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Lou Dobbs Moneyline
Dow Climbs 164.55 to 10,405.67; Nasdaq Advances 25.08 to 1,984.32; Housing Industry Defying Economic Downturn
Aired July 25, 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: A powerful rebound on Wall Street today, restoring nearly $200 billion in market value. One industry that continues to defy the economic downturn: housing. We'll have the latest report. I'll talk with the heir apparent of America's biggest brokerage: Merrill Lynch's president, Stanley O'Neal. The man who insists "clean coal" is not an oxymoron, the CEO of Murray Energy, the biggest independent coal producer. And economist Paul Krugman, who says the plan to save Social Security is biased and intellectually dishonest.
ANNOUNCER: From the heart of New York City, this is LOU DOBBS MONEYLINE. Here now, Lou Dobbs.
DOBBS: Good evening. In tonight's headlines, a late burst of enthusiasm on Wall Street pushes stock prices sharply higher, Wall Street breaking a three-session losing streak. Helping the Dow today: SBC Communications, a rare telecom that actually beat expectations with quarterly profits. And OPEC has confirmed its slashing production for the third time this year: oil prices moving for the third-straight day.
We have a lot to tell you about tonight, including today's late rally on Wall Street and deal developments from some of America's biggest companies. Let's go now to our reporters with a quick look at what they're working on tonight -- Jennifer.
JENNIFER WESTHOVEN, CNN CORRESPONDENT: Lou, stocks soaring in the final two hours of trading as investors look forward to the end of a disastrous earnings season.
KITTY PILGRIM, CNN CORRESPONDENT: And Lou, one week and counting for the decision that will make or break history's biggest airline deal: the latest on United-US Air.
STEVE YOUNG, CNN CORRESPONDENT: Lou, the speculation is swirling over a possible rival to Comcast in the bid to buy AT&T's cable properties.
DOBBS: All of that coming up on MONEYLINE. On Wall Street today, stocks staged their biggest rally in more than a week. The Dow today modestly higher for the entire session while the Nasdaq was languishing. But stocks began rallying late in the session, ending sharply higher across the board. The Dow soared 164 points. Jennifer Westhoven with the story from Wall Street.
(BEGIN VIDEOTAPE)
WESTHOVEN (voice-over): Investors finally had a reason to buy after some positive results, and more importantly, positive guidance. Earnings season is now nearly two-thirds out of the way.
ART HOGAN, JEFFRIES & COMPANY: Clearly what's more important right now as we go through this terrible earnings reporting season, what's more important is the guidance than the actual printed number. Obviously, we know the numbers aren't going to be good. Estimates have been brought down. People are going to be able to beat the lowered estimates, but what we're really focusing on is what does corporate America have to say about the future. And in those cases, when we hear positive guidance, the market certainly reacts positively.
WESTHOVEN: The Dow industrials traded up for most of the day, but a late-day rally sent it even higher, jumping 164 to 10,405. That nearly erased Tuesday's heavy sell-off that knocked 183 points off the Dow.
Helping set the positive tone, SBC Communications. It beat earnings forecast and boosted fellow phone company Verizon.
Peoplesoft beat The Street and raised third-quarter estimates. That helped other software makers. Drugmaker Bristol-Myers also rose after meeting targets.
Technology made a comeback after a lackluster day. The Nasdaq closed up 25 at 1,984, helped by a turnaround in chip stocks. Trading was light, though, and worries are still running high about earnings and the economy, with the second-quarter GDP number due on Friday.
MARK DONAHOE, U.S. BANCORP PIPER JAFFRAY: We've had six rate cuts. It hasn't seemed to have helped yet. People are wondering if we're going to get another one in August. I think people believe we will, but I also think people are starting to question whether or not we're going to come out of this in the short term.
(END VIDEOTAPE)
WESTHOVEN: Those questions have traders worry about a long, slow and depressing summer on Wall Street. And one piece of news that won't help: DuPont posting a second-quarter loss that was in-line with lowered estimates, but it issued another warning, this time for the third quarter for the chemical giant. And it also will cut another 1,500 jobs.
If you're looking for a silver lining, though, there are still plenty of other earnings reports and economic forecasts coming in the next two days that could lift the clouds -- Lou.
DOBBS: You're sure that's a silver lining, Jennifer? WESTHOVEN: Well, I think for you it is. But also, you know, there's a lot of hope coming up that maybe wireless is going to rebound a bit. A lot of people starting to look into that, and you're starting to see some stocks in that area getting a boost, too.
DOBBS: Jennifer, thanks. Jennifer Westhoven from the New York exchange.
As stock prices soared today. bond prices tumbled, suffering the worst one-day drop in almost four weeks. The 10-year note down nearly half a point in price, the yield at 5.16 percent tonight. The 30-year bond down 25 ticks, the yield at 5.57 percent.
Out with after-the-bell profits tonight: Compaq Computer. Compaq reporting a quarterly loss of more than a quarter billion dollars. When you take out one-time items, operating earnings coming in at $67 million. That met Wall Street targets. But Compaq said it may not meet expectations in the current quarter. Compaq was struggling even before the PC slump began to batter the company and the industry. Compaq during the first quarter was ousted by Dell as the world's No. 1 computer maker.
Bruce Francis is here now and has more on the day's report and the company's outlook -- Bruce.
BRUCE FRANCIS, CNN CORRESPONDENT: Lou, a glimmer of good news: We heard the "s" word, stabilization. That's one thing that we've all been looking for.
Let's take a look at the numbers that Compaq reported after the bell tonight. They did come in right in line with the estimate that they did -- did guide down to just a couple of weeks ago. A year ago, they earned 21 cents a share.
Revenue did fall 17 percent, as predicted, to $8.5 billion. Pro forma number in line with expectations. However, if you include everything, Compaq had a big loss of 17 cents a share.
Let's get to that outlook, because that's what traders are focused on tonight. The Q3 earnings estimate, 7 to 9 cents a share. The previous estimate from First Call, 9 cents, so they could be guiding us down on the bottom line just a little bit there.
Q3 revenue, that's where we see the big difference. The former estimate was 9.2 billion. Now the forecast from Compaq, 8 to 8.4 billion.
In the statement, CEO Michael Capellas saying that he does see some signs of stabilization, with the exception being the consumer retail front. That is a big deal for Compaq.
And they also said that the market has weakened in Europe and other geographies. That's concerning to those who are worried about the weakness in the U.S. really spreading overseas. Compaq says it certainly is. Earlier, we spoke to Eric Rothdeutsch of Robertson Stephens, who says that what Compaq is saying is fairly consistent with what we've been hearing from the sector.
(BEGIN VIDEO CLIP)
ERIC ROTHDEUTSCH, ROBERTSON STEPHENS: Well, that's more or less the same theme we've been hearing from other companies, that the companies have seen some stabilization in North America, and it is the international economies that are weakening, most notably Europe. Asia seems to be holding in there somewhat, but softening. Japan seems to be softening. But it is the international weakness that is causing some of Compaq's concern here.
(END VIDEO CLIP)
FRANCIS: Now, despite that big guide-down in revenues, there's not a lot of action in after-hours trading. If we take a look at where they are there, Compaq is off slightly, less than a quarter in after-hours trading.
So, Lou, despite the big guide-down in earnings -- rather, in revenues, rather, it does -- they might be going to that stabilization word, because that's something that we want to hear.
DOBBS: You want to hear it, but then you don't want to hear following it what Compaq said, which, with the exception of the consumer, which is where they live.
FRANCIS: And Europe, too, and international. These are big fronts for Compaq.
DOBBS: It sounds like an outright warning to me, Bruce. It may be guidance to others, but to me it sounds like a warning.
FRANCIS: I think that's fair.
DOBBS: All right, Bruce, thanks. Bruce Francis.
Well, topping tonight's "MONEYLINE Movers," QLogic tumbling more than $6 a share. The maker of software -- rather, data storage networks matching estimates, but warning second-quarter earnings will be disappointing. A handful of brokerages issuing bearish reports on the stock as well.
Dollar Tree falling more than $6 a share: The company beat estimates but warned of weaker sales ahead.
TicketMaster up nearly $2 a share today. The ticket agency, a unit of USA Networks, beating Wall Street estimates by a wide margin, posting a 13 percent jump in revenue.
USA Networks itself reporting a narrower-than-expected second- quarter loss. TicketMaster had an impressive run-up on the year, so far up more than 70 percent. Corning after the bell posted an enormous loss that's become typical of battered telecom-related companies, almost $5 billion: a stunning reversal of fortune for a century-old glass-maker that reinvented itself into a fiberoptic giant. When you take out special items, the company earned 29 cents a share. That beat expectations. Revenue was up 5 percent, and the stock is up fractionally in after- hours trading. It's down, however, nearly 90 percent from its 52-week high.
Compaq joins a litany of companies posting devastating results for the second quarter. First Call saying that profits for S&P companies on average are now down nearly 19 percent from a year ago.
Joining us now, one money manager who says we won't see a recovery until at least next year. He's been saying it for some time.
Vince Farrell, I'm starting to believe you.
VINCE FARRELL, VICTORY SBSF CAPITAL: Lou, I might be right. I don't want to be right, but you know, it typically takes 12 months for a Federal Reserve move, up or down, to work its way into the economy. The Fed stopped raising rates last May. I argue we're still feeling the impact of that chokening process that they put on us.
Lowered rates starting in January. I think it's going to be next year before we see the economy start to pick up.
DOBBS: Now, in this market, we have been hearing a lot about the lows of March and April for the Dow and Nasdaq. Do you believe that those were the lows for the year 2001?
FARRELL: I do. I've thought for a while -- in fact, last time we visited I guessed -- it is a guess -- that we might revisit those lows. This is the revisit right now. We're getting close enough -- it might go lower -- but we're close enough that we can call this a test.
I believe the economy recovers next year. Stocks discount by a certain time factor that improvement. So I think stocks are going to start to do a little bit better by the end of this year. And so we're in that testing, bottoming process right now.
I'm much more enthusiastic about the stock market today than I have been all year. I'm starting to see things that are so cheap -- I'm sure they're going to go lower if I buy them...
(LAUGHTER)
... but now's the time you want to be establishing positions.
DOBBS: Well, what would be a few of those that you think might go lower if you buy them?
FARRELL: Real quick, in the financial section, which I think financial stocks tend to do well in a lower interest rate environment, J.P. Morgan Chase is being given to you at a very. very fair price right now. The energy sector has come down significantly, we've been involved in that for two years. But I think Texaco, Rowan Drilling would be good examples there.
On the tech side: our basic tech stocks have been IBM and EDS, both of which have done very well, relative. But the fallen angel here might be a company like Tellabs, which I liked for a while -- and I've been wrong -- and we're buying slowly, small bits and pieces. Tellabs very simply has no debt whatsoever, $800 million in cash, and at the bottom of the cycle here, positive cash flow, that's what you want to look for in tech companies.
DOBBS: And you're staying with the selections the last time we visited?
FARRELL: Yes, Tellabs was one of them.
DOBBS: Right. Do you want to add one great bold move for us?
FARRELL: Was that AT&T? I forget what I said today. I think it was AT&T. I like AT&T because the pieces add to more than 20 bucks, we'll get broadband one way, shape or form. They spin it off, Comcast buys it, AOL Time Warner goes for it, but then the rest of the stuff is probably worth about 25, altogether worth 25.
DOBBS: I'm trying to do some quick math to see how we come out on that.
FARRELL: Well, you get 20 to 25 over the course of the year, that's not like the home run we got in '98, '99 buying tech, but if I could get 25 percent with very little downside risk, which I think telephone possess, I think that's a pretty good deal.
DOBBS: And you're not concerned about the divestiture plan of theirs, the spin-offs being held up. We know AT&T broadband just is not going to happen, based on the board, and we don't know what's going to happen in terms of the suitor. Obviously, Comcast still very much interested in the lead. Some word that ABC Disney is interested as well. AOL Time Warner, parent of this network. What do you think happens there?
FARRELL: I think that talking with everybody makes Comcast up their bid a little bit. Broadband will get spun or bought. Now, the risk, which I think you just touched on, is it gets very murky and takes longer to realize the game. But if I have to stretch out the game when I still have relatively little risk, I'll go with that.
DOBBS: OK. That's what makes markets, right?
FARRELL: That's what makes markets.
DOBBS: Thanks, as always.
FARRELL: Thanks, Lou.
DOBBS: AT&T is reportedly talking with a new potential partner to buy its cable assets: AOL Time Warner, parent of CNN. The nation's two biggest cable companies are talking about combining, one week after AT&T rejected a bid from Comcast. Steve Young has the report.
(BEGIN VIDEOTAPE)
YOUNG (voice-over): The idea of the nation's No. 1 cable company, AT&T, hooking up with No. 2 AOL Time Warner is still in the preliminary stage according to several reports. No comment from either company.
But someone close to AT&T told MONEYLINE, Comcast, whose bid was rejected by AT&T's board as too low, is trying to create the impression that AT&T's broadband cable unit has no other suitors. According to the source AOL Time Warner and several other companies have been talking with AT&T about making friendly bids. Media analysts say the talks between the two biggest broadband players, first reported in "The Wall Street Journal," could lead to an TV, Internet, telephony powerhouse.
In one scenario under discussion AT&T would spin-off its broadband unit and merge it with AOL Time Warner's in an independent unit, but analysts that would put AOL in an earnings crunch.
TOM WOLZEIN, SANFORD C. BERNSTEIN: About 30 percent of the earnings of AOL Time Warner come out of the cable operation, and in this period when advertising is extremely weak, the subscriptions from cable are helping the company.
YOUNG: Some antitrust experts believe there would be regulatory issues, but they wouldn't be insurmountable.
DAN WALL, LATHAM & WATKINS: In a sense AOL and Time Warner have already done the hard work with their merger and the previous merger of Time Warner and TCI. At this point what you're really adding to the mix is more geographically distinct cable franchises. The regulators want to take a look at that, but it's not a deal blocker.
STEPHEN AXININ, AXININ VELTROP: Only one cable company will win a franchise in any given area. And so, there is no direct horizontal competition between cable companies typically.
(END VIDEOTAPE)
YOUNG: In other words, while cable companies are monopolies, they are monopolies in distinct geographic regions. So combining them doesn't create antitrust issues, it just creates a larger monopolist, but regulators might require open access to Internet service competitors and companies doing long distance over the web -- Lou.
DOBBS: It's getting more intriguing. And the Disney ABC participation in that, which has been rumored throughout the day, coming out of a AT&T conference call, we have received an official no comment from Disney, but some of our source is saying that's just not going to happen.
YOUNG: Yes, that was based on a comment that Armstrong had yesterday, and there are a lot of people who think that AT&T planted that story in "The Wall Street Journal". DOBBS: Oh, no.
YOUNG: Yes.
DOBBS: That's discouraging. Steve, thanks very much. Steve Young.
Still to come on MONEYLINE, the man tapped to run the country's top brokerage: Merrill Lynch's new president and CEO Stanley O'Neal.
Also, we'll have a status report on a major airline merger, it was once dead. It may not be dead after all.
And OPEC votes to tighten the supply of crude oil. We'll check out the impact on oil prices.
And, the comeback of coal as an energy alternative, we'll hear from the head of the country's biggest independent coal operator. You might be surprised to learn he thinks coal should be an important part of any new policy.
ANNOUNCER: Coming up, Lou talks to Robert Murray, CEO and president of Murray Energy.
(COMMERCIAL BREAK)
DOBBS: Less than a week away from a decision that will make or break history's biggest airline deal, Wall Street all but certain that regulators would reject the merger but now, some aren't so sure.
Kitty Pilgrim has a look at the prospect of the deal going through.
(BEGIN VIDEOTAPE)
PILGRIM (voice-over): Wall Street is waiting for the word from Washington on the United-USAir merger. While the Justice Department has until the middle of next week to give a final decision, rumors are flying a decision is imminent.
JULIUS MALDUTIS, CIBC WORLD MARKETS: I have heard people comment that they expect a decision by Friday which would lead me to conclude that the merger would be turned down, in one form or another. If on the other hand, we don't hear anything on Friday the odds will be increasing that the merger will go through.
PILGRIM: The deal had been declared all but dead after UAL officials confirmed in early July they wanted to get out of the deal. Still, there are other possibilities. The Justice Department could leave the door open for the two companies to restructure the deal, or certain assets.
Analysts say the most interesting asset is the U.S. Air shuttle, which is highly profitable. Potential suitors include American, Continental and possibly Northwest Airlines. Still doing another deal may pose problems for USAir. RAY NEIDL, ABN AMRO: They have got one of two choices. I think one is try and do another deal which I think would be difficult unless they maybe cut the airline up and sold it in pieces. There would be buyers for the different pieces. I think there is value in USAir broken up, but that would take all the skills of Steve Wolf to be able to do that in an orderly manner.
(END VIDEOTAPE)
PILGRIM: While this has been going on for the last year and a half, the industry has been struggling. The industry is expected to lose a billion and a half dollars this year, because of a fall off in business travel and higher labor costs. So no matter what happens with these airlines, they face a challenging environment ahead -- Lou.
DOBBS: Kitty, just checking in after-hours trading, US air is up 42 cents a share. I don't think that's a very clear signal that we can figure out exactly what's going to happen.
PILGRIM: A lot of rumors on Wall Street about this and analysts are very much poised to hear what happens, but they do think it is going to happen faster than August 1, which is the date.
DOBBS: With this market the way it is and the airline industry struggling as much as it is, there may be some greater latitude here for this deal.
PILGRIM: Maybe, but it's hard to find an analyst that recommends airline stocks at this point.
DOBBS: I think that's probably true in lot of industries right now. Kitty, thanks a lot. Appreciate it. Kitty Pilgrim.
Oil producers agreed by telephone today to slash petroleum production by a million barrels a day, to slightly over 23 million barrels. Energy Secretary Spencer Abraham said the administration would monitor the situation very closely and take, quote, "whatever actions are necessary" to ensure adequate supplies of heating oil.
The OPEC production cut will take effect in September, but it had of course an immediate effect on crude prices. In fact, the anticipation of the cut had an affect. Those prices had recently declining when the cartel decided to hold the line on production earlier in the month. But then as rumors of this production cut came about, light sweet crude rising, today up 49 cents a barrel settling at $26.80.
Strength in crude prices last quarter also helping to boost profits in the oil industry. After the bell, oil services firm Halliburton reporting profits more than double. The company, which was once run by Vice President Dick Cheney, said earnings surged to $143 million in the quarter. That outpaced Wall Street expectations. Fellow oil services company Schlumberger, saw a 20 percent jump in its profits. That also ahead of Wall Street targets. Texaco also soaring, up 27 percent earning $817 million. Checking the stocks of those companies, Texaco shares up more than $3. Schlumberger shares up almost $3. And Halliburton ahead of that after-hours news had risen $1.81.
The rising price of crude oil has brought some out-of favor energy options back into the forefront. The Bush Administration trumpeting coal in its new energy plan, and the White House rejection of the Kyoto protocols created more breathing room for coal-powered utilities.
My guest tonight runs the nation's largest independent coal producer. He's Robert Murray, the CEO of Murray Energy. He spent the day on Capitol Hill meeting with key senators and lobbying of course for coal's role in the energy mix.
Bob, what was the reaction you got amongst the legislators?
ROBERT MURRAY, CEO, MURRAY ENERGY: Very positive, both from the Democratic side and the Republican side, Lou, as well as the administration. Electricity is a staple of life today and we need low-cost electricity for everyone on fixed income and for every factory that sells its product in the global marketplace.
Plus electricity usage is projected to increase 45 percent in the next 20 years, so I think everybody is focused on the need for a national energy policy in our country.
DOBBS: And you know better than most, the environmental concerns that attend coal as energy source in this country, despite the fact that more than half of our electrical power is generated by coal. You have some very tough sledding when it comes to environmental issues, don't you?
MURRAY: Not really, Lou. If I might put it this way. Clean coal technology has been developed to allow low cost coal to be used to generate electricity. We, by the way, have 250 years of coal in the country and electricity from coal is one-third the cost of electricity from natural gas at the prices that have prevailed in recent months.
So the technology has been developed, Lou, to use the coal and with minimal emissions and use the coal cleanly.
DOBBS: I'm not suggesting, Bob, at all that coal has not improved in terms of a emissions control and reducing those emissions. What I'm talking about is that there is still a terrific lobbying force environmentally against coal that you have to work against.
MURRAY: That's correct, sir, and they're mistaken. Coal can be burned very cleanly today. The technologies have been developed. All we need is to provide incentives for the electric utilities to install clean coal technologies and our national electricity and environmental technology act is an environmental bill which provides in incentives for the electric utilities to install clean coal technologies.
And that bill has been introduced both in the House and in the Senate, sir.
DOBBS: In a ratio of three to one, Bob, in terms of the ability to generate particularly electrical power you're just over 50 percent of the source of all electrical power. Realistically, what could that be raised to, what percentage?
MURRAY: Right now there are 32,000 megawatts of coal-fired generation planned. That realistically could be raised to about 75 percent of our needs. Right now renewables only count for 1 percent, nuclear power for only 20 to 25 percent. And as I said before, electricity from coal is one-third the cost of electricity from natural gas at the prices that have prevailed in recent months.
DOBBS: So that could have a significant impact on demand for imported oil and certainly for natural gas. Bob Murray, we appreciate you taking the time to be with us here on MONEYLINE. Thank you very much.
MURRAY: Thank you, Lou.
DOBBS: Coming up in the next half-hour of this broadcast, a rebound on Wall Street. Stocks prices bounce back after three straight losing sessions. We finally have some good news for you.
Also, a rare bright spot in what has been a slumping economy. The housing market is still going strong, thank you. And the symbol of Wall Street bullishness names a new man as the heir-apparent
(COMMERCIAL BREAK)
DOBBS: In tonight's MONEYLINE headlines, stocks climb for the first time in four sessions fueled in part by a positive earnings report from Dow component, SBC Communications. Compaq Computer reported profits and sales sharply below the year-ago period, saying it may not meet this quarter's expectations either.
Well, Corning suffering an almost $5 billion loss in net income, blaming that decline on a slowdown in the telecom industry.
Also ahead here, an industry under attack over charges of conflict of interest under pressure from a weakening economy and weaker markets. Brokerages. I'll be talking with the man who has been chosen as heir-apparent at the nation's largest brokerage, Merrill Lynch's president, Stanley O'Neal.
One industry delivering double-digit earnings growth, drug companies still thriving as this economy struggles. I'll be talking with "New York Times" columnist Paul Krugman, who says the plan to save Social Security is an intellectual sham.
Well, no sham on Wall Street today, a solid session after three losing days. Both the Dow and Nasdaq gaining well over 1 percent. A three-digit gain on the Dow, gaining 164 points, quite a turnaround from just a day ago. Only four Dow components finished in the red today, SBC Communications, 3M, Home Depot all leading the Dow higher, finishing up more than 160 points. As I said, up 164.55. On the Nasdaq, software issues boosted by a strong earnings report from PeopleSoft. The stock gained more than $4 a share, chip stocks, Internet shares, down on the day, however.
Big gainers among the widely-helds today. SBC Communications and Oracle, both up more than 5 percent on the day. Sun Microsystems and Home Depot both rising more than 4 percent, and Wal-Mart up more than 3 percent on the day. On the big board, advancing issues beat out decliners by a 3 to 2 margin.
In other corporate news tonight, another quarter in the red for Xerox. The beleaguered office equipment company posting a $281 million second-quarter loss. Xerox is cautioning it won't return to profitability until at the earliest, the fourth quarter, despite drastic cost cutting.
More job cuts hitting corporate America tonight: Wal-Mart, laying off 100 employees at its headquarters in Arkansas, the first job cuts at its home offices since 1995. The world's largest retailer also eliminating 300 positions that have gone unfilled, trimming expenses in the slowing economy, a familiar theme.
The FCC, giving the green light to a $4 billion media merger tonight. News Corp winning approval to acquire rival Chris-Craft with few restrictions. That decision allows Rupert Murdoch's News Corp to avoid selling properties, at least for now.
And one influential figure in the financial world is changing channels. Elizabeth Mackay, chief investment strategist of Bear Stearns, is leaving Wall Street. She is heading to Columbia law school. The 43-year-old Mackay says her plans to attend law school are simply, something she's "always wanted to do," and here she goes.
Wall Street's top brokerage firms are of course facing major challenges on two fronts of late: a weak market hurting profits, of course, and lawmakers in Washington putting the industry under intense scrutiny.
Peter Viles has the report.
(BEGIN VIDEOTAPE)
PETER VILES, CNN CORRESPONDENT (voice-over): The brokerage industry is under pressure from politicians in Washington, from angry customers and from Wall Street itself, which has been hammering brokerage shares. Goldman Sachs off 22 percent this year. Merrill Lynch off 23 percent. Morgan Stanley off 27 percent. All of those losses more than double the loss this year on the S&P 500.
The financial challenges facing brokerages: lower trading profits, partly due to weak volume, partly due to decimalization. Reduced volatility in the markets. Volatility is a good thing for professional traders. And general weakness in investment banking is another headache.
AMY BUTTE, BEAR STEARNS: All the businesses are at risk. In retail there's risk that the retail investor is frozen, afraid to do anything, buy, sell and simply say, I'm not going to do anything a at all. In capital markets we have a risk that the drought in underwriting activity and M&A and advisory continues.
VILES: As a result, Wall Street is turning attention to its own compensation costs, which rose sharply during bidding wars for hot bankers.
MARK CONSTANT, LEHMAN BROTHERS: The immediate decisions for most people on the Street right now revolve around costs. When the revenues aren't there, the only way you support the margins and profitability that you try to produce, even the down cycles for your investors, are through cutting costs.
VILES: Another decision for Wall Street executives: whether any of other will show up in Washington to defend their research analysts, like Merrill Lynch's Henry Blodget, who are under fire for failing to warn investors of the coming technology implosion.
Industry heavyweights have not been formally invited to testify and have not yet volunteered.
(END VIDEOTAPE)
VILES: Those hearings are expected to resume next week in Washington, with testimony from acting SEC chairman, Laura Unger, who has been very critical of Wall Street analysts -- Lou?
DOBBS: Pete, thanks very much. Peter Viles.
The analyst controversy at Merrill Lynch, just one of the problems that Merrill is facing. Merrill has been suffering an even greater profit decline than most of its rivals. As part of its turnaround effort, Merrill yesterday named Stanley O'Neal, one of the few high-ranking minority executives on Wall Street, to be the company's new president and chief operating officer. The move puts O'Neal in line, of course, to take over when chairman CEO David Komansky retires in just about three years.
Joining me now, Stanley O'Neal. Stan, it is great to have you with us.
STANLEY O'NEAL, PRESIDENT & COO, MERRILL LYNCH: Thank you. Great to be here.
DOBBS: Congratulations.
O'NEAL: Thank you very much.
DOBBS: This is a terrific mark of honor and a great challenge for you, personally. But as I look at those profits declining, a market that is battered, Washington focusing on everything that Wall Street is doing in the brokerage industry, I think this is a pretty tough time to take on the role?
O'NEAL: Interesting times. I'm not sure there's anything other than interesting times in this business. I've been in the business about 15 years and we've seen ups and downs, and we'll see them over time again.
DOBBS: Well, you have served as the CFO of the company, you have run the high-yield operations, or junk bond operations, a remarkable contrast in demands on your talents, and you've done extraordinarily well in both.
How soon will you begin putting your management team together at Merrill that's going to be supporting you?
O'NEAL: One of the things that's served me very well over the years is to spend time with the people. Lot of ideas, lot of great thoughts come out of our people. We have some great people. So what I'm spending my time doing now is just spending time in the businesses that I haven't spent time in for a few years, refamiliarizing myself with the leadership and some of the specific business opportunities that we have, and over time I think those issues will work themselves out.
DOBBS: Where is that big old Merrill Lynch bull these days? When one thinks of Wall Street and the period of optimism, that bull connotes everything positive that's going on. We haven't seen it much of late, it seems to me.
O'NEAL: I'm not sure that's true. I think it's a great symbol, I think it's widely recognize. We've used it on our ad campaigns a lot recently. For a period of time we didn't use it quite as much as we had historically, but it's a great symbol of optimism. And you're absolutely right, we do intend to make it very prominent.
DOBBS: And your focus, strategically going forward, you have focused the company on high net-worth individuals, more affluent customers for your brokerage. Give us a sense of where you're going to take -- where you want to take the firm.
O'NEAL: Well, I think it's early. It's about 48 hours now, so to talk about strategic vision...
(LAUGHTER)
O'NEAL: If I might be allowed a little Gerstner latitude for the moment. I think I want to make sure that I understand the lay of the land in some detail, and take counsel of lot of good people before I start making pronouncements about what we're going to do with the firm.
One thing I will say, we have a great strategy. It's well in place. I don't anticipate any major changes here. David and I, I think, are in agreement on that.
DOBBS: Let me just offer you one well wish here. May your forebearance work as well for you as Lou Gerstner's did for him.
(LAUGHTER)
DOBBS: You and David Komansky at the top of the firm, you work well together. Give us a sense of the chemistry.
O'NEAL: David and I have different styles, we're different people. But at the core, I think we're very similar in terms of how we view what is important. People, our reputation, clients, excellence and making sure that Merrill Lynch remains one of the top preeminent firms in the world. And so it's that value, I think, that draws us together. We've worked together for many, many years and no one works closer than a CFO and CEO, which I had a great experience of doing when I was CFO with David.
DOBBS: Especially in these times, right?
O'NEAL: Absolutely.
DOBBS: Stan, thanks very much. And again, congratulations.
O'NEAL: Great to see you.
DOBBS: Thank you.
Coming up next here, one of the few forces keeping recession at bay: housing. We'll tell you why this sector continues to be solid. We'll take a look at an industry that's giving investors what they crave, believe it or not, double-digit earnings growth.
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DOBBS: The housing sector continues to show remarkable strength despite a slowing economy. Home sales did fall slightly last month, but the sales pace is still one of the strongest on record.
Lisa Leiter has our report from Chicago.
(BEGIN VIDEOTAPE)
LISA LEITER, CNN CORRESPONDENT (voice-over): Like a load-bearing wall, the housing market continues to prop up a sagging economy. Sales of previously owned homes dipped slightly in June but held at a near-record pace, topping forecasts.
DAVID LEREAH, NATIONAL ASSOCIATION OF REALTORS: This could be the second best year in housing. I know that's just remarkable considering the rest of the economy is slipping, but that's what we have.
LEITER: Regionally, sales fell everywhere but the west. They dropped more than 4 percent in the Midwest. That's no surprise to Chicago realtor Dee Taylor.
DEE TAYLOR, COLDWELL BANKER: There is a downturn, I notice it's quieting up in the market. But there are still some things that are moving quickly.
LEITER: Like more expensive properties. Demand for them pushed up the median price of a home to a record $152,000, up 8.8 percent. Fed Chairman Alan Greenspan told senators Tuesday that those rising home prices have helped offset falling stock prices, creating another kind of wealth effect. Alan Fuller sold two homes in Michigan, and is now looking for a million-dollar home in Chicago.
ALAN FULLER, HOMEBUYER: Did very well as far as investment wise, buying and selling them, so that's a big factor in terms of finding a property that's going to be a good investment.
LEITER: Buyers are also lining up because of low mortgage rates. And refinancing applications jumped 14 percent last week alone.
DIANE SWONK, CHIEF ECONOMIST, BANK ONE: The refinancing activity itself also has helped to feed into the furniture and appliance sales in recent months, going to continue to feed into that.
LEITER (on camera): But mortgage rates have likely seen their lows. And some economists question whether housing can stay strong if the economy, especially the job market, weakens further.
Lisa Leiter, CNN Financial News, Chicago.
(END VIDEOTAPE)
DOBBS: Another sector continuing to show strength: pharmaceuticals. Three of the largest drugmakers in the U.S. today reporting profits in-line with Wall Street targets. Strong sales of prescription drugs helping Bristol-Myers and Pharmacia post double- digit earnings growth.
But Schering-Plough bucking the trend. Quality control problems at two plants keeping profits flat from a year ago. Those problems disrupting approval of Schering-Plough's new drug Clarinex. That drug is designed to succeed the highly profitable allergy drug Claritin, whose patent expires next year. Claritin is worth $3 billion a year to Schering-Plough.
Schering-Plough stock falling 75 cents today. Bristol-Myers shares moving up more than $2. Pharmacia, Merck, and Eli Lilly making fractional gains on the day. As a group, the pharmaceuticals are just about flat in the past year...
(BEGIN VIDEO CLIP)
LEONARD YAFFE, BANC OF AMERICA SECURITIES: Stocks will do better into the future driven by drug industries that's growing 12 to 15 percent this year, probably 10 to 15 percent next year. It represents about 43 percent of the worldwide total, so overall, we think the drug industry fundamentals are still good.
(END VIDEO CLIP)
DOBBS: As a group pharmaceuticals just about flat over the past year. The sector outperforming the broader market, which has fallen about 20 percent over the same period a year ago.
Just ahead, an influential economist calls the White House logic behind reforming Social Security: "Orwellian doublethink." We'll ask "New York Times" columnist and MONEYLINE Paul Krugman about what he thinks is wrong with that bipartisan approach.
(COMMERCIAL BREAK)
DOBBS: "New York Times" columnist, MONEYLINE contributor Paul Krugman has been a critic of the president's plan to overhaul the Social Security system through partial privatization. In his regular "New York Times" column today, he took aim at the White House Commission on Social Security calling its recent report: "biased, internally inconsistent and intellectually dishonest."
Economist Paul Krugman, how could you say such things?
PAUL KRUGMAN, ECONOMIST/"THE NEW YORK TIMES" COLUMNIST: With that report, I was startled. What it reminded me of was Hollywood studio accounting. You know, how they promise you a share of the profits, then they always manage to jigger with the accounting?
DOBBS: Yes.
KRUGMAN: So what they did was they managed to create an eminent crisis in Social Security by shifting the accounting. So in some years when Social Security is putting money into the system, that doesn't count. But in some years when Social Security will draw on its I0Us, that's a deficit. It was incredible. Why do they do that?
DOBBS: They're just setting the stage, and I'm stunned to hear you talk about it in this way, because you have eight Republicans and eight Democrats who come to gather in a bipartisan way and you look at it as biased?
KRUGMAN: I think what actually happened here is the commission, commissioners were really not paying attention. You know, the staff is all like people from the Heritage Foundation, right wing think tanks and staff went ahead and wrote this report, and I think the commissioners didn't look at it until the last minute -- and didn't realize...
DOBBS: You are looking at it in a ideological term, surely. This is just basic economics.
KRUGMAN: Well, it is just basic accounting. The one rule you do is -- you know, there are different accounting standards -- but whatever you do, you stick to one. You don't switch in midstream. And what this report does is it switches in midstream selectively. And that's -- that's a no-no.
DOBBS: Well, the basic issue here is that the Social Security trust fund, most people think of it as a trust fund. It isn't, is it?
KRUGMAN: It's -- it's a little complicated.
DOBBS: They don't -- they don't trust it. It's a not a fund. It's an entry, and they have an IOU against it they have to pay at some point. KRUGMAN: Right, but there are two ways you can cut this. You can either say the government is all one big happy family and it's all one big budget, and these intergovernmental IOUs, which is what the trust fund is, don't matter.
Or you can say Social Security, we're going to wall it off. Yes, of course, it's an accounting convention, but we're going to let it have its own account.
What the commissioner report does is it says as long as Social Security is contributing, as long as its running these surpluses, then we're all one big happy family, there's no real trust fund. But the day in 2016 when it starts to draw on the IOUs, oh, well there are no real assets there and -- and you're on your own. And that -- that's -- that's the unevenness.
DOBBS: And as you point out, I believe the first year is -- what? -- 160 billion based on the math that you were using.
KRUGMAN: No, but when you actually -- the other thing they imply is that when it comes time to supply this, you know, by 2040, when my generation is all on retirement, that it's going to require that there be a net transfer into the Social Security system. But as a share of the economy, it's no worse than the tax cut we just passed.
DOBBS: And you don't like that either. Think about how bad the economy would be were we not to have that tax cut, Paul.
KRUGMAN: Oh, I think...
DOBBS: You're a Keynesian after all.
KRUGMAN: I think there's something to be said for the rebate this year, which, by the way...
DOBBS: I want to write this down: Paul Krugman admits there's something to the rebate check.
KRUGMAN: Ah, but go back and look at what Larry Lindsey and Paul O'Neill said about the idea of giving a rebate just a few months ago, and they thought that was a terrible idea. All they wanted was the long-term tax cut. Now that they were forced into it, they claim it was their idea.
DOBBS: Well, at this point, the debate becomes academic, the 40 billion moves into the economy and it's good -- I think it's a good thing in terms of giving...
KRUGMAN: Yeah.
DOBBS: ... some relief, both psychologically and real, don't you?
KRUGMAN: Yeah. I mean, I'd take another 50 basis points off the Fed funds rate in preference, but I'd like to have both actually.
DOBBS: Well, on August 21st, maybe we can give you your Christmas present early.
KRUGMAN: Yeah. You know, let me just say about -- about the report...
DOBBS: OK, quick.
KRUGMAN: ... why did they do this? You know, they've now effectively prevented any Social Security reform for a couple of years, because now we have to wait for the bad taste of this report to go away.
DOBBS: Well, it's Washington, it's 2001. Bad tastes seem to go away a little faster than they used to.
KRUGMAN: Your mouth, not mine.
(LAUGHTER)
DOBBS: OK. Paul, thanks a lot. Paul Krugman.
Up next, we'll take a look at your e-mails and "Ahead of the Curve."
(COMMERCIAL BREAK)
DOBBS: Another round of quarterly results out tomorrow: Qualcomm, LSI Logic, Worldcom, Lockheed Martin, Dow Chemical, Amgen, all of them reporting tomorrow. And in economic news, the employment cost index for the second quarter -- that's one of those indexes Alan Greenspan likes to pay a lot of attention to, so we will as well. Also, the durable goods orders for the month of June and the jobless claims report out tomorrow as well.
Now taking a look at your comments. Udotha Senakaine writes, quote: "Earlier there were stories about the projected budget surplus being based on conservative assumptions, and therefore, there was nothing to worry about. Now we hear the surplus is shrinking. What happened?"
Political economist Greg Valliere says the main problem is no one predicted this economic slowdown when calculating the surplus. By the way, that's true of both Democrats and Republicans. It was a straight line for 10 years, you may recall. But Valliere says there will still be a surplus of up to 200 billion in this current fiscal year and a similar amount next.
The Congressional Budget Office, the White House will release updated estimates and reports later this summer.
Viewer Josias Dezeme writes: "I don't understand how First Union can be buying Wachovia and yet accepts to drop their corporate name for the name of the company they're buying."
Well, David Berry of Keefe, Bruyette & Woods says it really isn't that unusual in banking. A few examples: Norwest's purchase of Wells Fargo. Well, it's called Wells Fargo. Nation's Bank purchase of Bank of America. It's now called Bank America. You get the idea.
Berry says it's often a condition of the deal, in fact, part of the negotiation process. And he says in the case of First Union, the bank had some service quality issues in Philadelphia, so perhaps it isn't a bad idea to let that name just go on by.
Let us hear from you. E-mail us at moneyline@cnn.com.
And for tonight, that is MONEYLINE. Thanks for being with us. I'm Lou Dobbs. Good night from New York. "CROSSFIRE" is coming up next.
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