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Lou Dobbs Moneyline

Dow Falls 21.66 to 10,876.68; Nasdaq Climbs 52.36 to 2,220.60; President Bush Announces Social Security Commission

Aired May 02, 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: Nasdaq on a roll! The beaten-down index soars again. This is MONEYLINE for May 2nd, 2001.

High-tech names re-emerge as the must-have stocks of the moment: The Nasdaq rises for the fourth-straight session. Does this rebound have legs?

President Bush attacks an explosive issue: saving Social Security as he tries to sell the biggest tax cut since the Reagan era. And the unseen victims of the market turmoil: nonprofits watching their donations and their own portfolios wither.

ANNOUNCER: This is MONEYLINE. Reporting tonight from New York, Willow Bay.

BAY: Welcome to MONEYLINE. We begin tonight with the remarkable surge in battered tech stocks. The Nasdaq composite today hit its highest level in months as a renewed sense of optimism abounds on Wall Street. We've seen bursts of bullishness throughout the year only to see the bears step back in. But this rally offers more encouragement. It's already lasted an entire month.

Kitty Pilgrim looks at the resurgence of technology stocks.

(BEGIN VIDEOTAPE)

KITTY PILGRIM, CNN CORRESPONDENT (voice-over): The Nasdaq closed near a two-month high as techs gained for the fourth-straight session. Even more impressive, the Nasdaq is up some 36 percent from lows hit just last month.

Some say it's a rally that's born of new optimism in the economy and fear of not catching the upside once momentum kicks in.

JOSEPH BATTIPAGLIA, GRUNTAL: That 70 percent drop of the Nasdaq over a year's period of time with lots of volume on the way down created a great amount of carnage, no matter how you describe it. And to me, that's the capitulation that everyone has looked for. Now we're getting on to the other side of that, and that's very powerful.

PILGRIM: Cisco led the rally with a more than $2 gain. Networking companies such as Juniper Networks and Sycamore Networks also benefited from the enthusiasm. LARRY LAWLER, DREYFUS: There's no doubt the networkers and the opticals are leading the way in the over-the-counter market. I think that's a great sign. I think it's a good sign for the economy. I think people would not be investing and going full force like they are in those stocks unless they thought the economy was going to start to do better.

PILGRIM: Some of the biggest caps on the Nasdaq have posted even more stratospheric gains from their 52-week lows. A little historical perspective shows Microsoft up 73 percent, Sun up nearly 60 percent, Cisco 51 percent, Intel up 43 percent, and Oracle up 32 percent -- all from their lows.

(END VIDEOTAPE)

PILGRIM: There are still holdouts who say that techs haven't got the all-clear signal yet. Over the past few months, the Nasdaq rallies have not had much saying power. This one, however, appears to be the strongest and the most convincing of them all -- Willow.

BAY: Thank you, Kitty, and we will wait and see. Kitty Pilgrim, thanks.

Taking a look at today's closing numbers, the Nasdaq jumped 52 to end at 2,220, a nearly 2 1/2 percent gain. The index has jumped 2 percent or more in each of the last four sessions.

The buying did not extend to the Dow. It ended in the red after a triple-digit surge yesterday, down 21 at 10,876.

The S&P edged up less than a full point to close at 1,257.

Clearly, all the focus is on the Nasdaq with some hoping we're now solidly on the comeback trail.

Let's go to Greg Clarkin at the Nasdaq marketsite with a look at what drove tech stocks today -- Greg.

GREG CLARKIN, CNN CORRESPONDENT: And Willow, there were a couple of sectors that were absolutely on fire today at the Nasdaq. The networking stocks specifically as well as the Internet stocks.

Let's take a look, if we can, at the networkers first, and the big story today, Cisco Systems by far and away was the most actively traded issue on the Nasdaq. You can see the stock being better than 12 percent: in this on what was decidedly a mixed report, a mixed research note out of Morgan Stanley analyst Chris Stix.

Now, Stix says that yes, there are some signs that Cisco's North American enterprise business is turning around, but still there are some very, very big questions, including its Europe business. And on top of that, Stix said, you know, the valuation really is just too rich for his blood, he's choosing to sit on the sidelines.

So what did investors do? They just rushed into the stock today, just seizing on those few positive comments there in Chris Stix's report. And you can see Cisco trading at $20. Stix says: You know what? By all metrics, a fair valuation for Cisco is about $18 a share. And investors are boosting it up to 20. And now, Stix's words -- he says: You know, I don't like being the cold blanket on Cisco, but still, what he's learned is that valuation is paramount.

Now, that lit a fire under the other networking stocks: JDS Uniphase gaining almost 8 percent on the day. Redback up better than 23 percent, a tremendous jump for Redback. Sycamore Networks up better than 10 percent. So those were the networking stocks.

Now, the Internet stocks also had a very, very strong showing. Let's take a look, if we can, at how some of those fared on the day, and let's start with Yahoo!

You go back to the April 4th bottom on the Nasdaq. Yahoo! was trading at $11 a share. Take a look at it right now. It's up around $23 a share.

Amazon was down around -- around $8 and change actually. Now, it's up at 17 after today's trading. Priceline.com right now is trading up around $7 a share. CMGI and Internet Capital Group, two real interesting stories, especially CMGI, yesterday a big gain, about 25 percent. Today, it was up 40 percent.

That stock was a $1.75 on April 4th. Take a look at it today, running up toward $6.

Now, these companies are both -- they're known as incubators -- Internet incubators, and the feeling is, with the IPO market showing signs of life, some of the stakes those companies hold in the privately held Internet companies may eventually see some IPOs, and those stocks moving higher on that.

Willow, that's it from here. Back to you.

BAY: OK, an interesting day there, Greg. Greg Clarkin, thanks.

Well, new-economy names shot higher today. Old-economy stocks headed lower with oil stocks taking a big hit. The sector has been a standout performer recently, but today's downturn wasn't just about profit-taking.

Allan Chernoff reports.

(BEGIN VIDEOTAPE)

ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): The trouble started in the futures market. A buildup in crude oil inventories caught traders by surprise.

SCOTT HESS, G&H COMMODITIES: We've been having drawdowns over the last few months, and now all of a sudden we've been seeing quite a bit of a build.

CHERNOFF: Normally this time of year crude oil inventories decline as refiners prepare for the summer driving season. But the Energy Department reported a buildup of more than 6 million barrels of crude oil last week, confirming a separate survey from the American Petroleum Institute.

Inventories of gasoline and distillate, which is heating oil and diesel fuel, also jumped.

ANDREW LEBOW, MAN FINANCIAL: Crude stocks are now about normal for this time of year, where a couple months ago we were well behind four-year averages. And what that means is some of the real bullish psychology has been removed from the markets.

CHERNOFF: Crude oil tumbled a $1.14 a barrel at the New York Mercantile Exchange. Gasoline fell nearly 3 cents a gallon, and heating oil dipped more than 2 cents a gallon.

A more dramatic reaction in oil and gas stocks, which had begun falling Tuesday after posting big gains this year.

MARK DONAHOE, U.S. BANCORP PIPER JAFFRAY: It looks like to me, based on the money flow that we see here, is that this money that's coming out of energy pretty much is going into technology right now, across the board.

CHERNOFF: Drilling and equipment companies were hit the hardest, including Rowan Companies, Smith International, Transocean Sedco, Schlumberger, and Baker Hughes.

Refiners also suffered steep losses as UBS Warburg cut ratings on some key names in the group. Among the losers: Tosco, Ultramar Diamond Shamrock, Valero Energy, Ashland, and Sunoco.

(END VIDEOTAPE)

CHERNOFF: Keep in mind oil stocks have been spectacular performers. Rowan Companies, for example, is up 57 percent from its 52-week low at the beginning of December. Analysts say drilling and refining companies should continue turning solid profits even if crude oil falls a bit more. But at the moment, these stocks do appear to be losing some of their momentum -- Willow.

BAY: Allan, a bit of the changing of the guard. Allan Chernoff, thanks.

Investors today were also assessing another round of economic news beginning with the latest report on demand for big-ticket goods. Factory orders gained nearly 2 percent in March, a bit better than expected. But there's still underlying weakness: Take out transportation orders and the number would have been negative.

Investors got even more confirmation of continued economic weakness from the Federal Reserve in the latest Beige Book regional survey. The Fed found that almost all districts report a slow pace of economic activity in March and early April.

Not a huge reaction in the bond market. The 10-year up one tick to yield 5.28 percent. The 30-year up nearly half a point. The yield there at 5.7 percent.

In Washington today, President Bush began to address saving Social Security Republican style. Mr. Bush named yet another White House panel to look into reforming the system with one extremely controversial proposal at its core: allowing Americans to invest some of their Social Security in stocks.

Peter Viles reports.

(BEGIN VIDEOTAPE)

PETER VILES, CNN CORRESPONDENT (voice-over): Early in the 2000 campaign, it seemed like a slam-dunk idea: to let Americans put some of their Social Security money into the booming stock market. It's been a year of turmoil in the markets since then, but the new president is undeterred, arguing Americans deserve a better return on their Social Security dollar.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Today, young workers who are paying into Social Security might as well be saving their money in their mattresses. That's how low the return is on their contribution.

VILES: To no one's surprise, the president's new commission on Social Security is filled with people who agree that workers should have the power to invest some of their Social Security money on their own. The commission is headed by former Democratic Senator Daniel Moynihan and Richard Parsons of CNN parent AOL Time Warner.

Democratic leaders, who oppose privatization, were immediately critical of the commission's makeup.

REP. RICHARD GEPHARDT (D-MO), MINORITY LEADER: It is a huge fundamental change to privatize it and to allow people to invest their accounts on their own. If you just look at the last year of experience with the stock market, you know that that is a risky idea.

VILES: The problem is projection: Social Security will run out of money in 37 years. Allowing workers to invest some of their Social Security contributions in the stock market could extend the life of the program.

TANNER: It changes it from a system in which you're benefits are determined by the political process, would no relationship in reality to what you pay into the system. To a system in which your benefits are based on what you pay in, plus the enormous power of compound interest and private investment.

VILES: Much of Wall Street is routing for privatization, because even if workers can put 15 percent of their Social Security contributions in to private accounts, that's $80 billion a year that could be invested in stocks.

Peter Viles, CNN financial news, New York.

(END VIDEOTAPE) BAY: In the House today, a victory for a proposal that would be the most comprehensive change in retirement plans in a generation. The house overwhelmingly passed a bill to increase the limits on tax deferred contributions to IRAs and 401(k)s. The bill has passed in the House six times, and then died in the Senate.

Supporters say it has a better chance of passing this year. Under the proposal, the tax deferred limit for IRAs would increase over the next three years from 2,000 annually to 5,000. The limit on 401(k)s will rise from $10,500 to $15,000 in 2006.

Aside from retirement and Social Security, the talk of Washington today included the budget and taxes. Jonathan Karl joins us now from Capitol Hill with more that -- Jonathan.

JONATHAN KARL, CNN CORRESPONDENT: Well, Willow, congressional leaders have finally inked a deal on a budget blueprint that would include $1.35 trillion in unspecified tax cuts over the next 11 years. It would also increase federal government spending by 4.9 percent next year.

That increase in government spending is bigger than the 4 percent the president sought, but it's much less than the more than 8 percent passed last year under President Clinton.

At the White House, President Bush invited congressional key Democrats and key Republicans down to hail this as not only a victory for tax cuts but also a victory for his campaign promise to change the tone in Washington by working with Democrats.

(BEGIN VIDEO CLIP)

BUSH: It couldn't have been done without the cooperation and work of some of our Democrat friends, Breaux of Louisiana and Miller of Georgia. Condit of California, members around this table who realize it was time to come together to put a good budget together on behalf of the American people.

(END VIDEO CLIP)

KARL: But Democratic leaders said the president only worked with moderates in their party, after he was forced to, after he was unable to pass the full $1.6 trillion through the Senate on party lines. This is what Tom Daschle had to say.

(BEGIN VIDEO CLIP)

SEN. TOM DASCHLE (D-SD), MINORITY LEADER: He was drag kicking and screaming to that number and now has claimed victory and I've said it before, but we'll take more victories like that. I think he did it the hard way. He could have done it in a much more bipartisan and conciliatory way.

(END VIDEO CLIP)

KARL: This deal is expected to be passed by both the House and Senate tomorrow. But remember, Willow, this is just a budget blueprint. There is absolutely no guarantee that Congress will adhere to the spending limits, to that 4.9 percent increase.

In fact, they're already talking about passing some $6 trillion in spending -- $6 billion in spending this year for emergency spending and also more, an unspecified amount, on defensive spending this year -- Willow.

BAY: All right, Jonathan. Jonathan Karl on Capitol Hill; thanks.

After the break, we'll hear from the heart of the White House's economic team, Larry Lindsey.

Also ahead: GE gets the green light from Washington on a huge acquisition, but there are strings attached.

Plus: one more reason for tech investors to show some enthusiasm. A stellar, high-tech debut on Wall Street.

And a big development in the scandal that took the art world by storm. Critical charges for the chairman.

(COMMERCIAL BREAK)

BAY: Late word today that the Justice Department approved General Electric's bid to purchase Honeywell. But the DOJ attached conditions to the merger, and will require divestitures. The combined company will have to spin off a helicopter engine business, and another division that services and repairs engines.

Checking stocks in regular trading, General Electric and Honeywell both closed fractionally higher today.

And other news in Washington, the White House and Republicans in Congress today agreed to a budget blueprint that would increase spending by 5 percent next year, less than the Democrats have been looking for.

A few minutes ago, I spoke with White House economic adviser Larry Lindsey and began by asking him, where the battles over spending will be fought.

(BEGIN VIDEO CLIP)

LARRY LINDSEY, WHITE HOUSE ECONOMIC ADVISER: Well, I think there's a widespread agreement that the president's priorities will be carried, there's going to be a big increase in spending education as he suggested in his budget. There will also be increased defense spending. I think there's a broad, bipartisan recognition that we have not spent enough in defense in the last few years and we could spend more there.

BAY: $100 billion in immediate tax relief over the next few years, one of the things we discussed with Representative Armey here last night, does that -- are you concerned at all that that ties the Fed's hands, that the Fed will be worried about additional rate cuts over stimulating the economy?

LINDSEY: No, not at all. I think you've heard from Chairman Greenspan, members of Congress, administration officials, all year long saying the same thing. We need both monetary and fiscal policy. We have a slowdown, industrial production peaked last September, so did real final business sales and it's the consumer who is pulling the economy along.

And we need both monetary and fiscal policy to work.

BAY: You've been clear for some time, you're worried about the economy, so how surprised were you to see the GDP growth number come in at 2 percent?

LINDSEY: Oh, I thought it was great news, i thought it was encouraging. These numbers of course are always revised. We got an inventory number today, for example, that strongly suggests that number will be revised down.

BAY: The president today, on the subject of Social Security, announced a new White House panel charged with coming up with ways to preserve and modernize Social Security. When did you think we'll get a plan from this panel?

LINDSEY: Well, the group, as you know it, includes 8 Democrats, 8 Republicans, people largely from the private sector. We hope he's going to report sometime this fall, we hope that it's the kind of report where they reach a consensus that the public and the Congress will enact into law.

BAY: And would you expect any plan that they put forth to include private Social Security accounts?

LINDSEY: Well, I think that the idea of having personal accounts is one that the president ran on, and I think most people who have looked at -- excuse me -- how to save the Social Security system, have concluded personal accounts are a necessary part of that solution.

BAY: And after what investors have lived through for the past two years, watching nearly all of those gains evaporate, do you really think that there will be appetite for private Social Security accounts, both in Congress and for Americans?

LINDSEY: Oh, my gosh. Remember, what we're talking about here, is not buying at the top of the market and selling at the bottom. What we're talking about is investing affixed amount, year after year after year.

You know, even if you -- the Dow fell to -- half tomorrow, if you've been putting money into the stock market, same amount every year for 20 years, you'd have a return that's almost four times what Social Security is now giving you. And that's with the market cut is half.

So, I don't think there's any question that, you know, prudent investing over the long-term is actually good for Americans. BAY: Mr. Lindsey, thank you for joining us tonight. We appreciate your time.

LINDSEY: My pleasure. Thank you.

BAY: And coming up on MONEYLINE: Tech heavyweights gather today in New York. What are executives saying about the outlook for techs?

(COMMERCIAL BREAK)

BAY: We've heard a lot about this year's IPO drought. In fact, the number of IPOs are down 80 percent from a year ago. But today, it seemed like a return to brighter days, as investors clamored for shares of Simplex. Simplex, which makes chip software, priced at $12, the top end of its range, raising a total of 48 million. And it got a royal reception on Wall Street. The stock surged more than $9, or nearly 77 percent on strong volume of more than 7 million shares.

In tonight's "Tech Watch," top executives from companies like Sun Microsystems, EMC, and Broadcom gathered today: The venue a Merrill Lynch hardware conference in New York. Bruce Francis was there.

So, Bruce, what are they saying? Is the worst over for technology and tech stocks?

BRUCE FRANCIS, CNN CORRESPONDENT: You know, it's mixed picture. I think if you Look at the PC segment, yes, but beyond that it's very hard to call a bottom these days. Well, some unusual and welcome words from a former tech high flyer today: "We are positioned to meet or beat expectations." The speaker: Gregory Reyes, the CEO of Brocade Communications Systems. Reyes says that business is strengthening, and April was encouraging. Brocade sells its switches through partners like EMC and Sun Microsystems, and Reyes says that those companies are beginning to see some improvement, too.

(BEGIN VIDEO CLIP)

GREG REYES, BROCADE COMMUNICATIONS: I could tell you that many of our hardware partners -- system partners -- that had March quarter ends had better Aprils than we had anticipated. And I think that's a positive indication.

FRANCIS: Well, shares of Brocade are off 62 percent from their peak, and up though, 177 percent from their Nasdaq low on April 4th. Well, despite some encouraging words from some of the presenting companies, Merrill Lynch's technology strategist Steven Milunovich sounds bearish in the short term.

Milunovich notes that after the long painful bursting of the bubble, tech stocks in the S&P 500 are finally trading at P/E comparable to their nontech brethren. That hasn't happened in a while, but P/E'S for the Merrill Lynch 100 are still fairly high, back in the 40s after bouncing off around the 30 mark. That's still expensive compared to when they were hovering near 10 during the recession of the early 90s. So, after an astounding April for the Nasdaq, Milunovich is advising professional clients to lower their exposure to tech stocks.

(BEGIN VIDEO CLIP)

STEVEN MILUNOVICH, MERRILL LYNCH: You do want to think about lightening up. We believe that this recovery is "U" shaped, so we could kind of bump along the bottom for a while, so it would be premature to get too excited. Also valuations are fairly high. The PE on our Merrill Lynch 100 Tech Index is 45 times this year's earnings.

(END VIDEO CLIP)

FRANCIS: Now If you have to look around for bright spots here, Milunovich says that one the best bets in today's tough tech environment: That would be storage.

BAY: OK, Bruce Francis, thanks

Coming up, the men behind the auction gavel face federal charges. Stay with us.

(COMMERCIAL BREAK)

BAY: A federal grand jury indicted the former chairman of Sotheby's and Christie's today on charges they conspired to fix commissions in the auction business. The government alleges that from 1993 to '99 the two auction houses worked together to set rates on commissions amounting to some $400 million.

Indicted today: Alfred Taubman, the long-time chairman of Sotheby's who stepped down last year. Taubman said he was absolutely innocent of the charges. Also charged was Anthony Tennant, who chaired Christie's from '93 to '96. He could not be reached. Christie's, which is cooperating with the government, had no comment.

If convicted, the two men could face as many as three years in prison. Expected to testify against them: former Sotheby's Chief Executive Didi Brooks, who has already pleaded guilty to separate price-fixing charges, but has not yet been sentenced. Sotheby's has also been hit with a $45 million fine. Christie's is not publicly traded, but Sotheby's stock has tumbled since the scandal, closing today at 18.21.

Coming up in the next half hour, more on another run-up in tech stocks, driving the Nasdaq for the fourth straight day. But can this rally last? And the doyen of domesticity issues her latest numbers. We'll hear from Martha Stewart whether consumers kept up the spending spirit.

(COMMERCIAL BREAK)

BAY: In tonight's headlines: techs took center stage on Wall Street today, surging on hopes the economy is on the mend. And Congressional Republicans push forward on a budget plan, deciding on a 5 percent spending increase for many programs next year. And small investors weren't the only ones who took a hit when the Internet bubble burst. Many nonprofits fell victim as well: A MONEYLINE special report.

But first, the Nasdaq finished in the plus column for the fourth session in a row. The Nasdaq closed up 52 points, or nearly 2.5 percent at 2,220. Networking and software stocks led the pack today: Cisco, Nortel Networks, Juniper Networks, Verisign, Veritas Software all higher on the day. A different story for Blue Chips, pulled lower by poor performances among energy and health care issues.

The Dow dropped 21 points, to finish at 10,876. A mixed session for the broader market. The S&P 500 flopped between positive and negative territory throughout the session, closing up less than a point at 1,267. A bright spot on the day, brokerage stocks, Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and J.P. Morgan Chase all gained ground.

Action continues in the after hours market. Joining us from the Instinet trading floor, Jen Rogers -- Jen.

JEN ROGERS, CNN CORRESPONDENT: Willow, earnings news once again driving the late session here. Let's start with Cirrus Logic. This is a specialty chip maker and they came out in line with Wall Street estimates. These were lowered estimates for the fourth quarter, but they met them at 6 cents a share. They did warn that sequentially revenue will be down from the fourth quarter. The first quarter they're looking down 10 to 15 percent revenue. The shares though, managed to end up, up 55 cents here at $17.25.

Another stock to the up side. Hotjobs.com making 9 percent move up in after hours, up 49 cents. The online recruiting sight came out posting a narrower than expected loss and saying they see profitability in the third quarter, relatively thin volume here though, less than 20 thousand shares. To the down side, Vitesse Semiconductor down more than a dollar. The communications chip maker came out saying it's going to reduce its work force by 12 percent, also saying that upper management is going to be taking a pay cut of between 10 and 25 percent.

Macro Media another one getting punished after hours, down more than $5. This is a Web design software company. They came out, they missed Street estimates and earnings came in at half the level they were a year ago. Fifty-two week high on this one, $120.87. Right now sitting just about $21 -- Willow.

BAY: Jen Rogers with lot of after hours action. Thanks.

In other corporate news, Kraft Foods said today that it hoped to raise nearly $9 billion in an IPO of its Kraft Foods unit. That would make it the second largest IPO in U.S. history. Kraft, a unit of Philip Morris that makes Oreo cookies and Oscar Mayer hot dogs, said in an SEC filing that it would look to sell 280 million shares of common stock at price range of $26 to $31 per share. That could raise as much as $8.7 billion.

Our next guest oversees more than $500 billion in assets for Merrill Lynch. He says the stock market has definitely hit bottom, but the recovery process will take time. Robert Doll joins me now with his market outlook.

Bob (sic) , welcome back to MONEYLINE.

ROBERT DOLL, MARRILL LYNCH: Good evening.

BAY: Your company had a tech conference today, and your tech analyst, Steve Milunovich, is very cautious on techs, Bill, are you?

DOLL: We think it's too late to be significant sellers of technology. But I would agree that the fundamentals are not very good. We've had a Nasdaq here that's up almost exactly 600 points from 1,620 to 2,220 in one short month. That's discounting some nice recovery which we think will happen, but unfortunately only eventually. It's going to take some time.

BAY: Tech investors are acting as if tech stocks are must haves. Are you concerned that tech investors are too eager to jump back in?

DOLL: We are, unfortunately. We think that a number of these companies while reporting results may be in some cases slightly better than much lowered expectations, we still think there's bad news to come over the next quarter or two. And the stocks never really got cheap. So...

BAY: Right, so these P/E levels still high a concern for you?

DOLL: That's right. And therefore we would be neutral weighted to technology -- neutral to a benchmark.

BAY: Walk us through where we are in terms of this economic recovery?

DOLL: Well, we think that the economy is still has bad news to come. I'm going to say we're halfway or maybe a little bit more than halfway through the down part of the economy.

BAY: What kind of bad news?

DOLL: I think there's more bad news on the consumer side to come. Layoffs unfortunately, are just starting. There are more to come, and therefore we think the headlines for the economy are is still going to have some bad reading.

BAY: So, what advice are you giving to your investors?

DOLL: Will, the good news is, markets tend to discount the economic happenings, and in fact, markets tend to bottom about halfway through the economic downturn. We think we're past halfway, therefore we think the market have made a bottom.

BAY: Bob Doll, thanks for joining us tonight.

DOLL: Thank You.

BAY: Coming up on MONEYLINE: Securities regulators dig deep on Wall Street, looking for signs of foul play in the IPO market. And Martha Stewart gets the job done this quarter, but can she keep up the momentum? We'll ask her when MONEYLINE continues.

(COMMERCIAL BREAK)

BAY: An investigation into Initial Public Offerings is causing tension on Wall Street. Securities are delving widely into Credit Suisse First Boston as part of an investigation into allocation of shares and IPOs. A six month probe which also involves other Wall Street firms is aimed at determining whether IPO allocations were made in exchange for excessive commissions or promises to help prop up the market for new stocks. Allan Dodds Frank has the story.

(BEGIN VIDEOTAPE)

ALLAN DODDS FRANK, CNN CORRESPONDENT (voice-over): In the latest twist of the investigations into Initial Public Offerings, three Credit Suisse First Boston Employees may soon be disciplined by regulators. Records from NASD regulation show the three men are subject of an investigation that could result in a disciplinary action under the NASD rules. Each man denies any wrongdoing.

The three employees handled stock sales to hedge funds, wealthy individuals, international customers and institutional investors. NASD regulation is working with investigators from the Securities And Exchange Commission and the U.S. Attorney's Office. They are looking into possible market rigging in connection with IPO allocations.

JOHN COFFEE, COLUMBIA UNIVERSITY: I think they would like to say that there was an effort made to manipulate the secondary market so that we can blame some of this bubble not simply on mania among investors but on a deliberate pattern of market manipulation.

FRANK: Credit Suisse First Boston in a statement tried to distance its high-technology sector banking star, Frank Quattrone, from the swirl of allegations that has erupted in the last six months. The firm said: "Frank Quattrone is not and was not responsible for overseeing brokerage accounts or commissions. Nor is he or was he responsible for IPO allocations."

Authorities want to know if brokers allocated IPO shares to customers who pledged to buy more stock after it hit the market. The investigation has sparked class-action lawsuits.

MELVYN WEISS, MILBERG WEISS BERSHAD HYNES & LERACH: In these activities, you see layers of buying way above the offering price to boost the price of the stock up, which make it an artificial market.

FRANK: There was no comment from the three Credit Suisse First Boston employees, but the company says it is cooperating with investigators.

Allan Dodds Frank, CNN Financial News, New York.

(END VIDEOTAPE)

BAY: In other corporate headlines tonight: Steve Madden resigned as CEO of the trendy footwear company bearing his name. The decision may be related to his ongoing legal troubles. Madden will stand trial this fall for massive stock fraud. And published reports say the SEC is investigating insider trading in the company's shares. The stock fell 40 percent in one day after Madden's arrest last June. Since that bottom, though, it has more than doubled to $16.46.

Delta Airlines also out with a management shuffle, selecting Frederick Reid to fill its president and COO positions, which have been vacant for about two years. Separately, the company CEO, Leo Mullin, promised investors that Delta will return to profitability -- quote -- "reasonably quickly." Delta gained a solid 2.25 to 46 in trading today.

In tonight's MONEYLINE focus: Martha Stewart. Her company measured up well today, beating profit estimates by two cents a share. Revenue, though, fell short of forecast, and the company lowered second quarter targets. Still, the stock ended up more than 1.5 to just over 20 in trading today, and has gained 25 percent over what's been a rather rocky 52 weeks.

Joining us now, Martha Stewart. Martha, nice to have you with us again.

MARTHA STEWART, CEO, MARTHA STEWART OMNIMEDIA: Hi, thank you.

BAY: So, this quarter, clearly you were facing a number of challenges, not the least of which was ad spending. But where did the good news come from?

STEWART: Good news in merchandising, our sales are strong. And also in publishing. Sales are strong, of the magazine, on newsstand. Our special issues -- we finally had a first special publication in gardening, which contributed to revenues. So we're looking forward to a good year this year in 2001.

BAY: So you got some help from new products and new magazines?

STEWART: Oh, yes, indeed. And we are a growth company, don't forget, and we're just 1 1/2 years old -- or 1 3/4 now. So we continue on this growth trend.

BAY: Now, you did warn for the second quarter. Why, what are you facing?

STEWART: Well, still a soft ad market in the publishing area. And we're also in Internet direct spending -- Internet direct commerce, excuse me. We are -- we still see a little bit of softness in our revenue growth there. But we have taken all steps to continue.

BAY: What does that mean about your outlook, though, for the full year?

STEWART: Oh, good. Good. We expect earnings per share to grow 20 to 25 percent for the year, and revenue growth in the upper single digits.

BAY: But given some of the softness that you're seeing, will you have to do -- will you have to take any cost-cutting measures?

STEWART: Well, we're very -- we're very, a careful company. And we have been doing that all along. We are not hiring freely. We are looking at each position very carefully. We are a careful company.

BAY: You have some interesting insight into the advertising climate. So I'd like to ask you couple of questions about advertising. Now, last quarter you said that it was a bit sketchy, in terms of the magazines, but TV was good. Does the picture look any different now?

STEWART: Well, no. Magazine spending and ads seems to be strengthening in the second half for us. We have a very varied advertiser base -- 18 PIB categories. So the -- really, the weakness was in the dot-com advertising for us. And this is coming off of a very strong first quarter and second quarter last year. So it's mostly the dot-com area for advertising for us.

BAY: In terms of your merchandising, as you said, it delivered quite well for you. But are you concerned that with all these layoff that we report on a near-daily basis, that consumer sentiment, and therefore consumer spending will weaken and people will be spending a little less?

STEWART: Well, retailers seem to be doing very well right now. And I think in the mass-merchandising area, where more and more people are shopping, that's where our greatest exposure and our greatest profitability lies. So I think Kmart has been reporting better numbers and I think that we're looking forward to a good year there.

BAY: What can you do with your on-line business? There was a study out today suggesting that in fact, catalog retailers on-line are, out of the group, the most consistently profitable?

STEWART: Well, that's what we are. We're Martha-by-mail, on- line. And we have been migrating our customers from the paper catalog to actually buying on the Internet. It's now about 50/50. So that is an encouraging note for us. And yet, the customers love the paper catalog. They love to get that in the mail. But they study it and they go on-line to buy it, and that's exactly what we want to be happening.

BAY: Real quickly, your goal for profitability in that segment?

STEWART: We're very enthusiastic about our on-line business, and we're continuing to feel that way.

BAY: Martha Stewart, as always, nice having you with us.

STEWART: Thanks, Willow.

BAY: Coming up on MONEYLINE, shares of Cigna plunge today, taking the rest of the HMO sector down as well. A close-up on the sector when MONEYLINE returns.

(COMMERCIAL BREAK) BAY: In tonight's "Sector Report": HMOs. The sector was humbled today after a disappointing profit report from Cigna. The company met lowered estimates, but revenue slid more than 3 percent, and Cigna slashed second-quarter and full-year guidance.

Several analysts downgraded the company, citing the unhealthy combination of declining HMO memberships and rising medical costs. And some analysts warn those trends won't change for the next 12 to 18 months. Cigna's news cast a shadow over the entire sector. It fell nearly $16.

Humana, also out with results, down fractionally. Aetna, off nearly a dollar. Oxford, down more than 1 1/2, and United Health off about 3. So far this year, the picture is not much better. Hurt by rising medical costs and decreasing memberships, Cigna, Humana and Aetna all off 30 percent or more.

The lone bright spot, United Health. It beat the Street last week, and is the only company with growing HMO memberships.

Coming up on MONEYLINE: The nation's nonprofits sweat out a market downturn -- a MONEYLINE special report.

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BAY: Marathon negotiations continue today between screenwriters and studios in Hollywood. The two sides met after a brief break. Just last night, they sat across the bargaining table for 17 hours, where the two sides reportedly moved closer to a deal. Some believe the wrangling continues over an additional $100 million in salary demands over three years.

We learned today that the foundation started by high-tech pioneer William Hewlett, one of the founders of Hewlett-Packard, is donating $400 million to Stanford University. That is believed to be the largest gift ever to a single American educational institution.

But the huge donation belies a troubling trend in the not-for- profit world. The nation's universities and charities are facing a money crunch as the value of their investments suffered in a volatile market.

Fred Katayama has the story.

(BEGIN VIDEOTAPE)

FRED KATAYAMA, CNN CORRESPONDENT (voice-over): The parents of these kids in upstate New York dreamed big dreams: building a new Chinese language school and community center. They planned to break ground next year for their building.

But they may not be moving here anytime soon. Hoping to quadruple returns for its building fund, the community placed its bets on Wall Street. It pulled $100,000 out of certificates of deposit and plowed them into aggressive stock mutual funds.

HSIN-PANG WANG, CHINESE HERITAGE SCHOOL: We always have people saying we should be more aggressive, invest money in the stock.

KATAYAMA: But the community earns an F for timing. It made its move in April last year, just after the Nasdaq peaked in march and had begun its steep slide. Its funds shrank 29 percent.

HONGYU WANG, CHINESE COMMUNITY CENTER: I do have a member of the board who came to me, saying that, you know, you guys better stop now before you totally lose the money.

KATAYAMA: What's more, with the economy sputtering, people are holding back on giving.

HSIN-PANG: It's difficult to ask people to pledge. People think maybe we'll wait until the market come back.

KATAYAMA (on camera): The Chinese-American community here has clearly suffered a big setback, but it's not alone. The carnage on Wall Street and the slowing economy are also hurting many other nonprofit groups and charities nationwide.

(voice-over): A study by Giving USA has found that corporations often give less and individuals give at a slower rate during recessions. Among the recipients most impacted: social services, health and education. Sydney Evans is visiting investment advisers in New York. He oversees the endowment at Dillard, an African-American liberal arts university in New Orleans.

SYDNEY EVANS, DILLARD UNIVERSITY: We may want to look at a couple of strategies.

KATAYAMA: He's considering new investment products to boost returns. Dillard's endowment is small and getting smaller. It shrank 10 percent, or $5 million since June. That's painful for university where enrollment grew 30 percent in the last three years. Sixty-five percent of its portfolio was invested in stocks, much of that blue chips, which were whip-lashed on Wall Street.

EVANS: It obviously had a tremendous impact on our endowment. This really impedes on our ability to meet the needs of the institution.

KATAYAMA: To cut costs, Dillard enacted an early retirement program in April. It diversified its portfolio, and it's reviewing the performance of its money managers.

Numbers on charitable giving always lag a year or two, so our findings are mostly anecdotal. Perhaps the charities and foundations that have been hardest hit lie at the epicenter of the high-tech economy, Silicon Valley. Those who help others, need help themselves.

At Community Foundation Silicon Valley, contributions plummeted 50 percent to $25 million in the first quarter. At the local Make-A- Wish Foundation, gifts in stocks fell 86 percent in the first three months. The plunge in the stocks of Hewlett-Packard and its spin-off, Agilent, has shrunk the endowment of the David and Lucille Packard Foundation 35 percent, compared to the beginning of last year. At the local United Way, stock gifts, which made up more than half of contributions last year, have dropped precipitously, shriveling 87 percent to $28,000 in the first three months of this year.

GREG LARSON, UNITED WAY, SILICON VALLEY: The bitter irony of a recession is our supply of resources go down as the demand goes up. So we are looking at possibly having to reduce some funding we provide next year to the best agencies of Silicon Valley.

KATAYAMA: But all is not dour for non-profits. Roughly 40 percent of contributions pour in the final three months of the year. So, they'll be all right if the economy snaps out of its doldrums and stocks snap back before year end. But back in Albany, the Chinese- American community says it may have to put off its groundbreaking plans for another year or two.

Its leaders say they've learned a good lesson about investing. After their brutal brush with Wall Street, they'll put any money they raise, for now, into CDs, not stocks.

(END VIDEOTAPE)

KATAYAMA: In case you're wondering, the Chinese community says it will not sell off its mutual fund holdings. It's stomaching the paper losses for now, and hoping that stocks will bounce back soon so it can start construction -- Willow.

BAY: So Fred, what determines how much people give?

KATAYAMA: Well, from the '50s all throughout the '80s, income was the biggest factor, not stocks; from the '90s, that reversed course. It's stocks now.

BAY: Interesting, Fred Katayama, thanks.

Up next, "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, more on the economy with weekly jobless claims, projected to remain near numbers not seen for nearly 10 years. And watch for quarterly results from Royal Dutch, Echostar Communications and Revlon. And to stay a step ahead of the markets, tune in to "AHEAD OF THE CURVE" at 5:00 a.m. Eastern right here on CNN.

That's MONEYLINE for this Wednesday. I'm Willow Bay. Good night from New York. "CROSSFIRE" is next.

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