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Lou Dobbs Moneyline
Dow Declines 37.64 to 10,434.84; Nasdaq Advances 10.12 to 2,074.74; Fed Cuts Interest Rate by a Quarter Point
Aired June 27, 2001 - 18:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
LOU DOBBS, CNN ANCHOR: Tonight: The Fed cuts interest rates for the sixth time in six months, but by only a quarter point. Economists and investors were expecting more. A modest rally evaporates on Wall Street.
We'll tell you what General Electric and Honeywell now are willing to give up to win European approval of their merger.
And, California's embattled governor throws the switch on a new power plant. Economist Paul Krugman on why the energy crisis may be easing.
ANNOUNCER: Live from the heart of New York City, this is LOU DOBBS MONEYLINE. Here now, Lou Dobbs.
DOBBS: Good evening.
The Federal Reserve today did the expected, but only halfway. The Fed cut interest rates, but by only a quarter-point rather than the half-point that most economists expected and nearly all investors wanted. The Fed's fund rate stands at 3.75 percent tonight. That is the lowest rate since 1994. This is the sixth interest rate cut by the Fed in six months, and Alan Greenspan's most aggressive bid ever to avoid a recession.
We begin our coverage with Tim O'Brien in Washington.
(BEGIN VIDEOTAPE)
TIM O'BRIEN, CNN CORRESPONDENT (voice-over): Wall Street was divided over whether Alan Greenspan and the Fed should cut interest rates by a quarter or a half a percentage point, and divided over whether the quarter-point they settled on was enough.
Members clearly were not blind to the economy's lingering problems. In a statement, they acknowledged, "... declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad continue to weigh on the economy."
Problems Merrill Lynch felt would have justified yet another half-point cut. BRUCE STEINBERG, MERRILL LYNCH: I'm kind of disappointed. I had hoped that they would do more. There was nothing in their statement which explained why they did the lesser move. In fact, their statement painted a fairly uniformly negative view of the U.S. economy right now.
O'BRIEN: Today's cut is the sixth rate cut in six months, bringing the target rate down from 6.5 percent last January to 3.75 today. That's the most aggressive credit-easing campaign in nearly 20 years, and some economists warned had the Fed gone any further, it could have fueled inflation.
In its statement, the Fed said: "Easing of pressures on labor and product markets are expected to keep inflation contained."
MIKE RYAN, PAINEWEBBER: It's sort of like Dad took off one of the training wheels and is making sure that the bike is still balanced. And here we are, we're going to try and keep the bike on a clear path.
O'BRIEN: And if the economy continues to deteriorate?
DIANE SWONK, BANK ONE: I still think another move inter-meeting is very possible. This is a Fed that's going to be monitoring events very closely.
(END VIDEOTAPE)
O'BRIEN: The lag time is at least six months to a year for rate cuts to actually be felt. Now, there has been a smattering of encouraging economic news in recent days, which could mean previous cuts are finally beginning to take effect. Defenders of today's quarter-point cut say the Fed is entirely justified in determining if it's off in the right direction before picking up any additional speed -- Lou?
DOBBS: If we can call this speed, Tim. Tim O'Brien from Washington.
Following the Fed's decision, top banks announced they were cutting the prime interest rate, of course, is what banks charge their best customers. It now stands at 6.75 percent. That is the lowest level in seven years.
As one economist put it today, there was no urgency to the Fed's statement, and that, clearly, the impression on Wall Street, where stocks erased modest gains in the minutes following today's announcement. The Dow ended lower for the fourth straight session, the first time that's happened since February. The Nasdaq did manage to end 10 points higher.
Jennifer Westhoven reports from Wall Street.
(BEGIN VIDEOTAPE)
JENNIFER WESTHOVEN, CNN CORRESPONDENT (voice-over): The Federal Reserve's decision to cut rates turned into an anticlimax on Wall Street. For days, traders said investors were staying quiet, waiting for the Fed. But by the closing bell, stocks showed little reaction to the latest rate cut.
FRED SEARS, INVESTOR CAPITAL FUNDS: The corporate earnings are the be-all and end-all of the market long term. When earnings improve, the market will do better, but not until corporate earnings improve. And we feel we're several quarters away from that environment.
WESTHOVEN: After a day of modest gains, the Dow sold off sharply on word of the Fed's decision. But just as quickly, the selling tapered off. The Dow closed down 37 at 10,435. The Nasdaq composite also dived to session lows after the news, but the index rallied back to post a small gain of 10 points.
Housing stocks were one sector that did move on the rate cut news. Take a look at how Home Depot's stock dropped right after the Fed's announcement.
One report that could be encouraging for summer drivers was not so good for oil and gas stocks. An industry group said surprisingly large supplies of energy are on hand. Chevron, Texaco, ExxonMobil and Amerada Hess closed lower.
But traders said worries about earnings warnings are still too close for comfort for a more substantial rally.
SAM GINZBURG, GRUNTAL & CO.: It's really eerily quiet on the trading floor. Not a lot of money being put to work. Kind of a blah day.
WESTHOVEN: Volume here at the big board came in at just over 1.1 billion shares. Nothing out of the ordinary. It was the second straight Fed meeting where investors signaled they'd rather see profits or economic growth than more rate cuts alone.
(END VIDEOTAPE)
WESTHOVEN: Traders say the tight trading ranges, even on a Fed day, are another sign that investors just aren't willing to play the quick ups and downs of the stock market the way they used to. Like the Fed, they also want to wait and see if these interest rate cuts will work their way into the economy -- Lou?
DOBBS: Jennifer, what was it like there on the floor of the Exchange when that decision came down from the Fed at 2:13 Eastern time this afternoon?
WESTHOVEN: Well, from watching it, it looked pretty exciting in the first -- that first part of it. But really, it was rather amazing that the volume just quelled off right afterwards. If you look at average volumes right around that hour, the kind of volume that we saw today was just absolutely nothing special. It was just barely above the average.
DOBBS: Terrific. Jennifer, thank you very much. Jennifer Westhoven from the New York Exchange.
Policy makers have engaged in one of the most dramatic easing campaigns now in Fed history, and yet both the Dow Jones Industrials and the Nasdaq are actually lower since the Fed stunned the financial world on January 3rd with a surprise interest rate cut.
Allan Chernoff looks at why stocks aren't responding to the Fed's bold, constant moves.
(BEGIN VIDEOTAPE)
ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): It takes time for Federal Reserve interest rate cuts to work through the economy and the stock market.
ALAN SKRAINKA, EDWARD JONES: I think investors have to be patient. The medicine will work with .
CHERNOFF: But from Wall Street's perspective, it appears Fed Chairman Greenspan has been shooting blanks. Since the Fed first began cutting interest rates on January 3rd, the Dow is down 2 percent, the Nasdaq off 9 percent.
ALAN BLINDER, FORMER FEDERAL RESERVE VICE CHAIRMAN: Every time the Fed is in an easing cycle or a tightening cycle, people get impatient, because it takes a long time for this medicine to work. And they say, oh, it's not working this time. Somehow, it always does. I wouldn't bet against it this time either.
CHERNOFF: Before today's move, the Federal Reserve had cut interest rates six times in a row only three times in the postwar era. Three months after the sixth cut, the Dow was up 6 percent, the Nasdaq up 8 percent. After 12 months, the Dow was up 24 percent, the Nasdaq up 29 percent.
TOM GALVIN, CREDIT SUISSE FIRST BOSTON: The history shows that it takes six to nine months for rate cuts to start to have an impact, and therefore we should start to see that over the next couple of quarters.
CHERNOFF: The data show a similar response after three consecutive rate cuts. On average, the Dow has been up 7.5 percent three months after the third interest rate cut, 21 percent after 12 months; the Nasdaq up 12 percent after three months and 40 percent after 12 months.
(END VIDEOTAPE)
CHERNOFF: Strategists who have been telling clients to put money into the market are certainly hoping that history repeats itself. But of course, investors buy stocks based on what they expect will happen in the future, not on historical precedent -- Lou?
DOBBS: Thank you very much, Allan. Allan Chernoff.
Economist Ed Hyman says we're in recession, and he says the Fed should have delivered a more aggressive half point cut in interest rates today. Ed Hyman of the ISI group, rated the top economic forecaster by the "Wall Street Journal."
Ed, good to see you.
ED HYMAN, ISI GROUP: How are you doing?
DOBBS: You expected more from the Fed today?
HYMAN: Yes, I thought they'd do 50.
DOBBS: And what do you think the result is, of 25 basis points?
HYMAN: Well, less than I thought it would be.
(LAUGHTER)
HYMAN: At the -- it looks to me as though they have a debate going on, and Greenspan lost. My guess is that he wanted to go 50.
DOBBS: Now, that's a headline. "Greenspan Lost"?
HYMAN: Well, I'm not trying to make a headline, but it looks to me as though some of the other governors thought that they should take it a little bit more pacier, and that's what they ended up doing.
DOBBS: Well, that's interesting, because we have seen in the last few reports some on strength that we've looked at. But in the most recent survey of regional activity, without exception, across the country, weakness in the economy. Why would the governors be resistant, do you think?
HYMAN: The main thing is that they've done a lot of easing already, and they'd like to sort of pause a little bit and see if what they've done starts to make a difference over the next few months. There have been a few things, like consumer confidence, which dropped sharply and has stabilized. And I think the combination of that (UNINTELLIGIBLE) weigh a little bit.
DOBBS: It's actually risen over the past two months. Are we to make much of that?
HYMAN: I think so. It looks -- I mean, the economy had a drop. It stabilized here, and I think it still has a risk of having another leg down in the next three or four months. I think they also had an argument against more of a rate cut, with that money growth has picked up a lot, and some of the guys might have been focused on that.
DOBBS: In terms of the economy, you've talked about recession here, a growth recession, if you will. Do you think we'll see, in the classic definition, that is, two terms of negative GDP -- a recession this year?
HYMAN: I guess -- that's not my best guess, but it's so close, I don't think it makes a big difference. The second quarter we have is zero, and it looks like it could easily be negative. DOBBS: Correct.
HYMAN: And the third quarter is just a question of whether or not those tax rebates that come in make a difference. But as you know, there's no doubt the economy has been weak. And if you talk business people, it's definitely been in a recession.
DOBBS: Give us your outlook for the remainder of the year, both in terms of the markets and GDP.
HYMAN: I think that for the next three to six months, the economy has a lot of risk on the down side. Zero growth or 1 percent growth. In the fourth quarter I think it will turn up some. I think it will be darker hours before the dawn, you don't know it will turn up. On the markets, I think the stock market is in a irregular pattern, and interest rates are headed down.
DOBBS: Did we see a bottom in April?
HYMAN: I think we saw a bottom in April. It might test it again.
DOBBS: Ed, it is always good to have you with us.
HYMAN: My pleasure.
DOBBS: Coming up on MONEYLINE, Jack Welch hasn't given up after all. G.E. and Honeywell, ready to make a new offer to the European Union.
What Jack Welch is willing to give up now: An exclusive report from the "Financial Times."
Also: Firestone may shutdown its plant in Decatur, Illinois, saying the decision has to do with costs, not quality. We'll bring you a live report.
Also: California Governor Gray Davis throws the switch on a new power plant. And we'll talk to an economist who says this crisis is perhaps easing after all. Paul Krugman joins me next.
(COMMERCIAL BREAK)
DOBBS: G.E.'s Jack Welch has said for weeks, his final offer for Honeywell is on the table. The European Union could accept or reject it. But now, apparently, the G.E. chairman is having a change of heart, and tonight is still ready to negotiate to win approval for his takeover of Honeywell. The "Financial Times" has the story. The "Financial Times'" Andrew Hill joins us now.
Andrew, tell us about it.
ANDREW HILL, "FINANCIAL TIMES": Hi, Lou.
G.E. is making a dramatic last-ditch attempt to try and rescue regulatory approval of the deal. They got their final offer two weeks ago. Today we've learned that G.E. representatives and the commission are back around the negotiating table in Brussels with some informal proposals from G.E. to try and sell off up to 20 percent of their aircraft leasing on (UNINTELLIGIBLE).
This is the part of the whole deal that is really stuck in the throat of the European regulators. They've said we must have some action, structural action in the part of the business, or we won't approve the whole deal. So they've come back and said 20 percent to an outside buyer. We don't know who, but a private placement of up to a fifth.
DOBBS: Likely a financial institution?
HILL: Probably.
DOBBS: And no indication at all of what institution it might be?
HILL: No, it's certain not to be a competitor. There were some proposals on the table from the commissioner on those lines, but that's not unacceptable to G.E.
DOBBS: Also discussion at one point that the APU business would also be considered a part of a package. Any word on that today?
HILL: What G.E. is doing is it is taking off the table some of the disposals that it has proposed two weeks ago. So it is saying to its shareholders effectively, this deal is still worth the same as the one we put on the table two weeks ago, it is just different in format.
DOBBS: Is this in your judgment -- you followed the story from the very outset. In this posturing on the part of G.E., vis a vis Honeywell, that wants it to go forward. Is Jack Welch looking for a graceful way out, give us your best judgment?
HILL: I think probably -- my judgment is, they're making a genuine move here. They may be under pressure from Honeywell. Some of the Honeywell shareholders were worried about this. The real question is, and we don't know this: is it enough for the commission? Will Mario Monti, their competition, decide to go with this? Or will he decide to reject it notwithstanding the political fury that would cause.
DOBBS: Andrew Hill, "Financial Times", thank you very much.
HILL: Pleasure.
DOBBS: Word of the new offer is sending shares of Honeywell sharply higher in after hours trading, Honeywell has now risen nearly $2.50 dollars a share. It's at $39.95. General Electric has fallen almost a dollar.
After the closing bell. A warning from Redback Networks. Redback said its second quarter loss will be wider than Wall Street expected and sales will be short of predictions by more than 30 percent. The chief financial officer of Redback blaming an unprecedented downturn, as he put it, in the market for telecommunication equipment. Shares down more than $2. The 52-week high on that stock -- $181.
Coming up next on MONEYLINE, Firestone tries to put the past behind it. We'll have a live report for you from Decatur, Illinois.
(COMMERCIAL BREAK)
DOBBS: Bridgestone/Firestone is tonight planning to close a plant whose tires triggered a massive recall. The company today giving its union six months notice that it intends to shut the factory in Decatur, Illinois. Tires produced their at the center of last year's recall. But the company insists the closure is about cutting excess capacity, not about quality. Allan Dodds Frank has the story.
(BEGIN VIDEOTAPE)
ALLAN DODDS FRANK, CNN CORRESPONDENT (voice-over): $100 million a year, that's how much Bridgestone/Firestone says it will save by closing its Decatur, Illinois plant. The company said that supply and demand, not quality, was the reason for closing the plant that made more than $6.2 million Firestone tires, tires that eventually were recalled.
ROD LACHE, DEUTSCHE BANK ALEX BROWN: Everybody knows that this is the plant where bad tires were produced. So it had to play some role, but the fact of the matter is that they had to shut down a plant and they may have to shut down more plants.
FRANK: Bridgestone/Firestone says it still is working off excess inventory left when sales plunged after the recalls started last year. On top of $360 million for recalls and litigation this year, the company will take a write-off on another $210 million, to close the plant.
The company says its plants currently are running at 70 percent of capacity, despite a 5 percent downturn in the overall passenger and light truck tire market. Closing the 37-year-old Decatur plant will leave Bridgestone/Firestone with five other passenger tire plants, including two nonunion ones.
MIKE GOREY, BRIDGESTONE/FIRESTONE: We've been running Decatur at about 50 percent of capacity for most of this year. And we anticipate that with the phase out of operations in Decatur, that that will permit us to nearly fully utilize the other factories, of which we've had layoffs involved most of this year.
FRANK: So far, the company says it is giving the steelworkers union six months notice about closing Decatur, which could affect more than 1,900 workers.
(on camera): Despite sales declines and its continuing fight with Ford, Bridgestone Firestone says its network of dealers and stores remains intact. And the company expects to return to profitability by the second half of next year.
Allan Dodds Frank, CNN Financial News, New York.
(END VIDEOTAPE)
DOBBS: There's almost 2,000 workers at the plant that learned this morning about the company's intentions. Jeff Flock is in Decatur now, and he has the reaction of those people who could be directly affected by this news -- Jeff.
JEFF FLOCK, CNN CORRESPONDENT: Lou, as you know, this is a company town, although it's a bigger company town for ADM. Archer Daniels Midland employs twice as many people as the Firestone plant does that you see behind me. Still, it is a big hit here and the workers that we talked to some who work at this plant, some 1,500 or 1,400 of them, think that they're being held scapegoat for the problems of Firestone tires. And they don't think it's very fair.
ADA OWENS, BRIDGESTONE/FIRESTONE EMPLOYEE: OK. Because that's -- that's why we're, in my opinion, in the position we're in today. You know, blame, blame, blame. It was a problem with whatever. Try to correct the problem. Instead, one corporation against another, blame, blame, and the workers are the losers.
FLOCK: Lou, John McQuade, the senior VP for Firestone was extraordinarily available to reporters here today and I asked him if they weren't eager for the publicity on this plant closing, to put this all behind him. He emphasized that it is a supply and demand issue. Folks in this town though, seem to think it is a little bit of both -- Lou.
DOBBS: Whatever it is, harsh reality for the folks in Decatur. Thank you very much, Jeff Flock from Decatur, Illinois.
Coming up next: Another round in the struggle over the rights of managed-care patients. Also ahead we'll be telling you why oil prices today hit the lowest level in months.
(COMMERCIAL BREAK)
DOBBS: The Pentagon tonight calling for cuts in America's Cold War arsenal. Defense Secretary Donald Rumsfeld today handed Congress a $329 billion military budget for 2002, $33 billion more than the current budget. It is also $18 billion above the proposal President Bush made in January.
The new budget calls for slashing America's B-1 bomber fleet by a third, decommissioning all fifty peacekeeper long-range nuclear missiles, and shutting down an unspecified number of bases. Secretary Rumsfeld will be our guest here tomorrow night.
Federal prosecutors tonight say they've charged eight people with stealing and selling FBI records. Among the accused, a New York attorney, an investigator for the Nevada attorney general's office, and a Las Vegas court worker. They allegedly sold those documents to criminal defendants and their attorneys as well as to targets of grand jury investigations. Earlier this month, prosecutors charged a Nevada FBI analyst with selling classified documents.
And a defeat for Senate Republicans today in the battle over the so-called patients' bill of rights. The Senate voted down a key amendment to the Democrats' version of the bill. And joining us now from Washington with more on that and the White House reaction, Major Garrett -- Major.
MAJOR GARRETT, CNN CORRESPONDENT: Lou, the White House continues to lose ground in its uphill struggle to amend and change to its liking that Senate bill backed by a majority of Democrats and also John McCain of Arizona, the Republican nemesis of this White House.
So the president and his advisers are shifting strategies. Senior White House advisers telling CNN that now the White House will get behind an emerging bill in the House of Representatives that it believes is superior to that Senate Democratic-backed bill, one that they hope they can use in conference when the Senate passes its bill later on this week to deal with HMO and its protections on its terms.
The president invited several House Republicans here to the White House today and during a meeting with them he said his number one concern about the Democratic bill in the Senate is that many Americans will lose health care coverage if it passes.
(BEGIN VIDEO CLIP)
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: There are some other alternatives that are working their way -- being debated on the House and the Senate that will run up the cost of health insurance for American workers and could conceivably cost millions of people their health insurance. I can't accept that kind of legislation. I look forward to signing a bill such as the one that we've discussed here, a good piece of legislation that will make sense for the American workers.
GARRETT: Now, Lou, the president in endorsing this House-passed bill is trying to thwart the Senate democrats. And the key issue is liability. The ability of people who belong HMOs to sue those HMOs in state and federal court as the Senate Democratic bill allows if they're either harmed or upset with a Medicare decision an HMO makes.
One Republican who came over to the White House today, Spencer Bachus from Alabama, who had previously supported a House bill very similar to the Senate Democratic bill, said he now supports the president's alternative and he too worries about Americans losing health care coverage if that bill becomes law.
(BEGIN VIDEO CLIP)
UNIDENTIFIED MALE: If we pass Ganske-Dingell or if we pass McCain-Kennedy and 3 million or 4 million Americans lose their health care coverage, is Dr. Daschle, or is Dr. McCain or is Dr. Ganske, are they going to provide free health care for those people?
(END VIDEO CLIP)
GARRETT: That's the central issue, providing health care coverage while also providing expanded rights for HMOs. The debate is yet to be finished. Lou, the White House is backtracking, trying to find a House bill that it can accept and prevail with, but much more work needs to be done here in Washington. The White House trying to find a way out to sign a bill and sign it soon -- Lou.
DOBBS: Thank you very much, Major. Major Garrett from the White House.
Still ahead: The Fed keeps cutting interest rates, but traders in the bond market keep pushing them higher. Also, California Governor Gray Davis throws the switch on a new weapon in his state's fight for power.
(COMMERCIAL BREAK)
DOBBS: In tonight's MONEYLINE headlines, the Federal Reserve cuts interest rates for the sixth time this year and indicates at least one more cut could be on the way. The quarter percent point cut does little to stimulate the markets. After an initial sell-off, stocks finish near break-even. And there is tonight a possible breakthrough for the General Electric-Honeywell merger. "The Financial Times" reports G.E. has made a new offer to gain European approval of that deal.
Now, more on the markets: Ahead of the Fed's rate cut, both the Dow and Nasdaq were higher. But once the quarter-point cut was announced, stocks reversed course. Some of the Dow's biggest losers, ExxonMobil, Eastman Kodak, Caterpillar, that index down 37 points. The Nasdaq managing to bounce back late in the session because of strength in the Internets and software issues. The index finished the 10 points higher.
On the big board, advancing issues beat out decliners by a 3 to 2 margin. Since the Fed started its aggressive rate cut campaign on January 3, there's been no rally for Wall Street. The Dow has actually fallen 2 percent. The Nasdaq is down nearly 10 percent.
The same can be said for the bond market. Never before, when the Fed has been in an easing cycle, have long terms rates gone up. But that's exactly what's happening. Lisa Leiter reports from Chicago.
(BEGIN VIDEOTAPE)
LISA LEITER, CNN CORRESPONDENT (voice-over): Sellers stormed most of the treasury pits at the Chicago Board of Trade when the Federal Reserve cut interest rates for the sixth time this year. The Central Bank disappointed those traders by trimming rates just a quarter point. They concluded that the aggressive rate-cutting campaign could be coming to an end.
ANTHONY CRESCENZI, MILLER, TABAK & CO.: When the Fed cuts rates by smaller than expected amounts, typically this hurts the short end of the yield curve because it is short term rates that the Fed controls.
LEITER: A much different story in the 30-year bond pit, where the buy orders started flying after the Fed's announcement. Those traders relieved that the Fed decided on a smaller cut, calming fears that Alan Greenspan and company could cut rates too much and eventually spark inflation.
MICHAEL BOSS, IBJ LANSTON FUTURES: Now that it appears that we are getting towards the end of this Fed easing cycle, with commodity prices coming down, the CRB at almost a two-year low today, we are starting to see 10-year and longer yield bond rates come down, and that is going to help those who want to refinance.
LEITER: Long-term interest rates have actually climbed this year as the Fed has cut short-term rates. That's never happened before. As a result, mortgage rates and other consumer borrowing costs are actually higher now, hurting the Fed's efforts to revive the economy.
(END VIDEOTAPE)
Based on the statement that accompanied the Fed's decision, the bond market is still betting on one more quarter point rate cut by the Fed at some point, and futures traders here believe there's a small chance that it could come before the Fed's next meeting on August 21 -- Lou.
DOBBS: Lisa, thank you very much. Lisa Leiter from Chicago.
Checking on the bonds finish, the 30-year up nearly half a point in price, the yield at 5.62 percent. The 10-year lower, the yield there, 5.23 percent.
Topping tonight's MONEYLINE movers: Schering-Plough falling more than $1 a share. The company saying its president and chief operating officer, Raul Cesan, has resigned. The company didn't say why, but recently the company again cited by the FDA for manufacturing problems.
Pennzoil Quaker State losing more than a quarter of its value today. The auto products company, which runs Jiffy lube, cutting its profit targets and announcing a restructuring, saying motorists are driving less because of higher gas prices, hurting demand for its products.
And Palm jumping 16 percent after its latest earnings report. The handheld computer-maker saying it will return to profitability by the second quarter of next year. Palm stock is still down 77 percent from its high of last year.
Earnings disappointments, evidence of a slowing economy, and little, if any, market reaction to Fed rate cuts, has some on Wall Street worried. Joining me now with his take on where things stand from Boston is Ned Riley, chief investment strategist with State Street Global Advisors.
Let me ask you, what do you think of this rate cut, a half measure?
NED RILEY, STATE STREET GLOBAL ADVISORS: I think it's a half measure, but I think it's probably the best measure right now, Lou. I think what the Fed is trying to do is get a little bit Machiavellian here in terms of the way they are going to approach these rate cuts. I think the 50 basis points might have sent the wrong message to the American consumer that the economy was really in serious straights and that they may have to cut back their spending because of the potential of higher unemployment. So I thing the Fed right now is sending the message that we're not too concerned about the economy, and clearly, I think, more importantly, I think the Fed knows its limitation on monetary policy.
Nobody's mentioned the fact that the Fed really can't control technology spending, the Fed can't control the level at which inventories have been held in that area, and probably most importantly, the profit side of the equation could be influenced a little bit by Fed policy, but clearly we've got a cost problem in America today that profit margins are being squeezed. So, I think the Fed is holding off the ammunition a little bit, 375 basis point to zero, and I truly believe that they're concerned about the dollar versus the Euro as well.
So, I think we are going to see more cuts. I think he's actually building it up so that we can anticipate cuts through the second half of the year. And August is not the last cut in my judgment.
DOBBS: Well, Ned, at this point just how much more cuts can there be with the discount rate sitting at 3 1/4 percent, inflation sitting, one can argue, at 2 and 3/4 percent? There's not a lot of room left here to have any real interest rate at all, is there?
RILEY: Well, Lou, that's a great question because if we do look at the current inflation rate and we look at the funds rate and the discount rate, we're talking about getting into that negative territory again.
I think what we have to look for is what the inflation rate may be next year. I'm optimistic that we're going to get that inflation rate down to about 2 percent next year. And clearly I think we have at least another 75 basis points of cuts ahead of us. I think the Fed has to wait until they see the whites of the eyes, that is when profits are starting to turn or the economy looks a little firmer, that may be when they stop.
DOBBS: Sort of the unspoken aspect of the Fed's rates cuts is just how much influence can a monetary policy have in a market suffering from drawback in business investment in particular, and now the corporate America that's trimming dramatically and quickly. At this juncture what do you see in terms of the markets themselves?
RILEY: Believe it or not, I like the market. I like it because this is the same patent we saw in the first quarter of this year where the preannouncements really created a market bottom back on March the 22nd and April the fourth for the Nasdaq.
I think we're going to see a same pattern in July. As the announcements comes from the corporate execs out there, and clearly the analysts trash it, you know he lemming syndrome that things couldn't get any worse, I think we're going to get a rally in bad news. And therefore I think, I like the markets right now and I think all the other factors are working for him.
DOBBS: OK, Ned Riley, thanks for being with us.
RILEY: My pleasure.
DOBBS: Coming up next, a possible break in the energy crisis. We'll have the story for you. Also, California Governor Gray Davis sparking a power surge. And a leading economist's somewhat different perspective on the energy crisis in California. Powering America is next.
(COMMERCIAL BREAK)
DOBBS: Oil prices today plunged on word that gasoline inventories rose for the 10th consecutive week. Light sweet crude oil tumbling a dollar as well, $1.37, to $25.61 a barrel. And gasoline futures fell 6 cents to 71 cents a gallon. That, the lowest level in nearly a year and a half. They hit a record high in April of $1.07.
In tonight's "Powering America," as oil prices plummet, a move by California to ease its energy prices. Governor Gray Davis today fired up a new power plant, a month ahead of schedule. Casey Wian has more on the story from Kern County, California.
(BEGIN VIDEOTAPE)
CASEY WIAN, CNN CORRESPONDENT (voice-over): It may not look like much, but when you consider that just six months ago it looked like this -- the Sunrise Power Project is indeed an impressive accomplishment. Crews worked 18-hour days, six days a week and the state streamlined its permitting process.
California Governor Gray Davis ceremonially flipped the switch on a plant that will eventually generate 585 megawatts of electricity, enough for about a half million homes. For now, it will operate at about 60 percent of that. It's a drop in the bucket compared to the state's projected electricity shortfall this summer, but Davis says it's only the beginning.
GOV. GRAY DAVIS (D), CALIFORNIA: My administration has worked night and day to license new plants. We've licensed 16 plants, nine are under construction, and today I'm very pleased to officiate at the opening of the first major power plant to be built in California since 1988.
WIAN: The plant is co-owned by the parent company of Southern California Edison. As part of Edison's deal with the governor to try to avoid bankruptcy, the company has agreed to sell electricity from the sunrise plant to the state at a fraction of current market rates.
JOHN BRYSON, CHAIRMAN & CEO, EDISON INTERNATIONAL: Let me say first that one of the things that is most important about this project I think is that it conveys what a healthy Edison company can do to serve customers and meet the needs of the people of the state of California. WIAN: But so far, the state legislature has refused to approve the rescue plan. And Edison has been forced to delay a bond offering this week as fears grow that the company may follow Pacific Gas And Electric into bankruptcy. It's another reminder that despite the fact that California has so far enjoyed a blackout free summer, the state's electricity crisis is far from over.
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WIAN: Davis predicted the Sunrise Plant opening is the beginning of the end. However he admits blackouts are still likely this summer -- Lou?
DOBBS: At this point Casey, they are bringing this plant on, the governor making reference to nine others. They appear to be less likely, don't they?
WIAN: They do appear to be less likely. Californians have done a good job according to Governor Davis, heeding his warnings to conserve. Their electricity usage is down 11 percent in the month of May. And he says that the drop will be even higher when the June numbers are out -- Lou?
DOBBS: Some good news for you Californians, all right. Casey, thanks. Casey Wian.
My next guest tonight says the California crisis is easing: Economist and "New York Times" columnist Paul Krugman, in an editorial today in fact, argued that power companies are now generating more electricity only after facing "intense public scrutiny."
Paul, good to have you with us.
PAUL KRUGMAN, "NEW YORK TIMES": Good to be back.
DOBBS: You think scrutiny has led to greater power generation.
KRUGMAN: Yes, let's be clear. I don't think there's anything here -- I don't think we'll see energy executives going to prison or anything like that. But throughout this crisis, throughout this past year, there's been this X-factor, this mysterious failure of capacity to be used. And there's been a lot of circumstantial evidence, now there's a little bit more sort of stories suggesting that power companies have taken a look and said, gee, I wonder what would happen to the price if one of my generators went off line, and actually acting to the answer to that questions.
Now, the generators are coming back online. The X-factor, which was working massively against California during the winter months when there should have been plenty of power, now seems to have gone away.
DOBBS: At the same time, it's important for us to recall, too, that the change in the regulatory mechanism that California was buying power, particularly long-term power, added measurably to their problems. KRUGMAN: I think there's blame to go in all directions here. It's clear that California set up a badly engineered regime. It set up a regime that was an open temptation to the kinds of things that were going on this last winter.
DOBBS: As an economist, are you surprised how, frankly, quickly the market though is working? Because we have -- in a question may be of one of expectations, but we had been led to believe that this market was so in this equilibrium that there would be a year or two of protracted energy crisis. It does appear we're seeing easing, doesn't it?
KRUGMAN: Oh, yes. The numbers are stunning. The wholesale prices right now in California are running at levels that people I spoke to didn't expect to see until the summer after next. So it's faded away very rapidly. A heat wave, a drought could make it come all back. But this is an incredibly rapid turnaround.
DOBBS: Let's turn to G.E. "The Financial Times", as we've reported, they will have the story tomorrow morning. G.E. coming with a new proposal to Mario Monti and the EU Commission. What do you make of that?
KRUGMAN: First of all, I think Jack Welch really wants to go out with this deal. I think that we're seeing an attempt now, this is a gray area case, everybody acknowledges that Mr. Monti has a case, everybody acknowledges that G.E. has a case -- just what shade of gray it is unclear.
What G.E. is doing is mixing a little white paint into the gray trying to shift it.
DOBBS: A little more power.
KRUGMAN: I think it might work, because everybody would like a way out of this confrontation. But you know, the real message here is not about G.E. or Honeywell. It is, hey, there's another economic superpower on the block, and the United States has to live with that.
DOBBS: And live hopefully very productively and beneficially.
KRUGMAN: Yes, but they've got veto power on our mergers, remember that.
DOBBS: That in itself is new. Paul, as always, good to have you with us. Paul Krugman.
Next on MONEYLINE, a staff shortage weakens profits for the nation's second-biggest drug retailer. Details just ahead in our "Sectors Report."
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DOBBS: In tonight's "Sectors Report": drug retailers. The nation's second-largest drugstore chain, CVS, today warning it will miss profit estimates for the full year. CVS joining Walgreens, which missed profit estimates on Monday. Both companies blaming weak sales in so-called front-end products. Those are the high-margin items like toothpaste, cosmetics and shampoo.
CVS also saying today it's having trouble hiring enough qualified pharmacists, that that shortage is shaving as much as 16 percent off its full-year profit targets. The stock today was downgraded as well by Merrill Lynch and JP Morgan.
CVS, the biggest loser in fact on the New York Stock Exchange today, falling more than $7.50 a share. The rest of the sector moving lower on the day as well.
Coming up on MONEYLINE, tonight's CEO on the edge. The head of Polaroid. We'll have a snapshot of a company people in trouble.
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DOBBS: Tyson foods and IBP winning approval by a Delaware judge on their second merger proposal. It's virtually identical to its original agreement. The $2.7 billion cash and stock deal creates the largest U.S. meat company.
In tonight's "CEOs on the Edge," Polaroid's Gary Dicamillo. After more than five years at the helm, some on Wall Street are saying that the company is facing possible bankruptcy. The problem, he say, outdated products, a lack of cash, and intense competition. Fred Katayama has the story, in tonight's "CEOs on the Edge."
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FRED KATAYAMA, CNN CORRESPONDENT (voice-over): Investors are pouting at Polaroid.
Aside from a few hit products, there hasn't been much to celebrate under the reign of Chairman Gary Dicamillo, the first outsider to head the 64-year-old company. Since he became CEO in 1995, the stock has mostly gone south, falling 94 percent and it hit a 52-week low today, as some on Wall Street bet the company will file for Chapter 11.
Analyst Ulysses Yannas rates Dicamillo's performance a "C."
ULYSSES YANNAS, BUCKMAN, BUCKMAN, AND REID: What he could have done better is try to protect his basic business, the traditional Polaroid business, and I don't think he's done a very good job at it.
KATAYAMA: He has produced a big hit with the instant camera that produces photo stickers, but analysts criticize him for not redesigning its old lineup. One-step has gone through a quarter of a century without a major overhaul. And business users of its instant cameras like real estate brokers and insurance agents are increasingly switching to digital cameras. That eats into sales of its profitable films.
Dicamillo has little time to raise cash. With more than $500 million of short-term debt coming due within seven months, Wall Street has downgraded its bonds.
JOHN MOORE, MOODY'S INVESTOR'S SERVICE: They're in extremely risky financial position. There's continued underperformance in their primary business, which means that the core instant business of Polaroid is still -- there's accelerated underperformance.
KATAYAMA: Polaroid has warned that second-quarter loss would be substantially worse than analysts' forecasts.
(END VIDEOTAPE)
KATAYAMA: Two weeks ago, Dicamillo launched his second restructuring plan in six months. He's cutting one-third of its work force, selling real estate, and getting outside manufacturers to make its cameras. And he has suspended its dividend in a race to save cash to pay down the debt. And the company recently unveiled two new digital printing systems that some analysts say could become big hits -- Lou?
DOBBS: Big hits is what they need.
KATAYAMA: Definitely.
DOBBS: Thanks, Fred Katayama.
Up next, we'll take a look at your e-mails and "Ahead of the Curve."
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DOBBS: Now a look what to expect tomorrow.
Weekly jobless claims to be reported. Economists expecting that number to climb again after declining last week. Also out tomorrow: Quarterly results from both Nike and FedEx.
Finally tonight, a look at your comments. After six interest rate cuts by the Fed this year, Jeff asks: "When will the markets recover?"
That's a simple, direct question, a very good one. And of course there is no easy answer. John Shaughnessy, the chief investment officer at Advest, says stocks should experience a summer rally, that should hold through year end. His reasoning: Those Fed rate cuts are just beginning to kick in.
Liz Mackay from Bear Stearns also looking for a second half recovery for stocks. Her advice however is be patient.
John writes: "Regarding the subject of alternative energy, why isn't their more publicity about fuel cells? It said this is the energy of the future that will revolutionize the use of power."
One of the reasons it's not getting more coverage is the technology is still far from becoming a consumer reality. David Smith from Salomon Smith Barney telling us it will gain wider acceptance in the coming years as reliability in the products increase and costs come down. He likens it to the early days of the auto industry. Yes, you are right, it is the most promising energy alternative.
And finally, with tongue firmly in cheek, Kurt says, "Given that current profit in earnings problem has negatively affected Merrill Lynch stock, maybe they should ask Henry Blodget for a target price recommendation."
Well, of course, analysts don't make recommendations on their employers. We want to hear from you. E-mail us at moneyline@cnn.com and please don't forget to include your name and your town.
And that is MONEYLINE for this Wednesday evening. Thanks for joining us. I'm Lou Dobbs. Good night from New York.
"CROSSFIRE" is next.
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