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Lou Dobbs Moneyline

Dow Advances 40.17 to 10,610.00; Nasdaq Climbs 30.42 to 2,046.59; Microsoft Issues Profit Warning

Aired July 19, 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 world's largest software company has a surprise for investors. Microsoft's president is here to tell us why Microsoft has just issued a profit warning.

Two of corporate America's most powerful women join us tonight: Avon CEO Andrea Jung on making over a cosmetic icon. And Meg Whitman the CEO of a bona fide Internet star: eBay.

And, a tough choice: Protecting a scenic wonder, or rescue a town's economy. A modern battle rages on the Hudson.

Good evening.

In tonight's headlines, stocks end higher across the board but well off their highs for the session. Bolstering the market today: Nokia. The stock surged after the world's biggest mobile phone maker reported profits at the high end of expectations. And the U.S. trade deficit narrowed unexpectedly in May to a 16-month low.

We begin tonight with an after-the-bell profit report from Microsoft. The No. 1 software company met expectations -- but barely. And that was the extent of the good news. Microsoft went on to warn that profits and sales will disappoint in the current quarter.

Steve Young joins us now and has more on the story -- Steve.

STEVE YOUNG, CNN CORRESPONDENT: Lou, Microsoft delivered more sales than was expected for its June quarter until recently, but warned it will be singing a different September song. It stated a key earnings number only with a giant charge. Analysts say that using the normal procedure earnings per share would amount to about 43 cents as expected.

Sales were up 13 percent just over $6.5 billion. Income climbed about 8 percent. But the company sees a September chill. Wall Street thought Microsoft would earn 45 cents. The company says that number could be as low as 39. Still, on the strength of Windows XP which is set to go on sale in late October the company reiterates guidance for growth in the mid single digits for all of Microsoft's fiscal 2002 year.

(BEGIN VIDEOTAPE) GREG VOGEL, BANC OF AMERICA SECURITIES: They're saying they're going to have a dismal September, and they are going to make up the difference over the next three quarters. That obviously is going to create some risk. A company says we're going to still meet the same number but thing's are going to get worse before they get better? That's a little troubling.

(END VIDEO CLIP)

YOUNG: Also troubling, analysts say, Microsoft's profit margins dropped in the June quarter to 42 percent, down from 45 percent. It was over 50 percent a year ago. Microsoft is taking that enormous non operating charge of nearly $4 billion largely because a number of its investments in the cable and telecom sector are depressed. Some of the projected September shortfall could be because customers are delaying purchases until the new operating system goes on sale.

On its conference call Microsoft said it's pleased with sales of its server software -- Lou.

DOBBS: Steve, at this point in the equation at all the introduction of Office XP?

YOUNG: All its eggs were in that basket, Lou, and of course in the basket that there are no delays, no injunctions sought by the states or the federal government.

DOBBS: OK, Steve. Steve Young.

Investors punishing Microsoft's share price in stock in after hours trading. Microsoft's is now down more than $2.5 a share trading at $69.90. Microsoft stock was higher during the regular trading hours. It was a solid session for the markets. Stocks surged early in the session as investors relished something they haven't had in a long time: A lot of good news from tech and telecom but the rally momentum by the closing bell.

Jennifer Westhoven has the story from Wall Street.

(BEGIN VIDEOTAPE)

JENNIFER WESTHOVEN, CNN CORRESPONDENT (voice-over): Stocks started with a rally after something rare -- good news from some tech and telecom companies. But the broad buying tapered off by day's end.

MICHAEL BALOG, BANC OF AMERICA: People are willing to play games and buy stocks and trade around them. But when you know that the night is coming, and each night we are going to get some typically negative news, then people step out of the way and say who needs to get whacked out tonight.

WESTHOVEN: The rally started strong. At its high, the Nasdaq was up more than 3 percent before settling up just 30, or 1.5 percent at 2,046. Nokia said second-quarter profits topped forecasts and said some time next year sales growth will jump back to stunning levels. Its shares rose more than 14 percent in heavy trading. German software maker SAP had a strong quarter, Dell Computer said results are on track. And wireless phone company Sprint PCS signed up more customers and said earnings for the rest of the year would be better than investors were hoping.

The Dow Jones Industrial Average rose by as much as 109 during the session before closing up 40 at 10,610. The bullishness overcame worries after IBM warned that its second-half results might be disappointing.

JON BURNHAM, BURNHAM SECURITIES: The market acted rather well today considering the bad news that was out yesterday and the other days this week. Traders are having such an effect on the market because most investors are sitting on the sidelines.

WESTHOVEN: And there were still pockets of weakness. Airlines fell and many financial stocks dropped. Credit card companies sold off after Providian Financial said more card-holders aren't paying their bills.

(on camera): Traders say there's still too much fear in the air, and too many earnings still to come for investors to place their bets with conviction. But to have positive reports coming from some major industry bellwethers, not just whispers from some small chip companies is much better grounds for business -- Lou.

DOBBS: Jennifer, this warning tonight from Microsoft after the close of trading certainly has to create some caution in the market tomorrow, don't you think?

WESTHOVEN: You would think so and it will be interesting to see how it plays out but it is fairly amazing as the analyst was saying before that IBM's news was really completely overcome by Nokia and Sap. the negativity from that was just really washed away. So, we'll have to see what happens tomorrow. Either way traders are seeing lots of range bound trade, you get one day up, one day down. The market not really going anywhere.

DOBBS: Jennifer thanks. Jennifer Westhoven from the New York Stock Exchange.

In tonight's "MONEYLINE Movers," Extreme Networks jumping 15 percent in price. The network equipment maker posting stronger than expected quarterly results. But Extreme expects sales to be flat in the current quarter blaming weak demand in Europe.

All-State falling more than $5 a share. Profits at insurer plunging 47 percent. All-State paying out nearly half a billion dollars in claims because of tropical storm Allison. It swamped parts of Texas and Louisiana last month. That storm, and others in the Midwest, making the second quarter one of the most expensive on record, costing insurance companies more than $4 billion. And today Liz Claiborne up almost $3 a share. The clothing designer reporting a 10 percent increase in its quarterly sales. Despite the difficult retail environment, Liz Claiborne says it can still achieve double-digit sales and earnings for the rest of the year.

(BEGIN VIDEO CLIP)

PAUL CHARRON, CHAIRMAN & CEO, LIZ CLAIBORNE: Nobody is hitting the cover off the ball in this economy. That includes us. But in a difficult economy the diversity of the portfolio, the cost reduction initiatives we put in place, the technology investment we made over the last several years, supply demand balancing, sourcing synergies, these are all working positively for us and so we feel quite comfortable affirming the guidance that we previously stated.

(END VIDEO CLIP)

DOBBS: Liz Claiborne's comfort should be enhanced by the stock performance. Liz Claiborne stock today closing at a three-year high.

Several reports out today suggesting the economy may be improving. But there are still some troubling details behind the headlines. The number of Americans seeking unemployment benefits fell last week. But the total number of people receiving benefits still tops 3 million, that is the highest number since 1992.

The U.S. trade deficit in May fell to its lowest level since January of 2000, while exports of services hit a record. Imports plunged for a second straight month showing weak demand for consumer goods and business equipment. The top economic adviser to the president, Lawrence Lindsay, today said the economy was at a virtual standstill. But Lindsay said he expects growth to resume in a robust fashion next year thanks to tax cuts and interest rate cuts.

The index of leading economic indicators out today suggests that some hope is warranted. Up in the month of June, the third straight month that the LEI has risen.

There was after-the- bell profit news tonight not just from Microsoft but also from eBay. The online auction site beat expectations and Bruce Francis has been analyzing that report and joins us now -- Bruce.

BRUCE FRANCIS, CNN CORRESPONDENT: Lou, how would you like to hear about a economy, an Internet company at that that's actually raising guidance ? That's exactly what eBay is doing. Let's take a look at what eBay said after the bell in our earnings score card. eBay reported earnings of 12 cents a share, that's versus the estimate of nine cents and better than the five cent a year ago comparison.

Revenue soared to $180 million. That was substantially above expectations. When you factor in some charges, though, earnings were about nine cents a share. Let's take a look at eBay by the numbers and pick apart what eBay reported tonight. eBay said gross merchandise was up 74 percent from a year ago. Listing also 58 percent higher than a year ago, very positive signs.

Looking at the second half they said that revenues could be 15 to 30 million dollars higher, and on the bottom line 1 to 2 cents better than Wall Street is currently expecting. And eBay said that they do think they'll have strong Christmas season selling items this year.

Earlier we spoke to Michael Legg and he said that basically everything is going eBay's way.

(BEGIN VIDEO CLIP)

MICHAEL LEGG, JEFFERIES & CO.: Operating model is right. Over 80 percent gross margins with a long-term operating potential of 30 to 35 percent. Already we say them hit 20 percent operating margin this quarter on a pro forma basis. That's as high as 25 percent. So the model is there.

Second, you have a management team that's executing that model.

(END VIDEO CLIP)

FRANCIS: It's a very expensive stock, Lou. And tonight, it's getting even more sell. Let's take a look where eBay is trading in after hours action right now. Up almost $3 a share, and very heavy after hours trading.

Lou, this is a stock that Wall Street has named a big survivor of that Internet bubble -- Lou.

DOBBS: More than a survivor. It is obviously succeeding. EBay's resilience would be hard to overstate, in fact. Thank you, Bruce. Bruce Francis.

Over the past year, countless dot-coms have gone bankrupt or they've seen their stocks fall as much as 90 percent. EBay's stock, in contrast, has more than doubled from its 52-week low. And "Business Week" recently said eBay may be the Internet's only undisputed success story.

Joining us now from San Jose, California, eBay CEO Meg Whitman. Is that a smile I see on your face, Meg?

MEG WHITMAN, CEO, EBAY: Glad to be here, Lou.

DOBBS: Congratulations on the results.

WHITMAN: Thank you very much.

DOBBS: The (UNINTELLIGIBLE) guidance through the remainder of the year, most notable to me was the fact you're expecting a strong holiday season sales performance, you're not concerned about the slowdown?

WHITMAN: No, we really aren't. What we have seen is that our army of entrepreneurs, our users bring to market what consumers want, and they are far more adaptive and than any company could be. So it is the beauty of the model that I think allows us to be so confident of Q3 and Q4.

DOBBS: And your model -- obviously, there's been some talk about, is eBay becoming a mall rather than an auction house? How do you respond to that?

WHITMAN: We have said from the beginning that eBay is a global on-line trading platform where practically anyone can sell practically anything on a global basis. And there's really three pillars of the business: the U.S. auction business, the international auction business, and an emerging fixed price format with half.com, buyitnow, and the new eBay storefronts.

DOBBS: And half.com -- you've had it just about a year, is it performing expectations?

WHITMAN: It is. Half just launched four new categories. For the first year, they just operated in four categories, launched four new categories, and we could not be more pleased with the growth of half.com and the management team there.

DOBBS: And in the listing of the big ticket items, part of the success going forward, how is that going?

WHITMAN: Well, increasingly people are getting confidence to list higher value items on eBay. And whether that is real estate or high end musical instruments, or high end sporting goods. You know, the average ticket does increase over time on eBay. Our newer markets and international tend to start in lower price points.

But we're pleased with the growth across the whole range of categories on eBay, in terms of low ticket items as well as the higher ticket items.

DOBBS: Do you expect to sign up -- do you want to sign up more big corporate partners?

WHITMAN: It is an opportunity for the company. You know, eBay is an incredible vibrant marketplace that manufacturers, retailers and liquidators are finding attractive. I will say it's at its earliest phases, they are experimenting with the platform and have best to use it, but we really want to make this platform available to sellers of all sizes, small, medium and big business, and we think we can do it on a level playing field that actually benefits everyone.

DOBBS: Meg, again, going forward, price increases -- are they in the offing?

WHITMAN: Well, our gross strategy for the company is to continue to attract new buyers and new sellers and grow the gross merchandise sales that has transacted in the site. We've had just one price increase in four years, which was January a year ago. We don't have any near term price increases planned. That notwithstanding, our sellers think I think that this is a real value, but the strategy of the economy is to bring new sellers, new buyers, and to have more business done on the eBay platform. DOBBS: Well, obviously, Meg, it's a strategy that's working, congratulations on these results, and good to talk with you. Meg Whitman.

WHITMAN: Thank you very much.

DOBBS: Still to come, President Bush meets with British Prime Minister Blair, looking to bridge differences with the Europeans. And the president's choice to run the SEC has a hearing in Congress.

Also, the battle between conservation and capitalism in a New York town, whose name once signified scenic wonder.

(COMMERCIAL BREAK)

DOBBS: More trouble to report tonight for the Bridgestone/Firestone/Ford Motor controversy. Sources tell MONEYLINE that federal safety officials will seek a mandatory recall of more Firestone tires.

Patty Davis is in Washington with the latest -- Patty?

PATTY DAVIS, CNN CORRESPONDENT: Well Lou, the news came late today. The National Highway Traffic Safety Administration saying it was taking that drastic move simply because Firestone said that it would not voluntarily do a recall on its own. The agency saying that it will issue a defect decision the next step towards a mandatory recall.

Now, NHTSA is not saying how many or which tires it will seek to recall. Bridgestone/Firestone President and CEO John Lampe said in a telephone conference call late this afternoon with reporters that he maintains that his company's tires are safe. He says he will fight any recall.

Now, so far, the tires and the Ford Explorer have been linked to 203 deaths from rollovers in those Ford Explorer. Both companies blaming one another. Firestone has already done one voluntarily recall, that was last year, 6 1/2 million, 15-inch Wilderness AT Tires. In addition, Ford did its own replacement program, 13 million additional tires. That was also months and months ago. And that is going through right now.

Now, depending on which tires the National Highway Traffic Safety Administration goes ahead and seeks on a recall, Firestone could be on the hook though to pay for some of those tires that Ford is now replacing. Could cost Firestone a pretty penny -- Lou.

DOBBS: OK, Patty. Patty Davis from Washington.

Well, the president is in the midst of his second European trip, spending a second day in Great Britain. President Bush met with Prime Minister Tony Blair at his country residence, discussing issues ranging from Northern Ireland to the Kyoto Treaty, to the White House plans for missile defense system, which has been heavily criticized by both Russian and some European leaders. (BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: There is no need for to us live under a treaty that codified a period of time in which the world was divided into armed camps. It's time to work together to address the new security threats that we all face.

(END VIDEO CLIP)

DOBBS: The president leaves for Genoa, Italy tomorrow, for the start of the G8 Summit. The G8 Summit has not begun yet, of course, but security preparations are in high gear. In Genoa, Italian officials preparing for demonstrations -- they've cordoned off the event site as a high-security red zone.

This as thousands of protesters descended to voice their sentiment that the G8 impose unfair trade rules on developing countries. Previous economic summits, in Quebec a few months ago and two years ago in Seattle, have been met with similar protests.

Another protest overseas. A general strike in Argentina kept many workers at home and brought public transportation to a standstill, as unions demonstrated against the government's austerity plan. That austerity plan is meant to ease Argentina's financial crisis by drastically cutting public spending, aiming for a zero- deficit budget.

But those budget cuts, about $1.5 billion this year alone, are being heavily borne by state workers and pensioners.

In Washington, D.C., the House is right now voting on the renewal of Beijing's normal trade status. The House approved China's permanent normal trade status last year. It goes into effect after China is admitted into the World Trade Organization. The WTO vote is expected later this year.

And as I mentioned to you a few days ago, we have been gauging public sentiment toward China's entry into the WTO, and in a recent CNN-Gallup U.S. Poll of nearly 1,000 people, half of those surveyed favor China's inclusion. This number is down slightly over the past two years from a high of 56 percent.

President Bush's choice to head the Securities and Exchange Commission today faced the Senate Banking Committee today. He received a warm reception in his confirmation hearing. Harvey Pitt, now a high-powered Wall Street lawyer and frequent critic of the SEC, had served as the agency's legal counsel during the Clinton administration.

Tim O'Brien has the story from Washington.

(BEGIN VIDEOTAPE)

TIM O'BRIEN, CNN CORRESPONDENT (voice-over): If confirmed to head the Securities and Exchange Commission, Harvey Pitt's pay will tumble to $134,000 a year, down from the more than $3 million he made last year representing a wide range of clients prominent in the financial world. Pitt told senators it's worth it.

HARVEY PITT, SEC CHAIRMAN NOMINEE: I will be trading some very wonderful clients for the most wonderful client of all, the American investing public.

O'BRIEN: The fact that Pitt may now be regulating the big five accounting firms and brokerage houses he previously represented did not appear to worry senators, who saw his extensive Wall Street experience as a plus.

SEN. PHIL GRAMM (R), TEXAS: There are people in America who think the best qualification for anything is to just have come in on a turnip truck.

O'BRIEN: Pitt said he would want the SEC to conduct a wholesale review of U.S. securities laws, which he said were almost 70 years old and as antiquated and complicated as the internal revenue code.

PITT: There are no rules that I would start out believing should be overturned, or no decisions that should be overturned, but there are also no rules or actions that would be off the table, if people could persuade us that there are problems with them.

O'BRIEN: One rule Pitt himself opposed as a practicing Wall Street lawyer was the controversial Regulation Fair Disclosure, or FD, requiring corporations to simultaneously disclose to the public any market-sensitive information they disclose to stock analysts. He told the committee, however, that in principle, it's not a bad idea.

PITT: I think the underlying concept of Regulation FD is really unassailable, which is that no one should have an unfair advantage in the marketplace.

(END VIDEOTAPE)

O'BRIEN: The hearing was cordial throughout, with several senators stating publicly what appeared obvious, that Pitt's confirmation as head of the Securities and Exchange Commission will be swift -- Lou.

DOBBS: And Tim, that should come as soon as when?

O'BRIEN: We really don't have a timetable on it, but it could be -- I would assume in the next several weeks.

DOBBS: And was there much inquiry by the committee about Reg FD, Tim, if any?

O'BRIEN: There was an inquiry about that, and what his statement was, that he approves of it in principle, but he has some problems with the way it's worded. There may be a need for modification. The SEC is right now examining FD and he approves of that re-examination. But in principle, he supports it.

DOBBS: And it sounds like -- it's easy to remember that he did spend some time previously in Washington, D.C. with that answer. Tim, thanks a lot. Tim O'Brien.

Still ahead on MONEYLINE: stock prices surge, then give back much of that gains. We'll have all of the day's action for you from Wall Street. Microsoft warning about future profits, taking a massive charge. We'll hear from the company's president and chief operating officer, Rick Belluzzo.

And California's power problems take a shocking turn. How an energy crunch has turned into a troublesome, mysterious surplus.

And a river town famous for its vistas considers an industrial future, a tale of conservation versus concrete.

(COMMERCIAL BREAK)

DOBBS: In tonight's "MONEYLINE Headlines": Microsoft barely met street expectations and it warns profits and sales will fall in the current quarter. A better story from online auctioneer eBay. EBay beat Wall Street estimates, earning 12 cents a share when you take out special items, and revising higher its guidance for the remainder of the year.

And the U.S. trade deficit in May shrank to its lowest level since January of 2000. Service industry exports hit a record, and imports dropped for the second straight month.

Also this half-hour: calling Avon CEO Andrea Jung, the company's stock not far from a 52-week high and earnings meeting expectations. Microsoft's president will be here to tell us what's going wrong with software sales this summer. Kitty Pilgrim will wrap up the rest of the after-the-bell profit news from the technology world.

And a clash of wills in a small Hudson River town: it's the environment versus economics. And we'll take a look at an embarrassment of riches in California: A strange twist in the statewide energy crisis. Casey Wian will be reporting.

Now for a check on the markets: A rocky session that ended with a solid advance across the board. The Dow had been as high as -- 110 points higher earlier in the session, only, then, to fall late in the session. In the end, the index up 40 points. Leading the way: shares of Microsoft Caterpillar and Intel. And, of course, that was before the Microsoft announcement. The Nasdaq finished higher by 1.5 percent. Helping that index today, networking, chip and wireless issues. On the Big Board, advancers beat out decliners four to three.

Several technology firms beyond Microsoft out with quarterly results after the bell, and here to wrap up all of that activity for us is Kitty Pilgrim -- Kitty.

KITTY PILGRIM, CNN CORRESPONDENT: Lou, let's get straight to it.

There was not a lot of good news in the after-hours market. So starting with Gateway -- Gateway had a pre-tax loss of 9 million, or 2 cents a share. Now, the estimate was for a loss of 1 cent. The company performance was hit by continuing slowdown in worldwide PC demand.

Onto Nortel Networks: It followed through on an earlier warning. Second quarter net loss was more than $19 billion, or 48 cents a share. Now, most importantly, the company gave no new forecast. They expect the industry dynamics to, quote, "remain challenging," and they eliminated the work force by 23,000. They expect to cut another 7,000 jobs within eight weeks.

Now, following on that theme, PMC Sierra reported a second quarter loss in line with reduced forecasts. Falling telecommunications spending hurt the company, but the loss of $13 million, or 8 cents a share, matched analysts' forecasts.

And others reporting in after-hours trading were Vitesse and Xilinx, and here's a look at what those stocks did in after-hours. And you can see, not a winner in the bunch.

DOBBS: PMC Sierra getting particularly hard hit, and it's been battered all along. Well maybe -- just maybe -- we'll one day hear some good news from telecom.

PILGRIM: Not today.

DOBBS: OK. Nor any day soon, Kitty. Thank you Kitty Pilgrim.

In corporate news: a slow start for shares of Accenture. Accenture debuted on the New York Stock Exchange at $14.50 a share. The stock rose up 67 cents a share. At day's end, Accenture raised nearly $1.7 billion in its offering. The consulting firm, a former unit of accounting firm Andersen.

And solid earnings results from Quaker Oats overshadowed by reports federal regulators may block its deal with Pepsi. Neither company will comment on reports that the FTC will block Pepsi's bid to buy Quaker Oats, on fears the new firm would dominate the sports drinks industry.

Some good news for shareholders of R.J. Reynolds: The company posted a 9 percent rise in second-quarter earnings and announced a 13 percent increase in its quarterly cash dividend. And RJR set a $300 million stock buyback plan.

The world's largest software maker out with quarterly results after the bell. Microsoft barely managed to hit Wall Street estimates, and the company painted a somewhat gloomy picture for the current quarter as well.

Joining me now with his outlook on the firm is Rick Belluzzo;. He is president and chief operation officer of Microsoft.

Good to have you with us.

RICK BELLUZZO, PRESIDENT & COO, MICROSOFT: Good to be here, Lou.

DOBBS: these results -- Microsoft has a tradition of being extraordinarily conservative in its outlook and its guidance. you -- at this juncture, how long ago did you know we're going to have a problem here?

BELLUZZO: Well, we feel like we had a very good quarter. In our fourth quarter we grew revenue 13 percent. We had good growth and operating income. So, given the environment that the industry is in, we thought the results were very positive and, in fact, we're on the beginning of a new product cycle that we think will continue to build momentum as we go into next year.

DOBBS: And Office XP, how is it going?

BELLUZZO: Well, Office XP was launched in the end of May. The acceptance has been very good. We've won many accounts. People are shifting over to Office XP.

And so we're in the phase now where we're building revenue and building momentum around that product. But the reviews and the reception have been very good.

DOBBS: And the write-off -- $4 billion, a huge charge. Where were those investments primarily?

BELLUZZO: Well, they were investments largely in the telecom and cable space. Those have been sectors that have been hit very, very hard. And we felt, based on our paramount rules, that it was appropriate to write those down, which we did in this quarter.

DOBBS: And certainly Microsoft has a cash position that is the envy of the corporate world. Give us your forecast now for where you expect to be in terms of a cash position by the end of the year.

BELLUZZO: Well, I'm not sure I could project the cash position completely. We have, in recent quarters, generated, you know, $3 billion or so of cash, and so we expect the trend of cash generation to continue as we look to the future.

It's important to know that we are on a very important new product cycle. The launch of Windows XP and Xbox this fall are very critical products for the company, very critical products for the industry because we really believe that they deliver breakthroughs around the PC and in gaming. And we have have more products in a variety of other areas that we think will really generate positive growth as we go into next year.

DOBBS: You continue to see your margins -- again, the envy -- would be the envy of any company in corporate America -- to continue to diminish. Still in the 40 percent range. Do you see that continuing, or do you expect further diminishment?

BELLUZZO: Well, we're building several new businesses across the company. Our profile of business has changed quite a bit over the last several years. We're seeing growth in new areas that today have lower margins. Those are some of our fastest growing business. And so we will grow the absolute level of profit over the next several years, of course, but the margins will, in a short term, be lower as we bring on these new business with lower margins. But we're playing for the long-term. We're building innovation and new products that we think deliver a great growth platform for the future.

DOBBS: A good future to match, as they say, a pretty good past performance. Rick, good to have you with us. Thanks for being here.

BELLUZZO: It's a pleasure. Thank you.

DOBBS: In tonight's "Powering America," California has sent dire warnings of an energy crisis in the state for the past several months. It has rocked the country, in fact, with its problems. But it seems things have drastically changed. Not only have the threats of rolling blackouts not occurred, California now has, in fact -- believe it or not -- a surplus of power.

Casey Wian has the story from Las Angeles.

(BEGIN VIDEOTAPE)

CASEY WIAN, CNN CORRESPONDENT (voice-over): "The New York Times" calls it California's new problem. Consumer activists say it's something worse.

HARVEY ROSENFIELD, CONSUMER ACTIVIST: First we were forced to pay too much for electricity. Now the taxpayers are watching their money being flushed down the toilet because we overpaid.

WIAN: That's right, California, at least for now, has more electric power than it can use. The state is even selling sell some back to electricity producers for a fraction of what the state has contracted to pay. The power surplus, like the blackouts that occurred earlier this year, is the result of several factors.

First, the state has increased supply by signing long-term electricity contracts and bringing new power plants on-line. Second, demand has been cut through aggressive conservation, higher prices, and unexpectedly cool weather so far this summer.

Critics say the surplus is another example of how state officials have bungled the electricity crisis. But the top energy adviser to California Governor Gray Davis says it's just the opposite.

DAVID FREEMAN, SENIOR ENERGY ADVISER TO GOV. GRAY DAVIS: We've been in shortage, shortage, shortage, blackout, blackout, blackout. Now we've achieved a slight surplus. And this is great news for the people. It shows that our programs are beginning to work.

The truth of the matter is if you buy insurance, you don't ask for your money back just because you lived another year.

WIAN: Several independent studies of California's electricity market earlier this year predicted a summer of blackouts. Businesses threatened to leave if state officials failed to secure a stable supply of electricity. Integrated Micromachines makes fiber-optic switches. It lost power to blackouts earlier this year, which put workers at risk because its chemical filter system shut down. The company bought a backup generator, and despite conservation efforts, is paying higher power bills. That, officials say, is better than blackouts.

ART HUSKEY, INTEGRATED MICROMACHINES: The economy will take care of the cost problems. What I can't afford to do is endanger my people and have the Third World kind of generating electrical system that we were experiencing.

WIAN: Despite the power surplus, Integrated Micromachines isn't even considering returning its back-up generator.

(END VIDEOTAPE)

WIAN: That's because in any return of a heat wave in August or September could bring the state back to the brink of blackouts -- Lou.

DOBBS: And the sense is, Casey, that this surplus is for real and will be around for a while?

WIAN: The surplus is for real. The state has about 40,000 megawatts of electricity available. Current demand is running around 33,000 megawatts. It's expected to be around for a while, but no one can predict the weather. If a power plant goes down, the temperature goes up, we could be right back into blackouts again later this summer.

DOBBS: Well, after all that California has been through, Casey, we're delighted to have the good news. Thanks, Casey Wian.

WIAN: Absolutely.

DOBBS: Still ahead here: A small town along the Hudson River is deeply divided over its economic future and the business of staying beautiful, a cosmetic company growing despite an economic downturn.

ANNOUNCER: After the break, Lou speaks with Avon CEO, Andrea Jung.

(COMMERCIAL BREAK)

DOBBS: The cosmetics business is one of the few sectors doing well despite a soft retail environment. Skin care beauty products considered a necessity, not a luxury. Shares of Revlon, Estee Lauder and Avon, all outperforming the broader market over the past year.

Avon today reporting quarterly results that met estimates. Profits rising 10 percent; revenue, up 5 percent, driven by a pickup in sales in the United States. And Avon shares adding about 2 percent today. Over the past year, the stock has risen nearly 20 percent. Avon said today it's on track to meet profit targets for the year. Avon also planing expansion into retail stores next month, for the first time in the company's 116-year history.

And joining me to give us a closer look at Avon's results and its future: Andrea Jung, the CEO of Avon Products. Good to have you with us.

ANDREA JUNG, CEO, AVON PRODUCTS: Hi, how are you.

DOBBS: Congratulation on the results, we're delighted to have good news on this broadcast.

JUNG: Thank you. We're very pleased with our results, obviously.

DOBBS: Driving these results in this kind of environment, what is the secret?

JUNG: I think we have a unique positioning, and our proposition certainly is a combination of value pricing -- and while cosmetics is not 100 percent recession-proof, certainly women still want to look beautiful in these kind of times -- our value positioning is very, very important, and we combine that with something I think is unique to Avon, which is the fact that we offer earnings opportunity for women.

So, particularly in economics slowdowns all over the world, one of our major strategies is to go out and recruit more representatives, and we are seeing great growth in that area.

DOBBS: And the growth is balanced?

JUNG: The growth is balanced. We are reporting today 11 percent growth in active representatives this quarter, but it's our seventh consecutive quarter of double-digit growth, and it's balanced. We have the strongest representative growth in the United States that we've seen in the last half decade, at 4 percent, and we've got double-digit growth in most of our international regions, so it is balanced around the world.

DOBBS: And recently, the deal with Sears becoming the brand that you're going to launch. That deal blew up, why?

JUNG: Well, Sears has announced a pretty major strategic shift from the time that we signed the agreement with them well over a year ago. And I think their positioning going forward didn't make sense, so logically it was right to terminate the partnership.

We are pleased with the settlement. It gives us the breathing room and the flexibility to not do anything right away. We've got a very exciting partnership with J.C. Penney's, and we're about to launch and open 75 doors in August, and we're actively looking for another partner, and there's a lot of interest in the brand. We have gotten some terrific press on it.

DOBBS: You want to reveal tonight who that partner is likely to be?

JUNG: Early days still, but we're sure we're going to have an exciting partnership going forward.

DOBBS: And the reaction amongst your representatives -- more than 90 percent of your sales coming from those representatives -- to the idea of selling in retail?

JUNG: Well, we've been talking about it for well over a year, and they understand that it's a different brand and it is significantly higher priced than our core brand. So, the products that they sell will always be their domain.

So, we have proven over two years in mall tests that a higher price product is attractive to a mall customer -- and she's an incremental customer -- we've proven that 96 percent of the sales at least that we've sold in the malls were coming from new customers who haven't bought an Avon in previous years, so we feel very good about that.

DOBBS: Andrea, and you've got great results to feel good about. Congratulations. Thanks for being with us.

JUNG: Thank you, Lou.

DOBBS: Well, just ahead here, an epic battle between environment and economics in a scenic park of the Hudson Valley. We'll have that story for you next.

(COMMERCIAL BREAK)

DOBBS: G-8 leaders meeting in Italy tomorrow will be discussing how to balance the environment and economy. But the battles over these matters often take place on the local level. Tonight, we look at one such conflict in Hudson, New York, sitting in a valley once celebrated as a symbol of America's natural beauty.

Peter Viles has the report on the deep divide over whether to build a new cement plant.

(BEGIN VIDEOTAPE)

PETER VILES, CNN CORRESPONDENT (voice-over): It is the landscape that defined early America. The artists who painted the Hudson River Valley 150 years ago were sending the first picture post cards of this country.

PETER JUNG, PETER JUNG ARTS & ANTIQUES: Many Americans, and of course many Europeans who haven't been to America, formed their notion of the magnificence and the grandeur of America as a result of those images.

VILES: Now, this valley is deeply divided over its economic future. At issue: whether to allow construction of $330 million coal burning cement plant with a 400-foot smoke stack that would tower over the region.

UNIDENTIFIED MALE: Bring this plant, we want the plant in this area.

VILES: In some ways the city of Hudson has been fortunate.

(on camera): While the downtown areas of many Americans cities are dying, this one has been reborn. By one count, there are 70 art galleries and antique shops here, and that rebirth is one of the reasons that the fight over the fight of the city's future is so fierce.

(voice-over): On the refurbished main shopping street, signs of posing the new plant, but just a block away, signs supporting it. Quebec-based Saint Lawrence Cement already operates a plant across the river. But there is a cement shortage in the northeast, created in part by massive building projects like the Big Dig in Boston.

So Saint Lawrence hopes to build a bigger, more efficient plant near this quarry.

PHILLIP LOCHBRUNNER, ST. LAWRENCE CEMENT: This is a great opportunity to allow us to replace old with new. We can replace older technology with new cleaner technology. We can make use of an existing site. This site's been used for cement production for over a century.

VILES: The opposition comes from merchants, many newcomers here, and from environmentalists led by Sam Pratt.

SAM PRATT, FRIENDS OF HUDSON: If you actually look at their application, the new plant is not cleaner, it's only cleaner per ton, but they're building a plant that's 3 1/2 times larger than their old plant. So basically, they're taking all the efficiency of the new plant and putting it into their bottom line, as oppose to using it to clean up our air.

VILES: On balance, the plant will create only a handful of new jobs. But County supervisor Gerald Simons has decided it's worth it.

GERALD SIMONS, COLUMBIA COUNTY BOARD OF SUPERVISORS: I think you need heavy in the industry for those people who are not professional people, those people that are not artists, that aren't writers, I do think they -- you need a place for those people to support their families.

VILES: This is a campaign without an election. The fate of the project rests with the state environmental judge. And it is a local argument, but a national issue: how does a region balance its need for economic growth with a preservation with its natural beauty?

Peter Viles, CNN Financial News, Hudson, New York.

(END VIDEOTAPE)

DOBBS: Coming up next, your e-mails and "Ahead of the Curve." Stay with us.

(COMMERCIAL BREAK)

DOBBS: More on the earnings front tomorrow. DaimlerChrysler, Merck, Gillette, Ericsson and Hershey out with their quarterly results. The Treasury Department reports on the federal budget for June. We're expecting a $34 billion surplus, down from more than $55 billion a year ago.

And we'll be joined tomorrow night with best selling author and energy expert Daniel Yergin.

And Peruvian economist Hernando De Soto. He'll be talking about why his latest book "The Mystery of Capital" -- why capitalism triumphs in the West and fails everywhere else.

Now for your comments.

Matthew from New Zealand asks: "Why doesn't Alan Greenspan rapidly devalue the U.S. dollar so that U.S. companies with overseas interests receive more money back on their investments, thus stimulating the economy?"

Well, devaluing the dollar would cause an instant inflation problem, raising the price of goods that we import. It would also make our market less attractive to overseas investors, and it would be embarrassing for Alan Greenspan and the rest of us.

Lloyd in Seattle writes: "Immunex reported good earnings Wednesday after the bell and gave good news about the future, but did you say anything about that? Noooo! Would it kill you to report a bit of good news once in a while?"

No Lloyd, in fact, it wouldn't kill us. In fact, we would love to report more positive news on this broadcast. Unfortunately, there hasn't been a whole lot of it recently. As for Immunex, the drug maker earned 9 cents a share, 2 cents better than Street estimates. And total revenues climbed 12 percent. And shares today climbed $1.66 on the news.

Mark also from Seattle writing: "Why doesn't your program ever quote the price of gold unless it spikes up an unusual amount in an unlimited period of time?"

Basically, it's because gold is a relatively stable commodity. Despite a brief rally in the month of May, gold prices are up about a dollar from a year ago. Merrill Lynch senior futures strategist Bill O'Neill says gold is currently trading at a higher range, because some traders believe the dollar will soon take a hit, which would drive gold prices higher. From now on, every Friday, we will take a look at the price of gold and silver, and report it to you.

We always enjoy hearing from you. You could contact us at: moneyline@cnn.com.

And that is MONEYLINE for this Thursday evening. Thanks for joining us.

I'm Lou Dobbs. Good night from New York. "CROSSFIRE" is next.

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