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Lou Dobbs Moneyline

Congress Asks: Can Wall Street Be Trusted?

Aired June 13, 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, HOST: Tonight: the president's most important meeting yet as a world leader, pressing NATO to support his missile defense plan.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: It is the right signal to send, that the Cold War must be abandoned forever.

(END VIDEO CLIP)

DOBBS: On Wall Street, a late sell-off sends stock prices lower across the board, and the Nasdaq is now down 6 percent in less than a week.

CEOs on the edge. Tonight, Carly Fiorina, two years leading Hewlett-Packard, $25 billion in market cap lost.

And the Expos, the Devil Rays, the Marlins: they're on baseball's endangered list. We go live to the baseball owners meeting in Pittsburgh.

Good evening. President Bush is in Brussels tonight, telling NATO time has run out for the 29 year-old anti-ballistic missile treaty, that it's time for NATO to embrace his missile defense proposal.

In this country, a new survey reveals the crime rate has plummeted. In fact, the sharpest one year decline in crime in the history of the survey.

And on Wall Street, all of the major indexes today fell. Investors reacting to new corporate earnings warnings and troubling reports on the strength of the economy.

We begin with one of the most explosive issues on Wall Street, where analyst research is tainted by conflicts of interest. Tomorrow on Capitol Hill a House subcommittee will begin investigating the issue. A Wall Street trade group yesterday issued guidelines that prohibit firms from linking analyst pay to lucrative investment banking deals. But it may take more than voluntary measures to erase the deep skepticism about an analyst's motives, when they recommend buying a stock.

Peter Viles has our report.

(BEGIN VIDEOTAPE)

PETER VILES, CNN CORRESPONDENT (voice-over): The markets may have stabilized, but $3.5 trillion of value has disappeared. Now Congress wants to know why Wall Street analysts never warned investors to sell, or at least duck.

REP. MICHAEL OXLEY (R), OHIO: I'm distressed by the statistic that as the markets were crashing last year, less than 2 percent of analysts' recommendations were for selling.

VILES: In a hearing Thursday, Congress will pose the question the news media has been asking for months: can you trust Wall Street analysts? Trustworthy or not, they still don't like to say, "sell." Research by First Call shows 29 percent of all recommendations are strong buys; 37 percent buy; 31 percent hold; only 1 percent sell; and only .4 percent strong sell.

Wall Street will go to Washington armed with a voluntary solution -- so-called best practices to ensure the integrity of stock research. Research departments should not report to investment banking units, analysts should recommend both buy and sell ratings, analysts should not trade against their recommendations, analysts' pay should not be linked directly to investment banking business.

FRANK FERNANDEZ, SECURITIES INDUSTRY ASSN.: Clearly, there is a perceptual issue at the very least, and the industry felt we needed to address this, because even the perception of a conflict of interest is too much.

VILES: But the initial reaction from Congress is that this voluntary code is not enough.

REP. RICHARD BAKER (R), LOUISIANA: It's one thing to put a nice pretty code of standards together, publish it and put it on a shelf. I'm more interested in the usage, and whether or not it's actually being applied in the market. As my hero Ronald Reagan said, "you trust, but you also verify."

(END VIDEOTAPE)

VILES: Expect some sharp criticism of Wall Street tomorrow, notably from bearish investor David Tice, who has argued that bad advice from Wall Street hurts not just investors, but the entire economy. He cites over-investment in telecommunications, and under- investment in energy as economic problems that analysts bear some of the blame for -- Lou.

DOBBS: Pete, David Tice will be our guest on MONEYLINE tomorrow night. In terms of these guidelines that the SIA recommended and the major firms have accepted, doesn't that basically address most of the issues that would come up in Congress?

VILES: Most of the issues, on the chairman of the subcommittee said this was a good first step. They do want to know if Wall Street will live to these. They are voluntary. So, perhaps some wiggle room there for Wall Street to makes a commitment to these voluntary guidelines, and this thing could be pretty simple, but we will have some theater in the meantime.

DOBBS: I love the idea of "trust but verify," not a bad idea. Thanks, Pete.

Energy policy dominated the congressional agenda today. There were hearings in both the Senate and the House. Democrats attacking the president's overall energy strategy, and his handling of the California power crisis. The Federal Energy Regulatory Commission today did suggest that it would try to ease the pain facing California residents. But Democrats insist it's not enough. Tim O'Brien joins us now from Capitol Hill.

(BEGIN VIDEOTAPE)

TIM O'BRIEN, CNN CORRESPONDENT (voice-over): The man who heads the Federal Energy Regulatory Commission, Curt Hebert, wouldn't use the words "price controls," but he strongly hinted that what the agency calls a price mitigation plan, based on supply and demand, would be expanded.

CURT HEBERT, CHAIRMAN, FERC: We're trying to do what a functioning market would otherwise be doing.

QUESTION: Is it a price control of any kind to impose some sort of external limit?

HEBERT: I don't care what you call it. It's a fix for California, and it's going to protect the consumers of California.

O'BRIEN: And probably to other western states too, according to Senate sources, and not just during power emergencies. Democrats, who have long argued for price controls to prevent gouging, were not impressed.

REP. RICHARD GEPHARDT (D-MO), MINORITY LEADER: I think the American people want to save the economy of the west coast and the only way that is going to happen is with temporary relief through price caps on wholesale prices for electricity.

O'BRIEN: Meanwhile, Energy Secretary Spencer Abraham, was taking some heat on Capitol Hill for the president's emphasis on production rather than on conservation.

REP. HENRY WAXMAN (D), CALIFORNIA: On the one hand, we're being told there is a crisis, let's drill -- and yet, we don't have the effective ways to use our energy more efficiently and to conserve.

O'BRIEN: Abraham reminded lawmakers of the tradeoffs. More fuel efficient cars, for example, might not satisfy the safety standards of NHTSA, the National Highway Traffic Safety Administration.

SPENCER ABRAHAM, ENERGY SECRETARY: One of the ways manufacturers could meet a higher standard on fuel efficiency is to make a vehicle lighter. Now, if a vehicle is lighter, NHTSA has concluded that there is a correlation to more serious accident ramifications.

O'BRIEN: There were hearings on the Senate side too, but the dynamics have changed dramatically as a result of the reorganization in party leadership.

(END VIDEOTAPE)

O'BRIEN: Instead of focusing on what the president's energy package would do in the long run, the emphasis was on what it could not accomplish in the short run. There seemed to be no agreement, no room for compromise and Lou, a long, hot summer ahead.

DOBBS: And Tim, apparently no progress on the president's energy proposals?

O'BRIEN: None whatsoever. There is debate and we are assured there's going to be a lot of that. But whether there will be any solutions or any compromise, there's no progress at all.

DOBBS: OK, Tim, thank you. Tim O'Brien reporting from Washington.

While Congress debates solutions to the California energy crisis, state officials lashed out at energy companies. State Attorney General Bill Lockyer said he'll call a criminal grand jury early next month to examine charges of price gouging. He did not identify those companies that would be investigated.

In Brussels, President Bush met with NATO allies for the first time. His message to European leaders: abandon "a Cold War mentality" and embrace a missile defense program. The president's push followed his forceful comments yesterday in Madrid. He urged Europeans to face the new threats in the post-Cold War era -- namely from rogue nations.

Today's meeting represents the biggest test yet of the president's diplomatic skills. The next comes Saturday when Mr. Bush will discuss missile defense with Russian President Vladimir Putin. Senior White House correspondent John King is traveling with the president and reports from Brussels.

(BEGIN VIDEOTAPE)

JOHN KING, CNN SR. WHITE HOUSE CORRESPONDENT (voice-over): His NATO debut was major test, and the president claimed progress, converse to his controversial plan for missile defense.

BUSH: We saw a new receptivity towards missile defense as part of a new strategic framework to address the changing threats of our world.

KING: Britain, Hungary, Poland, Italy and Spain offered at least general words of support.

TONY BLAIR, BRITISH PRIME MINISTER: Europe and America should always stick together. KING: But Mr. Bush by no means closed the sale. German Chancellor Gerhard Schroeder said the technology is still unproven. And French President Jacques Chirac took issue with Mr. Bush's characterization of the 1972 antiballistic missile treaty as a Cold War relic.

PRES. JACQUES CHIRAC, FRANCE (through translator): We have some reservations and some concerns, notably about the risk of proliferation in this area of ballistic missiles and weapons of mass destruction.

KING: But NATO's secretary general was more upbeat.

GEORGE ROBERTSON, NATO SECRETARY-GENERAL: What the president asked for and what the president got was an open mind by the other allied countries to look at the risks and emerging threats that exist against NATO countries today.

KING: Several allies have complained of a go-it-alone approach, so Mr. Bush arrived in Brussels with something to prove.

BUSH: Unilateralists don't come around the table to listen to others and to share opinion.

KING: But he also made clear listening doesn't necessarily mean giving ground.

BUSH: I think people are coming our way, but people know that I am intent upon doing what I think is the right thing in order to make the world more peaceful.

KING: Saturday's meeting with Russian President Vladimir Putin is critical. There would be much less controversy if Moscow agreed to amend the ABM Treaty.

Brussels was stop two, and like Madrid the day before, protesters made clear their opposition to missile defense and other Bush administration policies. And officials are bracing for more protests at the next stop, Sweden, where Mr. Bush joins a European Union meeting.

The president took time out in Brussels to indulge his sweet tooth.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Oh, this is really good.

KING: A brief respite on a trip in which Europe is taking his measure.

(on camera): Mr. Bush says his take is, so far so good. He claims significant progress in building goodwill among the allies and, in his view, at least modest headway in making the case for missile defense.

John King CNN, Brussels. (END VIDEOTAPE)

DOBBS: Coming up on MONEYLINE: "CEOs On The Edge." Tonight, Carly Fiorina, corporate America's most powerful woman. She's in a fight to revive the HP way.

It was Wall Street's second biggest IPO ever. Today Kraft shares traded for the first time in more than a decade, and the broader market erasing modest gains ending the day lower. I'll be talking with a strategist who sees reason for buyers to hold back this summer.

(COMMERCIAL BREAK)

DOBBS: The most actively trade stock today, this year's most anticipated IPO: Kraft Foods. Kraft, the company behind Planter's Peanuts, Ritz Crackers, Oreos, making it's trading debut. The stock gaining slightly on the day, closing $31.25 cents, up 25 cents. Not bad, however, said the IPO watchers considering the massive size of this offering.

Kraft, the largest U.S. food company, now boasts a market cap of $54 billion, more than three times the size of it closest competitor, Sarah Lee. Kraft remains a subsidiary of Philip Morris. Kraft gaining a quarter on the day. Philip Morris lost 76 cents.

Overall on Wall Street, it was another day of volatility. The Dow and the Nasdaq spent most of the day lower, but in the final 90 minutes of trading, stocks tumbled. The Dow trading in a 130 point range. The Nasdaq dropping 2 percent.

Kitty Pilgrim reports from Wall Street.

(BEGIN VIDEOTAPE)

KITTY PILGRIM, CNN CORRESPONDENT (voice-over): Comments from a Fed official hit an uncertain market and caused some selling pressure in what was generally a moody day. U.S. Federal Reserve Vice Chairman Roger Ferguson said the economy may not have hit bottom yet. And then profit warnings from a few companies intensified the gloom. On top of that, economic data from the Federal Reserve's Beige Book showed weakness.

BRIAN BELSKI, U.S. BANCORP PIPER JAFFRAY: I think the key thing to this market is the actual length or amount of negative news is less than it was a month ago, two months ago and six months ago. And that's the key to any market that needs to solidify -- that the negative news begins a slowdown and it eventually turns positive. We're not near turning positive yet.

PILGRIM: The Dow Jones Industrial Average closed down 76 points after meandering much of the morning. Among the Dow movers, Eastman Kodak, GE and Honeywell still in limbo with European regulators over a proposed merger. Techs Intel and Microsoft also showing weakness. Brokerage stocks did not do well. Merrill, Goldman, Morgan Stanley, and Lehman all traded lower. The Nasdaq lost 48 points to 2,121 with big stocks like Cisco falling on the day.

LARRY SEIBERY, BARRETT ASSOCIATES: We're sort of in a waiting period here. The Fed will give us some sort of an announcement on the 26th, 27th after their meeting. We have earnings announcements, perhaps a few more preannouncements. So we are in a bit of a dead zone here, probably for another couple of weeks.

(END VIDEOTAPE)

PILGRIM: The rest of this week may not be an easy one. This is triple witching Friday. It's generally characterized by increased volatility. With such indecision in the markets the next two days may be choppy indeed -- Lou.

DOBBS: Well, it's been a choppy month, so I don't suppose we should expect much difference for the remainder of the week. Triple witching: Do you think it will be quite an impact, Kitty?

PILGRIM: Well, they say these days that it starts to factor in a little bit earlier, by Wednesday or Thursday. And that may be why we're seeing some volatility today. But it's not going to be an easy week all around with this confession season coming upon us.

DOBBS: Terrific, Kitty, thank you. Kitty Pilgrim at the New York exchange.

CEO Jack Welch today met twice with Europe's top antitrust regulators. Mario Monti, the chief regulator, the flurry of negotiations came a day before a deadline for meeting EU objections to the $41 billion takeover of Honeywell by General Electric. No official comment on how those talks are progressing, but there's clearly concern in the market that the deal is in trouble.

Both stocks fell today. So far, this month, they have been diverging, showing that some investors are skeptical that a deal will actually happen. Well, my guest tonight is cautious on this market. John Manley of Salomon Smith Barney. John, good to have you with us.

JOHN MANLEY, SALOMON SMITH BARNEY: Good to be back.

DOBBS: Let's start out with GE. What do you think's going to happen? Is that deal going to happen?

MANLEY: I think the odds still favor it. It just gets tougher and tougher. You know, it's now a multinational game we have to play. And the U.S. is fine. I'm sure Mr. Welch has some pretty good arguments.

DOBBS: And a little in the way of resources?

MANLEY: I think he does. I think he might not be adverse to using them either.

DOBBS: At this juncture, this market, Kitty Pilgrim just described this as choppy. The volatility has returned, if it ever truly left. What do you make of what this market is doing right now?

MANLEY: Well, my caution if I have it is more short term. I think it's actually typical if you think about it, the market discounted a perceived recession a couple months of ago. And typically, after that the prices come back a lot faster than the fundamentals. And you run into this awkward phase where prices are ahead I think ahead of fundamentals, but they're both moving in the right direction.

DOBBS: Both the fundamentals and stock prices?

MANLEY: ... are moving in the right direction. I think fundamentals are getting less bad, and as they get less bad that's the first move toward more good, i guess. But that's how I start.

DOBBS: We're going to have to chart this, John.

MANLEY: You can see it on the charts. What's happening -- revisions, earnings revisions, a couple months ago running 35 percent worst than normal. They were earning 20 to 25 percent worse than normal now. That's still not great but it's better than it was. And we've reached this awkward phase, where it's a bit ahead of itself but that's a tough game to play I think.

DOBBS: You were talking about discounting recession and then it looked as though this market was also forecasting out six months of booming recovery. What is it forecasting now with this activity?

MANLEY: I think it stopped forecasting. I think what it's doing right now is having seen both sides of the extreme, it's trying to come to grips with the very short term issues. You know, the numbers aren't going to be good in the second quarter. We knew that. I think it's hard to extrapolate that into next year, and I think that limits the damage for the time being.

DOBBS: Well, let's extrapolate out short term, let's call it the end of the year. Give us your expectation for the remainder of this year?

MANLEY: I think it's going to be reasonable good after the next couple of weeks through the end of the summer. I think September you're going to see some tax selling, if nothing else and September is tricky in the sense that it's the first glimpse we're really going to have into next year. Now I think it's going to be OK. But add tax selling to the danger of me being wrong which has been known to happen from time to time, it gets a little dicey.

Ultimately,though, I don't see how you fight the Fed. I don't see how you fight the Congress. You still have fairly low expectations. You still have a high fear, high anxiety factor. I think the market overcomes that.

DOBBS: Has the impact in terms of investor confidence, as represented by what we're seeing in the market to both the tax cut and to five interest rate cuts by the Fed, been as impressive as you would have a expected? MANLEY: It's good enough. Let's put it that way. You're going against a couple of things here. You're going against primarily rising unemployment. Now if you think what makes consumers go forward: What makes them go forward are their wealth and their income. They're taking hits to their income. The Fed is concerned that they don't take too many hits to their wealth. And I think on that basis, the Fed is in a pretty friendly mood for the market -- not directly so, but our interests sort of align at this point in time.

DOBBS: Terrific. John Manley, as always, good to see you.

MANLEY: Good to see you, Lou.

DOBBS: Coming up next, taking off, and logging on. Boeing in a deal to bring high speed Internet access to the skies. Also, the sharpest decline in violent crime in at least 28 years. We'll take a look at the report. And trying to level the playing field for the boys of summer. We'll have a live report from the baseball owner's meeting.

(COMMERCIAL BREAK)

DOBBS: In tonight's "Tech Watch": broadband Internet access at 39,000 feet. Boeing today teaming up with three major U.S. carriers to provide high-speed Internet service on some long-distance flights, American, United and Delta taking a minority stake in Boeing's in- flight service. That service is called "Connexion." It's expected to be installed in 500 airplanes by next summer. Special antennas on the planes will connect with satellites, allowing access to the Internet. But passengers must bring their own laptops or other devices. The price tag? About $20 an hour.

Some analysts have doubts about the service. They say budget travelers may be put off by that cost, and business travelers, one analyst noted, could have a hard time claiming $20 for an hour on the Web when some can't even expense $9 for a hotel room movie.

Coming up next, the high cost of Tropical Storm Allison on medical research. Also tonight, a Silicon Valley icon falls on hard times, leaving CEO Carly Fiorina "on the edge."

Baseball looking to its future and imagines fewer teams in that picture. A live report tonight.

(COMMERCIAL BREAK)

DOBBS: The Justice Department today said the rate of violent crime plummeted 15 percent last year. That's the steepest decline since the government started tracking the data in 1973. There were 1 million fewer violent crimes last year than in 1999. This, according to the Department of Justice's National Crime Victimization Survey.

The declining trend in violent crime began in 1994, but the source of the trend is hotly debated. Among the theories, increased police presence, higher rates of incarceration and a strong economy. The decreases in crime affected nearly every demographic group surveyed.

Well, from crime to nature, the flooding and devastation caused by Tropical Storm Allison will likely cost more than a billion dollars. But some other damage may be priceless in terms of lost medical research. Laboratories run by Texas Medical Center were inundated by the flooding, killing more than 30,000 lab mice, destroying samples involving years and sometimes decades of research. This dealing a serious blow to research in cancer, AIDS and gene therapies.

Global military spending increased 2.3 percent last year, reaching almost $800 billion. A Swedish foundation, the Stockholm International Peace Institute, reported about 2 1/2 percent of the world's gross domestic product is spent on defense. Driving last year's growth, spending by the United States, Russia, as well as African and South Asian nations. The United States accounts for 37 percent of global arms expenditure.

Coming up next: She took the top job at Hewlett-Packard, making promises and making history. Now Carly Fiorina is a CEO on the edge.

Also, shoppers grow cautious about their spending habits. We'll talk with one economist who says we're headed for a recession and there's nothing Alan Greenspan or anyone else can do about it.

And the deep-set problem in Major League Baseball: small-market franchises failing to keep up with big-time clubs.

(COMMERCIAL BREAK)

DOBBS: In tonight's headlines, stock prices slump, rattled by another round of profit warnings as investors watch the Dow lose 3/4 of a percent and the Nasdaq more than 2 percent. And Kraft makes its debut: the second-largest IPO in history rising only slightly on its first day of trading. Also, the Fed releasing its beige book survey, showing little or no economic growth in most parts of the country.

Our regular segment, "CEOs on the Edge," chief executives trying to navigate through difficult times. Tonight, Carly Fiorina of Hewlett-Packard. She's been called the most powerful woman in business and she's the only woman ever to run a company in the Dow Jones industrials. But her performance, so far, less than stellar. The stock is now trading at three-year lows. The company is shedding jobs and losing credibility on Wall Street.

Bruce Francis reports on Carly Fiorina: a CEO on the edge.

(BEGIN VIDEOTAPE)

BRUCE FRANCIS, CNN CORRESPONDENT (voice-over): When Carly Fiorina arrived at Hewlett-Packard almost two years ago, the company certainly needed help. Growth was anemic at a time when the Internet frenzy and Y2K worries were thrusting tech spending into hyperdrive.

CARLY FIORINA, CEO, HEWLETT-PACKARD: Hi, it's me again. How are you? FRANCIS: Fiorina, a leading executive at then-hot Lucent, looked like just what the company needed: a bold, strong-willed outsider ready to shake things up. But some analysts now are wondering whether the company's troubles have just gotten deeper.

NICK MOORE, JURIKA & VOYLES: A lot of them were there before, and then I think some of them were exacerbated by some management missteps.

FRANCIS: After a rocky start under Fiorina, HP stock soared almost 49 percent in the first year of her tenure, helped by a successful spin-off of Agilent and brisk sales to dot-coms, including Amazon.com. That early performance and bullish goals from Fiorina herself kept hopes high.

THOMAS KRAEMER, MERRILL LYNCH: I think to some extent she set pretty high expectations. I think that the initial results that they put up, you know, further raised those expectations, and they really weren't at all tempered.

FRANCIS: But those expectations and HP's stock would soon be deflated. Last September, HP confirmed that it was in talks to buy the consulting division of PriceWaterhouseCoopers for $18 billion.

Mid-November, just as Fiorina was supposed to give a keynote at the Comdex trade show, she was forced to make a confession: The company would miss earnings and revenue targets by a wide margin, partly due to a restructuring she had initiated.

FIORINA: It planned for real acceleration in our systems business.

FRANCIS: But two weeks later, many analysts were surprised by Fiorina's vow that HP revenues would increase between 15 and 17 percent in 2001: targets that would prove to be way too aggressive. Then, a little more than a month after that, Fiorina said that, quote, "the lights went out" on corporate tech spending and warned of profit and revenue shortfalls. Fiorina lowered guidance again in February and April.

In a series of cutbacks, Fiorina has slashed 4,700 jobs, delayed bonuses and even forfeited nearly $700,000 of her own pay. She still took home about $3 million in 2000. That doesn't include options, which are priced way above the current stock price.

At an analyst meeting earlier this month, Fiorina made sure she didn't over-promise again.

FIORINA: The global slowdown is now global in nature, and therefore, may last longer. Therefore, we are more cautious.

FRANCIS: But Wall Street won't let Fiorina blame it all on the economy.

KRAEMER: There are some self-inflicted wounds, some from old management and some from new, that certainly make the going for HP even tougher than what, you know, your average IT company is facing out there.

(END VIDEOTAPE)

FRANCIS: And that could be the biggest risk, that Hewlett- Packard could become an average information technology company, not as nimble at manufacturing as Dell and without IBM's depth of patents and innovations. Making HP live up to its current "invent" slogan will probably take more time than the two years Fiorina has served so far -- Lou.

DOBBS: And Bruce, all of this reminiscent of the years prior to her arrival, the description of HP.

FRANCIS: Exactly, and I think that's the big take-away. A lot of the problems that are dogging HP now were sown several years ago. They haven't all gotten better under Fiorina's rule. But you can't all but lay them at her doorstep.

DOBBS: Bruce, thanks. Bruce Francis.

Well, tomorrow night, another technology company with lots problems along with its leader. We'll be taking a look at Chris Galvin of Motorola, a CEO on the edge.

In other corporate news tonight, several companies out with warnings today. Polaroid warning that it will post a larger-than- expected second-quarter loss, and as a result, cut 25 percent of its work force. That would mean about 2,000 jobs. All of this following the 1,000 job cuts announced earlier this year.

The company's instant camera business is facing intense competition from one-hour film developing shops and new digital cameras.

Contact lens maker Bausch & Lomb warned its revenues and earnings for the second quarter will be below estimates, with sales 8 to 10 percent lower than the year-ago period. And a company said a slowdown in contact lens sales and surgical equipment sales are to blame.

Home appliance maker Maytag slashed second-quarter earnings forecasts by 25 percent, again blaming slowing sales within the appliance industry.

Checking the stocks, Polaroid gained 20 cents on the day. Bausch & Lomb, Maytag, both lower on the day.

Topping tonight's "MONEYLINE Movers," Eli Lilly down more than $2 a share, regulators taking months longer than expected to review Lilly's drug to treat the bacterial infection sepsis.

One of the most widely held stocks in the country, Avaya, losing 10 percent of its value today. As we reported to you last night, the telecom company lowering its earnings guidance. Avaya also cutting 3,000 jobs, or 11 percent, of its work force.

And Lucent Technologies, which spun off Avaya last year, dropping more than 8 percent today after its debt was downgraded to junk status yesterday.

And one of the biggest losers on the Nasdaq today, MicroMuse, the software maker plunging more than $8, losing another $2 in after-hours trading. Its CEO making cautious comments at a technology conference in New York today. He didn't give any earnings guidance, but analysts fear the company may be about to issue an earnings warning. Taking today's action into account, MicroMuse has now lost more than two- thirds of its value over the past year.

Coming up next here, labor disputes, financially strapped teams, a decline in attendance: major league baseball at a crossroads. We'll have a live report for you.

And the latest retail sales figures add up to a more conservative consumer. We'll have the details for you.

Also, the United States on the bring of recession -- so says my next guest. MONEYLINE will continue.

(COMMERCIAL BREAK)

DOBBS: Retail sales during the month of May, weaker than expected as the slowing economy took its toll on the consumer spending. For the month, retail sales rose just 1/10 of a percent. Excluding autos, sales rose 3/10 of a percent. One source of strength: gasoline sales, which were higher. But that was due mostly to the fact that gasoline prices were higher.

Clothing sales down by 1 percent, and sales of building materials and general merchandise stores were also lower.

In other economic news, the Federal Reserve released its Beige Book, its regional survey on economic climate, saying, quote, "Most districts report that economic activity was little-changed or decelerating in April and May." That report found manufacturing down or weak in most regions.

The Federal Reserve will likely consider those reports, along with several others, including producer prices and consumer prices, when it meets June 26th and 27th. Many analysts predict the Fed will decide to lower interest rates yet again. But my next guest says rate cuts won't save us from a recession.

Joining me now is Lakshman Achuthan, who is managing director of the Economic Cycle Research Institute. And it is great to have you with us...

LAKSHMAN ACHUTHAN, ECONOMIC CYCLE RESEARCH INSTITUTE: Good evening.

DOBBS: ... despite your forecast.

ACHUTHAN: Calling it like the numbers says.

DOBBS: You absolutely believe that recession is inevitable? ACHUTHAN: I think that we've moved from forecasting a recession to having an recession. It's not even a forecast any more. The indicators that define recession are acting in ways that are only seen during a recession.

DOBBS: Let's step back to the classic definition of a recession, two consecutive quarters of declining GDP. And in the first quarter, the government, with its revision, says 1.3. The second quarter, you think, is at what level?

ACHUTHAN: Maybe end up being a little bit positive. But that's really a rule of thumb. It's the -- the actual definition is a pronounced pervasive and persistent decline in industrial production, employment, manufacturing and trade sales, and income.

And the first three areas are all moving in ways that are similar to how they move in recessions. Often, the first quarter, when a recession begins in that quarter, it might actually be positive, but the recession could still begin.

DOBBS: It could.

ACHUTHAN: That happens.

DOBBS: Point in fact, one could argue, that after seeing a dramatic revision in first quarter GDP growth, it wouldn't be unreasonable to expect another revision even more dramatic?

ACHUTHAN: Government statistics have been known to be revised.

DOBBS: But let's look at the economy in other ways, in terms of unemployment, we're at basically 4.5 percent, which is basically where we were two years ago. We still have constrained inflation, we have five interest rates cuts, 250 basis points. We have tremendous vitality on the part of the consumer in the face of all negativity surrounding consumers. Doesn't that surprise and in any way, gladden your heart as you look at these things?

ACHUTHAN: There's many things that gladden my heart. I like to see the consumer spending. I like to see the Fed cutting. I like to see tax cuts. The last two, Fed cutting and tax cuts, will mitigate the downturn. It would be a lot worse if that was not happening.

However, in five of the past nine recessions, personal spending never turned down. So, but the broader measures like manufacturing and trade sales, those are going down. So, that's what's of concern, and if we are in a recession now -- if we're not, it's the worst non- recession I've ever seen. But if we are in a recession, what's troubling is that we also have a lot of weakness overseas, we have overseas big economies contracting.

DOBBS: But isn't overseas, as you point out, particularly -- particularly Mexico and Japan declining. In the case of Japan, it looks as though a recession is a forgone conclusion, perhaps we can add Mexico to that. But those economies are relied upon this, not we upon theirs, in the final analysis, our market will remain despite the huge declines last year, strong, this economy remains vital, it is not growing at anything like a run away rate.

Give me an idea when to go to that classic definition of two quarters of negative GDP?

ACHUTHAN: You may have to wait until the end of the year, maybe early next year.

(CROSSTALK)

ACHUTHAN: Yes, the dust will settle, and you'll see it. They never really date a recession when it's happening. They do it well after the fact. And it's true that this economy very often could stand on its own, but when we've had persistent recessions, ones that are longer than average, those are like 73, 75, 81, 82, those are international in nature, and that backdrop has us a little worried, too.

The second part that has us worried is that the leading indicators that anticipated the current weakness in the economy have yet to decidedly turn up, save the financial markets, those are the only ones that have turned up so far.

DOBBS: With some aberration, I guess what you would call aberration in the index, the leading economic indicator?

ACHUTHAN: Those are one set of indicators. I think we watch a much broader set, and even those are acting recessionary at this point in our view.

DOBBS: I respect greatly your work and that of your institute, and I know your sophistication and I hope in this case, the sophistication doesn't turn out to be correct.

ACHUTHAN: This will just set us up for the next discussion.

DOBBS: Good to have you with us.

ACHUTHAN: Thank you very much.

DOBBS: Next on MONEYLINE, a red hot sector on track for a record year.

And later, down sizing a national pastime. We'll go live to Pittsburgh for the baseball owners meeting next.

(COMMERCIAL BREAK)

DOBBS: In tonight's sectors report: housing. Fannie Mae today saying the housing market continues to show strength, and will be very close to hitting a record for the year. The country's leading mortgage finance company said its portfolio grew by 5.2 percent in May.

Home building stocks mostly weaker today, but the biggest stocks in the group are still trading close to their 52-week highs. Coming up, baseball owners hash out the future of the national pastime. We'll go live to Pittsburgh, where Allan Chernoff will tell us all about what's going on there -- Allan.

ALLAN CHERNOFF, CNN CORRESPONDENT: Lou, dealing with those critical issues facing baseball, it looks like it will go into extra innings, we'll explain why -- Lou.

DOBBS: Thanks, Allan.

We'll also bring you the very latest of your comments to MONEYLINE next.

(COMMERCIAL BREAK)

DOBBS: Baseball owners gathered with Commissioner Bud Selig in Pittsburgh today, hanging over those talks: the financial discrepancies that have affected the national pastime for some time. Topping that list: the wide gap between big and small market teams. Alan Chernoff is in Pittsburgh and has the latest for us -- Allan.

CHERNOFF: Lou, the owners announced two honorary league presidents, awarded the All Star Game to Houston in 2004, and they also talked about how baseball games are running a bit too long these days.

But in terms of dealing with substantive major business issues, that all remains unresolved.

(BEGIN VIDEOTAPE)

CHERNOFF (voice-over): The commissioner of Major League Baseball thinks there's too much baseball! So he's talking about eliminating teams. But the owners avoided the topic.

BUD SELIG, MLB COMMISSIONER: No, no, we didn't discuss that today. And I know where all the clubs are.

CHERNOFF: The reason to consider contraction or relocation of teams, baseball's basic business problem: the growing disparity between the rich, like the Yankees, and the poor.

Montreal, Tampa Bay and Florida are currently on the endangered list.

ANDREW ZIMBALIST, SMITH COLLEGE: There are really three groups of owners, three different heads that are generally conflicting with each other: the high-revenue team group, the middle-revenue team group and the low-revenue team group.

CHERNOFF: The commissioner of baseball could play Robin Hood -- take from the rich and give to the poor. A blue ribbon panel last year offered proposals that owners now must consider: Sharing local revenues, which have soared in some big cities, a 50 percent luxury tax on team payrolls above $84 million, a competitive balance draft, in which the weakest eight teams would pick players from the top eight teams.

DAVID M. CARTER, THE SPORTS BUSINESS GROUP: If the fundamental finances of the sport are not fixed, then it really doesn't matter where they move these teams, because two or three years from now, they'll face exactly the same problems.

CHERNOFF: One more familiar problem is on the table: Negotiating a new labor deal with the players. The current agreement expires at the end of the season. Any plan to eliminate teams could cause a major dispute because it would be the baseball equivalent of a corporation shutting down factories. Like any union, the Players Association would fight to save jobs.

(END VIDEOTAPE)

The commissioner refused any comment whatsoever on the labor situation, and he also said that the owners did not discuss either moving or eliminating teams. He said all of that will be addressed in due time -- Lou.

DOBBS: Alan, I have the feeling that George Steinbrenner was not on that blue ribbon commission -- a 50 percent luxury tax, and sharing local revenue. He must be very excited about that.

CHERNOFF: Oh, for sure. Absolutely. The Yankees have a huge payroll, dramatically greater than many of the teams in the league. And of course, he'd rather not. But one reason that owners like George Steinbrenner would like to contract the league is that they'd rather not share all of their revenue with so many other teams, particularly since one of the items suggested by that blue ribbon panel is to actually share local revenues, which have soared recently, Lou.

DOBBS: And I know you Yankee fans would be just excited about that, Al. Allan Chernoff, thank you.

CHERNOFF: Well, we're certainly hoping for a turnaround.

DOBBS: Thank you, Alan. Another sports note tonight: Philadelphia 76ers president Pat Croce today reached new heights boosting his team. He climbed a Philadelphia bridge, it's only 374 feet in the air, and there Croce unveiled a banner saying, "Go Sixers, beat L.A." In less than two hours those Sixers play game four of the NBA finals, trailing the Lakers 2 games to 1. Here on MONEYLINE last week Croce said he hadn't made a dime from the Sixers but it was still a dream to be in the finals.

Coming up next, some final thoughts on the day, your e-mail and we'll take a look "Ahead Of The Curve."

(COMMERCIAL BREAK)

DOBBS: Tomorrow brings reports on the economy with the Producer Price Index for the month of May. Wholesale prices expected to rise 0.3 percent. Jobless claims expected to remain near their 10-year highs. Also tomorrow, quarterly earnings results from Adobe Systems and Heinz.

Corporate earnings warnings continue to mount, and there's even a chance we'll set a new record for quarterly warnings this month. And that weak, retail sales report today and the Fed Beige Book Survey of regional economies did little today to enthuse investors, investors who continue to move out of technology stocks. The Nasdaq has now lost 6 percent in less than a week.

And given the still high multiples of many of those technology issues and the uncertain prospects for earnings in that sector, those investors are acting rationally. And even though we may see more down days than up for a period, that is a positive signal for the longer term health of the equity markets. And it is the longer term we're all interested in -- right?

Well taking a look now at some of your comments, a number of interesting messages on and thought on energy. For one: If the energy crisis shows we need to build 20 percent more capacity at a $10 billion cost and the same can be accomplished through energy conservation, for $100 million, which approach makes sense?"

And this one: "What about fuel cells as a replacement for oil energy production? Apparently it's available in quantities for cars and homes and is a clean alternative. I understand they'll be delivering units for use in homes in California this summer."

Well, unfortunately, not quite. It sounds terrific, but the technology is still several years off. The benefits of fuel cells are they don't require the use of transmission lines. Instead, a building or a neighborhood has its own fuel cell from which to draw energy, a much more efficient, clean, and cost-effective way to transmit power.

We talked with the California Energy Commission, and found out that usable fuel cells are currently in the start-up stage. There are a handful of homes and cars in California testing the technology, but it will be at least a year before they're commercially available in automobiles. And it could be a decade before ready for homes and buildings.

Please let us hear from you. Our address is moneyline@cnn.com.

That's MONEYLINE for this Wednesday evening. Thanks for being with us. I'm Lou Dobbs. Good night from New York.

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