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Lou Dobbs Moneyline
State of U.S. Economy
Aired January 21, 2002 - 18:00 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.
ANNOUNCER: This is a special holiday edition of LOU DOBBS MONEYLINE.
JAN HOPKINS, CNN ANCHOR: Welcome to this special holiday edition of MONEYLINE. I'm Jan Hopkins in for Lou Dobbs. Tonight, a closer look at the state of our economy. We begin 2002 in the midst of a recession, which started in March of last year. It's hard to believe that just two years ago, the market was hitting all time highs.
There have been many reasons for the economic slowdown and the events of September 11 simply worsened an already tough situation. Now analysts and investors are asking whether we're headed for a recovery and when.
Tonight, we'll take a look at several industries impacted by September 11, among them the travel, defense, and auto industries. We'll speak to some leading economists, a travel expert, and take a look at the markets with a few of our own experts.
But first, we begin with the economic outlook for 2002, by outlining some of the challenges left over from 2001. That was a year plagued with tumbling stock prices, record interest rate cuts, and massive layoffs.
And then, the unthinkable disaster that pushed the economy into the first recession of the new millennium. Kathleen Hays has the report.
(BEGIN VIDEOTAPE)
KATHLEEN HAYS, CNN CORRESPONDENT (voice over): 2001, a painful U.S. economic odyssey from the start. Tumbling stock prices destroying investor wealth. Surging energy prices robbing consumers of purchasing power. A nasty hangover of crushing debt and excess capacity from the high-tech bubble that burst the year before.
The Federal Reserve kicked off the new year with two interest rate cuts in less than a month. The critics say the Fed was late getting to the party.
DAVID RESLER, CHIEF ECONOMIST, NOVURA SECURITIES: It was too little, too late, and if the Fed had adjusted interest rates earlier last year or just simply done away with the tightening (UNINTELLIGIBLE) in 2000, when it was appropriate to do so, I think we would have been better off.
HAYS: A contested election created more debilitating uncertainty in January, but did not stop the new President from proposing a cross- the-board tax cuts to rev up the consumer and stave off recessionary forces.
In February, the Fed was still looking for growth to pick up in the second half of the year though Alan Greenspan said a loss of consumer confidence could upset that forecast.
ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE: This unpredictable rending of confidence is one reason that recessions are so difficult to forecast.
HAYS: The Fed cut rates again in March, but the battered manufacturing sector continued to cut output and shed workers at a rapid rate, one of the clearest signals the economy was sliding toward recession.
By March, job cuts spread across the economy as profit-strapped companies struggled to cut cost, another sign of impending recession. This motivated warring political forces to come together behind the administration's tax cuts.
The first rebate checks went out in July, but by early September, it was evident Americans saved them instead of spending them as worried consumers paid down debt.
And then the disaster of a magnitude never imagined struck. The loss of life and innocence left the nation reeling, and knocked the struggling U.S. economy flat on its back.
GAIL FOSLER, THE CONFERENCE BOARD: Just about the time the businesses really felt that they were moving out of the woods and it looked like the order books were going to come back on stream in a big way, we had this sort of seizure, one can say, in the economy where everything stopped for a week.
HAYS: Airline losses in the billions of dollars, empty hotel rooms, canceled cruises. The impact of September 11 reverberated through the economy and announced layoffs soared.
By November, an official declaration of recession, which experts said had actually begun in March, and is not over yet.
MAUREEN ALLYN, ZURICH SCUDDER INVESTMENTS: I do think that we're really in the last couple of months of the downturn, and that we'll begin to see an upswing here, partly just because, you know, they're throwing everything at the economy.
HAYS: Despite a lackluster holiday shopping season and Congress' failure to pass a fiscal stimulus package, economists are hopeful as they look to 2002. They say 11 Federal Reserve rate cuts and the billions of dollars pledged to rebuild after the attacks and fight the War on Terror, will bring the battered U.S. economy back. HAYS (on camera): But what kind of recovery lies ahead? With many consumers in debt, and corporate profits expected to remain lean, some fear that when the economy does recover, it may not feel a whole lot better than the current recession.
Kathleen Hays, CNN Financial News, New York.
(END VIDEOTAPE)
HOPKINS: For more perspective on the economy, I'm joined by Ed Yardeni, Chief Investment Strategist at Deutsche Bank Securities; Lakshman Achuthan of the Economic Cycle Research Institute; and Diane Swonk, Chief Economist at Bank One, joining us from Chicago. Welcome to all of you.
I want to ask the question that I think everyone's asking which is, are we coming out of this recession now? Are we soon going to come out? What's going on? Lakshman, you first.
LAKSHMAN ACHUTHAN, ECONOMIC CYCLE RESEARCH INSTITUTE: Well, I think that in the first quarter of this year, early 2002, the economy will bottom and turn up. And then the question will be how strong of a recovery is that?
HOPKINS: What do you think, Ed?
EDWARD YARDENI, DEUTSCHE BANK SECURITIES: I almost agree. I think we already started to recover in the fourth quarter of last year. If I had to pick a month, I'd say November was the bottom for the recession. We cleaned out an enormous amount of inventory at the end of last year, sold a lot of cars, but a lot of that came out of inventory, and I think we're going to be rebuilding some inventories in the first quarter. I think consumers are going to keep doing what they do so well, and that's shop.
HOPKINS: Diane Swonk, what's the view from Chicago?
DIANE SWONK, BANK ONE: Well, you're not going to get a lot of disagreement on this panel, except for days. I'm not sure exactly what day it will happen, but sometime in the first quarter, we are going to see this economy turn. I think we've already planted the seeds of recovery and they've begun to take root. It's just when we're actually going to be able to harvest them.
HOPKINS: Well, and I guess the other question that you raised Lakshman is how strong is it going to be? People are assuming that we kind of go from recession and come out quickly, and it will feel like it did about a year ago.
ACHUTHAN: Right.
HOPKINS: Is that true?
ACHUTHAN: I don't think that that's the most likely outcome. I think the reason they feel that way is because the garden variety type of recovery in the post-war period has been a sharper recovery. But we also have had some anemic recoveries like we did in '91, what they called a jobless recovery, and we may be looking at something more like that this time around.
HOPKINS: Diane, what's your view on that?
ACHUTHAN: Well, I guess now we'll find a disagreement. I don't think - I agree that we'll have a muted recovery, but a muted recovery could still be four to five percent growth in the second quarter, four percent, five percent in the second half of the year. That would be considered a muted recovery relative to history.
I think there's a lot of reasons not to think this is 1990-91. We don't have the 50 mile per hour headwind that Greenspan used to refer to in '91, which was a credit crunch across the board. We had a lot of overhang in real estate. We had a lot of banking problems, S & L crisis. There were a lot of things and high oil prices, all holding us back. Those are not the factors that are going to be holding us back this time around.
HOPKINS: Ed, do you think that we came out of this relatively unscathed?
YARDENI: It's hard to imagine all the things that went wrong last year, culminating of course with that terrorist attack of September 11. It was just a horrible year, and yet the economy I think held its own, largely because the Fed lowered interest rates very dramatically, and also because corporations decided to take it on the chin. They lowered their prices. That hurt their profits, but it kept consumers spending.
HOPKINS: And what about coming out? Is it going to be strong or weak or do you have a view?
YARDENI: I don't think it will be recovery unless, you know, coming out of a recession, there was an also kind of "v" on the downside. So I think it's maybe a baby "v" or lower case "v" rather than something more dramatic.
HOPKINS: Lakshman, do you have anything?
ACHUTHAN: I think that we might see 75 mile an hour headwinds here in this recovery, because we have the first business-led recession, which means that the businesses have a lot of extra capacity.
HOPKINS: It wasn't the consumer that stopped spending.
ACHUTHAN: It wasn't.
HOPKINS: It was the businesses.
ACHUTHAN: The consumers have kept going, which also may be a double-edged sword because there's not as much pent-up consumer demand on the recovery side. Again, if we look outside of our borders, we are in the midst of the first synchronistic global recession in 26 years. So, European, major European economies and Asian economies are contracting at the same time. So there we have a few things that are going to be challenged in this recovery.
HOPKINS: You know, it's interesting, economists are notoriously wrong about making predictions. Most economists in the country said that we weren't going to have a recession. That was back in February, and then it turns out we were in one in March. And now, most economists, like all of you, are saying we're going to be out of the recession soon if we're not already out. What could go wrong? What are we not looking at? You're talking about the global situation.
ACHUTHAN: I think you're in a window of vulnerability here, around recessions where some of these shocks that you truly can't see coming can have more of an impact than they would if we were already well into the recovery.
YARDENI: I think this all has to do with the consumer. We already know that capital spending is weak and maybe it doesn't recover much at all. If we lose the consumer because they suddenly do get concerned about their jobs and the debt-to-income ratios are high, what the consumer has going for them is their real wages, their real take-home pay has been going up, thanks to all these incentives and discounts.
HOPKINS: Diane, what are you looking at that could derail things?
SWONK: Well, actually - well certainly the consumer is key here and I think, you know, the geopolitical situation and low oil prices have been a major factor, helping out the consumer. Where we end up in this war could very much determine the fate of oil prices, and what happens next. With that said, I think we also have to look at, I don't believe this is 75 mile per hour headwind at all. I think we might have avoided recession entirely. There is a lot of evidence suggesting that if we had not hit the situation of 9/11, the economy was remarkably resilient and there's no reason to believe that after it took such an enormous blow, that once those blows dissipate, you'll see a much stronger economy.
HOPKINS: Thanks very much. Diane Swonk, Ed Yardeni, and Lakshman Achuthan, we'll talk to you a little later in the program.
Coming up on MONEYLINE, overall airlines are suffering in the wake of September 11, but one segment of the industry is actually seeing an increase in business. We'll have that story.
And, a slowing economy prompted automakers to offer incredible deals on new cars, but that's led to an overload of used cars, a look at what that means for the industry. And cities across the nation are dealing with a downturn in the economy, but we'll take a look at one small city thriving, thanks to cutting edge technology used in the fight against terrorism. MONEYLINE will be right back.
(COMMERCIAL BREAK)
HOPKINS: The terror attacks of September 11 nearly crippled an already struggling airline industry. Since then, passengers have slowly returned to flying, despite continued safety fears. Kitty Pilgrim looks at the condition of the airline industry, and whether airlines are anywhere close to breaking even.
(BEGIN VIDEOTAPE)
KITTY PILGRIM, CNN CORRESPONDENT (voice over): The flying public, lured by cheap fares, took to the skies in December but airlines are not out of financial trouble yet.
Industry analyst Ray Neidl predicts when the final numbers are tallied, the industry loss will be $3 billion in the fourth quarter of last year and about $5 billion for the year ahead.
RAY NEIDL, AIRLINE ANALYST: Traffic seems to be a little bit heavier than expect, but the thing is, I think a lot of the traffic is still being brought by discounting. I think you're going to see yields really suffering. I'm expecting large losses for the carriers in the fourth quarter.
PILGRIM: For December, one measure of airline performance, revenue passenger miles, were still low. Continental down 10.3 percent; U.S. Airways down 22 percent; and America West down 15 percent, compared to the same period a year ago.
Still, it's a far cry from the disaster scenario set forth by airline executives in the weeks after September 11. Airlines drastically scaled back workers and schedules, and as a result, analysts now expect no bankruptcies among the major carriers.
And very few airlines will need to apply for Federally backed loans. America West is the exception, and is waiting for Federal approval on a government loan guarantee.
Flight schedules, which had been cut on average by 20 percent, are running only at about 12 to 15 percent reduced capacity so far this year.
DAVID SWERENGA, CHIEF ECONOMIST, ATA: But we've got some other problems that we're facing. We've got some pretty high and rising costs. Our labor costs are increasing pretty rapidly, and obviously we've got a new layer of security costs that have been added on to the industry and insurance costs. So lots of problems on the cost side of the equation.
(END VIDEOTAPE)
PILGRIM (on camera): But balancing that out to some extent, fuel costs have dropped significantly. Because fuel costs are such a major factor in an airlines cost structure, that one factor has been very helpful in difficult times. Kitty Pilgrim, CNN Financial News, New York.
HOPKINS: Despite continued struggles for the airlines, there is one small segment of the industry that's thriving. Charter flights, once a privilege for the wealthy are gaining in popularity. Susan Lisovicz has the story.
(BEGIN VIDEOTAPE) SUSAN LISOVICZ, CNN CORRESPONDENT (voice over): This is the new face of aviation, post September 11.
ROBERT MORRISSEY, CHARTER PASSENGER: It's just in and out. You arrive at the airport. You take off and it's just much better use of your time.
LISOVICZ: Charter flights are taking off. Because of more stringent security checks, commercial flying takes more time. That has sent travelers scrambling for alternatives. While big carriers saw business off nearly 20 percent in November, charters soared on average 26 percent. Marqui Jets, which launched in August, says it is exceeding forecasts and is already profitable.
TODD ROME, PRESIDENT, BLUE STAR JETS: We'll also show you on the itinerary, the channel numbers, your FBOs and we'll also show you the overnight charges.
LISOVICZ: Blue Star Jets was named after the fictitious airline from the movie Wall Street. It's founder, who worked on the street, says his new business has a lucrative future.
ROME: Before September 11, it was people that were wealthy, people that needed the security of safe flight. Right now, we're seeing a lot of newcomers, a lot of people converting from first class flying to private jets.
LISOVICZ: Charter flights were already on the rise among business people and affluent travelers prior to the terrorist attacks. Simple logistics have helped fuel their popularity. Regularly scheduled flights can fly from 580 airports throughout the U.S., whereas charter flights can use more than 5,400. The recent decline in daily scheduled flights has forced many business class travelers to stay overnight, which can add considerably to the cost of the trip.
FRED GEVALT, PRESIDENT, AIR CHARTER GUIDE: It's become much, much more difficult for business people to travel on the airlines, and their rates have not gone down. So, all considered it's just a better deal flying air charter.
(END VIDEOTAPE)
LISOVICZ (on camera): Charter flights are not a great deal for economy class travelers, but depending on the number of people on board, it can work out to the price of a first class ticket. Even in the depths of recession, charter flights are tapping into a growing mentality that believes time is money. Susan Lisovicz, CNN Financial News, New York.
HOPKINS: It's not just the major carriers that are suffering from an extreme slowdown in travel. Hotels, cruise ships, and theme parks are just a few areas of tourism also dealing with a huge drop in bookings. While travel is picking up, these crucial winter months often make or break the industry.
Joining us now is Thom Multy, President and COO of the online travel services firm, Navigant International. Welcome, Tom.
THOM MULTY, PRESIDENT AND COO, NAVIGANT INTERNATIONAL: Good to see you, Jan.
HOPKINS: So we're in a new year, now is the business traveler coming back?
MULTY: Business travelers are coming back. We're seeing it's been slow and steady, but right now our company is showing that we're running about 10 percent behind last year, and in fact, the first three days of this week were actually ahead of last year.
HOPKINS: So some of the predictions that travel would be slow through the winter are going to be wrong?
MULTY: Well, travel is always slow through the winter, and so any kind of a downturn at all will make a slow period even worse. Airlines always have to do things during this time of the year to stimulate travel, because they're not just out there. Vacation travelers will show up for the Easter holiday and the Spring Break period, but other than that, it's all business travelers, but they are starting to come back.
HOPKINS: And what about fares? Does that mean that the fares are going up or there are still deals?
MULTY: There are some great deals out there. You have to hunt for them. They're not always easy to find, but there are some deals out there. The thing you have to remember is that this time of year there are always deals, so when you compare this year to last year, it may not seem much different. But this time of year, the airlines have to stimulate travel with deals for leisure travelers.
HOPKINS: some people are finding that, they're assuming that the flights will be wide open and that's not true at all.
MULTY: It's not true. I travel on an airplane just about every other day, and I'd say 90 percent of the flights that I have been on have been almost full, including the one I was on today.
HOPKINS: And that's because they've cut out so many flights or they've lowered fares and filled those seats?
MULTY: Well, it's because - it's both of those things. It's primarily because they've cut out flights however. The system is just much smaller than it was a year ago at this time. So flights that are out there are full, especially those flights during the prime time for business travelers.
HOPKINS: What about the business traveler and staying in hotels? Is he or she traveling differently this year?
MULTY: Well, you know, they - obviously when the airlines are down, the hotels are down and some of the things you find, some of the airport hotels have not been doing that well this year. But I think that's more to do with the weather than with the economic conditions or September 11. When we have good weather, airport hotels don't do well, because oftentimes their occupancy is driven by passengers being put there when they're stuck in certain cities.
HOPKINS: But in the midst of a recession, are companies telling employees to not stay at the Four Seasons and stay at a little cheaper hotel?
MULTY: That has clearly happened. We have travelers who have been downgrading. Those Four Seasons travelers move into the Hiltons and the Hyatt, and the Hyatt and Hilton people move down into Quality Inn and other hotels. So the move down has been taking place.
HOPKINS: What about cruises? This is a leisure kind of event, but apparently there are lots of good deals for travelers that want to take a cruise.
MULTY: There are some incredible deals out there, primarily because there's a lot of capacity out there with cruise ships. Once again, because of the time of year, the cruise ships generally have to discount their product, other than when they really get into the Easter and Spring Break period. But there's a lot of capacity. Whenever you have a lot of capacity, you can find good deals.
HOPKINS: What about the profits for these companies? Are they going to rebound anytime soon?
MULTY: I think so, especially the airlines. I think eventually they will recover. Many of them are taking this opportunity to actually restructure their companies and the way they're doing it, they're getting of older airplanes. They're taking a look at how they're doing business. They're reducing the types of airplanes they fly. And I think the long-term prospects for airlines is probably pretty good.
HOPKINS: And what about the travel industry? You're in it. How's business?
MULTY: Business for me has actually been pretty good. I've been quite pleased with the way things have bounced back. We were actually projecting that we'd be running about 15 percent behind last year at this time. We're actually running about 10 percent behind, and I think a couple of times, every now and then, we see some of these days where we're actually ahead of last year. So, it's feeling much better, and I think the economy is driven by travel, and I think you're going to see business travelers really bounce back.
HOPKINS: Thanks very much. Thom Multy, President and COO of Navigant International.
MULTY: Thanks, Jan.
HOPKINS: Coming up on MONEYLINE, if you've noticed more ads on the Internet recently, you're not alone. We'll tell you what's behind the aggressive marketing. And, if you're in the market for a car, you may want to check out the used car lots. The auto industry's recent plan to entice buyers has led to a glut of pre-owned models. And, we'll discuss the market outlook for 2002, with a panel of our own experts.
(COMMERCIAL BREAK)
HOPKINS: Amid a slump in advertising, companies are coming up with creative ways to get their message out. Ads are popping up everywhere on the web, getting more invasive every day. But, is it a sign of desperation? Bruce Francis has the story.
(BEGIN VIDEOTAPE)
BRUCE FRANCIS, CNN CORRESPONDENT (voice-over): Some find them annoying. Some may even find them titillating. But these days you find them everywhere, pop up and pop under ads. Unlike a banner ad, these force you to look at them. The X-10 video camera ads are the most common, from almost no hits at this time last year, they soared to 40 million hits at their peak.
STEVEN KIM, JUPITER MEDIA METRIX: When you look at the statistics beyond that, how long did people spend at that site? How often do they come back? You know, are they really using the site? The numbers are pretty weak.
FRANCIS: But pop-ups are tame compared to the latest wave of web ads that are taking over your computer screen. This ad for "Planet of the Apes" is just one of many ads from agency.com that push way beyond the banner. The latest, a screen-spinning new promotion for British Airways. You can't miss it, even if you'd rather.
KYLE SHANNON, AGENCY.COM: Companies in facing a slowing economy are looking at, how do we sell more stuff? How do we drive more sales? So marketers need to find ways to rise above the noise, in order to sell more things.
(END VIDEOTAPE)
FRANCIS (on camera): Advertisers are experimenting with new technologies too, and they're more and more willing to jump in between you and what you're looking for on the web. Universal Virtualities has signed up advertisers like P & G for its animations superimposed over a web page, up to eight seconds worth each. But is that too much?
DEB BROWN, UNIVERSAL VIRTUALITIES: I guess my answer to that is, hello, this is advertising, and basically what our charter is, is to capture a consumer's attention, be relevant, and make the grand voice come through.
FRANCIS (voice over): And as the recession and ad spending continues, you can bet on more interruptions, or as the industry likes to call them, innovations in the months ahead. Bruce Francis, CNN Financial News, New York.
HOPKINS: Auto industry analysts say the zero financing campaign by the big U.S. automakers may have been effective in warding off an industry depression in the fourth quarter, but it may have come with some unintended costs in 2002. Tim O'Brien has that story from Washington.
(BEGIN VIDEOTAPE)
TIM O'BRIEN, CNN CORRESPONDENT (voice over): New car dealers say the zero financing promotion has been a phenomenal success. The fourth quarter is traditionally a slow time for the auto industry, 9/11 could have made it disastrous. Interest-free car loans have not only produced a rush of new car sales, they've also resulted in an unprecedented glut of used car trade-ins.
JONATHAN CHURNIER, DEALER: No question that about 50 percent of the people that we sell a new car to have a trade in.
O'BRIEN: Ray Nichols, President of the National Auto Auction Association, says the zero financing on new cars has indirectly contributed to record sales of used cars to around 16 million in North America in 2001.
RAYMOND NICHOLS, PRESIDENT, NATIONAL AUTO AUCTION ASSOCIATION: We're a tiny industry selling an $80 billion amount of cars this year. In my lifetime, and I've been in this business, you know, since I was 19 years old, I don't think there's ever been a better time to buy a used car.
O'BRIEN: Spoken like a true car salesman.
NICHOLS: I believe it. No, I believe it.
O'BRIEN: Nichols says that's because prices on used cars have declined on average between 10 and 15 percent, and in some cases, as much as 20 percent. The surplus of used cars, with their lower prices, could undermine the zero financing promotion on new cars, which some analysts believe could have been a costly overreaction.
JOHN CASESA, MERRILL LYNCH: It was so successful now that you can't have it both ways. You can't have better than expected sales in September, October, November, December and expect great sales in the months after that.
O'BRIEN: Casesa predicts a sharp decline in new car sales in the first quarter. Because the auto industry accounts for about five percent of the country's gross domestic product, that would not help the economic recovery.
(END VIDEOTAPE)
O'BRIEN (on camera): But it would help at least one person, the consumer, in the market for a used car. It's a buyer's market and likely to stay that way for some time. Tim O'Brien, CNN Financial News, Washington.
HOPKINS: Just over two years ago, the Dow Jones Industrial Average reached its highest close ever. Now blue chips have fallen more than 15 percent from that record high. The Nasdaq has fallen in half from its record. Our Wall Street Correspondents Christine Romans and Greg Clarkin follow the markets and join us now, and Kathleen Hays is here with here thoughts on the economy. Welcome to all of you.
Let's talk about the markets first, and how much what's going on in the economy is affecting what we're seeing in the Stock Market. Christine.
CHRISTINE ROMANS, CNN CORRESPONDENT: I mean it absolutely is, and the folks on Wall Street have been absolutely betting on the fact there was going to be an economic recovery early in 2002. Now they've brought the Stock Market from a full fourth quarter rally and they're waiting for the evidence and they're not quite seeing it yet.
Even the evidence they do get, they think it's not quite enough. So now it's a bit of a reality check, trying to figure out, can we be sitting at these levels without solid evidence the economy has: a) bottomed out, and a recovery is underway. Those are two different things, and so folks starting to get a little nervous.
GREG CLARKIN, CNN CORRESPONDENT: And Jan, you see that illustrated dramatically in the Nasdaq, up 40 percent in the fall. People bid it up really just on the expectations of a rebound of the economy, as well as a balance in corporate profits. And again, as Chris said you know, they've got to see some kind of hard evidence to maintain those levels.
HOPKINS: And it's earnings season.
ROMANS: It's earnings season.
HOPKINS: So we're starting to get evidence or no evidence.
ROMANS: Or they don't like the evidence that they're getting, and we're going to have so many companies reporting this week. I mean, you know maybe almost half of S & P 500 companies.
CLARKIN: And last week, early indications out of Intel, I mean that was not a good sign. The company very cautious on the first quarter, cutting capital spending, off on the year by 25 percent, which really just came out of left field for a lot of folks. So early indications have a lot of folks very jittery.
HOPKINS: Now how much is all of the concern about Enron kind of overriding the market?
ROMANS: I'm hearing everyday on the trading floor what they're calling Enron noise. They say Kmart shares would not have fallen so much, even though Kmart has some serious issues to deal with, Kmart shares would not have fallen below $2 a share many people are saying, if people weren't so nervous about Enron, if it hadn't cast a shadow over corporate credibility.
You take a look at some of the companies that last week lost some ground, Dow Chemical, Halliburton, also 3M on asbestos litigation worries. They also say maybe, prior to Enron, that wouldn't have been such a huge sell-off either. They say there's a lot of emotion in the market and that's the Enron noise.
HOPKINS: What are you hearing at the Nasdaq?
CLARKIN: Well, as far as tech stocks go, it really is as Chris mentioned kind of a shadow, just you know broader market impact. As far as tech stocks go, you know, it's a whole other issue as to when some of the capital spending will come back, and again Intel's sign that they're cutting rather than just maintaining, that was a real wakeup call to a lot of folks.
HOPKINS: Let's bring in Kathleen Hays. We saw problems with Enron. We're seeing problems with Kmart. How many more problems are there going to be out there, because of what's going on in the economy?
HAYS: Some people are worried about credit quality, Jan. Last year was a year for record defaults, a lot of confidence in the banking system though being well capitalized. Many economists looking for the recovery that Wall Street's just impatient to see.
HOPKINS: What about politics and the economy? How much are we going to be hearing about what's going on in the economy as we get into the political season with re-elections in Congress?
HAYS: They already blew it on a fiscal stimulus package. And in fact, some people think that we will start to see those signs of recovery as the economy rebounds, as the consumer spending holds up, as we saw. Maybe we see some bottoming out in manufacturing.
But I think there will still be some pressure to get some kind of package. An interesting angle that's developing now, it hasn't got a lot of play, is the states are coming up with a lot of fiscal deficits. California faces a big fiscal shortfall. That's the kind of thing that might present a headwind to the economy just when some other things are picking in like the record drawdown in inventories. The economy drew down inventories at the fastest rate on record last year for manufacturers and wholesalers inventory. Even a small amount of demand should get production going again, chairman of the Federal Reserve said that recently.
But it's still a forecast. That's the problem. I think Wall Street saw stocks rebounding and it was sort of a self-fulfilling prophecy. We're rebounding, therefore the economy must almost be here. It hasn't happened. They're waiting for the economy to catch up. But the bullish people, bullish economists, on growth conditions for that rebound say, you're impatient. It's going to happen. It is going to be slow, but it's coming. The Fed has been stimulative. We've had stimulus from 9/11. It's going to happen, but it just hasn't happened yet.
HOPKINS: Thanks, Kathleen Hays, Christine Romans and Greg Clarkin.
And coming up on MONEYLINE, tracking the money trail. The latest in the government's efforts to find and freeze terrorist funding. MONEYLINE will be right back.
(COMMERCIAL BREAK) HOPKINS: Some of the smartest weapons used in the war against terrorism come from Huntsville, Alabama. The city of 160,000 is a high-tech citadel in one of the nation's poorest states. Fred Katayama looks at some of the companies and the cutting edge products that are fueling that city's economy.
(BEGIN VIDEOTAPE)
FRED KATAYAMA, CNN CORRESPONDENT (voice-over): The sensors that guide missiles, unmanned reconnaissance vehicles.
UNIDENTIFIED MALE: You can see here the counterstrikes going out with our artillery going after their launchers.
KATAYAMA: Simulation software to plan the attack, some of the smartest weapons used in combat, including the war on terrorism, were developed by the tech titans of Huntsville, Alabama, nicknamed Rocket City. The maker of that war gaming software, Teledyne Brown Engineering, is developing a portable robotic system for checking bombs. It sprays water and abrasives at speeds so fast, they slice metal.
JAMES LINK, PRESIDENT, TELEDYNE BROWN ENGINEERING: This technology allows us to keep people out of harm's way, to allow the robot to do the work, disarming a bomb or perhaps investigating a weapon of mass destruction.
KATAYAMA: The war and the anthrax scare have put fellow defense contractor Camber in overdrive.
WALTER BATSON, JR., CHAIRMAN & CEO, CAMBER: We were going to grow at about a 28 percent rate. And it looks like we're probably going to grow to about a 30 percent rate now, post 9/11.
KATAYAMA: Camber's new device detects biological agents in the air. New York City's security forces used it at Yankee Stadium during the World Series. After 9/11, sales of the unit rose from two to 50. And the company says that could skyrocket to as high as a thousand next year.
(on camera): These air testing devices cost about $30,000 each. But Camber's plant can't turn them out fast enough. So the company has set up this makeshift production facility in its headquarters.
(voice-over): ADTRAN sells high-speed digital communication equipment to the baby bells. Despite the telecom spending meltdown, the company has only had to cut about five percent the of its workers.
MARK SMITH, CHAIRMAN & CEO, ADTRAN: Due to this low turnover, we didn't have to go out and spend lots of money hiring large numbers of people for fear of not being able to keep up with the business activity that was going on. Therefore, when that bubble burst, we were not extended on the up side.
KATAYAMA: Providing the up side to Huntsville firms, the Redstone Arsenal. It has awarded $1 billion in contracts this year to local companies.
AL SULLIVAN, VICE PRESIDENT OF STRATEGIC PLANNING, COLSA: The Arsenal is taking a look today at missiles that loiter. We can fire them, find the enemy and then send it to where we want to go, TVs installed so that you can take a look at the target just before you finally hit it.
KATAYAMA: Look for more smart weapons to merge from one of the smartest cities in the south. Fred Katayama, CNN Financial News, Huntsville, Alabama.
(END VIDEOTAPE)
HOPKINS: The New York Stock Exchange was spared any serious damage from the attacks on the World Trade Center. But a MONEYLINE viewer asked if the Big Board has learned any lessons in case terrorists strike the financial capital again. Steve Young has the story.
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STEVE YOUNG, CNN CORRESPONDENT (voice-over): Back-up power, phone service and two redundant offsite data processing centers have long been part of the Big Board's contingency plan. But there's something new since the dreadful events of September 11. The Stock Exchange now has an alternative place to trade on standby.
ROBERT BRITZ, CIO/COO, NEW YORK STOCK EXCHANGE: If for some reason, we were not in a position to occupy this building, and therefore, not in a position to bring up the trading facility here, we would be operating on a worst case basis next day from an alternative trading site.
YOUNG: Taking a page from the Bush administration, which often says Vice President Cheney is at a secure undisclosed facility, the Stock Exchange says the location of it's alternative trading floor is secret except that it's somewhere in New York City.
RICHARD GRASSO, CHAIRMAN & CEO, NEW YORK STOCK EXCHANGE: If, God forbid, we were to have to deploy this strategy, we're obviously going to have a fair amount of interest as to where that site is. And you're going to want to be there and that will happen, OK. We just want to be in a position that we don't necessarily put road maps out well in advance.
YOUNG: Disaster recovery experts say to refurnish the standby site for hundreds or even thousands of workers and keep its location secret sometimes requires nondisclosure agreements.
JIM SIMMONS, CEO, SUNGARD AVAILABILITY SERVICES: I know that in some cases, clients have done things like that just to help keep things quiet. Some of them will also use internal labor or contractors that they've use for a long time.
YOUNG: Barriers keep potential Stock Exchange bombers from getting any closer than a block or two. And security inside and out has been considerably beefed up.
(on camera): On 9/11 businesses that routinely back up their computer files realize too late they fail to back up their paper records. The Stock Exchange is ahead of the curve and does paper backups, too.
Steve Young, CNN Financial News, New York.
(END VIDEOTAPE)
HOPKINS: As we try to protect ourselves against the possibility of additional terrorist attacks, the government is doing its part to track down and choke off terrorist funds. Despite the government's crackdown, donation are still flowing into leading Islamic charities in the United States, charities that are thought to be funding terrorism around the world. More than $3 million is now sitting in frozen accounts.
Allan Dodds Frank reports.
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ALLAN DODDS FRANK, CNN CORRESPONDENT (voice-over): Jerusalem, 1997: suicide bombers kill five, wound 192. The terrorist organization Hamas takes credit. Investigators discover possible connections between Hamas and some charitable organizations in America.
Now the United States government says it has strong evidence that a network of U.S.-based Islamic charitable organizations has been funding not only Hamas, but also Osama bin Laden and his worldwide al Qaeda network. FBI agents last December raided the Holy Land Foundation for Relief and Development, The biggest Islamic charity in the country.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Money raised by the Holy Land Foundation is used by Hamas to support schools and indoctrinate children to grow up into suicide bombers. The money raised by the Holy Land Foundation is also used by Hamas to recruit suicide bombers and to support their families.
GHASSAN ELASHI, HOLY LAND FOUNDATION: We are a strictly charitable organization and we have no relation with any terrorist organizations.
FRANK: According to Holy Land's tax returns, the foundation raised more than $13 million in the year 2000 to support its programs in the Middle East. But the U.S. government has now blocked the financial assets of the foundation.
JIMMY GURULE, UNDERSECRETARY OF TREASURY/ENFORCEMENT: If the money trail leads us to a charitable institution, a charitable organization that's funding terror, that funding mechanism must be cut off.
FRANK: The Holy Land Foundation and its chairman, Ghassan Elashi, declined to speak to CNN.
UNIDENTIFIED MALE: You're convinced this is a spear campaign?
SHUKRI ABU BAKER, HOLY LAND FOUNDATION: Absolutely.
FRANK: But at an earlier press conference, the group's spokesman complained about the government's action.
BAKER: This is black day, terrible tragedy for the American Muslims and for American civil liberties.
FRANK: Holy Land and other charities targeted by the government say they are being unfairly singled out, victims of anti-Muslim feelings since the September 11 attacks.
(on camera): This mosque in southwest Chicago is the centerpiece of one of the largest Muslim communities in the United States. And within a few miles from here are offices for most of the major Islamic charities, now under investigation by the federal government.
(voice-over): Thousands of Muslims live in this suburban community which houses two of the largest American Islamic charities, the Global Relief Foundation and the Benevolance International Foundation. On December 14, the government blocked the assets of both charities.
In Global Relief's offices, there is disbelief, even as workers resume their prayer rituals days after the FBI raid. Mohamad Chehade, the executive director of Global Relief, is still upset by the FBI seizure of many personal items from his apartment. His wife and three daughters also remain rattled.
ASMAA CHEHADE, WIFE: I felt very saddened and hurt when I found out that my wedding pictures were missing.
FRANK: Mohamad Chehade is trying to resume a normal schedule. But at his office, the government's actions have brought work to a stand still even as the mail brings in stacks of new donations.
MOHAMAD CHEHADE, GLOBAL RELIEF FOUNDATION: This is a donation of $15,000.
FRANK: They pile up before being deposited into blocked bank accounts. Compassion in action throughout the world. That's the motto of Global Relief, which began in 1992 by focusing on Afghanistan. Global Relief says in the year 2000, it raised $5.3 million from about 20,000 donors. The money funded the foundation's operations in 20 countries, including many hot spots suspected by the U.S. of harboring terrorists.
(on camera): Why do you think the U.S. government has the notion that you're somehow supporting terrorist organizations or terrorist activities?
M. CHEHADE: We believe really it's a part of organizational profiling now. We are a Muslim charity operating in Afghanistan, operating in a hot spot.
FRANK: Do you it's possible that any of your funds or programs have supported any of the terrorist groups the United States government is opposing?
M. CHEHADE: I would say it's impossible. We do not tolerate violence or act of terrorism. So we make sure -- we insure that our money is spent on the proper way.
FRANK (voice-over): That claim rings hollow in Washington.
GURULE: The government has clear and credible evidence that Global Relief is supporting terrorist activities.
FRANK (on camera): Do you have reason to believe that it's related to al Qaeda or the Taliban?
GURULE: Yes, we do.
FRANK (voice-over): In fact, while refusing to cite specifics, the government admits it is investigating numerous charities and the way they interact. The government crackdown bothers some legal experts.
PROFESSOR DAVID COLE, GEORGETOWN UNIVERSITY LAW CENTER: If you've got a general program of assistance to the needy, and some of the needy are needy because their, you know, father was killed in a suicide bombing or was arrested for a criminal activity, that shouldn't undermine the legitimacy of the general program.
If on the other hand, you can show that these entities are supporting children of suicide bombers in some special way, then I think you could make an argument they are in fact seeking to support the terrorist activity.
Although much of the government's evidence against Global Relief and other charities remains classified, Mohamad Chehade vows to contest the case.
M. CHEHADE: There must be organizations to fulfill the obligation of Muslims, whether they are in the States or somewhere else.
FRANK: Allan Dodds Frank, CNN Financial News, Bridgeview, Illinois.
(END VIDEOTAPE)
HOPKINS: Coming up on this special MONEYLINE, some perspective in the markets in 2002 from a few of our own experts. And a look at some of your thoughts regarding the economy and the markets, when MONEYLINE continues.
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HOPKINS: For more on the economic outlook in 2002, I'm joined again by Edward Yardeni, chief investment strategist at Deutsche Bank Securities. Lakshman Achuthan of the Economic Cycle Research Institute and Diane Swonk, chief economist of Bank One.
Ed let me start with you. What's the stock market telling us about what's going to happen with the economy. The stock market first went up and now it is coming back?
YARDENI: Well, the stock market is a component of the leading indicators so it is telling us that a recovery is coming. I think with the market up 20 percent from the September 21 low, it is telling us that a very good recovery is coming. But now as it is starting to have second thoughts about that, we're seeing a bit of a correction.
We went from a very bearish environment, where the consensus was extremely pessimistic, to just too many bulls right now. So, I think we have to come back to the planet earth and the Fed Chairman Greenspan recently in a speech, king of reminded us that there is still some risks out there for a recovery.
HOPKINS: Lakshman, what do you see about corporate profits? Are they going to be not as rosy as investors may have baked in to stock prices?
ACHUTHAN: Well, to the extent that they were expecting those profits would be in line with a sharp recovery, certainly that's going to remain a question. There's no evidence right now that we're going to have a very sharp, sustained recovery because of the nature of this recession. With the overcapacity the businesses still have it's very difficult for them to get to profitable business models in a very short period of time. That will challenge their profitability as the recovery takes hold.
HOPKINS: Diane, you're the optimist in the group, do you think the stock prices can continue to do well, that investors are the ones that are really telling us what's going to happen in the economy?
SWONK: I think unfortunately stock prices will do too well, is my fear this year. We have a lot of easy money coming from the pipeline from what the Fed has done in terms of easing. That's yet to work its way through the economy, particularly in the stock market.
And I do think we will get a little catch-up in profits. We are set up very well, because of oil prices played a very large role in damping profits last year, along with other factors. So did inventory draining.
Those things are reversing which makes for short term catch up period year over year comparisons on profits, by the second half of the year looking very good. It will not be a return to the bull markets in the 90s, but I am afraid the markets will get a little caught up in themselves and we could see much more gains in markets than are justified, and this time I keep reminding, as bullish as I am about the economy, it is still a tepid recovery compared to history. And I keep reminding people, this is not repeat of the great bull market of the 1990s, don't get too greedy this time around.
HOPKINS: You know, Ed, we hear some talk about the possibility that there could be a bubble again, in the stock market.
YARDENI: There is a bubble. There is a bubble in technology again, particularly semiconductors. They have discounted an amazing recovery in earnings there and now with Intel recently announcing they are not going to spend as much on capital equipment as was expected, we're seeing a little correction there. But I agree with Diane. There is an enormous amount of liquidity. It is something bizarre called MZM, is up a trillion dollars in the past year. This is a measure if liquidity.
HOPKINS: And a lot of it is on the sidelines in money market funds. YARDENI: They are earning less than 2 percent.
ACHUTHAN: Right. This is another one of the leading indicators, the money supply out there. And it moves hand in hand sometimes with the stock market. The Fed cut 11 times, they may be on the verge of the 12th cut. That's supporting a lot of this. That's a reason why we're having a recovery, but it is not always the best reason to have a sustained recovery.
HOPKINS: And actually, Diane, the bond market is telling us maybe the Fed is almost finished lowering rates and might be raising them later in the year.
SWONK: And that's what the fed's real challenge is. Politically, are they going to have the political cover to raise rates with the lag to prevent a bubble from happening. I think it is going to be a very difficult thing for the federal reserve.
Inflation is going to remain benign this year. Unemployment is a lagging indicator. It is going to continue to rise well after the recovery has staged. It is going to put the Fed in a very tough position in terms of when they actually start raising rates. I think the bond market has been a little overly aggressive on that front, more than the Fed can possible eke out over the year.
My own wish is in a perfectly theoretical world, yes, will the Fed start tightening much sooner than I think they actually will, yes, because I'm worried those 12 to 18 months lags. What we are going to see in terms of a bubble, but I don't think particularly the reality in an election year, that we are going to be able to see the Fed really tightening.
They are just not going to have the cover until second half and even then moving very aggressively is very difficult. It is a lot easier to bring the punch to the party than take it away.
HOPKINS: That has to be the final word. Thank you very much, Diane Swonk, and Lakshman Achuthan, and Ed Yardeni.
Coming up next, a look at your e-mails, and a preview of corporate earnings due tomorrow.
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HOPKINS: Tomorrow, quarterly results are expected from AT&T, International Paper, Merrill Lynch, Merck, Lucent, and Motorola.
And reports on the economy include leading economic indicators for December.
Tune in tomorrow night when former Secretary of State Henry Kissinger joins us with his thoughts on India Pakistan tensions as well as the Philippines.
And now for a look at your thoughts. On the economy, John Tyson, in Burbank, California writes: "Why does the Fed think lowering rates will stimulate the economy? It would be one thing if companies needed to expand and inventories were depleted, but they are not?"
Economists agree, working down inventories and ramping up production is vital for an economic recovery. And recent evidence shows companies are working on at least one part of that equation. Business inventories have now fallen for 10 months in a row.
Another critical part of the economic equation: jobs. Chris Palacios, in Snyder, Texas writes, "Although analysts remain bullish for the upcoming year, are they at all concerned about the fact that a continued rise in unemployment will create an even greater decline in consumer spending?"
Absolutely. Fed Chairman Alan Greenspan in his most recent public comments said the biggest risk to the economy is rising unemployment, which could dampen consumer spending.
On to Enron's meltdown, Dan Leahy in Santa Barbara, California writes, "For bankrolling the Republican campaigns, these crooks were given a seat at the table in Cheney's energy commission. This is influence peddling, and it is wrong."
Of Course Enron spread the wealth in Washington, although Republicans did receive the lion's share of contributions.
Walter Kitchenman writes to say he doesn't believe the president or anyone else in the White House engaged in some unscrupulous activities or lack of oversight in regards to Enron. "I think they enjoy power," he says, "but basically they give up all sorts of money by going into public service. We need campaign finance reform to avoid even the appearance of conflict and undue influence."
P. Lerro writes, "A special prosecutor is needed to reveal the depth and breadth of the involvement of this administration and Enron."
That's MONEYLINE for this evening. Thanks for joining us. I'm Jan Hopkins in for Lou Dobbs, good night from New York. Have a great holiday.
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