its money.

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BAY: The personal computer market is down in the dumps, but the market for PC accessories is going gangbusters. The market leader, Logitech, yesterday posted solid sales and strong profits for the quarter. And now Logitech has a newfangled mouse to help preserve its domain.

Steve Young reports.

(BEGIN VIDEOTAPE)

STEVE YOUNG, CNN CORRESPONDENT (voice-over): Logitech, which makes accessories for PC's, has just reported the kind of fat financial results that are just a dim memory for Intel and Microsoft. Its sales for the year climbed nearly 25 percent. Profits soared more than 60 percent. And the Swiss company with a California subsidiary and a Nasdaq listing has a brand-new weapon in its arsenal.

It's the world's first cordless, optical mouse. That means no more wire tangles. No more balls to get gummed up in the bottom of the gizmo. Logitech claims 70 percent share of mice sold to PC makers, and the new device should strengthen its hand in the overall $1.5 billion mouse market. Microsoft is No. 2.

ROBIN SELDEN, LOGITECH: Microsoft itself said if you could figure out a way to do optical and remove the cable, you'd probably have the Holy Grail of mice, at least for this generation of technology. And for some reason, Logitech was able to figure it out first and get it to market.

YOUNG: Analysts say a slow PC market is a good market for accessories such as mice because people like to spruce up their old machines. It's like the after-market for car accessories.

ROB ENDERLE, GIGA: People spend a lot of time in front of their PC every day. And a lot of people spend a lot of time in front of their car every day -- in their car every day, and so they care. They care what's around them. They want their functionality to be easier. They want to be comfortable. They want it to be easy to use.

YOUNG (on camera): : There may be just one thing wrong with the cordless optical mouse -- same thing as TV remote controls. Where'd I put the thing?

Steve Young, CNN Financial News, New York.

(END VIDEOTAPE)

BAY: Up next, a soft landing Alan Greenspan might appreciate.

Plus: "Ahead of the Curve": some of what you need to know tonight, ahead of tomorrow's trading. Stay with us.

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BAY: Taking a look at some of what could move the markets tomorrow: a read on the economy, with an Alan Greenspan favorite: the Employment Cost Index for the first quarter of 2001.

Also due out: weekly jobless claims, already at a five-year high. They're expected to rise.

And watch for earnings from Corning, Worldcom and Exodus Communications.

Plus, reports from Texaco, Reebok, and Starbucks.

Finally tonight, a soft landing that Alan Greenspan would surely be proud to engineer himself. In Fed circles, a "soft landing" means bringing a fast-growing economy down to a more sustainable level with little turbulence.

Well, if Mr. Greenspan is looking for inspiration, he could have found it today on the tarmac. It was a frightening and riveting scene shown live on CNN earlier today: a twin-propeller plane with its left landing gear stuck, attempting to land at the Opa Locka airport in Florida. After an hour of circling, the aircraft began the approach with only one wheel descended. The pilot shut down the right propeller's engine, and then, watch what happened.

An extraordinary feat for pilot Sebastian Pardo, just 22 years old, with just four years of flight experience. Let's hope Chairman Greenspan can pull off the same feat with the U.S. economy.

That is MONEYLINE for this Wednesday. I'm Willow Bay. Good night from Los Angeles.

"CROSSFIRE" is next.

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