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Lou Dobbs Moneyline
Dow Tumbles 166.50 to 10,872.64; Nasdaq Plummets 91.04 to 2,084.50; Sun Microsystems Lowers Earnings Forecast
Aired May 30, 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.
LOU DOBBS, CNN ANCHOR: Tonight, a brutal market sell-off after Sun Microsystems sparks fear a high-tech recovery is nowhere in sight.
And more hemorrhaging in the telecom business. A special report tonight on an industry debacle that may rival the S&L crisis of the 1980s.
And tonight, our guests are the king of discount brokerages, Charles Schwab, the Reverend Jesse Jackson on minority economic power and boycotts and Former National Security Adviser Sandy Berger on national missile defense and China.
ANNOUNCER: From the heart of New York City, this is LOU DOBBS MONEYLINE. Here now, Lou Dobbs.
DOBBS: Good evening. Our top story tonight: a broad retreat on Wall Street wiping out nearly a quarter-trillion dollars in market value. The Dow today, falling back below 11,000 after breaking through that level just over two weeks ago. And the Nasdaq, plunging more than 4 percent today, its worst session in more than a month. The key cause: Sun Microsystems.
Sun warning that quarterly profits and revenue will fall short of Wall Street expectations. And Morgan Stanley this morning downgraded four telecom and fiber-optic stocks. The reason for the downgrades sums up the fear that haunted many investors today: there is no evidence of a quick turnaround in technology.
Kitty Pilgrim has the report.
KITTY PILGRIM, CNN CORRESPONDENT (voice-over): A profit warning by tech bellwether Sun Microsystems spooked investors into selling shares. After nine straight sessions above the psychologically key 11,000 level, the Dow slipped 1 1/2 percent, shedding 166 points. The Nasdaq fared even worse, closing down 91 points, or 4 percent. Lead the sell-off: worries over technology sparked by Sun Microsystems after the company issued a profit warning for the next quarter.
JOHN EADE, ARGUS RESEARCH: They said if you read their warning, that not only are U.S. conditions still weak, but Europe is a problem now, too. So it seems like the weakness is spreading beyond these borders and it's raising uncertainty. MARK DONAHOE, U.S. BANCORP PIPER JAFFRAY: That's starting to get people to think again: "Uh-oh, are we back in for more trouble than we were back in early April?" And I think you've seen a sell-off in the other technology stocks and the entire group because of that.
PILGRIM: Among the big losers: Nortel Networks, which suffered from a downgrade by Morgan Stanley Dean Witter. It was joined by EMC, Texas Instruments and Dow components Hewlett-Packard and IBM, which all fell sharply on the day.
But interest rate speculation still is very much a driving force in the markets. Of late, there has been a shift on Wall Street regarding the Fed based on the recently-passed tax cut package. UBS Warburg changed the Fed cut prediction to 25 basis points rather than 50. Deutsche Banc Alex. Brown economists went so far as to predict an uptick in growth of 1.2 percent for the third quarter because of the rebate checks. That uptick in growth could make an aggressive Fed move less likely.
More of a snapshot of the economy will come in a couple of days. Now, investors are expected to continue to reserve judgment, at least until Friday, when the government issues its latest employment report -- Lou.
DOBBS: Kitty, thank you very much. Kitty Pilgrim.
Well, the Nasdaq tumble a bitter setback for investors. Just a week ago the Nasdaq was above 2,300. It had gained more than 40 percent in just a month and a half. But since then, the Nasdaq has plunged in four of the past five days. It's lost nearly 10 percent. It is the worst five-session decline since the first week of April, when the Nasdaq hit a 2-1/2-year low.
Greg Clarkin joins us now from the Nasdaq marketsite and has a look at the major stocks that affected the Nasdaq today -- Greg?
GREG CLARKIN, CNN CORRESPONDENT: OK, Lou, no shortage of stocks that are really being hammered today. Let's pick up a little more with Sun Microsystems. That is a stock that has recovered very nicely from its early April lows, and you can see the rebound there in the far right side of the screen. But today it stands just less than $4 away from hitting those lows again of $12 and change.
Now, other tech losers today include shares of optical equipment makers. And that, after Morgan Stanley's analyst lowered his rating, He says a rebound in spending by these telecom carriers could be much later than many anticipated, as late as possibly the third quarter of next year,
Now, JDS Uniphase, Tellabs, Sycamore, all downgraded. Ciena was not downgraded, but it fell as well. Then look at the communications chip companies. Again, Morgan Stanley was the brokerage house. An analyst lowered his earnings estimate on those. You can see the damage that was done to that group of stocks today. So all in all, a broad and a sharp sell-off here today, Lou. Back to you.
DOBBS: Greg Clarkin, thank you.
Another factor troubling many investors today: a profit warning from Alcatel. That warning coming after merger talks with Lucent collapsed. One reason that deal may have fallen apart: Alcatel is clearly facing its own serious financial struggles. The French telecom announcing it would post a $2.5 billion quarterly loss and embark on a massive restructuring as well. Alcatel down $2.50 in New York trading. Lucent, down fractionally on the day.
Richard Quest joins us now from Paris. He has the latest on what's been a dramatic few days for Alcatel -- Richard?
RICHARD QUEST, CNN CORRESPONDENT: Lou, quite extraordinary what happened to Alcatel. Barely had the deal with Lucent being picked out of touch when the company embarked on its massive restructuring program. Out goes the handsets division, to be diversified. Out goes various parts of enterprises. Instead, Alcatel will concentrate on fiber optics and networking. The company will take that huge charge you mentioned in its latest quarterly.
But most important, Alcatel wants again to refocus its attention on how to break into the United States. The company CEO, Serge Tchuruk, said in a conference call, "Our objective to be a bigger player in the USA is essential." And he'll personally see to it that this is followed through. But how that will actually happen, now that the Lucent deal is off, is far from clear.
He did say, Mr. Tchuruk continued, "We don't need to consolidate. If opportunities arrive, we'll take advantage. We are not hurting. We are not hunting." Alcatel tonight, one of France's biggest companies, is clearly deciding what to do next in the U.S. -- Lou?
DOBBS: Richard, thank you. Richard Quest, tonight from Paris. The news from Alcatel and Sun, of course, disturbing, because it shows a global economy that is definitely weakening. Europe in particular is emerging as a problem. Alcatel, for instance, said that in the e- business sector -- quote -- "Losses are due largely to the very weak cellular handset market in Europe." End quote.
Sun warned that -- quote -- "Demand in Europe has really trailed off more than we thought." Sun also noted weakness in Asia, as well. None of this is lost on policy makers, of course. Michael Moskow, president of the Chicago Federal Reserve, today said in a speech, "Growth abroad has been less robust. Should foreign growth remain sluggish, it would be a negative for the U.S. outlook."
Joining me now from Washington with his outlook on the global economy is Fred Bergsten. He's the head of the Institute for International Economics. Fred, good to see you.
FRED BERGSTEN, INSTITUTE FOR INTERNATIONAL ECONOMICS: Good to see you.
DOBBS: Fred, let's begin with Europe. There are definite signs of significant weakness there. Europe was to be the bastion, the fortress for any weakening, in the United States in particular. What's your view?
BERGSTEN: Well, Europe is slowing down. They had expected growth of about 3 percent this year, it will come in closer to 2, and that is a drag on our outlook. On the other hand, I think our domestic picture will probably pick up pretty sharply in the second half. We've had big interest rate cuts, we've got a substantial tax cut. The reasons that our economy slowed down over the last year have been largely reversed. Oil prices have dropped back down, the interest rate increases of a year ago have been reversed, and the wealth effect from declining stock market, despite continued bouncing around, has been, to a large extent, offset.
The new economy, the sectors you've been talking about just now, surely do continue to be weak. But the old economy is picking back up. Housing is strong, autos are strong, and I think you've see the U.S. back up over 3 percent in the second half of this year, certainly going into next year. So the U.S. will exceed Europe, rather than the reverse. The U.S. will help pull Europe back up, rather than the reverse. I don't think there's any risk of a global recession, and in fact, the overall world outlook ought to be turning around in the positive direction over the next two to four quarters.
DOBBS: Next two to four quarters takes us into 2002. 2002, generally acknowledged to be a year of some level of recovery. The World Bank, just revising downward its worldwide growth rate, down significantly, by about a third. What is your -- what is your view, in terms of Asia? Japan in particular.
BERGSTEN: Well, I think Japan is the biggest single threat to the world economy. It has an essentially bankrupt financial system. It has been very slow to force the banks to get rid of their non- performing loan. It's been very slow to put in the magnitude of government capital that is essentially required to recapitalize the banking system and restore confidence in their economy.
Under some accounting reforms they have adopted, they are going to be forced to come clean on the position of their banks over next few months, My guess is that will force them to take some decisive action on the banking system. If they do that, then I think there's a strong chance they can restore confidence in both the consumer side and the investment side. Japan has been flat for almost a decade, so if they do restore confidence, they'll be able to get some sharp catch-up growth over the next year or two. I think it's nip and tuck, but if they are forced, finally, to take the kind of banking reforms that are required, they could be a positive factor in the world economy, certainly, getting out into 2002 and 2003.
DOBBS: Great. Fred, thank you very much. Fred Bergsten.
Well, one more note on the economy from Paul O'Neill. The treasury secretary today said he is pushing top officials at treasury and the Internal Revenue Service to rush refund checks to taxpayers before September. His goal: to give consumer spending something of a quick boost. The treasury secretary added that the $1.35 trillion tax cut should boost economic growth by about one half of a percentage point over time. Still to come on here: Colin Powell tries to convince NATO allies to sign on to missile defense. We'll hear from former Clinton Adviser Sandy Berger on the merits of the national missile defense plan.
And a powerful face in American politics who has set his sights on corporate America: Jesse Jackson.
Also, the telecom boom that turned to bust. How a mountain of debt has overwhelmed a cutting-edge industry. Stay with us.
(COMMERCIAL BREAK)
DOBBS: An uncertain future tonight for the world's fifth most populous nation. Indonesia's parliament has voted to censure its president on charges of corruption and incompetence, recommending that he be impeached. But supporters of the President Wahid smashed through police lines and surrounded the parliament with knives and sticks to protest the vote.
Indonesia of course is a major producer of natural gas, paper products, and manufactured goods, and exports more than $10 billion of those goods to the United States each year.
The penalty phase began today for two of the four men convicted in the bombings of U.S. Embassies in Africa. The bombings in Kenya and Tanzania killed 224 people and injured thousands of others. Prosecutors say the man behind the attack is Osama bin Laden, who is believed to be living in Afghanistan.
Afghanistan's ruling government, known as the taliban, condemned the verdict, and in a rare television interview, told CNN it would not extradite bin Laden.
(BEGIN VIDEO CLIP)
SAYED RAHMATULLAH HASHMI, TALIBAN AMBASSADOR AT LARGE: I don't condone the attacks on the embassies of the United States in Kenya and Tanzania, they were also acts of terrorism. But how do we know that bin Laden is behind it? Bin Laden says he is not. So in order to find that out, the United States should give -- provide us with evidence. They have not given us any kind of evidence.
(END VIDEO CLIP)
DOBBS: Back here in New York City, the sentencing phase is expected to take about one month.
In Budapest today, Secretary of State Colin Powell discussed plans for a national missile defense system with Russian Foreign Minister Igor Ivanov. President Bush and Russian President Vladimir Putin will discuss the issue face to face next month.
The White House is trying to win over the Russians and skeptical NATO allies, and now the Bush team is facing some newly powerful adversaries closer to home in the Senate. Tim O'Brien reports from Washington. (BEGIN VIDEOTAPE)
TIM O'BRIEN, CNN CORRESPONDENT (voice-over): Secretary of State Colin Powell had hoped to persuade NATO foreign ministers to support President Bush's plans for a controversial missile defense program. All he got was a pledge that future talks with Washington would include appropriate assessments of risk.
That smacked of a flat rejection of administration warnings about a "common threat" of a missile attack from terrorists or hostile nations, such as North Korea, Iran or Iraq.
COLIN POWELL, SECRETARY OF STATE: If you want to have systems that could deal with such threats, you don't wait until they are pointed at your heart. You start working on it now. And that is what we are doing.
O'BRIEN: Here's the hang-up. Russia, China and the U.S. all have nuclear arsenals to deter one another from an attack. NATO foreign ministers fear the creation of the administration's proposed missile shield around Europe and the U.S. could destabilize that balance, with the potential to reignite the arms race.
JACK MENDELSOHN, LAWYERS ALLIANCE FOR WORLD SECURITY: We're in a world of retaliation and fear of retaliation, which basically keeps the nations from going to war. If one nation tries to interfere with another nation's retaliatory capability by putting up defenses against that retaliatory force, then we've got problems.
O'BRIEN: The administration must also consider possible opposition at home, particularly in light of last week's party switch by Vermont Senator Jeffords. The incoming chairman of the Senate Foreign Relations Committee, liberal Democrat Joseph Biden, may not be as receptive to the president's plans as outgoing chairman, Jesse Helms, one of the Senate's most conservative Republicans.
Before departing for Washington tonight, Secretary Powell did meet for half an hour with his Russian counterpart, foreign minister Igor Ivanov.
(on camera): A State Department spokesman said the discussions were to set the stage for President Bush's meeting in mid-June with Russian President Putin and other NATO heads of state, but that was Powell's only purpose in going to Budapest anyway, making his mission a success -- Lou.
DOBBS: Tim, thank you very much. Tim O'Brien from Washington.
President Clinton's national security adviser says the Bush administration, will have a tough time winning overseas support for the national missile defense plan, and it may have trouble winning over Congress itself. Sandy Berger joins me now.
Sandy, good to have you with us.
SANDY BERGER, FORMER NATIONAL SECURITY ADVISER: Good to be here, Lou.
DOBBS: Sandy, at this juncture, do you think the change in the makeup of the leadership of the Senate will have any appreciable effect on the president's agenda in national missile defense?
BERGER: Well, I think -- I think that Senator Biden, as chairman of Foreign Relations Committee, Senator Levin, as chairman of the Senate Armed Services Committee are going to want answers to some very important questions that have not yet been answered.
Does a system like this work? We've spent $50 billion; we haven't demonstrated that yet. What's it going to cost? The administration says perhaps it will include Russia and include NATO in its coverage. I don't know who is going to pay for that. I know the Europeans and the Russians are not.
DOBBS: I think -- I think we know, Sandy, who will ultimately pay for it.
BERGER: Yeah. Well, I'm not sure that the American people will pay for a missile defense for protection of Europe and Russia.
I think, beyond that, there are other questions. Is this the right away to look at a threat? We have a growing weapons of mass destruction threat in this country; we are more vulnerable than we have been ever before to a chemical, biological or nuclear weapon. But the least likely way in which that is going to be delivered to the United States is by a long-range missile.
So, all of these questions, I think, are going to be asked by members of Congress and I hope that we have a debate about this. This is the most important decision that has never been made.
DOBBS: Of course, the decision that wasn't made took place also, under President Clinton, and it was considerable debate under the Clinton administration, in which you participated, decisions not taken, tests certainly carrying us as far as they could at that juncture, obviously, this has been an issue since the mid-80s under the Reagan administration, in something called "Star Wars."
Fundamentally, the changing the direction from mutually assured destruction to the national missile defense strategy, has proponents and strong advocates as well as skeptics. Do you believe, in your best judgment, that it is going to become a reality over the next decade?
BERGER: Well, I think we should continue to research such a system, continue to develop such a system. There is obviously a threat from rogue states of missile threat. But we have to have our priorities straight. We have to deal with the broad range of weapons of mass destruction threats and we have to answer the questions that I opposed earlier, that so far have not been answered.
DOBBS: OK, Sandy, good to see you. Thanks for being with us.
BERGER: Good to see you Lou, thank you. DOBBS: Coming up: Jesse Jackson, Charles Schwab and we'll be talking with two of Wall Streets best about these gut-wrenching markets and where they think they are headed. Stay with us.
(COMMERCIAL BREAK)
DOBBS: Satellite pictures today giving a clearer picture of man- made and natural disasters in the making. A NASA satellite has produced the most comprehensive view ever of air pollution on the planet. The Terra orbiter monitored carbon dioxide levels in the atmosphere over time, and shows pollution spreading widely across this continent.
The highest concentrations of carbon monoxide are shown in red, generated by everything, of course, from factories to forest fires. And those red zones can spread from one continent to another, affecting regions far from their source.
Meanwhile, satellite pictures also tracked the first hurricane of the season along Mexico's Pacific coast. At last report, the hurricane, named Adolph, losing some strength and moving farther from shore.
Coming up next on MONEYLINE, a civil rights leader trying to remain focused during difficult personal times and trying to encourage economic investment in the minority community. Reverend Jesse Jackson joins me next.
(COMMERCIAL BREAK)
DOBBS: The Reverend Jesse Jackson has spent much of his career in the spotlight as a civil rights activist and leader, religious leader, presidential hopeful and corporate executive. Recently, he has had to deal with the tough side of public life fielding tough questions about his personal life and his financial dealings.
Despite all of that, Reverend Jackson has remained committed to his leadership role in the black community, recently touring 25 cities encouraging voter registration and fiscal equity for the poor. He continues to lobby corporate America to invest in minority-run businesses, known as the Wall Street project, which he first discussed on national television, I believe, a couple years ago on this program. Joining me now, the Reverend Jesse Jackson.
REVEREND JESSE JACKSON, RAINBOW/PUSH COALITION: Lou, let me say to you, congratulations for being back, number one, but don't limit the focus of this just to the black community.
DOBBS: Right.
JACKSON: Fifteen hundred Americans die a day from cancer, 500,000 a year. A coal miner dies every 6 hours from black lung disease, 40 million Americans have no health insurance. Most of the people are white, female and young, where the white, black or brown, (UNINTELLIGIBLE) matters, and they must be a part of a bulging economy. When you have a trillion and a half dollar tax cut, and half of it goes to the top one percent, and the rest to the other 99 percent it affects everybody. We're trying to change the direction of our economy.
DOBBS: We're going to get started right off -- right out of Jump Street. Here we go.
JACKSON: Well, the point is if you just speak of the black community, you look at us through a key hole, and not through a door.
DOBBS: I was looking at it, frankly, through, I think, your prism, in terms of the Wall Street Project that is focused on minority, investment in minority businesses, is it not?
JACKSON: Indeed, because you have significant portions of our marketplace, black and Hispanic, where you have underserved markets...
DOBBS: Right.
JACKSON: Underutilized talent, and untapped capital and they are really primed for growth.
DOBBS: And most recently the threatened boycott against Toyota was specifically about...
JACKSON: Here's a case where 25 percent of the marketplace is black and brown.
DOBBS: Right.
JACKSON: Sixteen members of the board of directors: No woman, no person of color. Fourteen hundred dealerships, 33 are black or brown, 190 Lexus dealerships, only seven are black or brown. We want reciprocal trade. We want a mutually beneficial balance of trade deal. And so...
DOBBS: That is precisely the reason I was talking about it in terms of minority interests and investing in minorities, again, because in those specific two instances you are talking about race, and specifically minorities.
JACKSON: And it's a way, in that case, to expand the marketplace, which is a key to growth.
DOBBS: Couldn't agree with you more about expanding the marketplace. There are those, as you know however, that, for example, in the case of Toyota who are charging you with extortion. The company had already decided to pull an ad, that you stepped in and frankly that you are extorting them.
JACKSON: That was an ad last year, by Saatchi and Saatchi that said unlike your boyfriend, Toyota goes to work in the morning, an insult. This time an ad with a black face (UNINTELLIGIBLE) red lips and a Toyota stuck in the tooth. The same company three years ago did an ad with two white hunters in a Hummer going through a jungle chasing a Kenyan runner. So what we see is a surplus of insults and a deficit of trade. Extortion is a very legal term. We are demanding reciprocal and balanced and an end to the insults. Unless there is a plan for equity, we will withdraw.
DOBBS: Withdraw, boycott.
JACKSON: Withdraw. We will, in fact, demand of them, fair trade, reciprocal trade balanced trade, or no trade. Does not the U.S. leverage trade every day if you do these things, we invest in you, we defend you, you are our allies. Using our consumer dollars to expand our way into the economy.
DOBBS: And in terms of Toyota, you would carry out a boycott on the basis of race, again, because the company in your judgment was insensitive. By the way, I'm not saying whether you are right or wrong.
JACKSON: On the basis of exclusion. Why would they have 16 members of the board, no woman, no person of color? Well, that is an insult. They have 1400 dealerships, only 33 are black or brown. We have the capacity to be car dealers. They have a $500 million ad budget, but no black or brown ad agency. We simply want fair, balanced trade. That is what you talk about every night.
DOBBS: You better believe it. I want to talk with you a little bit more about it. But first we've got to take a break. We'll be right back talking with Reverend Jesse Jackson. Stay with us.
(COMMERCIAL BREAK)
DOBBS: Checking our top stories tonight: stocks hammered after another profit warning from Sun. The Dow losing 1 1/2 percent today, the Nasdaq tumbling 4 percent. And a Morgan Stanley downgrade hitting the beleaguered telecom sector, the brokerage seeing no short-term recovery for the once-hot sector.
And Treasury Secretary Paul O'Neill saying he's pushing the Internal Revenue Service to get those tax rebates back to taxpayers before September.
We're talking with Reverend Jesse Jackson about a threatened boycott of Toyota and about his Wall Street project, a man who's had considerable personal problems, well-reported and publicized. Do you feel that you've put the personal issues behind you, that you now have no challenges facing you?
JACKSON: Well, you know, when you're out in the public life, you fall down, you get back up again.
DOBBS: Right.
JACKSON: And Kennedy had his -- had his Bay of Pigs. Bush has had his problems. But leaders manage their crisis, and they handle them with responsibility and dignity, and they move on. And that's what I have done with my work and my life. DOBBS: You sure gave your adversaries, even your enemies, great, great ammunition. Does it -- does that stick in your craw just a little bit?
JACKSON: Not really, because you cannot spend your time getting even. You must spend your time getting ahead. Mine...
DOBBS: Well, I was really not talking about getting even, Jesse. I was really talking about when a man gives his opponents, his rivals, his enemies an opportunity like that, how bad must you feel that in some way you kind of let your -- the people who follow you and look to you for inspiration.
JACKSON: It hurts. It's an error to fall but it's a sin to wallow. And so champions say there is no place on the ground for a champion. You have to sometimes play with pain. But you overcome it if you keep working and keep serving and you're honorable in your service. And so, that's what I've continued to do, is to keep serving. Whether it's fighting predatory lending or whether it's seeking to bring our troops home from China or whether expanding the economy, I continue to work and I continue to serve.
DOBBS: And let's go back and rap up if we may, Jesse. A pretty good definition, I think, if I might say so of leadership, when you fall getting back up and overcoming it.
JACKSON: And when you're down, you look up. Whoever's looking down (UNINTELLIGIBLE) a saint. What is a saint? Peter a saint. Paul a saint. A saint is just a sinner who got back up again.
And so you must be -- you cannot be trivial about it. You can -- you must be contrite about it. But you can't wallow in it. And that's part of our -- you know, when I looked at, just briefly, the game when the Spurs played, and Robinson made a foul and he reacted and made another foul and he had to go to the bench, but on our best, when we make fouls, we are just -- we keep moving.
DOBBS: You're going to bring that level of forgiveness and openness to Toyota and others who in your view may have sinned?
JACKSON: Absolutely. We're willing to forgive and redeem, but there must be an even playing field, a commitment to fairness. The good news, when they even the playing field, they expand the marketplace. When they expand the marketplace, they grow. When they grow, when we grow, everybody wins.
DOBBS: Jesse Jackson, as always, good to see you.
JACKSON: Good to see you back.
DOBBS: Thank you, sir.
Also, MONEYLINE confirmed today that America Online is talking to one of its biggest rivals: Microsoft. Those discussions center around a potential distribution deal that involves Microsoft's audio and video software. But an even broader alliance could be in the works. AOL Time Warner, the parent company of America Online, closing up 10 cents a share today. Microsoft dropped more than a dollar.
Bruce Francis has the report.
(BEGIN VIDEOTAPE)
BRUCE FRANCIS, CNN CORRESPONDENT (voice-over): Sworn enemies that desperately need each other, America Online and Microsoft are moving beyond the browser battlefield and are now in talks about media player software.
ERIC SCHEIRER, FORRESTER RESEARCH: Microsoft clearly believes that this is going to be a battleground that is going to be important for control over the user experience and desktop penetration over the next couple of years.
FRANCIS: AOL, like CNN, is owned by AOL Time Warner. Media players are typically free for consumers. Companies like RealNetworks make most of their money from the behind-the-scenes software. Talks between Microsoft and AOL described as wide-ranging, but potential tradeoffs between the two companies could look something like this: America Online now includes media player software from RealNetworks under an agreement reached last summer. With the exclusivity on that deal expiring, AOL would also include rival software from Microsoft, a potential blow to RealNetworks, according to sources close to the talks.
Also under discussion, interoperability of MSN Messenger with AOL Instant Messenger. Currently, AOL blocks Microsoft users.
In return, Windows XP software would come bundled with America Online's program when it's released this fall. That would continue a critical agreement reached in 1996 between Microsoft and AOL.
JOHN CORCORAN, CIBC WORLD MARKETS: It wants to ensure that subscribers have easy access to AOL services through Microsoft's software offerings, so it's really interested in maintaining that channel.
FRANCIS: Neither side would comment on the talks. The deadline: potentially late summer, before Microsoft releases Windows XP to computer makers.
(END VIDEOTAPE)
FRANCIS: Well, the talks come as the rivalry between AOL and Microsoft becomes increasingly bitter. AOL officials are briefing House and Senate on the antitrust implications of Microsoft's .Net strategy, parts of which are seen as competing with America online. Microsoft lobbied the FCC late last year with concerns over the merger of AOL and Time Warner -- Lou.
DOBBS: Bruce, thanks very much. An interesting possible combination.
FRANCIS: More to come.
DOBBS: Thank you.
Well, a related programming note, as they say, Microsoft chairman and chief software architect, a fellow by the name of Bill Gates, will be joining us here tomorrow night on MONEYLINE. Please be with us.
Up next, a slowing economy makes for rough times within the brokerage industry. We'll take a look at one firm fighting to stay on top.
(COMMERCIAL BREAK)
DOBBS: Tonight's "MONEYLINE Movers", led by ExxonMobil gaining just over a dollar a share, the company upped its second quarter dividend by two cents a share and announced a two-for-one stock split.
Best Buy off about $5 a share. Bear Stearns downgraded the electronics retailer, citing weak demand for its biggest products, those including computers, wireless and appliances.
Rival Radioshack also falling nearly $6 a share, warning its troubles are escalating. Slower-than-expected sales will force 2001 profits to fall 10 percent below last year's levels and far below expectations. Radioshack shares have simply plunged this year, down 37 percent.
It has been a tough year for the brokerage industry, and Charles Schwab is no exception. The discount broker, which is the leading discount broker, recently met lowered quarterly estimates, but its earnings were nearly 50 percent below the year ago quarter. And the problems don't stop there.
Schwab reported a 39 percent drop in average daily trades for April from the previous year, and customers withdrew a net total of $500 million from their accounts. Because of the current situation, some Wall Street analysts are doubtful the firm will meet earnings expectations for the second quarter. Shares of the company trading just about 54 percent off the 52-week high. Joining me now from San Francisco, the man himself, Charles Schwab.
Chuck, good to see you.
CHARLES SCHWAB, CHAIRMAN & CO-CEO, CHARLES SCHWAB: Hi, Lou, it's nice to have you back with us every day now. It is -- love your friendly face.
DOBBS: Well, you are very kind. And I wish the times were kinder to nearly every business, but the brokerage business, and yours as well, obviously, facing enormous difficulty. What is your take on the current business conditions for Charles Schwab and the brokerage industry?
SCHWAB: Well the investment industry of course, as we all know, went through a fantastic boom over the last three or four years, and now we are having the aftermath of that boom. We are having a down and bear market. And consequently, we have gone through so it many times before, we sort of know what's going to happen. People have lost their confidence to some respect, and so, it rebuilds, and so whether it comes later this year or next year, there will be a return to more positive attitudes, I think in the future.
DOBBS: There is, to me at least, some surprising level of negativity around the economy. Much of this economy, in great shape, relatively low unemployment by any historical standard. Yet, the drumbeat continues because of what's happening principally in the Nasdaq markets. What is your view of the economy and its direction over the next several months?
SCHWAB: Well, I'm a little biased in one respect that I reside most of the time in the West Coast, where we have not only the problems with technology, and the sort of recession -- deep recession into technology, but we also have a power problem, also out here, so, our -- the pall out here in the West Coast is worse than would it be in other parts of the country.
But I do think the recession we are facing across the country will go on for a while. The Fed is doing its work, doing it aggressively, so I'm very optimistic about that. But, I think we just have to wait and see and let this play out itself before we can become optimistic again.
DOBBS: Well, trading volume down, withdrawals outflows in industry. What is your counsel to investors right now?
SCHWAB: Well, my counsel is, of course, always is -- that it is a long term situation. The withdrawal, many of which happened this April, went towards taxes. As we all know, we just had a little tax relief. But flows are coming back in pretty nicely in May.
And so, my view is: continue to hang on to your good portfolio, adjust some of the stocks that may have not met your expectations, but hang in there. This is not a time to be bailing out and going away from investing.
DOBBS: Always good to have you with us, Charles Schwab. We appreciate it. Good to see you.
SCHWAB: Thank you, Lou.
DOBBS: Coming up: $14.3 billion of bad loans, in one industry, in one year. We focus on the telecom crisis, next. Stay with us.
(COMMERCIAL BREAK)
DOBBS: In our sector focus tonight, a special report on the ongoing telecom disaster: the Lucent-Alcatel deal is called off, and in a downgrade of major equipment makers this morning, Morgan Stanley said sector fundamentals are weakening. And forget that second-half recovery. Morgan says the stocks may not pick up for another full year. Nortel, JDS Uniphase, Sycamore and Tellabs all tumbling on the news.
Peter Viles joins me now on the telecom meltdown and why it never seems to end -- Peter.
PETER VILES, CNN CORRESPONDENT: Lou, this is clearly the weakest part of the economy right now, what makes this doubly shocking to investors is that a year ago, it was or at least appeared to be the most promising part of the economy.
(BEGIN VIDEOTAPE)
VILES (voice-over): The Colorado headquarters of ICG Communications, one of the dozens of nimble upstarts formed with high hopes of moving Internet traffic. After once burning through cash at the rate of $1 million a day, ICG is finally turning a profit, but it is also in bankruptcy, a victim of its own ambition, the pursuit of growth at any cost.
RANDY CURRAN, CEO, ICG COMMUNICATIONS: I think there was a real race for market share, a race with no financial rules, quite frankly. A tremendous amount of junk bond debt was sold, and now that's all going to have to sort itself out, and companies are going to have to get their balance sheets squared up.
VILES: And those balance sheets are loaded with debt. In 1998, the telecommunications industry took on bank loans and issued bonds totaling $169 billion, another $169 billion in 1999, and $251, a quarter of a trillion dollars last year.
The industry put the money to work in a massive buildout, but the mountain of debt poses a risk to the economy. Standard & Poor's reports a huge spike in defaults on telecom debt, from $4.5 billion last year to $14.3 so far this year. But those numbers are dwarfed by the losses suffered by stock investors.
Cisco Systems has lost $348 billion in market value; Lucent, $190 billion; Nortel, $150 billion; AT&T, harmed by the collapse of long- distance pricing, $128 billion. All told, that's more than $800 billion in just four companies.
PAUL SAGAWA, SANFORD C. BERNSTEIN & CO.: I think it's accurate to say that this industry is having a greater effect on the economy than the economy is having on this industry. I mean, when I listen to conference calls from Cisco, Nortel and others, they're constantly pointing fingers at the economy, saying, "there, that's the problem." I think it's the opposite.
VILES: The collapse of this sector was built on easy money, overcapitalization, led to competition without regard to profit, over building of communications networks, which in turn led to overcapacity and plummeting prices.
UNIDENTIFIED MALE: The spot price of a high-capacity link between New York and Los Angeles has dropped 85 percent just in the past four months.
VILES: What happens next is probably more of the same. The list of bankruptcies, which now includes ICG, GST, Teligent, Winstar, and Northpoint, is likely to grow. Analysts say the industry also needs consolidation and plenty of it.
But the collapse of the Alcatel-Lucent talks shows that mergers can be a lot harder to pull off if your stock is down 88 percent from its peak and you are not getting a premium.
(END VIDEOTAPE)
VILES: Analysts say this unwinding process could last another year and may be helped along however by technology. A lot of the excess capacity and excess equipment may become obsolete before it is ever sold or used -- Lou.
DOBBS: An incredible story in telecommunications, just the overbuild alone, amazing.
VILES: Too much money can ruin a good industry, and underneath there is growth in this industry.
DOBBS: Absolutely. Pete, thanks a lot -- Peter Viles.
Coming up next here, perspective on today's markets and the direction we can expect in these markets over the coming months. Strategists Joe Battipaglia and Brian Finnerty join me next.
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DOBBS: Today, a tough session on Wall Street: The Dow back below 11,000 and the Nasdaq is less than 100 points from falling back below 2,000. What happened to all of that talk about recovery?
Joe Battipaglia and Brian Finnerty join me. Joe, good to have you.
Brian, what happened? Is this the -- what is this? I guess we should start...
BRIAN FINNERTY, C.E. UNTERBERG, TOWBIN: You know, I think today was a real shock to a lot of investors when they got a bad report from Sun Micro the previous night and then we got that downgrade that you guys just talked about on the whole Morgan Stanley thing on the telecom issue. And I think it sort of stretched out the idea of recovery in terms of investors minds right now, and it was a little bit of a shock.
We had been hoping it would come a little bit sooner, stocks might have gotten a little bit ahead of themselves, particularly in technology land.
DOBBS: Yeah, 40 percent run-up.
JOE BATTIPAGLIA, GRUNTAL & CO.: You talk about ahead, a six-week run that was fantastic.
FINNERTY: Yeah, right.
DOBBS: Forty percent... BATTIPAGLIA: That's right.
DOBBS: That's still good, right, Joe?
BATTIPAGLIA: Off the bottom, absolutely.
FINNERTY: So we were due for a bit of a pullback. We're getting it now. Now it remains to be seen how far down it's going to go. I don't think it's going to be more carnage. I don't think it's going to be another bloodbath.
BATTIPAGLIA: To me it looks like a stair-step situation, which is to say the market starts to rally on good fundamental developments in the economy: confidence up, the economy not slipping into recession. The next part is dealing with the earnings indigestion: analysts cutting back their expectations. Then we go back to looking at the economy again for the next leg up, which probably takes place sometime soon as we get into the month of June.
DOBBS: This idea that the markets are a leading indicator for what's going to happen with the economy. We're going to see, according to this market right now, we've gone from a bear market in the first quarter to now a bull market to now who knows what, but nonetheless indicating an economic recovery in the second half. Do you buy that, Brian?
FINNERTY: I do, Lou, although psychology changes on a dime. But I think, you know, from January 3rd, the first 50 basis point cut by the Fed, until May 20th, the fifth one, that's the most aggressive the Fed has ever been. I think, you know, as Joe will probably agree, it takes time to filter into the economy, but it's starting to.
BATTIPAGLIA: And analysts cuts can continue well through the third quarter with the markets still running against it. And what I like most about where we are is most of the economically sensitive sectors, ex-tech, are up so far this year by 5, 6 and 7 percent, including consumer durables, basic industries, transportation. That's telling us something.
FINNERTY: The boring stocks.
DOBBS: The boring stocks.
FINNERTY: But the techs are like a yo-yo, up and down, and...
DOBBS: And a lot of investors are glad they've got those boring stocks right now. What should investors be doing here? Joe, let me start with you.
BATTIPAGLIA: Know who you are. Are you a trader or an investor? And if you are an investor, go by the fundamentals. The U.S. economy will lead the world back to expansion. Interest rates are your friend now. Inflation is diminishing. The one thing I'm watching, of course, is gasoline prices for the summer as the major challenge. Without that, we have a very good inflation picture, and ultimately, a growth rate in the U.S. economy of 3 percent, supporting an expansion of valuations with the Dow and the S&P hitting a new high. So be diversified, participate and don't leave the market here.
DOBBS: OK, Brian.
FINNERTY: Lou, I think I'll take it from a technology stock standpoint. I think I'd much rather be buying them here at these levels, particularly after the last four days when we're down 10 percent alone in the Nasdaq. And a lot of those semiconductors, communication stocks down almost 20 percent in just the last week alone.
So I think you use these pullbacks to accumulate the quality companies in groups that you know are going to be growth leaders coming back out. Semiconductors. Optical stocks, believe it or not, will have their day again in the sun. And some of the others.
BATTIPAGLIA: Interestingly enough, there's a whole new wave of technology coming on at Intel, at Sun Microsystems that the analysts are not putting into the models yet because they're so fearful of right now.
FINNERTY: And that's what they need...
BATTIPAGLIA: But that's your opportunity.
FINNERTY: ... to spur demand.
DOBBS: (UNINTELLIGIBLE) past year and a half, new technology and new products to drive them.
BATTIPAGLIA: Right, and I'll add one more thing. The telecom service companies aren't going down any longer. They're flat so far this year, and perhaps there's light at the end of that tunnel in terms of their ultimate order rate for equipment, which brings along the telecom sector.
DOBBS: Need both of you guys back very quick. Every time, there's a down market you're making me feel a lot better.
BATTIPAGLIA: Done.
(LAUGHTER)
DOBBS: Brian Finnerty, Joe Battipaglia, thanks for being with us. Appreciate it, gentlemen.
Coming up next, "Ahead of the Curve." Stay with us.
(COMMERCIAL BREAK)
DOBBS: Out tomorrow, weekly jobless claims. Economists expecting that number to show continued weakness in the labor market. Also, Microsoft Chairman Bill Gates gives the keynote address at the launch of Microsoft Windows XP right here in New York City. Be sure to join us for MONEYLINE tomorrow night when I talk with Mr. Gates about his company, his industry, and perhaps even a new product. And finally tonight, battling it out in the PC wars, claiming to live those PC wars, Gateway founder and returning CEO Ted Waitt today promised to undercut his rivals on prices. On a nationwide advertising blitz that rolls out tomorrow, Gateway pledges to beat prices from half-a-dozen competitors, featuring the tag line "PC price war -- cool!"
Cool perhaps for consumers, but perhaps not for investors. Price wars, of course, aren't exactly friendly to profit margins, but Waitt, who's promised to return Gateway to profitability this year. Quote: "There has been a price war in the PC industry since we opened for business in 1985, and we love it." End quote.
That is MONEYLINE for this Wednesday evening. We thank you for joining us. I'm Lou Dobbs. Good night from New York. "CROSSFIRE" is next.
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