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Lou Dobbs Moneyline

Dow Falls 80.03 to 10,796.65; Nasdaq Tumbles 74.40 to 2,146.20; Rise in Jobless Claims Unnerves Investors

Aired May 03, 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: The high-tech rally runs into a brick wall. This is MONEYLINE for may 3, 2001.

The Nasdaq suffers a setback as stocks across Wall Street tumble after a very weak report on jobs.

Think it couldn't get any worse for Lucent? Think again. The company now a victim of suspected corporate espionage. And who won the Thursday night showdown between must see TV, and the folks in the outback? The tribe has spoken.

Welcome to MONEYLINE. We begin tonight with stocks skidding lower across Wall Street. The Nasdaq today retreated for the first session in a week and the Dow fell into the red as well after several reports threw cold water on optimism that the economy might be stabilizing. The Dow lost 80 points, ending at 10,796. More than a billion shares traded on the Big Board.

But the real disappointment was on the Nasdaq, which fell 74, or more than 3 percent, closing at 2,146. Volume there: nearly 2 billion shares traded. And the S&P tumbled more than 18 to end the day at 1,248. We have complete coverage of a discouraging session on Wall Street, with Allan Chernoff at the New York Stock Exchange and Greg Clarkin at the Nasdaq. We begin with Allan at the big board.

Allan?

ALLAN CHERNOFF, CNN CORRESPONDENT: Willow, today was the first time in a week and a half that all major stock indices suffered declines, a reflection of how giddy some investors have become. There was no major news moving the markets, more what some skeptical analysts would call a "simple taste of reality."

(BEGIN VIDEOTAPE)

CHERNOFF (voice-over): Bulls and bears could agree on today's decline. The market was due for a pause.

ARTHUR CASHIN, UBS PAINEWEBBER: We've been talking for a couple of days about the market having gotten a little bit ahead of itself, it was a little overbought.

CHERNOFF: The selloff was across the board, low and high-tech. Economically-sensitive and defensive names lost ground. The 74-point drop in the Nasdaq was the first decline in five trading sessions, and it came after an explosive rally. Even after today's loss the composite is up 33 percent from its intraday low on April fourth. The Dow Industrial Average is up 19 percent from its intraday low on March 22nd.

In the past two days, the index has once again been retreating from the 11,000 resistance level as it has repeatedly since late October. Economic data pointing to weakness in employment and services industries bolstered arguments that the economy could still be facing some tough times.

MARSHALL JAFFE, H.A. SCHUPF: I think the next shoe to fall is a consumer who is not going to be spending the way he or she did a year ago or is even spending today as the unemployment rate creeps up, as wages flatten out, you are going to have a reluctance to spend and that is going to filter through the economy. The consumer is two thirds of it and there is no way to avoid that.

CHERNOFF: Another item troubling some analysts: The fact that measures of investor sentiment are no longer indicating much fear about buying stocks, but rather a belief that the bull market has returned.

RICHARD LEVY, CIBC WORLD MARKETS: That definitely shows complacency and, in fact, that is somewhat worrisome if you are a contrarian, but I'm willing to overlook that. But yes, people are feeling much more comfortable with stocks.

(END VIDEOTAPE)

CHERNOFF: One bright sign for the bulls, the selling came on relatively light volume, in fact the lightest volume here in nearly two weeks, indicating there's no big rush out the exit. Volume on the Nasdaq was down 23 percent from yesterday -- Willow.

BAY: Allan, as you noted just a moment ago, there was no major market moving news today. But how important will tomorrow's job reports be for the market?

CHERNOFF: No question that could be a major mover. But we'll really have to see how the report delivers and how the market interprets it. But of course, that typically is the most important economic report of each month.

BAY: Allan Chernoff at the big board. Thanks.

Volume may have been relatively light, as Allan noted, but there was still plenty of action at the Nasdaq. Greg Clarkin joins us now from the Nasdaq marketsite with a look at the day's big movers -- Greg.

GREG CLARKIN, CNN CORRESPONDENT: And willow, some of those red hot sectors of recent weeks really cooled off in a big way today. Now there was a feeling that lot investors may be lightening their positions, or getting out of some positions, locking in some recent gains and kind of stepping aside waiting for that employment report tomorrow morning.

Now two pockets of real weakness we saw today, networking stocks and the Internet stocks. Let's go back here to the wall, I'll give you an idea of how they did. Goldman Sachs Internet Index, down 5.4 percent today. Big losses for Amazon, Priceline, Yahoo! Some of the recent winners all fell today. Moving over to the Amex Networking Index, also down 5.4 percent today. We saw weakness in shares of Cisco, Juniper and pretty much every networking stock was on the down side today.

Now let's take a look at how the big caps did. We saw a lot of weakness in Dell computer today. About mid afternoon or so, Dell was the subject of a downgrade. The analyst was Don Young, the firm was UBS Warburg. Now Young cut Dell from a strong buy to a buy. He's concerned about Dell's aggressive cutting of prices. Young says he's not sure of short term profitability will result in long-term gains.

You could see what Dell Computer did on the day, down $1.80. Cisco fell, Intel, Microsoft, Sun Microsystems also losing ground. On the day the Nasdaq losing better than 3 percent giving back some of earlier in the week's gains. Willow, back to you.

BAY: Greg Clarkin reporting from the rather noisy Nasdaq. Thanks, Greg.

One Big Board stock that got hit today: Newell Rubbermaid, after announcing job cuts and a profit warning for the current quarter and the full year. The consumer products giant said it would layoff 3,000 workers or about 6 percent of the global work force. Checking the stock today, it fell nearly $1.50 to close at $25.85.

That wasn't only disturbing news to emerge about jobs today. The labor department today reported that jobless claims last week shot to a fresh five year high. Claims for unemployment came in well above 400,000 and the four-week moving average surged to its highest level since 1992. The report is just a prelude to those crucial monthly figures due out tomorrow. Lisa Leiter reports.

(BEGIN VIDEOTAPE)

LISA LEITER, CNN CORRESPONDENT (voice-over): "Help Wanted" signs are harder to come by these days, and it shows in the latest readings on the job market. People are filing for unemployment benefits at a level not seen in five years. And companies announced plans for more than 165,000 layoffs in April, a monthly record according to outplacement firm Challenger Gray And Christmas.

JOHN CHALLENGER, CHALLENGER, GREY & CHRISTMAS: We saw over 600,000 cuts in 2000. We're already at 572,000 through first four months. This is downsizing of a whole new scale. It's not like anything we've ever seen.

LEITER: The news had some economist scrambling to lower their forecast for Friday's monthly jobs report, especially in light of other worrisome trends: the purchasing managers Factory Employment Index fell for the seventh straight month. The closely-watched four- week moving average for jobless claims surged to an eight-and-a-half- year high, and the conference board's Help Wanted Index fell to an eight-year low. They are reports in stark contrast with last week's news that the economy grew at a surprising two percent rate between January and March.

BRIAN WESBURY, GRIFFIN, KUBIK, STEPHENS: No matter what the GDP data are doing, or how many housing units are started, if people are losing their jobs, that effects consumer confidence and attitudes.

LEITER: That is what Alan Greenspan is worried about, and it's why the jobs report is especially critical this month. It comes just 11 days before the Federal Reserve's next policy meeting.

DANA JOHNSON, BANC ONE CAPITAL MARKETS: The market, at least until today, was looking for a small increase in employment. I think the risk is it sees is a small to moderate size decline in employment. If it does, if it sees more than a 10th uptick in the unemployment rate, I think people are going to begin to wonder if the Fed is going to have to push the federal funds rate down into the threes.

(END VIDEOTAPE)

LEITER: The bond market is already betting that the Federal Reserve's key short-term interest rates will fall below 4 percent this summer. Traders are now betting that there is a 100 percent chance of a quarter-point rate cut at the Fed's next policy meeting, and about a 50-50 chance that the Fed will cut rates by a half a point, but tomorrow's jobs report, of course, could change those odds -- Willow.

BAY: And Lisa, what should investors look for in that report?

LEITER: Well what we're looking for is that businesses added 5,000 jobs to the payrolls last month in April, and an unemployment rate ticking up 1/10 of a percent to 4.4 percent.

BAY: Lisa Leiter in Chicago. Thanks, Lisa.

The report out today on jobs rattled some investors. Perhaps even more troubling: Word that the service sector is in a downturn. We've known for months that manufacturers have been struggling. But today purchasing managers have reported that their non-manufacturing index fell below 50 in April, meaning the service sector is contracting. It's the first time that's happened since purchasing managers began tracking services in 1997.

All this bad news for the economy was good news for the bond market. The 10-year note jumped more than 1/2 a point, the yield at 5.2 percent. The 30-year gained nearly a point, the yield there at 5.64 percent.

We also had developments today on the energy front. President Bush ordered federal agencies in California to dramatically reduce their energy use during periods of electricity shortages.

As Casey Wian reports from Los Angeles, it's part of the president's response to complaints he has not done enough to help California.

(BEGIN VIDEOTAPE)

CASEY WIAN, CNN CORRESPONDENT (voice-over): It may be a hot dark summer for federal workers in California. President Bush is ordering thermostats in the state's federal building turned up to 78 degrees and all non-essential lights turned off when electricity reserves fall below 5 percent.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: This administration is deeply concerned about California and its citizens. We're worried about blackouts that may occur this summer and we want to be a part of any solution.

WIAN: California officials have been sharply critical of the White House for not doing enough to ease the state's electricity crisis. Governor Gray Davis kept up those complaints, with a statement saying:

"While I appreciate the president's proposal, surely the federal government can do more and match California's 20 percent savings at all state buildings."

SPENCER ABRAHAM, ENERGY SECRETARY: Today, I'll be traveling to California, I'll be meeting with the governor and then in the morning with the representatives of all the federal facilities in the state to talk about ways that we can implement a plan to begin to reduce peak load usage at our federal facilities.

WIAN: Conservation is already a way of life for most Californians. The state reported this week its energy use fell nine percent in April compared to the same month last year.

WILLIAM SMITH, ELECTRIC POWER RESEARCH INSTITUTE: To have the federal buildings involved in reducing demand this summer is really going to help a critical need. It turns out that we did a rough calculation and estimate that the federal buildings use about, oh, say 1 percent or so of the electricity in California.

WIAN: The Pentagon, which says it's the largest single electricity user in California, says it can conserve enough to power 200,000 homes by complying with the order. California's power grid operator predicts more than 30 days of rolling blackouts this summer. A report by Salomon Smith Barney paints an even bleaker picture, saying California likely faces a hotter than average summer, with "severe economic and social consequences should that state, in fact, endure a hot summer, even a summer of normal temperatures is likely to cause significant energy-related problems."

(END VIDEOTAPE)

WIAN: President Bush repeated his warning that conservation is not the only answer to the energy shortage facing California and the nation. He stressed the importance of finding new supplies of power. Vice President Dick Cheney is expected to outline the administration's plans to accomplish that in about two weeks -- Willow. BAY: Casey Wian, thank you.

An unlikely statement today on energy and the environment from one of the world's largest auto companies. Ford Motor says the fight against global warming is its biggest corporate challenge.

In its second annual report on "corporate citizenship," Ford said that its response to climate change would be critical to its success. Ford has sought to define itself as a "green" automaker, vowing to cut emissions in its sport utility vehicles, and improve fuel efficiency by 25 percent over five years.

Ahead on MONEYLINE, it seemed like the Bush budget was going to fly through Congress. But not so fast. A live report from Capitol hill.

Plus: cloak and dagger corporate style, Lucent workers charged in a stunning case of intrigue.

And later, who is the rating "Survivor" in the Thursday night showdown? The winner is in.

(COMMERCIAL BREAK)

BAY: A budget compromise is making its way through Congress today, but the process, which was supposed to go smoothly, has run into a few bumps. We go now to Kate Snow on Capitol Hill for the latest -- Kate.

KATE SNOW, CNN CORRESPONDENT: Willow, the plan by Republican leaders here on Capitol Hill was to push this $1.97 trillion budget through the House and then through the Senate. They were supposed to vote in the House early this morning. Well, guess what? They haven't even started the process yet, and it probably won't happen until much later on this evening.

The reason they run into a few relatively minor glitches, the House budget chairman likened it to trying to get all 535 members of Congress to order one single pizza. He said, imagine that: everyone would have their different tastes and their different priorities. Well, he said it's somewhat like that. They've just got to figure out how to deal with some of the anchovies that are on the pizza.

Nothing of the basics are in question. The basics were set yesterday when the conference committee decided what this bill would look like, and basically it calls for federal discretionary spending, that's excluding programs like Medicare and Social Security. That spending would go up by 4.9 percent in the next fiscal year.

Also included in this: a $1.35 trillion tax cut over the next 11 years. That of course a smaller figure than what President Bush was looking for. But Republicans say that this is a good first step to providing tax cuts.

(BEGIN VIDEO CLIP) REP. JIM NUSSLE (R), IOWA: We believe that for our economy, we have got to get tax relief out to the American people as quickly as possible. One of the ways to do that, is to instruct in this budget process that the committees of jurisdiction write the tax bill -- let's get going, let's get it done, so that we can get it out as quickly as possible.

(END VIDEO CLIP)

SNOW: Now, the White House worked with moderate Democrats on the Senate side to craft this budget compromise before they were going to take it up. Most Democrats, though, are angry at the budget deal. They say they weren't included in the process, they say they haven't even had a chance to study it today and they are worried it doesn't include enough money for Social Security reform, for education, and for the environment.

(BEGIN VIDEO CLIP)

TOM DASCHLE (D-SD), MINORITY LEADER: It's an iceberg budget. We see a little bit of the tip of the budget. We have no way of seeing the rest. We have no way of knowing what is in it. And we are quite confident that this budget is going to hide many of the things that they don't want the American people to know.

(END VIDEO CLIP)

SNOW: Now, the budget is not a binding document. It doesn't have to be signed by the president. It is simply more of an outline, setting priorities for future spending. Both sides -- Democrats and Republicans -- admit, that there may be ways to work around the budget.

When they get down to it, they could find creative ways to increase spending even beyond what's laid in this budget.

Willow, back to you.

BAY: Kate, it seems like you may have a long night ahead of you.

Kate Snow on Capitol hill. Thank you.

Just ahead: A top computer maker vows to play hardball when it comes to cutting costs.

(COMMERCIAL BREAK)

BAY: In tonight's "Tech Watch": Dell Computer raised some eyebrows today after a senior executive reportedly said the computer maker will be "ruthless" in cutting costs. When contacted by MONEYLINE, a spokesman for Dell Computer said he could neither confirm nor deny that the word "ruthless" was used, but he said regardless of word choice, more layoffs are not necessarily on the way. He added that the company, which recently overtook Compaq as the world's No. 1 PC maker, has always and will continue to closely watch costs. Dell stock, which was also downgraded by UBS Warburg today, slipped nearly 2 to close just under 25. For the year, though, Dell stock is up more than 40 percent.

Coming up: the man who wrote the book on irrational exuberance will tell us why optimism has returned to Wall Street. Stay with us.

(COMMERCIAL BREAK)

BAY: Our next guest, Yale economics professor Robert Shiller, made waves in March of 2000 when he published a book called "Irrational Exuberance." He was talking, of course, about Wall Street, this as stock prices soared to record heights. We all know what happened after that, but last month the markets stormed back, giving investors hope that Wall Street escaped the bear's grip.

So we invited professor Shiller back to see if this run-up is justified, or just another round of irrational exuberance. Robert, welcome back to MONEYLINE.

PROF. ROBERT SHILLER, YALE UNIVERSITY: Glad to be here.

BAY: Clearly, we have got exuberance, but is it irrational?

SHILLER: I think we're still in the irrational exuberance phase. It has rather diminished, but price/earnings ratios are still high, and I think it's because of some irrational expectations still.

BAY: So you're still concerned about valuations? In April, you thought they were still too high, and that after the Nasdaq had dropped 25 percent. So still, even at this point, valuations, P/Es, still too high?

SHILLER: People tend to focus on short run news. The most important factor is the valuation, which is the level, and that's something that's been here for a long time. We can't forget about it.

BAY: So, we describe this commonly as a bubble bursting. Is that how we should be looking at it?

SHILLER: The metaphor is unfortunate, because with a soap bubble, you know when it burst. Bang, gone. But with speculative market bubble, you're never quite sure. It bursts slowly, and you're never quite sure when it's over. People think it's over. A lot of people think we've just seen it, but I don't think so.

BAY: What do you then think we're in for, and what does -- you've combed back through bear and bull markets over history, what does history tell us we should be prepared for?

SHILLER: Well, I don't know that any disaster, but I'm thinking the market is quite likely to languish for years from here.

BAY: For years from here?

SHILLER: For years, right. People have -- it's part of the psyche right now. People have the mistaken impression that the market goes up, only goes up. If it goes down, it corrects up. This has been a hallmark of this era. People think it rapidly corrects and goes back up. And it isn't true historically.

BAY: And investors believe that over time stocks outperform other assets. Is that not correct?

SHILLER: OK. Historically, for the last century, there's no 30- year period in which stocks did not outperform bonds. That sounds to some people like very impressive evidence, that it will continue to do so.

BAY: Why don't you think it is so impressive then?

SHILLER: We had a good century. We're coming into a new one. The U.S. was the most successful in the world in the 20th century, and it was a great century. And anyway, there aren't many 30-year periods in 100 years. You got to reflect on that. It's not convincing evidence.

BAY: We hear often these days, with the Bush administration making a case as part of Social Security reform, argument for the privatization of Social Security accounts. Given what you're saying, do you then think that's not a good idea?

SHILLER: Well, it is important that people save more. And so, in some sense, some kind of a plan to encourage saving is OK, but the idea of just privatizing Social Security, which means moving away from a sense of responsibility to the various groups in our society, like the aged, I think is wrong. I don't want to see that happen.

BAY: You warn that there's new century on the way. You're an economist. When you look at where we are in terms of the economy, what lies ahead? Is the worst over? Is a recovery in sight? Where are we now?

SHILLER: Well, of course, it's very uncertain, but I think that we're in a phase similar to that in U.S., say, in 1969, which is the second largest economic expansion in history. And I think that the likely outcome is it will be OK, but the market isn't going to go up, and growth is going to be not so great, but OK.

BAY: But OK. Robert Shiller, I'll let that be the last word. Thank you for joining us again.

Coming up in the next half-hour of MONEYLINE, more on the down day on Wall Street, as tech stocks break a four-day winning streak.

Plus, Lucent employee is charged with corporate espionage. And it's judgment day for the second round of "Survivor." Will CBS capture the crown of Thursday night rating contest?

(COMMERCIAL BREAK)

BAY: In tonight's headlines, red arrows across the market today, hit by weak economic data and talk of PC pricing wars. And the budget hits a bit of a hold-up in Congress, a Republican budget plan hitting roadblocks over education spending, the environment and Social Security reform. CBS goes head-to-head with must see TV and survives. We'll take a look at CBS's major risk and major reward, with "Survivor."

But first, a major criminal case against employees at Lucent, charged by the FBI with stealing Internet technology on behalf of China.

Peter Viles has the report.

(BEGIN VIDEOTAPE)

PETER VILES, CNN CORRESPONDENT (voice-over): In a New Jersey courtroom, allegations of corporate espionage -- that these three men, two of them Chinese nationals who work at Lucent Technologies, stole trade secrets from Lucent in hopes of creating a giant networking company in China.

ROBERT CLEARY, U.S. ATTORNEY, DISTRICT OF NEW JERSEY: In this information age, in the high-tech world in which we currently live, it is difficult to imagine criminal activity that is more debilitating to technologically based companies.

VILES: The government alleges the trio stole the source code for a Lucent product, the PathStar Server, and set up a Chinese joint venture to market the stolen technology.

CLEARY: In an effort to give their company, their joint venture company, a competitive edge, the defendants committed the most basic of crimes: thievery.

VILES: Charged are Hai Lin and Kai Xu, both Chinese nationals working for Lucent, and Yong-Qing Cheng, an American citizen who works for a networking vendor. The government alleges the three formed a New Jersey company called Comtriad, then negotiated with a Datang, a company controlled by the Chinese government, to form a joint venture called DTnet in hopes of selling stock in what they said would become the Cisco of China.

The tip that broke this case came from Lucent itself, and it is not clear whether Lucent will be hurt by the alleged theft because it discontinued the PathStar product in January due to slumping sales.

The three face charges of conspiracy to commit wire fraud, punishable by up to five years in prison. They did not enter pleas on Thursday.

(on camera): This truly is a while-collar case; one of the defendants, Kai Xu, asked for a court-appointed lawyer. The judge said, "How much money do you make?" Mr. Xu said, "$140,000 a year." The judge said, "You can afford your own lawyer."

Peter Viles, CNN Financial News, Newark, New Jersey.

(END VIDEOTAPE) BAY: Checking how Lucent performed today: the stock slipped more than 50 cents. It is down 84 percent from its 52-week high, hit by a series of profit shortfalls.

It was a down day across Wall Street, with both the Dow and Nasdaq finishing in the red. A major factor behind today's sell-off: a report showing jobless claims rose to their highest level in more than five years. That comes, of course, ahead of tomorrow's main event: the jobs report for April.

The Dow never made it into the plus column today, finishing the day down 80 points, at 10,796. The Nasdaq was especially hard-hit, dropping 3.3 percent, or 74 points, to finish at 2,146, chip stocks and PC makers leading the index lower. This follows four straight winning sessions.

Stocks continue to trade after-hours, and Jen Rogers joins us now from the Instinet trading floor with all the latest -- Jen.

JEN ROGERS, CNN CORRESPONDENT: Willow, some signs of life in Internet consultants after the bell as we got financial results from two big players. Let's start with Sapient. We are seeing this stock up 26 cents right now at $12.50. The company came out with a first- quarter loss that just missed sharply reduced estimates, but was basically in-line with the guidance that we got from the company back in March. They also warn that a second-quarter loss could be more than expected. On the conference call, though, the CEO said that business is stabilizing, although it is still tough, he said.

Razorfish another name in this arena, up 14 cents right now. That is an 11 percent move, though in after-hours. The company reported a narrower-than-expected loss and said for a quarter it sees them coming in at the high end of Wall Street's estimates right now. A CEO also stepping down, even though he will retain his co-chairman position on the board.

To the down side: Starbucks off 45 cents right now at $18.50. Now, the specialty coffee maker came out reporting same store sales for April that were just up 2 percent from a year ago. They did reiterate their 2001 earnings targets, though, said they are sticking to those, and also their revenue growth targets: 79,000 shares changing hands on that one.

And the No. 1 percentage loser to the down-side is Wind River. Now, the company fell more than $3 here to $23. Now, this company makes systems and software for embedded systems and cell phones and traffic lights. The company warned that earnings could fall short for the first quarter. They also announced layoffs of between 12 and 15 percent, said that executives will be taking a 10 percent pay cut. We saw that last night, as well, with Vitesse Semiconductor. The company also said that North American offices will be shutting down around the July 4 holiday. We have seen that, as well, with Sun Microsystems. All of these are strategies to cut costs. The stock was down 8 percent in the regular session. Another big hit here after-hours -- Willow.

BAY: Jan Rogers, a busy night, thanks.

After years of preaching caution, Ned Davis Research has turned bullish on the markets. The firm now suggests clients should move some money from cash into stocks.

Joining us now from Tampa, Florida, Tim Hayes, global equity strategist at Ned Davis Research.

Tim, Welcome.

TIM HAYES, NED DAVIS RESEARCH: Thanks, Willow.

BAY: Why the turnaround?

HAYES: Yes, well -- why the turnaround in our position?

BAY: yes.

HAYES: Essentially, there's three main areas that we focus on. One is the underlying condition of the market, the broad underlying -- how many stocks, how many sectors are participating in events, what's the momentum and the trend of the market. That has become a lot healthier recently, and we have models that gauge this, and it's actually risen to its most favorable level since 1998.

The other major area that we look at is monetary conditions. Of course, we know that the Fed has been cutting rates four times, together with money supply growth, low loan demand, other measures of economic liquidity are all favorable.

The third area we look at is liquidity and sentiment, just the sheer amount of cash on the sidelines -- I believe $211 billion came into money market funds in the first quarter. So there's just a huge pile of liquidity for the market to tap into.

BAY: And what about sentiment? Are you concerned at all that there's too much optimism out there right now?

HAYES: Actually, our sentiment work would say that we've had sufficient pessimism. During the last technology-led decline of the market this year we had quite a bit of fear come in, at least enough to set up a good bottom. The market got very oversold, and now we've had a reversal in sentiment. So, actually, the optimism that we're seeing right now is probably good from the standpoint of getting momentum going to the upside.

BAY: And it's interesting -- why now? Doesn't history suggest that May through September is not the best time for investors? That October through May is better?

HAYES: Well, that's right. In fact, we actually put out a report of this a couple days ago suggesting that we need to remember that, while the conditions are bullish, you know, the upside may not be what we had been used to in the late 1990s. In fact, this summer might be a time we'll be looking at our valuation indicators, at that time revisiting a lot of these things and see how they look because we could very well be in a situation toward the end of the summer where we might be in a high risk situation again.

BAY: And what would put us in a high risk situation again?

HAYES: Well, for one thing, if you would get overvalued. Right now our estimates suggest we're about 10 percent overvalued. We got 90 percent overvalued early last year when the market peaked out. But history suggests when you get to about 25 or 30 percent overvalued, normally, in a normal cycle, that's when you tend to be at risk. And we think we're probably back into a more normal type of market cycle, not the type of exuberance we saw in late 1999.

BAY: And put this into the context of your economic outlook. What are you seeing in terms of the economy?

HAYES: Well, the key point to remember regarding the stock market and the economy is the fact that the stock market leads the economy and also leads earnings bottoms. So the fact, actually, is that when earnings momentum is very negative you have some of the best returns, historically, in the stock market. This seems counterintuitive to a lot of people, but actually, the fact that we're seeing such negative earnings momentum right now is a bullish condition.

BAY: Bottom line on all of this: What are you telling investors?

HAYES: We're telling investors to be overweight, I think, on a short-term basis. If we're having some weakness, it's a good time to add to your asset allocation and to be 60 percent in equities and 40 percent in bonds.

BAY: Tim Hayes of Ned Davis Research, thanks for joining us.

HAYES: Thank you.

BAY: Next on MONEYLINE: opening the window at Microsoft, just a crack. And television wars: Who survived the fight for Thursday night supremacy?

(COMMERCIAL BREAK)

BAY: Online auction house eBay today said it is banning items associated with hate groups from being sold at its Web site. This following a similar move by the Web portal Yahoo!, following pressure from overseas to put an end to the practice.

EBay said it already prohibited many sales of items linked to the Nazi regime and the Ku Klux Klan, but these kinds of items could still be found today online. The new policy which would put an end to such auctions.

In other corporate news, Royal Dutch-Shell group posted its fifth consecutive record quarter, thanks in part to higher gas prices. Profits climbed 23 percent to $3.8 billion. But some disappointments on the merger front, Barrett Resources rejected its takeover bid, and the Australian government blocked its move to buy Woodside Petroleum. A difficult quarter at Revlon. The company posted a loss of $24.3 million, or 47 cents a share. That's narrower than Street expectations of 69 cents per share. Sales dropped more than $32 million to $323 million. Over the past 52 weeks, shares of Revlon have traded as low as $3.50. Shares are trading below 17 percent below a 52-week high of $8.50.

In tonight's MONEYLINE movers: Liberty Financial, shares plunged after the company disappointed the Street with a deal to sell-off its annuity business to Sun Life financial services of Canada. The company also posted lower earnings, pressuring the stock down five to close at 37.

Satellite company Echostar surged nearly 5. It reported a narrower than expected loss and subscriber growth and cash flow. Both beat expectations. Analysts characterized the results as incredibly impressive, on all fronts.

And shares of Handspring were punished after a Lehman Brothers' analyst downgraded the stock, citing increased pricing pressures from rival palm. While Handspring shares ended the day off three at 14.45, the stock has more than doubled in the past month.

In New York today, Microsoft walked straight into the fierce debate over open-sourced software. Steve Young reports.

(BEGIN VIDEOTAPE)

STEVE YOUNG, CNN CORRESPONDENT (voice-over): This is what Microsoft says is for the birds. The penguins symbolize the Linux Operating System and the rest of the open source software community. The movement says software should be developed by a wide group of software programmers -- free -- and anyone should be able to peek under the wings and make technical changes.

But Microsoft has just taken aim and fired. At New York University's Stern Business School, one of Bill Gates Sr. strategists said the company believes in helping software developers, but it doesn't want them to help themselves to Microsoft's research and development. It advocates what it calls "shared source," which for a fee would allow non-Microsoft programmers controlled access to Microsoft's software code.

CRAIG MUNDIE, MICROSOFT: While these are not open source, we should be clear, we're not in the business of giving away our sources or giving away our software products. We are a business and we want to create value over time in that business.

YOUNG: Microsoft says companies that embrace open source could crash and burn like all those dot-coms that gave stuff away hoping somehow to make money down the road. But IBM is pushing free Linux as well as its own proprietary products. It tells CNN MONEYLINE: "if we thought this was a trap, we wouldn't do it. We have a lot of open lawyers."

Ardent open source advocates are enraged by Microsoft's attack. ERIC RAYMOND, OPEN SOURCE INITIATIVE: It's a scam. We think it's an attempt to recruit free labor to do the job that Microsoft's quality assurance teams don't seem to do competently, without giving any of the outside contributors any stake in or control over the results.

YOUNG: The biggest commercial software trade group weighed in, saying: "Microsoft is employing public relations tactics to incite fear among businesses that are considering migrating to the open source model."

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YOUNG: Microsoft's rejoinder to all that: copyrights, patents or trade secrets are the legal foundation that made it possible for companies to raise capital, take risks, focus on the longer term and create a sustainable business model -- Willow.

BAY: So, Steve, is Microsoft out on a limb here or not?

YOUNG: Well, commercial software companies wants to make money. IBM, (UNINTELLIGIBLE), but Microsoft is way out in the polar extreme. Yes.

BAY: This is not a debate that is likely to end any time soon, is it?

YOUNG: It's very emotional; I don't think so.

BAY: Steve Young, thanks. Taking a quick look at Microsoft shares today: they fell more than a dollar to close at 6,853. It's still been a stellar comeback for Microsoft stock this year, which began 2001 in the low 40s.

Coming up: trouble in the chip sector. Stay with us.

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BAY: In tonight's sector report, semiconductors. Chip stocks took a hit today, pulled down in part by some bad news out of Vitesse Semiconductor. The company says it will cut its work force by about 12 percent, attributing the layoffs to "slowdown in consumer demand."

Top executives at the firm will also take a pay cut of up to 25 percent. In April, Vitesse reported a major declines in revenue for the second quarter in a row, the first sequential revenue drop in more than eight years.

Shares of Vitesse have fallen: 64 percent -- week high of $95 on the session, shares dropped more than three to finish at just over 34.

Now, the chip sector had a rough day across the board: Broadcom lost nearly five. KLA Tencor down nearly 3, Applied Materials off more than $2, and Intel off $1.50.

Coming up on MONEYLINE: A Wall Street veteran leaves his home of 2 decades. We'll ask why his Launny Steffens why he is stepping down from Merrill Lynch.

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BAY: Some news from Wall Street today: when Merrill Lynch vice chairman Launny Steffens who ran Merrill's individual investor business firm for quite some time announced his departure from the firm. He'll leave to start his own investment management business. To talk about his next move, we are joined by Launny Steffens. Launny, thank you, and it's four decades.

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BAY: So, why are you leaving after four decades?

JOHN "LAUNNY" STEFFENS, MERRILL LYNCH: Well, I think that, No. 1, I am going to be 60 years old soon, and I figured that maybe it's a good time to think about starting a new business.

BAY: And I know you are going to start a new business, but would you have liked the opportunity to run Merrill or to help run Merrill as president?

STEFFENS: Well, you know, it's been a long time from when we talked about that some time ago. But really, I took myself out of the running a long time ago. I wanted to run the private client business. It was a terrific business and a terrific run.

I think it came down to the point that we had to prepare for the next generation of management. And so, David made some changes that he needed to make, and I sort of decided that I'd like to do something entrepreneurial, while it's still good to be done.

BAY: And that started your own investment management business?

STEFFENS: Right.

BAY: What does, as you say, the new generation of Wall Street managers have in store? First of all, give us a sense, if you will, of the state of business on Wall Street. IPO market seems to be dead, the M&A business seems to have dried up. How bad is it?

STEFFENS: Well, I think that lots of these businesses have had some difficulties, but there's lots of bright spots, at least at Merrill Lynch. We've done terrific in the debt business. Debt business is probably up about 75, 80 percent.

We've started some interesting aspects of our banking business, and really have built some interesting capabilities along those lines. We had close to a record of new assets from new clients on the retail side coming in in the first quarter.

BAY: But the business environment, nevertheless, is challenging?

STEFFENS: Oh, there is no question.

BAY: Thousands of layoffs have been reported, but is Wall Street still too fat?

STEFFENS: I think that we seem to go through these periods all the time where we sort of go on diets. And so, we don't seem to be able to learn those lessons as well as we should.

BAY: And will Wall Street bonuses be going this year on diets as well?

STEFFENS: I can't believe that they won't.

BAY: What is your outlook now for the markets? What are you telling investors?

STEFFENS: We've actually been quite positive, with now the number of Fed cuts we've had. There's never been a time when those Fed cuts eventually didn't lead to better markets. In fact, I think with as many Fed cuts as we've had, the average a year later has been something like 20 to 25 percent.

I think that if we get a tax cut in June, I think the overall environment and consumer sentiment is likely to improve. May take three or four months, but I think that that will be built in to the market ahead of time.

BAY: Now, in '98, you said something interesting reportedly, that the "do-it-yourself model of investing centered on Internet trading should be regarded as a serious threat to Americans' financial lives." At the time, were you just reluctant to embrace the change, or did you really see all of this coming?

STEFFENS: Well, I guess I would like to say that I saw it all coming. I think that it was interesting because we had already introduced Merrill Lynch online model, it had 750,000 people. So I felt that it was getting to be too easy, people pressing buttons and thinking that it was going to be that easy to continue, and clearly, that wasn't going to be the case.

BAY: Launny Steffens, good luck with continued business. We appreciate it.

STEFFENS: Thank you very much.

BAY: Up next: why the winner of "Survivor" is no-brainer. Plus, "Ahead of the Curve." Stay with us.

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BAY: Taking a look at some of what could move the markets tomorrow: the key employment report for April. Economists expect 5,000 new jobs to be added, and the unemployment rate to rise to 4.4 percent. And to stay a step ahead of the markets, tune into "AHEAD OF THE CURVE," at 5:00 a.m. Eastern on CNN.

Finally from us tonight: the finale to "Survivor 2." It will answer whether Colby, Keith or Tina will emerge as the ultimate victor in the Australian outback. But the real winner is undisputed. Susan Lisovicz reports.

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COLBY, "SURVIVOR 2" CONTESTANT: The powers that be have predetermined long ago the pecking orderer here and also the elimination order.

SUSAN LISOVICZ, CNN CORRESPONDENT (voice-over): And the rules, as explained on "Survivor 2" have also applied to the urban jungle and the network's continuous battle there for domination in prime-time. For 17 years, NBC was the ultimate survivor on one of the most important nights in television -- Thursday.

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KELSEY GRAMMER, ACTOR: At 2:00, we have a choice between a sumptuous high tea and a relaxing Swedish massage.

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LISOVICZ: The peacock network's prolific win streak includes "Cheers," "Seinfeld," "Friends" and "ER." But CBS switched its strongest show, "Survivor," to Thursdays, and has been beating NBC from 8 to 10 when "Survivor" and another hit show, "CSI," air.

PAULA BERNSTEIN, VARIETY: "Survivor's" really done the impossible. It's made CBS a place, a destination on Thursday nights after years of dominance for NBC. A lot of people thought "Survivor" would not hold up another year. You know, the craze would die, and it has not died. In fact, "Survivor" has only done better this time around.

LISOVICZ: Perhaps even more important to CBS, the network that draws the oldest audience, has been luring larger numbers of young viewers, the demographic most attractive to advertisers.

STEPHEN BATTAGLIO, INSIDE.COM: From a perception standpoint, it's made CBS a cooler network. People who are not watching CBS at all for years, it was the network that my grandmother watches, shows like "Murder, She Wrote," "60 minutes." With adults 18 to 34, "Survivor" wins its time period.

LISOVICZ (on camera): The ratings and demographics all translate into money, of course, in the form of higher ad rates. That's especially fortuitous for CBS, since the networks unveil their fall prime-time lineup later this month.

(voice-over): And an important piece of the CBS lineup will be "Survivor 3," set to debut in October.

Susan Lisovicz, CNN Financial News, New York.

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BAY: That's MONEYLINE for this Thursday. I'm Willow Bay. "CROSSFIRE" is next. TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com