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Lou Dobbs Moneyline

Dow Advances 117.70 to 10,810.05; Nasdaq Climbs 40.80 to 2,075.68; Economy Grows 2 Percent in First Quarter

Aired April 27, 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: After today's triple-digit surge, the Dow is back in the black for the year. This is MONEYLINE for April 27th, 2001.

The Blue Chips weren't alone today in the winner's circle, as tech stocks go along for the ride. What fueled the across-the-board advance?

A key factor: A surprisingly strong report on the economy. Have we dodged a bullet in terms of a recession? And what does studying crime, classroom cheating, and corruption in sports, have to do with the economy? More than you might think.

Welcome to MONEYLINE. We begin tonight with a strong advance to end the week on Wall Street. Stocks jumped across the board, investors energized after a report was released that surprised even some of the more bullish economists. Gross Domestic Product for the first quarter gained 2 Percent, giving investors hope that the chances of a recession are dwindling.

The Dow jumped 117 points, or just over 1 percent, to close at 10,810. More than 1.1 billion shares traded on the Big Board. The index is now in the plus column for the year, though not by much. After a solid week, the Dow gained a bit more than 2 percent over five sessions.

Taking a look at the Nasdaq today: that index gained 40 points or 2 percent, ending at 2,075, about 1.8 billion shares changed hands on the Nasdaq.

While the Dow gained on the week, the Nasdaq was not as fortunate. It fell 4 percent, a discouraging relapse after a dramatic two-week rally. But today's rally was anything but discouraging, sparked, as I just noted by a solid report on the economy. A 2 percent gain in Gross Domestic Product is hardly a red-hot showing for the quarter, but considering some of the dire predictions of a recession, today's report was just the kind of news investors wanted to hear.

Kitty Pilgrim reports.

(BEGIN VIDEOTAPE) KITTY PILGRIM, CNN CORRESPONDENT (voice-over): The economy grew at a 2 percent annual rate in the first quarter of the year, twice as fast as most economists expected. Two percent however, historically, is hardly an economic boom.

LARA RHAME, BROWN BROTHERS HARRIMAN: Slowing growth from 5 percent last year to about 1.5 or 2 this year, is a very sharp slowdown. It is very sudden, and it will feel like a recession on a lot of fronts, even if it doesn't technically take us into recession.

PILGRIM: The Federal Reserve, anxious to head off a recession, cut interest rates aggressively four times since January. Even before the official word on first quarter growth, the most recent signs on the economy show strength. Housing is still very robust. New home sales are at a record, and prices have remained high.

Inventories have been drawn down, and rebuilding them will give the economy a boost. Consumer spending, especially on expensive items like cars, appliances and furniture shot up in the first quarter of the year. And even with the flurry of corporate layoffs, economists point out, people are finding new jobs quickly, and the jobless rate is still 4.3 percent, not a level that is consistent with recession.

MICKEY LEVY, BANK OF AMERICA: While the rate of economic growth is sluggish, there were some favorable signs and it highlights the very uneven composition of the growth.

PILGRIM: That's not to say there are no pockets of weakness. And Washington is keeping a close eye on growth.

PAUL O'NEILL, TREASURY SECRETARY: It's still only half of where we need to be. But I do think that our economy is wonderfully resilient and I think quick to respond to economic signals. And it's one of the great strengths of our economy, that it does have an ability to adjust and move.

(END VIDEOTAPE)

PILGRIM: There are a few negative things economists are watching closely: Business spending, which is weak, inflation, which was surprisingly high as measured in today's report, and a key component of inflation: high energy prices. All will influence just how strong the economy will perform -- Willow.

BAY: Kitty, and as you know, all things to keep a wary eye on. Kitty Pilgrim, thanks

The bond market today clearly saw the strength, not the weakness in today's report. Both the 10 and 30-year plunged more than a full point on fears that the Fed may act less aggressively in cutting interest rates.

But Wall Street, as we've said, loved the GDP news, especially fans of the so-called cyclical stocks. Allan Chernoff joins us now from the New York Stock Exchange with a look at why these stocks are grabbing the attention of investors -- Allan. ALLAN CHERNOFF, CNN CORRESPONDENT: Willow, Wall Street is reading this week's economic data as clear evidence that the economy is not heading into recession. After all, a recession is defined by two consecutive quarters of contraction in the economy, and we haven't even had one yet.

American industry as a whole may be suffering a profits recession, two consecutive quarters of declining numbers. But interest-sensitive sectors of the economy appear to be holding up well, and that's attracting investors to those stocks.

(BEGIN VIDEOTAPE)

(voice-over): It's the consumer who's spending, so investors are rushing into consumer cyclical stocks, closely tied to economic activity.

GREGG HYMOWITZ, ENTRUST CAPITAL: You'll see technology, business spending, still down. And really what allowed the GDP numbers to do what they did was, the consumer stayed strong. The consumer expenditures were up significantly.

CHERNOFF: Housing-related stocks jumped again today. Homebuilders Champion, Ryland, and Beazer Homes topped off a strong week, as did building supply retailer Lowe's. Retailers posted gains for the second day in a row, as investors snapped up apparel names including Pacific Sun Wear, Gap, Coach, Abercrombie & Fitch, as well as department stores J.C. Penney, May Department Stores, Nordstrom and Kohl's. Analysts say consumers are responding to the drop in interest rates.

ALAN SKRAINKA, EDWARD JONES: The medicine dished out by the Federal Reserve over the past few months is starting to bring the patient back to life. The broad economy is not in recession and actually is beginning to show signs of responding to the stimulation that the Federal Reserve has put in place.

CHERNOFF: While the stock market has swung up and down this year, the best-performing sector of the market has been consumer cyclicals, up 5 percent. The worst performing: Tech stocks, down 15 percent. Consumer cyclicals are behaving in textbook fashion. They're typically among the best-performing stocks following Federal Reserve interest rate cuts.

Previously, when the Fed cut rates four times in a row, autos have been up 39 percent one year later, homebuilding up 67 percent, household furnishings up 47 percent, department stores up 42 percent, and general merchandise stores rising 51 percent.

(END VIDEOTAPE)

CHERNOFF: That data is encouraging to bulls hoping there are more gains to be had in the consumer cyclicals. Now, it is quite clear that older industries like housing are now leading the economy. And guess what? It's the newer technology industries that have become the laggards. Willow, so much for the new economy. BAY: Yes, exactly, and all those tech investors feeling the pain. Allan Chernoff, thanks.

The key question now for investors: Does today's GDP report signal that we may be out of the woods in terms of a recession? Joining us now, David Horner, senior financial strategist at Merrill Lynch. David, welcome.

DAVID HORNER, MERRILL LYNCH: Thank you. It's good to be here.

BAY: You were expecting, what, around 1.3 percent GDP growth -- were you surprised when you saw this number come out this morning?

HORNER: Not really very surprised. I mean it definitely was higher than our call, but the first estimate of GDP generally tends to be off the mark. It's one of the hardest numbers to predict. It's certainly gratifying to see it higher than our call.

BAY: Just give us a -- remind us what's the range of the likely revisions?

HORNER: Well, the range can be up to a full percent. Although I think this number is a valid number. What happened was the consumer spending held up much better in the first quarter than I think many thought it would. I don't think, however, it was so much the rate declines by the fed, I don't think it has begun to work yet, I think it was more the weather change from the fourth quarter to the first quarter. People forget how bad the weather was the fourth quarter, so part of this is just a rebound from bad weather.

BAY: Folks are heading out and doing a little spending.

HORNER: Yes, I think so.

BAY: Does this mean then that we are out of woods. I mean, it appears as if Wall Street is betting that we won't see a recession. Is that a bet you would make?

HORNER: It is a bet I'd make but more cautiously than the market seems to be making it. And my reasoning is this. We saw some disturbing new these week, the employment news. For example, the jobs hard to get rose in the Tuesday conference board release and that's an early signal of problems in the job market. And certainly if job insecurity increases, that could be bad for consumer spending in the next two quarters.

BAY: Could be bad or is it likely that it will be bad? We've had some rather serious news about the job market, and with the daily stream of layoffs that we report, can consumer spending really stay strong?

HORNER: Well it can, but I really do think that's where the downside is, and by the way, the Fed does as well. I mean both in their March 20 reduction rates and in their recent intermeeting reduction rates, they definitely cited the potential weakness of consumer demand. Now they did not mention employment in that, but they did mention the impact of the wealth effect. Even with the market rally here we're well below a year ago and I think rising job insecurity. We saw, for example a new high in unemployment claims reported yesterday. That is problematic.

BAY: What do you think we will see going forward in terms of GDP growth? You know, some folks are saying, let's not get too excited by this number, because, in fact, we may hover here in the 1 to 2 percent range for a while. Do you think that's the case?

HORNER: Yes, I do. I do think we will avoid recession and hover at 1 to 2, but you know, 1 to 2 percent, given our potential growth, as O'Neill said earlier -- Treasury Secretary O'Neill said earlier -- is probably twice that. It's going to feel like a recession. It's certainly going to feel like a recession to the many people who are getting laid off. And those layoffs are not over.

BAY: When do you think that we will start to feel the effects of Fed tightening?

HORNER: The easing.

BAY: Yes, I'm sorry, the easing. How much will that help?

HORNER: Well, I think we'll begin to see it in the second half, about the same time that some of the reductions in tax rates begin to improve the economy. So by the fourth quarter I would hope that we're going back to our potential, but I don't think we'll be there yet.

It'll probably be next year before we are. Because remember, we also have slowing world growth, and so far Europe had done nothing to reverse that slowdown. And Japan really can't, because they're not in a position to do anything short-term. So there are other factors working to hold us well below potential growth for most of this year yet.

BAY: OK. So we won't be popping the champagne corks just yet.

HORNER: I don't think so.

BAY: David Horner, thanks for joining us.

Ahead on MONEYLINE: grading the first 100 days. An in-depth look at how the president has managed the economy and the environment.

And protests greet the Navy's decision to resume bombing on Vieques. We'll go live to the Puerto Rican Island.

(COMMERCIAL BREAK)

BAY: On Sunday, President Bush will mark his 100th day in office, a traditional milestone for judging the early effectiveness of an administration.

Greg Clarkin took a look at how the Bush White House is stacking up on economic matters, .

(BEGIN VIDEOTAPE)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: I, George Walker Bush, do solemnly...

GREG CLARKIN, CNN CORRESPONDENT (voice-over): He took the oath of office just days into the first quarter, the markets and the economy weak -- and now both have steadied. And with a massive tax cut looking likely, President Bush is receiving generally high marks.

DAVID JONES, AUBREY G. LANSTON: I'd give the Bush administration a B on the economy. It's not a spectacular performance. He was dealt a difficult hand, in the sense that we were seeing the stock market decline. We saw the economy basically hit a wall, in terms of growth, right around election time.

CLARKIN: The tax cut is the centerpiece of the White House economic plan, a plan critics charge is too narrowly focused.

EILEEN APPELBAUM, ECONOMIC POLICY INSTITUTE: This president set as his goal a tax cut for the rich and powerful at a time of budget surpluses. To me, that's not a very high hurdle. He set the level of performance pretty low.

CLARKIN: And there have been missteps. Shortly after taking office, the president was accused of talking down the economy. And talking about the dollar got Treasury Secretary Paul O'Neill in trouble.

PAUL O'NEILL, TREASURY SECRETARY: He's made some confusing statements, almost misleading statements about the dollar, suggesting that the administration is not in favor of a strong dollar but instead, in favor of a strong economy which creates a strong dollar. That was confusing enough to foreign exchange traders to cause some dollar volatility, at least.

CLARKIN: But many on Wall Street have liked what they've seen in the first 100 days of the administration.

JIM GLASSMAN, J.P. MORGAN CHASE: The way that they are dealing with the Fed is a big plus. The willingness to compromise with Congress on the tax issues and budget issues, I think, is a plus. So, I think so far, although it's very early in the game, so far all the signs are that they're on the right path.

(END VIDEOTAPE)

CLARKIN: And with the economy stabilizing and the president getting relatively high grades for his handling of economic matters, many on Wall Street say don't forget the Fed. After all, interest rates have been cut three times in the first 100 days of this president.

Willow, back to you.

BAY: That's right, Greg. Don't forget the Fed, as many on Wall Street remind us all the time. The economy, of course, is hardly the only challenge that the Bush administration has faced so far. And one of the most contentious issues to date: the environment. We polled a range of different voices for a report card on the president's environmental record, .

(BEGIN VIDEOTAPE)

BAY (voice-over): Bruce Josten, from the Chamber of Commerce, a voice for American business, gave the president a B-plus.

BRUCE JOSTEN, U.S. CHAMBER OF COMMERCE: He gets very, very high marks, probably again. I'd give him maybe a B-plus here. From the environmental community, I'm sure they'd give him an F, and I just have to say I don't understand why. He upheld Clinton standards on lead. He's upheld the Clinton standards on wetlands. He went beyond President Clinton on diesel.

BAY: Robert Reich, the former labor secretary, and one of the more liberal members of the Clinton administration, handed Mr. Bush a D.

ROBERT REICH, FORMER LABOR SECRETARY: I would give Bush a gentleman's D on the environment. He has created the impression in the public, whether true or not, I think it is mostly true, that he doesn't care much about the environment. In fact, he will roll over for industry.

And it has to do with the decision to roll back CO2 emission standards, the arsenic standard -- he's inched backwards on that. But nevertheless, the public understands him to be pro-arsenic. That's not exactly what a president wants to be known at.

BAY: Stephen Moore, a long-time champion of free markets and limited government, from the Club for Growth. He gives the president an A on the environment.

STEPHEN MOORE, THE CLUB FOR GROWTH: I think that Bush has been, from my perspective, just a star. I'd give him an A on environmental policy because he has been really looking at a lot of the extremist environmental policies that were passed by Bill Clinton and reversing a lot of those. My favorite example has been the suspension of the Kyoto Treaty.

BAY: And from Alyssondra Campaigne, of the environmental advocacy group Natural Resources Defense Council, a D-minus.

ALYSSONDRA CAMPAIGNE, NATURAL RESOURCES DEFENSE COUNCIL: I give the president a D-minus, and again, stress that they're asking for credit for turning in somebody else's homework. They're asking for credit for doing things that were leftover from the last administration. And the American public and our global environment won't benefit simply from not moving backwards on environmental protections.

(END VIDEOTAPE)

BAY: On Monday we'll see how the White House is scoring in other areas, among them: foreign policy.

Coming up: April, turning out to be the cruelest month for dot- com layoffs. We'll take the tally of the job cuts.

(COMMERCIAL BREAK)

BAY: A federal judge in Kansas today threw out a government suit that charged AMR's, American Airlines, with predatory pricing. The judge granted AMR's request for summary judgment, siding with the airline, one month before the trial was set to begin.

The federal government had charged American with illegally driving out smaller airlines from its Dallas hub by saturating certain routes with additional flights and low fares. The Justice Department expressed disappointment with the decision.

In tonight's corporate headlines: consumer products giant Unilever exceeded expectations despite a nearly 40 percent drop in profits. Unilever also announcing 8,000 layoffs related to its $24 billion acquisition of Bestfoods. Over the past year, Unilever has cut 33,000 jobs.

Dramatic impact from the pilot strike at Comair, Delta's regional airline, today announcing 2,000 layoffs. That is half of its remaining work force. Comair executives say they had no choice. Pilots have been on strike for more than a month, at a daily cost of $4 million. Affected workers will be let go May 13th, and return on an as-needed basis. Checking the stocks, Unilever added nearly $2 and Delta gained fractionally to 44.52.

In tonight's "Tech Watch": an update on layoffs in the dot-com world. We hear all the time about dot-com job cuts these days, but the actually numbers may surprise you. According to the out-placement firm, Challenger, Gray & Christmas, April set a record with more than 17,000 layoffs announced. That brings total Internet job cuts this year to over 51,000.

Taking a look at the distribution, Internet technology firms have slashed more that 6,000 jobs; online financial services and retailers both cutting more that 2,300 workers; and professional services firms, including Web advertising and consulting firms, are close behind.

Coming up, protests on a Puerto Rican island. Demonstrators calling for the Navy to stop bombing. We'll get the latest live from Vieques.

(COMMERCIAL BREAK)

BAY: The U.S. Navy resumed bombing today on the Puerto Rican island of Vieques, setting off a series of protests. Hundreds of demonstrators showed up, and several dozen people were detained for demanding that the military stop using the island as a bombing range. Vieques, just off the coast of Puerto Rico, has been the source of rising discontent, after a civilian guard was killed by an errant bomb two years ago.

John Zarrella is live in Vieques, and he joins us now -- John.

JOHN ZARRELLA, CNN CORRESPONDENT: Good evening, Willow.

It has been a long day's journey into night here on Vieques Island. You can probably hear over the microphone the -- what has become really, a festive atmosphere tonight. But it was nothing like that earlier in the day.

The protesters began gathering very early in the morning, and by about 2:00 this afternoon, what was a festive atmosphere, similar to this, turned very quickly. There were about 300 to 400 protesters here out in front of the Camp Garcia gate. And along the fence line, several dozen of them in small groups began to try to break through the fence and the concertina wire above it. As they got through, military MP police began to grab them and detain them.

There was at least one flatbed truck with several protesters on it who were taken away. There were others we saw who were detained and sitting down handcuffed in the grass. And there are reports that at another site a few hundred yards from here, that several of the protesters were injured, had minor injuries from, perhaps, rubber bullets that may have been fired at them. That is what the protesters here are saying, although we have not been able to confirm that.

Protesters say they're gong to continue their acts of civil disobedience into the night, perhaps even tomorrow. The military exercises went on as scheduled, the Navy saying that the protest did not interfere with those exercises. And they plan to continue them for at least the next two to three days, and perhaps as long as another week.

This is John Zarrella reporting live, Vieques Island, Puerto Rico -- Willow.

BAY: Thanks, John.

Coming up in the next half-hour of MONEYLINE: more on today's upswing in the markets. Why a major sign of economic growth sparked a buying mood on Wall Street.

An on-line retailer with an uphill battle: making money by changing the way Americans shop. We'll have the bottom line on Webvan.

Plus, a controversial new theory rocks the economic profession, links two of the most contentious issues of our age: crime and abortion.

(COMMERCIAL BREAK)

BAY: In tonight's headlines: Wall Street finishes the week on a high note, with the Dow back in the black for the year.

And the U.S. economy shows more strength than expected. Gross domestic product gained 2 percent in the first quarter, while businesses trimmed inventories for the first time since 1991. And an Internet firm, unwilling to give up. Online grocer Webvan struggles to keep from drowning, as it attempts to revolutionize the way we shop. "The Bottom Line" on Webvan.

But first: markets finish the session in the plus column, with that stronger-than-expected GDP setting a positive tone from the moment the opening bell sounded. The Dow climbed 117 points, or just over 1 percent to 10,810. Standouts on the index: IBM, up nearly $2.50. Intel, American Express, Wal-Mart and Procter & Gamble all up more than a $1.50.

A 2 percent jump on the Nasdaq, following yesterday's negative session. Chip stocks led the way, with some help from the biotech sector. The Nasdaq finished up 40 points, at 2,075. The broader markets rallied as well, finishing up 18 points, or 1.5 percent at 1,253. For the week, the Dow up 2.2 percent, and Nasdaq finished down 4 percent. And the S&P at the end of the week, up 1 percent.

For more on this week's trading and a preview of what's to come, Joe Battipaglia, chief investment strategist at Gruntal & Co. Welcome, Joe.

JOSEPH BATTIPAGLIA, GRUNTAL & CO: Good to see you, Willow.

BAY: Wall Street is betting that we are not heading for a recession. Is that a bet you'd make?

BATTIPAGLIA: I would definitely make that bet. The economy will not contract on the consumer side, the housing market is too strong. The consumer confidence has pulled back a bit, but it's still running at high levels. And quite honestly, when the Fed moves this aggressively on rates, it instills some confidence.

And the president's report card is also helpful here. There's a belief that there will be some tax relief, that marginal tax rates will come down, and that gives it some legs, as far as the next quarter and the quarters after that.

BAY: All right. Admittedly, a lot of positive, but still, the negatives do loom large. We have contracting earnings, contracts business spending and a near-daily litany of layoffs.

BATTIPAGLIA: Yes, that's clear. And it's important to point out here that whenever earning estimates are being cut in this manner, it's a cyclical process, and we have several more quarters of that coming.

However, the stock market anticipates a brighter future beyond it. And historically speaking, the market starts to move halfway through that process, and that's where we are now. Earnings estimates started to be cut in the latter part of last year, they have a couple of quarters to go, and that's it. In that event, the market usually rallies some 30-plus percent from that midpoint, and we are now entering that period of time.

BAY: What's the biggest risk that you see out there when you look forward? I know it's hard to get you to be too negative, but you know, when you do worry?

BATTIPAGLIA: Well, clearly this is a broad economy. And while we have had a capital spending contraction, which has been holding the tech stocks through the latter part of the year and into next year, the big challenge dead ahead here is the cost of gasoline in the summer and the cost of electricity for the cooling season.

If indeed, there's supply disruptions, or distribution disruptions, it can hurt various markets throughout the country. We know very well what is going on in California, and if that becomes a problem throughout the United States, consumer behavior changes. It would turn very nasty if gasoline broke through two and went on to three, and all those dire forecasts around electricity. I believe those problems can be averted, but we have to watch it very carefully.

BAY: You do. Even the gas problem that looms large and immediate?

BATTIPAGLIA: Well, we know where we are with oil, because we saw that going into the year 2000, and oil prices shot up and then of course, gasoline went with it. We had some comfort this year as those prices came down, but now they have bounced back up a bit, and there's concerns that distribution is going to be tight. That's something we have to watch for.

BAY: Let's go through where you think the markets are headed. Now, your targets for the Dow at year end, 1,205. Still in place?

BATTIPAGLIA: Still very much in place. 1,207 is a real possibility. 1,650 on the S&P 500, and 3,000 on the Nasdaq composite.

BAY: You revised that one?

BATTIPAGLIA: Well, we revised it down from 4,300 when we started the year, because the tech recovery is going to take a bit longer than we originally thought. But our Dow target and the S&P are still our original targets, and we are going to get there based upon the lowering of interest rates, based upon the fact that the markets will respond early to the ending of that cycle of downward revision on earnings estimates.

And quite frankly, as we look at 2002, there could be some very strong earnings to the upside, generally speaking, that could give us a 30-plus percent performance on the markets.

BAY: Well, that would certainly be welcome news for investors. Who leads this recovery, going forward?

BATTIPAGLIA: It's going to be broad participation. First of all, small and mid cap stocks will take their rightful place alongside some of the leadership, big-cap companies on the way out. We'll have the consumer sector clearly participate, financials and pharmaceuticals will be consistent performers in this, and the technology will come in at the latter part of the year to give the Nasdaq a big boost toward the end of the year to catch up with the Dow and the S&P. So, a broad-based recovery rally, typical of that when we come out of recessions.

BAY: OK, with the technology bringing up the rear. Thanks, Joe, we're going to talk to you again at the end of the show.

We have a story out of Texas tonight about President Bush's daughter. Jenna Bush, the president's 19-year-old daughter, was cited earlier today for alcohol possession by a minor. The citation was issued by police in Austin, Texas who were checking for minors in possession of alcohol at nightclubs. Officers questioned Jenna Bush, who is a freshman at the University of Texas, at about 1:30 a.m. While she was given a citation, she was not arrested. A White House spokesman said, quote: "We respect the privacy of this young girl, so we do not comment on her private life."

Coming up on MONEYLINE: bankruptcy, accusations of fraud and a market cap meltdown -- the latest on Lernout & Hauspie.

And what do economists and sumo wrestlers have in common? We will take a look when MONEYLINE continues.

(COMMERCIAL BREAK)

BAY: Problems continue to mount at voice recognition software company Lernout & Hauspie. The former high-flyer battered by accusations of fraud is stuck in bankruptcy, and now, the co-founders are facing criminal charges. Allan Dodds Frank has the story.

(BEGIN VIDEOTAPE)

ALLAN DODDS FRANK, CNN CORRESPONDENT (voice-over): It may soon be goodbye for Lernout & Hauspie, the troubled voice recognition software company based in Belgium. Criminal charges were filed in Belgium this week against co-founders Jo Lernout and Pol Hauspie. And the company, once a stock market darling, now faces likely dissolution.

The company's latest management team web cast what it called an "extraordinary" shareholders meeting, where officials talked in dry tones about findings of alleged fraud.

UNIDENTIFIED MALE: The auditor has made clear that a number of errors and irregularities were discovered in the statements of '98 and '99.

FRANK: The first allegations of fraud surfaced last summer about more than $100 million missing from the company's South Korean unit. A new American CEO, John Duerden, was brought in after the company he had been running, Dictaphone, was bought by L&H for more than $500 million.

But Duerden was ousted by the company's Belgian-dominated board before he could restructure the company, or find out the truth about the accounting mess. LANNY DAVIS, FORMER L&H OUTSIDE COUNSEL: Because of this resistance of getting this past behavior behind them and getting the truth out, I think that the company looks like it's in difficulty.

FRANK: The company's former auditors, KPMG have also sued L&H, claiming crucial information was withheld. But this week, L&H's co- founders claimed the accounting firm had had all the relevant information.

The chairman of KPMG Belgium told MONEYLINE, quote: "We are confident that shareholders will see this for what it is, a desperate act by desperate men to try to shift the blame from them to someone else."

L&H filed for bankruptcy last November, and now is contemplating selling off its assets.

"As stockholders, when we hear them talk about liquidating, it's a concern. You can't imagine a worse market to be selling assets into."

(on camera): And even if buyers can be found, asset sales are likely to be complicated by investigations and lawsuits involving the company on three continents.

Allan Dodds Frank, CNN Financial News, New York.

(END VIDEOTAPE)

BAY: Coming up on MONEYLINE: biotechs get a boost from some positive quarterly results, but can the sector sustain the momentum? The outlook on biotechs, when MONEYLINE continues.

(COMMERCIAL BREAK)

BAY: In tonight's "Sector Focus": Biotechs. Human Genome Sciences posted a narrower-than-expected loss. The company boasts one of the largest databases of the human genome, and is now seeking to develop gene-based drugs on its own. And while current sales of 5 million may seem small, one analyst told us why the company has a compelling future.

(BEGIN VIDEO CLIP)

MATT GELLER, CIBC WORLD MARKETS: It's a very good quarter, but this story really isn't necessarily about the quarter. What this story is about, is about a company that really has the lead in developing drugs out of the human genome. They're not just doing theory and science, they're really developing drugs on a massive scale. To me that's what's exciting, that's what gives them such a great future.

BAY: Investors liked that prognosis, sending Human Genome up more than 3 1/2. Amgen also a winner, up nearly 4. The nation's largest biotech beat the street late yesterday, but FDA delays forced it to lower sales guidance for the year. Biogen, Celera, and Gilead Sciences all up 2 or more helping the AMEX biotech index up over 6 percent. Over the past year, biotechs have outperformed the broader tech world. The AMEX biotech's 20 percent gain compares to an almost 45 percent loss from the Nasdaq.

Coming up on MONEYLINE, online grocer Webvan unveils a sweeping restructuring, but will the plan work? We'll check out the bottom line. And could there be two more rate cuts in the future? Myron Kandel thinks so. We'll debate the issue when MONEYLINE returns.

(COMMERCIAL BREAK)

BAY: In tonight's "Bottom Line," a dot-com once thought to have great promise that is now fighting for its life: Webvan. The online grocer is in the middle of a major restructuring plan that involves layoffs and closures. The company has taken aggressive steps to remain listed on the Nasdaq, and recently named a new CEO. But Webvan's biggest challenge, changing the shopping habits of Americans. Will it succeed? Casey Wian takes a closer look in this week's "Bottom Line."

(BEGIN VIDEOTAPE)

CASEY WIAN, CNN CORRESPONDENT (voice-over): Webvan employees in Atlanta this week learned first hand a hard lesson about job security in the Internet era. As part of a massive corporate restructuring, the online grocer announced Thursday it would close its Atlanta operation, wiping out 485 jobs.

UNIDENTIFIED FEMALE: I just showed up for work, any other normal day. Doors were locked, I have no access to the building. So I'm really kind of clueless as to what I should do.

UNIDENTIFIED FEMALE: This was my first day back from vacation. I had no idea. They told us we that we were secure, you know, at least until September.

WIAN: Atlanta is the third market, after Dallas and Sacramento, that Webvan has exited this year, trimming its territory to seven mostly West Coast cities. It's part of a shakeup designed to conserve cash and focus on markets with the biggest profit potential.

Webvan also plans layoffs of another 400 workers at its corporate headquarters near San Francisco and elsewhere, a 25-for-1 reverse stock split to keep its Nasdaq listing, and the promotion of former chief operating officer Robert Swan to CEO, replacing George Shaheen, who resigned. Swan defended the moves during Webvan's quarterly conference call, "While we regret the impact this decision has on our employees and customers in Atlanta, these moves are intended to lower operating cost and support our push to profitability. Under this revised business plan we have sufficient capital for the year 2001."

WIAN: Beyond that is anyone's guess. Webvan, which bought competitor Home Grocer last year, was once viewed as the Internet's next big thing. But turning a seemingly good idea into a sustainable business has proved difficult. MARK ROWEN, PRUDENTIAL, SECURITIES: Well the most massive challenge that the company faces is its basic business proposition, which is that they'll pick, pack, and deliver groceries for consumers at no additional charge. They still haven't shown that they're going to be able to do that and make money at it.

BUD GREBEY, WEBVAN: What we've learned is that breaking generations of shopping behaviors is very difficult to do. That people have been shopping in stores for 40 or 50 years the same way, and it's not intuitive for people to just go onto the Internet and start purchasing their groceries and other items over the Internet.

WIAN: As a result, Webvan has burned through about 90 percent of the more than $1 billion invested in the company so far.

(on camera): Analysts say competition from traditional grocers moving online is almost a nonissue for Webvan, because the company still hasn't come close to proving there's a viable market for even one online grocery service.

(voice-over): Webvan's market value has plunged from $10 billion in late 1999, to less than 60 million. Nasdaq has threatened to delist the stock, which prompted the 25-for-1 reverse split.

ROWEN: What a lot of companies who have done these reverse splits in the past have found, is that the stock sinks back to the lower levels anyway, below a dollar, and they eventually get delisted. But in Webvan's case, if they can make the business model work and the business plan work, maybe they'll come out of it.

WIAN: Key to that effort will be successfully incorporating home grocer's distribution system and customers into its own, and sticking around long enough to prove the skeptics wrong. There are positive signs. Webvan says it cut its cash burn rate by 40 percent in the first quarter. And its Orange County, California division became its first center to operate at a profit.

Casey Wian, CNN Financial News, Los Angeles.

(END VIDEOTAPE)

BAY: Shares of Webvan finished the day at 12 cents a share. The company has tanked more than 99 percent from its all-time 52-week high of just over 25. Webvan went public in November 1999, at $15 a share.

CNN's financial editor, Myron Kandel, predicts the Fed will cut rates at least once, if not twice, in the next couple of months. Here to discuss that, Myron and Joe Battipaglia of Gruntal. Gentlemen, welcome. Myron, a rate cut?

MYRON KANDEL, CNN FINANCIAL EDITOR: Willow, I think today's GDP figure and plus yesterday's increase in inflation takes some of the pressure off the Fed to cut rates another 1/2 point on May 15.

However, the key is next Friday when the job reports for April are released, and they look like they're going to be very weak. And that will increase the pressure on the Fed for another rate cut. I think it will be at least 1/2 point -- at least 1/4 of a point, and maybe 1/2 point. And if it's 1/4, it will be another 1/4 in June, Willow.

BAY: So, where do you think about where they Fed is headed next? Do you agree with Myron?

BATTIPAGLIA: No, I don't. I think that Alan Greenspan is very happy where he is right now, as opposed to six weeks ago. Because I think he's firmly in front of this thing now. So that if the economy demonstrates more weakness, and the job report is deteriorating rapidly, he can then move ahead with the rate cut.

But I suspect what he'll do is wait, that the data will not be that bad on the employment picture. He has a good GDP number. He has some price pressure from the economy, the consumer is looking very good. He can hold that in abeyance to some future date, should the economy need it.

Remember, the last time he was down in the 3 percent area, he was not comfortable. He'd like to be at 4 1/2 for a while yet.

KANDEL: Willow, I -- let me jump in, because Joe makes a very valid case, and I wouldn't argue that that's a possibility. But Joe is even more bullish than me on the stock market, so I'm encouraged to be with him.

I do think the Fed -- the economy is not strong enough to avoid another rate cut by the Fed, but I do think the market will be encouraged as we go in the months head.

BAY: R&D...

BATTIPAGLIA: So, the Fed realizes that they can't make purchasing managers buy things with rate cuts per se, particularly in the technology, so the economy has to heal itself now and let the rate cuts stand, knowing that there is a tax cut coming also...

KANDEL: Joe, give Willow a chance.

BAY: No, I'm sorry, I'm going to go out for a cup of coffee. I will be back in a couple of minutes. You guys continue.

But do you think, both of you -- do you think that we can complete this inventory correction, this business-led inventory correction without a drop in consumer spending? Speaking of a cup of coffee, Starbucks today is reporting that, you know, future sales are looking kind of questionable. Clearly, people are choosing, you know, not to go for the $4 double latte.

KANDEL: Well, I think one of the problems is the employment figures. People are worried about their jobs, and that obviously erodes consumer confidence. But think about the huge rally in the stock market over the last five weeks, and that's a plus for consumer confidence. So, I don't see consumer confidence dropping as much as some people expect, Willow. BATTIPAGLIA: And Willow, if you don't mind me weighing in: on the housing side, we have such strong numbers for new homes and resales, which usually precipitates spending on home-related items. And if that's a recession, give me more of it, because the consumer looks very vital at this time.

BAY: Gentlemen, a pleasure to have a couple of bulls joining us this evening. Well done. Thank you.

Up next: a different kind of look at the economy. And the lower the level on the Nasdaq, the cheaper the lunch. We'll explain next.

Plus, "Ahead of the Curve." Stay with us.

(COMMERCIAL BREAK)

BAY: Taking a look at some of what could make headlines on Wall Street next week: more clues on where this economy is headed with the employment report for April on Friday. Leading up to that watch for personal income and spending, the NAPM manufacturing index, construction spending, auto sales and factory orders.

More quarterly results next week from Dow component Procter & Gamble, from Priceline.com, Nextel Communications, Phillips Petroleum, Cigna and Martha Stewart Living.

And tune into MONEYLINE's weekend edition with Terry Keenan, a wrap-up of this week's Wall Street action and a look at what's ahead.

The American Economics Association met today in Boston to chose a winner of a prestigious academic award. The John Bates Clark Medal goes every two years to an economist under the age of 40 who is doing groundbreaking work. And you might be surprised to learn what some of these cutting-edge economists have been up to. Steve Young has the story.

(BEGIN VIDEOTAPE)

STEVE YOUNG, CNN CORRESPONDENT (voice-over): Economics today is not just the study of the economy, stupid, it's a study of why the crime rate is falling. What's up with corruption in sumo wrestling? The tip off: the sea of statistics on the Internet. And how come a classroom of kids gave the same answer on a test? Were they cheating?

Young economists are training the tools of their trade, computers, away from markets and onto social problems. They're using econometrics, or mathematical models, to tease out complex relationships and even insights into the family and religion.

GIORGIO TOPA, NEW YORK UNIVERSITY: I am a strong believer that economics shouldn't just be confined to issues such as, you know, the inflation rate or the unemployment rate, or the latest cut in the interest rates. But it can and should involve itself with other questions on, in general, on social behavior and human behavior.

YOUNG: University of Chicago economist Steven Levitt uncovered perhaps the most controversial correlation claimed by this new band of young economists. He and a Stanford University economist say crime fell in the 1990s because abortion was legalized in the 1970s, and there were fewer unwanted children. That's been attacked as everything from racist to pro-abortion.

DAVID EPSTEIN, COLUMBIA UNIVERSITY: The good thing about this study by Steve Levitt is not that it definitely answered the questions about the effects of abortion, but that it started asking questions that we haven't been asking before, and in that way it's going to start a dialog we haven't had. And that's a good thing for society. I think it's a very positive development.

YOUNG (on camera): Some traditionalists say the young turks using computers and econometrics on issues such as obesity are trivializing their discipline. Maybe not. After all, economics is known as a social science.

Steve Young, CNN Financial News, New York.

(END VIDEOTAPE)

BAY: Finally tonight, one culinary perk of the high-tech bloodbath: the Nasdaq bear market lunch. New York's Smith & Wollensky Group is featuring a Friday lunch special, priced according to the level of the Nasdaq. The price of a three-course lunch at one of seven hot spots is pegged to the close of the Nasdaq on Thursday.

Yesterday, it closed at 2,051. That means today's lunch cost less than $21, not including tax, tip and those three martinis. Sounds like a good deal? Well, a few weeks ago that lunch would have cost $16. The Nasdaq hovered around 1,600 when the idea was hatched. The rally that followed presented a dilemma for market-savvy diners.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: On one hand, I wanted my portfolio to go up, but on the other hand, I was, like, well, I can get lunch for $16.

(END VIDEO CLIP)

BAY: So what if the Nasdaq fully recovers to last year's record 5,048? Smith & Wollensky insists that at $50, its lunch is still a bargain, although they should probably throw the martinis in for free.

That's MONEYLINE for this Friday. I'm Willow Bay. "CROSSFIRE" is next.

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