Article 21 of 200
Stuart Varney, Steve Young, Ceci Rodgers, Bruce Francis, Fred
Katayama, Susan Lisovicz, Terry Keenan, Kitty Pilgrim
CNNfn: Moneyline News Hour
(c) Copyright Federal Document Clearing House. All Rights Reserved.
STUART VARNEY, CNNfn ANCHOR, MONEYLINE: Tonight on MONEYLINE, the
government delivers its final word on how to punish Microsoft -- break
it in two. Will the judge listen?
A strong hint that six rate hikes are finally working: Orders plunge
big-ticket goods. We`ll look at fears the economy may slow too much.
Business is certainly slowing for some top retailers, as Office Depot
(URL: http://www.officedepot.com/) sets off a profit alarm. We`ll take
a "Bottom Line" look at another retail disaster this week: Costco (URL:
And we told you last night he was selling his prized possessions.
Today he sold off his biggest asset of all: a stunning twist in the saga
of Saul Steinberg.
ANNOUNCER: This is THE MONEYLINE NEWS HOUR. Reporting tonight from New
York, Stuart Varney.
Good evening, everyone. Willow is off tonight.
The most important antitrust battle of the high-tech era is fast
approaching its climax. The government today made its final move in the
U.S. versus Microsoft (URL: http://www.microsoft.com/) , asking a
federal judge to split the company in two. The Justice Department made
only minor revisions to its original punishment plan, even though the
judge questioned whether a two-way split would just create two
monopolies rather than one. Now the fate of one of the world`s most
valuable companies is in the hands of the court.
Steve Young has the latest.
STEVE YOUNG, CNNfn CORRESPONDENT (voice-over): In sticking with the
two-part breakup plan, the government made some technical changes and
accused Microsoft of cynicism in court and distortion. The company is
expected to file a final comment late next Wednesday, and Judge Jackson
could enter his final judgment as soon as the next day.
Microsoft hopes to win a reversal from the D.C. Circuit Court of
Appeals on procedural grounds.
C. BOYDEN GRAY, COUNSEL FOR MICROSOFT: It isn`t that Microsoft didn`t
have a chance to know that there might be a breakup. The issue is
whether there`s anything in the record to support it. And the
government`s "evidence," so-called, is untested, un-cross-examined.
YOUNG: Judge Thomas Penfield Jackson expressed admiration for a brief
calling for a three-way Microsoft break up. But many antitrust experts
say it would be a real stunner if he ordered that on his own.
SPENCER WILLIAMS, BROOKLYN LAW SCHOOL: I think it would be highly
unlikely that without doing more hearings or hearing any witnesses he
would just go with an amicus brief rather than the position of the
YOUNG: In a concession, the government eased one restriction that
would have hammered the Microsoft stock holdings of co-founder Paul
Allen. He left Microsoft back in 1983, when the company had fewer than
Supporting its argument for a breakup, the government unsealed an
e-mail Wednesday that Bill Gates sent after the main part of the trial
was over. It said, "Microsoft should make products that`s don`t work as
well with the competing operating system from Palm computing.
DAN WALL, LATHAM AND WATKINS: The recently uncovered evidence is
the most damaging evidence to Microsoft in the whole case. This notion
that we`re going to intentionally design a product so that it doesn`t
work with others is inexcusable from an antitrust standpoint.
YOUNG: Microsoft says it will delay by three weeks a crucial meeting
with financial analysts and reporters that had been set for next
Thursday. The all-day session is scheduled to explain how the company
hopes to duplicate its PC success with an operating system for the
Internet. It`s now tough for Microsoft to continue to maintain that
despite the momentous trial it`s business as usual -- Stuart.
VARNEY: That`s a surprise, isn`t it? I mean, it has some significance,
YOUNG: Yes, this is not the first delay, but this is probably the most
important thing that Microsoft is set to do since 1995, when Bill Gates
said the company would be hard-core about the Internet.
VARNEY: Fair enough. Steve Young, thank you.
On Wall Street today, Microsoft shares fell fractionally after a steep
slide yesterday. The stock is down more than 40 percent since the
beginning of April, when the judge found that Microsoft had broke
antitrust law, about $235 billion in market value wiped out.
The proposal today from the government is just a prelude to the
blockbuster decision by the judge, which could come as early as next
week. CNN, MONEYLINE, and CNNfn.com will be following all the
developments in this story with coast-to-coast coverage and in-depth
analysis. We`ll have it all when that decision comes down.
As for Wall Street today, it seemed less fixated on Microsoft and more
concerned with making a Memorial Day getaway. Trading slowed to a crawl
on both the Big Board and the Nasdaq.
The Dow did shoot higher as the day began, but retreated just as
quickly, and then dipped in and out of negative territory, finally
ending down 24.
The Nasdaq, which has been regularly making 100-point moves this year,
ended the day off less than a point.
A bit more drama in the bond market, where bonds scored their fourth
winning session out of five in a shortened pre-holiday session. The
10-year note up half a point, the 30-year long bond up 26/32.
Triggering the bond market rally today, a possible sign that history`s
longest expansion may just be losing some steam. Orders for durable
goods -- big-ticket items, like refrigerators for example -- plunged in
April in the biggest monthly drop since December of 1991. And that
wasn`t the only report out today suggesting that six interest rates
hikes may finally be working to slow the economy.
Ceci Rodgers reports.
CECI RODGERS, CNNfn CORRESPONDENT (voice-over): Can it be? The
long-awaited slowdown in consumer spending may be at hand. Incomes
outpaced spending for a second straight month in April, the first time
that`s happened in two years, personal income rising a strong 7/10 of a
while spending rose just 4/10. And April`s drop in orders for big-ticket
manufactured goods was the largest in almost nine years.
A record decline in electronics and fewer orders for automobiles
reflected weakness in the consumer sector, while business spending on
capital goods remained strong. That adds to recent evidence of a slight
slowdown in economic activity.
MARIO DEROSE, EDWARD JONES: We may have saw it yesterday. The existing
homes sales were down a bit. I mean, that`s the most interest-sensitive
sector of the economy.
RODGERS: Existing home sales fell in April, as did retail sales. And
private surveys show retailers see more weakness this month. In fact,
analysts say auto sales may post their first monthly decline in 18
A weaker economy would be welcome at the Federal Reserve, but analysts
say the signs are still too tentative to head off more interest rate
DAVID BLITZER, STANDARD & POOR`S: Income continues to be strong.
Consumer spending continues to be strong. And the Fed, which has been
worried about these, will continue to be worried. RODGERS: The best
predictor of such hikes, the Fed funds futures contract, has seen a
retreat in its implied forecast for short-term interest rates, now
pointing to just a quarter-point hike at the June Fed meeting after
pricing in a half-point move last week.
(on camera): Economists and the Fed will know more in a week, after
they take a look at the first indicators for May: a key manufacturing
survey and always-crucial employment report.
Ceci Rodgers, CNN Financial News, Chicago.
VARNEY: Well, today`s modest retreat on Wall Street caps a rough two
weeks for the markets, a steady sell-off that followed the Fed`s
decision to hike interest rates another half point. The Dow has taken a
triple-digit dive in four of the past eight sessions, losing more than
630 points. The index is now off more than 12 percent from its
high and back firmly in a correction.
The Nasdaq has taken a bigger tumble, ending lower in seven of the
past eight sessions. It is down more than 36 percent from its high, the
worst bear market for the Nasdaq in the past two decades.
Well clearly the Fed`s anti-inflation crusade has hurt the stock
market over the past year. Since the first of six rate hikes back in the
late June of last year, the Dow is down more than 6 percent. One critic
argues that the Fed`s approach simply isn`t working. In a recent
editorial, Eugene Ludwig, former comptroller of the currency, warns that
Mr. Greenspan is taking a hatchet to the bull market, even threatening
the economy needlessly. Well, Mr. Lugwig says there are better ways to
keep inflation at bay, and he joins us now to explain.
Sir, good evening and welcome to MONEYLINE.
EUGENE LUDWIG, FORMER COMP. OF THE CURRENCY: Stuart, it`s nice to be
on your show.
VARNEY: If you`re not going to raise interest rates to head off the
threat of inflation, what are you going to do?
LUDWIG: Stuart, I think there are a lot of different policy options we
ought to be exploring here. The economy`s been getting an A. I and many
of my colleagues would like to see it continue to get As. We don`t want
to sort of see it get Bs and Cs.
The policies I would recommend are labor policies. I think that we
have a very large pool of labor that`s not being counted in our labor
statistics which we could take advantage of, and I think we ought to be
exploring policy alternatives that take advantage of the American
VARNEY: So there is a potential here for some wage-push inflation, but
you would head it off by changing labor policies, perhaps to bring more
people into the labor force? LUDWIG: That`s exactly right. The current
economy`s done a wonderful thing. The more people you have employed, the
less social ills you have. The thing that correlates best with lower
crime rate is strong employment, so having strong employment is a very
There are really tens of millions of Americans who could be employed
are currently not employed and not counted in the labor statistics...
VARNEY: Sir, that is a very...
LUDWIG: ... I`ll bet...
VARNEY: That`s a very high number. Tens of millions of Americans who
not currently employed who could be in the labor force? That`s a very
LUDWIG: Oh, yes. I -- even Labor Secretary Alexis Herman has said that
if you count the people who currently need child care and
transportation as well as the people who are working part-time and would
like to work full time, the employment pool would jump from 5.5 million
to 12 million. But in addition, there are people sitting at home
that may well want to work. Senior citizens -- I`ll bet that you know
someone in your family or a friend who is a senior citizen who is
currently not working, who could work, and has a lot of skill that
would help our labor supply.
VARNEY: We keep them working in my family, Mr. Ludwig, but that`s
another story entirely.
Now let`s suppose that the Fed raises interest rates, say, another two
times a quarter point a piece, briefly, what kind of shape will this
economy be in by the end of the year if the Fed does that?
LUDWIG: Well, these interest rate hikes do cause pain. There`s no
doubt about it. When they`re absolutely necessary, it`s sort of like
chemotherapy. There are times that interest rate policy certainly is
necessary. But rather than employing chemotherapy, we ought to be
looking for the scalpel, not the hatchet -- to mix metaphors a bit.
There are scalpels we can use, and labor policy is a very important
opportunity for us. It`s not just repairing damage, but increasing the
supply of labor. It`s tremendously advantageous.
Just think of the senior citizens again.
LUDWIG: If you`re a senior citizen, historically, Stuart, you would
your Social Security benefits taken away for working. We don`t want to
VARNEY: Fair enough. Eugene Ludwig, out of time, it was a pleasure
having you on MONEYLINE. Thank you, sir.
LUDWIG: Pleasure, pleasure being here this evening. VARNEY: OK. Now,
still to come on MONEYLINE, the dot.com meltdown has spread past those
e-tailers. E-brokers have also taken a huge hit, and the future looks
even weaker. We`re going to cover that for you.
Plus, profit worries at a brick and mortar retailer: Costco embarks
costly expansion, and investors pay the price. "The Bottom Line" on this
retailing giant and its problems, still to come on MONEYLINE.
ANNOUNCER: From CNN`s New York headquarters, this is THE MONEYLINE
VARNEY: Qualcomm (URL: http://www.qualcomm.com/) tops our "MONEYLINE
Movers" tonight. Shares of
the company fell nearly three, but they were down more than six points
intraday. It was the most actively traded stock on the Nasdaq. Analysts
have expressed concern over how normalized trade relations with
China would affect Qualcomm, but the company says the measure will
actually help, allowing it to deploy new technology in China which had
been previously suspended.
Immunex (URL: http://www.immunex.com/) lost more than 4 1/2 -- that`s
15 1/2 percent. PaineWebber (URL: http://www.painewebber.com/) cut the
company`s 12-month price target to $30, after the company said its
experimental asthma drug, Nuvance, failed to show an expected benefit in
But Lucent (URL: http://www.lucent.com/) Technologies gained 3 3/4. An
analyst at ABN Amro (URL: http://www.abnamro.com/) reiterated Lucent as
a top pick. He expects the
stock to reach 90 in a year.
And Goldman Sachs (URL: http://www.gs.com/) fell more than three
points on top of its seven-point loss yesterday. That came on news of a
downgrade by Merrill Lynch (URL: http://www.ml.com/) and Bear Stearns
(URL: http://www.etrade.com/) , Ameritrade (URL:
http://www.ameritradeholding.com/) and DLJdirect (URL:
http://www.dljdirect.com/) all declined to comment for our story. The
quarter is still two-thirds of the way through, though, Stuart.
VARNEY: With an average decline of 70 percent, I`m not surprised
there`s no comment there. Bruce Francis, thank you.
FRANCIS: My pleasure.
VARNEY: All right, coming up on MONEYLINE, the music phenomenon that`s
rocking the industry and rolling out a legal battle. We`ll bring you the
details on downloading the sound and the fury, coming up.
VARNEY: We`ve been hearing a lot lately about the debate over
downloading music from the Internet. It centers on music-sharing
services like Napster. Some accuse them of piracy. Others say they`re
giving the industry a welcome shakeup. The fight has led to lawsuits and
this week, to congressional hearings.
Fred Katayama filed this "Briefing Book" on how downloading works and
why it`s got so many people so worked up.
FRED KATAYAMA, CNNfn CORRESPONDENT (voice-over): Nate Dulley, a
freshman at USC, has collected more songs than a jukebox. But you will
not find a huge stack of CDs here. The 350 songs reside on his computer,
like this tune from the heavy metal band Metallica. And he got the songs
for free, using software called Napster.
NATE DULLEY, STUDENT: I don`t even play my CDs anymore. I`m on this so
much, like honestly, lately.
KATAYAMA: Like Nate, more than 70 percent of U.S. college students
surveyed use Napster every month to get free songs from the Internet,
according to the research firm Webnoize. The problem, critics say, most
of the hundreds of thousands songs posted are illegal, and so groups
ranging from Metallica to the recording industry have sued Napster.
LARS ULRICH, METTALLICA: We own the rights to those, we have paid for
them, and we want to be in control of what happens to them.
KATAYAMA: What made online music a reality: the advent of MP3 (URL:
http://www.mp3.com/) , a file format that allows users to download
near-CD-quality sound. To listen to digital music, users need a player
such as Real Jukebox or Music Match, which they can download for free.
Then they go to web sites such as MP3.com and scour to find the songs,
or they download the Napster software.
We`ll focus on Napster, since it`s the most popular method. Users type
in their request. Nate looks for "I Disappear" by Metallica. Seconds
later, a list of other Napster members who have the song on their
up. Nate double clicks, connecting his PC with that of another person
who has the song. Minutes later, the song is copied onto his hard
DULLEY: I`m going to download another thousand songs.
KATAYAMA: Nate found everything from the USC fight song to "Smoke on
The recording industry has been winning the early rounds in the
courts. A federal judge has ruled that MP3.com`s database violates
copyright law. And earlier this month, a federal judge issued a
preliminary ruling against Napster. She rejected the company`s
contention that it was a "mere conduit" for songs online and was
therefore not liable for its users` actions.
Now even Congress is getting involved, holding hearings on Napster.
But tech experts say legal victories will not solve the industry`s
woes, since new ways to download music keep surfacing.
ARAM SINNREICH, JUPITER COMMUNICATIONS: It`s like a hydra -- you cut
one head and 12 more spring up.
KATAYAMA: Experts say the free software Gnutella poses a bigger
threat. Gnutella software shared freely online that allows users to
download music files. But unlike Napster, Gnutella has no centralized
server and no company owns it.
JOHN COFFEE, COLUMBIA LAW SCHOOL: There`s really no one to sue.
There`s just a faceless sea in this online community of hackers who are
using this new technology.
KATAYAMA: One analyst said the recording industry should provide an
alternative to Napster that offers things like virus protection and
better sound quality that would compel users to pay for something.
(on camera): For now, the legal battle is over music. But as more
consumers get faster Internet access over the next few years, experts
say the next
battleground will be over downloading bootlegged movies.
Fred Katayama, CNN Financial News, New York. (END VIDEOTAPE)
VARNEY: It`s Friday, and there`s much more to come on MONEYLINE. We`ll
be right back after this.
VARNEY: Now here`s what we have for you in our next half hour. End
game in a landmark case against Microsoft. We`ll get a preview of what
may be a decisive week, waiting for a federal judge to determine
Microsoft`s penalty for breaking antitrust law. And the corporate raider
who already put his home and furnishings up for sale; he`s now unloading
the company that he led for decades.
VARNEY: In tonight`s headlines, Wall Street gets signs that the
blazing U.S. economy may finally be cooling off, but is the boom really
over, or just pausing for breath?
And another big retailer warns of weaker profits ahead: Office Depot
feels the pinch of weaker sales and gets a rough response from
Plus, an in-depth look at a discounting kingpin that this week sank
the market`s doghouse. Is the selling justified? We`ll check out "The
Bottom Line" at Costco.
First, though, more on our top story: another step closer to what
could be one of the most important legal decisions of the digital age.
The Justice Department today filed one of the last legal briefs of the
two-year Microsoft antitrust trial, setting the stage for a penalty
ruling as early as next week. As expected, the government did not push
for the most dramatic punishment against Microsoft, a three-way split.
Steve Young has been following the trial since the beginning and has
more on this final phase -- Steve. YOUNG: Stuart, the government stuck
original game plan, having told the judge Wednesday a three-way split
would be less efficient, would take longer and would be more disruptive
to the company.
The only changes were purely technical. The government said
Microsoft`s complaints about being denied due process are -- quote -- "a
cynical ploy calculated to raise diversionary issues on appeal." The
company will file its final comment on what it calls a corporate death
penalty Wednesday, and Thomas Penfield Jackson could enter his final
judgment as soon as the next day, which is Thursday, the very day
Microsoft had planned to explain to the world its strategy to be more
relevant in cyberspace by creating an Internet operating system.
That session has now been delayed three weeks, the company acknowledging
that no one would pay attention if it occurred as Microsoft faces its
antitrust day of reckoning -- Stuart.
VARNEY: All right, Steve Young reporting. And thank you, Steve.
Our guest tonight asked this question in today`s "Wall Street
Journal": What`s worse than two baby bills? His answer: three. Joining
us now, Nicholas Economides , economics professor at the Stern School of
Nicholas, welcome to the program.
PROF. NICHOLAS ECONOMIDES , NEW YORK UNIVERSITY: Thank you.
VARNEY: Why don`t that you think that a breakup into two or three
parts is a good idea?
ECONOMIDES : It`s a bad idea, it`s a very bad idea. First of all, it
won`t increase competition. It won`t make things better. Second, it has
a huge cost on Microsoft and the U.S. economy. And third, it`s not
necessary, it`s really not necessary given whatever Microsoft has done.
VARNEY: What impact on consumers?
ECONOMIDES : I think the impact on consumers is going to be very bad.
prices of software are going to increase. The prices of Windows or
something that is a substitute for Windows, the operating systems, is
going to go up, and that`s not something we want.
VARNEY: But wait a minute, back in 1981, when AT&T was dismantled,
prices actually for long-distance phone calling went down. Why wouldn`t
the same thing happen with Microsoft?
ECONOMIDES : Well, there are a number of reasons. There are a number of
differences between the companies. First of all, Microsoft is a new
company, a young company, flexible, with few managers. AT&T was 100
years old, many managers, many divisions running separately from each
other so they could easily be separated. That`s the first problem. The
second problem is that right now, Microsoft is a very innovative
company. AT&T at that point in time was an old, regulated company, easy
to break up. We didn`t really have big losses because of the breakup. We
expect to have big losses because of the Microsoft breakup.
VARNEY: What impact on the over all high-tech industry in America,
has been so successful, if there is a break up?
ECONOMIDES : If there is a breakup, things are going to be very much
uncertain for the rest of the industry. People wouldn`t know what to
expect from antitrust. This, in my opinion, is a very radical move by
the government against Microsoft. The same radical moves could happen
against AOL, against Yahoo!, against other big names in the area,
and we don`t really know if that`s going to happen. It`s creates
uncertainty for this industry.
VARNEY: Nicholas Economides , we thank you very much for being with us
tonight on MONEYLINE. Thank you, sir.
ECONOMIDES : Thank you.
VARNEY: Microsoft lost another 6 percent this week, as Wall Street
shuddered at the idea of an even harsher penalty than expected. Today
the stock slipped only fractionally, but that was enough to set another
new low for the year for Microsoft.
Now the markets overall drifted into the holiday weekend, as a woeful
week closed with a whimper. It was an up-and-down Friday for the Dow
before closing down 24 points, back at 10229. For the week, it was a far
uglier picture, down more than 3 percent, or 327 points.
As for the Nasdaq, turbulence reigned there, but the index closed
basically as it began, off less than a point at 3205. On the week,
however, the Nasdaq dropped nearly 5.5 percent, 185 points.
Checking some of today`s big movers: We had Lucent up 3 3/4. Intel
gained nearly 2 1/2. But ALCOA (URL: http://www.alcoa.com/) was down
nearly 3. Coca-Cola up 2. Applied Materials fell nearly 2 1/2.
Looming over Wall Street today, signs of a slowdown in durable goods
--that`s orders for big-ticket items -- which dropped 6.4 percent. It
the biggest monthly drop in nearly nine years.
VARNEY (voice-over): Today`s economic numbers threw a new wrinkle into
the outlook for interest rates, capping a week that many on Wall Street
would really like to forget.
Nervous investors unsure of the Fed`s next move. The uncertainty made
for a week of market gyrations.
DAVID POWER, EDWARD JONES: Investors are waiting to see whether or not
the Fed can, you know, generate a soft landing for the U.S. economy. And
until investors get some sense that the Fed has accomplished that goal,
there`s a lot of people that`d just rather sit on the sidelines.
JOHN MANLEY, SALOMON SMITH BARNEY: You have a situation where people
don`t have firm convictions, so it takes very little to get them
off-center. You have, you know -- you`ve greased the floor, so to speak.
So any little thing moves things tends to move things around.
VARNEY: Several events shook investors this week.
General Motors (URL: http://www.gm.com/) , that stock plunged more
than 10 percent on Monday after GM disappointed investors by offering to
swap fewer Hughes Electronic tracking shares. Wednesday, United Airlines
proposed buyout of US Airways (URL: http://www.usairways.com/) stalled
with investors who balked at the regulatory hurdles. Thursday, analysts
downgraded the big brokerage stocks, citing slow trading. Goldman Sachs
led the decline, losing nearly seven points. It fell again today,
sinking more than 3 1/2. Other big financials followed suit. General
Motors shares fell, again. General Electric (URL: http://www.ge.com/)
shares, Home Depot and Wal*Mart (URL: http://www.wal-mart.com/) slid as
well. And all of this understand the pall of a looming proposal to break
UNIDENTIFIED MALE: People are very nervous right now. There`s been a
lot of damage done in the technology sector. And there`s a lot of
people out there right now that just don`t want to stand up and catch a
falling knife. And so for the most part, trying to the forecast bottom
is extremely difficult in that type of market environment.
VARNEY: Well, that leaves investors on rather shaky footing as we head
into the Memorial Day weekend, especially as light volume amplifies the
volatility that has plagued these markets.
Well just ahead, we`ll take the market`s pulse with strategist Tim
and check out the prospects for a rebound when all of this selling is
We`ll be back.
VARNEY: In tonight`s "MONEYLINE Focus," a closer look into the ongoing
slump in stocks. Our next guest sees Wall Street stuck in a cyclical
bear market. One sign of trouble: the meager volume on the exchanges.
We`re joined now from Tampa, Florida, by Tim Hayes, global equity
strategist at Ned Davis Research.
Tim, welcome back.
TIM HAYES, GLOBAL EQUITY STRATEGIST: Thanks, Stuart.
VARNEY: With the Nasdaq closing today at 3205, do you believe that`s
anywhere near a bottom?
HAYES: I don`t believe so. I think the low volume is a sign that we
may see more volume on the downside and we`ll break the current levels,
not only unsuccessfully test them, but go down to new lows.
VARNEY: Is this volume sort of a key signal to you of the state of the
market now and where we`re going in the future?
HAYES: Yes, I think it`s a dangerous sign. What you want to see is
especially with the market drifting lower, you want to see very high
volume, putting in a lasting low that will indicate that there is
enough fear in the market, that there`s enough negative sentiment for
that low to last, but this kind of light volume is not a good
VARNEY: So what you`d want to see then, to show that the selling is
would be a high-volume, big-day sell-off, or a big-week sell-off, with
a volume that`s very, very strong, sort of a capitulation by the
HAYES: That`s right. You want to see very high volume, and also
there`s going to be downside volume relative to advancing volume, say a
ratio of about nine times downside volume to upside volume, and then
after that, for the confirmation that the bottom`s in-place to have the
opposite situation happen on the upside.
VARNEY: And that would be a high-volume rally, I take it.
HAYES: A high volume rally with heavy upside volume relative to
VARNEY: Is the key to all of this the Fed and what the Fed is doing
with interest rates.
HAYES: It really is. We`re in an environment right now where it`s
going to be hard for the market to break out of this situation. The --
inflationary pressures and the Fed raising rates are going to make it
difficult to know when to bottom out and stay bottomed out, but to have
any kind of rally that`s going to last beyond more than a very short
amount of time.
VARNEY: Tim, you sound rather bearish for the next few months. Do you
have any safe heavens to recommend for us?
HAYES: Well, I think the traditionally defensive areas like foods and
energy stocks and utilities and health care stocks, drug stocks would be
something to keep an eye on, especially a large position of cash. We
are at actually 40 percent stock, 30 percent bonds, 30 percent cash,
which is a very defensive position and a very high cash position.
VARNEY: It`s a totally different market from what it was like in, say,
January, February, March, isn`t it? The mood has completely changed,
HAYES: That`s right. In fact, that`s somewhat of a good sign, because
the sentiment has gotten more pessimistic. I don`t think we`re at the
pessimism levels that would really indicate that we`re ready to bottom
out. But certainly, there probably is some light at the end of the
tunnel now as opposed to where we were earlier in the year.
VARNEY: Well, we wish you could have delivered a different message as
head into the holiday weekend, but we thank you for what we`ve got.
Tim Hayes from Ned Davis Research, thanks very much for being with us,
HAYES: OK. Thanks, Stuart.
VARNEY: OK, Tim.
Next on MONEYLINE, a dramatic follow-up to a story we brought you last
night: Saul Steinberg today selling something even more valuable than
his famed art collection. We`ll bring you the story next.
VARNEY: Last night, we told you about a very unusual case of
Saul Steinberg, a corporate legend of the `80s, selling off his enviable
art and furniture collection at an auction today at Sotheby`s. And today
that downsizing took a stunning turn: Steinberg selling the company he
has long led, Reliance Group Holdings, to Leucadia National.
Susan Lisovicz has the story. (BEGIN VIDEOTAPE)
SUSAN LISOVICZ, CNNfn CORRESPONDENT (voice-over): Reliance made money
insuring clients against natural disasters, injuries in the workplace,
and other unwelcome events. But with increasing operating expenses and
losses, experts say Reliance itself was a disaster in the making.
Its stock crumbled nearly 90 percent from $19 two years ago to just a
bit more than $2 1/2 today, close to its 52-week low. Analysts say
Reliance --like many insurers -- is a victim of the times. Tenacious
competition has pushed down premiums, which have plummeted from more
than 20 percent in 1986 to less than 3 percent this year.
But many analysts say the man who has led the company for decades,
Saul Steinberg, did not help the bottom line. They say he and his
family, who own more than 40 percent of the stock, ran the company with
BOB HARTWIG, INSURANCE INFORMATION INSTITUTE: Reliance had some unique
features in terms of how it was run. It was essentially a family-owned
operation for the most part, which is very unusual in this industry
where most companies would have a fair number of outside directors.
Leucadia National Corporation is buying Reliance in a stock swap
valued at $293 million. Some analysts say that`s about one-third of
Reliance`s book value. But Steinberg said in a statement that the sale
represents the best alternative for shareholders, employees and
As a corporate raider, Steinberg made failed attempts at Walt Disney
Chemical Bank. This time Steinberg`s company was the target.
CHRISTINE LAI, J.P. MORGAN: I think it`s unlikely that Reliance would
have decided to sell itself if the property-casualty insurance industry
was really going to improve materially over the next six to nine
LISOVICZ: The sale of Reliance came on the same day that Steinberg
unloaded $12.5 million of his art and furniture in an auction at
LISOVICZ: Steinberg stepped down as CEO earlier this year, but
remained as chairman to focus on strategic planning. One of the
company`s turnaround steps was to sell its most profitable unit to
Travelers for $580 million. But Reliance still carried more than half a
billion dollars in debt due later this year, debt that Leucadia is now
VARNEY: Quite a switch.
Susan Lisovicz, thanks very much.
Now, checking some of tonight`s "MONEYLINE Movers": S1 jumped nearly
seven points after several analysts came out with positive comments on
the financial software maker. Late yesterday, S1 received a $244
million investment from several financial services firms. S1 software
helps financial institutions offer online banking.
Deere fell 3 1/4. Morgan Stanley Dean Witter downgraded the farm
equipment maker to a neutral rating. It said Deere has passed its $49
price target and currently trades at a large premium to its competitors.
And Federal Mogul down nearly 2 1/2 to a 52-week low. It`s an auto
parts manufacturer, and it warned late yesterday that second-quarter
and full-year results will fall sharply below estimates due to the
strong dollar. Shares of Federal Mogul have had a rough year indeed and
are currently down more than 80 percent from the 52-week high.
Federal Mogul is just the latest company to blame its profit shortfall
on currency troubles, and it probably will not be the last.
Terry Keenan explains why in tonight`s "Behind the Numbers."
TERRY KEENAN, CNNfn CORRESPONDENT (on camera): Stuart, we`re only a
little more than halfway through the second quarter, but the strong U.S.
dollar is already getting a bum rap from companies who say their
results are being hurt by the currency`s amazing strength against the
single European currency.
Since its creation 16 months ago, the euro has lost more than 25
percent of its value against the dollar. This year alone, it is down
nearly 10 percent. For U.S. companies with big European operations, this
can mean weaker sales since the almighty dollar makes it harder for U.S.
manufacturers to sell their products at competitive prices.
Today Office Depot shocked the Street when it said earnings would come
in sharply below expectations due to the dampening effect of the strong
dollar on its overseas sales. And Office Depot is not alone. McDonald`s
was the first to warn earlier in the month. With 40 percent of its
operating earnings coming from European sales, McDonald`s CEO Jack
Greenberg warned that the weak euro has -- quote -- "an insidious
Last week, Coca-Cola Enterprises (URL: http://www.cokecce.com/)
plunged more than 25 percent due primarily to currency concerns.
Economists say while many companies do hedge their currency risk, it`s
(BEGIN VIDEO CLIP)
ED YARDENI, DEUTSCHE BANK SECURITIES: They do have hedging programs to
offset some of the strength of the dollar, but at the end of the day, it
doesn`t help them. And many of them are already under a lot of pricing
pressures here at home and in lots of other markets around the world.
(END VIDEO CLIP)
KEENAN: Today, the euro did rebound a bit, trading above 92 cents on
the dollar, a level many say is key to stabilizing the currency`s value.
Still, don`t be surprised if other companies cry currency concerns in
advance of their second-quarter results.
Among those with high European exposure, Coca-Cola, Clorox (URL:
http://www.clorox.com/) and Colgate-Palmolive (URL:
http://www.colgate.com/) -- Stuart.
VARNEY: All right. Thanks very much, Terry.
Well, as Terry reported, Office Depot disappointed investors with a
second-quarter profit warning today, saying weak sales and a strong
squeeze profits 4 to 6 cents lower than analysts expected.
After that profit warning, several analysts downgraded Office Depot.
that, in turn, weighed on other retailers.
Checking investor reaction in tonight`s "Sector Report": Office Depot
sank to a 52-week low, down more than three points. It was the most
active stock on the big board. Staples lost nearly a point and a
quarter. And also lower today, electronic retailers like Best Buy,
Circuit City and Tandy.
Still to come on MONEYLINE, Costco in the bargain bin. We`ll have the
bottom line on the warehouse club retailer that has crushed --it was
crushed this week on Wall Street. That story in a moment.
VARNEY: Turning now to our special Friday feature, "The Bottom Line":
a close-up look at a company and the role it plays in the overall
economy. Tonight: Costco. The wholesale superstore that sells everything
from toilet paper to computers is seen by some as a proxy for the
economy. If that`s the case, this economic expansion could be in
trouble. This week, Costco said future earnings would be disappointing,
and saw its market capitalization shrink by more than $6 billion.
But as Kitty Pilgrim reports, Costco`s problems have less to do with
changing economic landscape than with its own jumbo-sized ambitions.
KITTY PILGRIM, CNN CORRESPONDENT (voice-over): Costco does nothing
small --the bulk packages, sprawling selections, acres of aisles.
big and living large. Cheaper by the dozen, if not by the gross, it`s an
outsize company. With double-digit growth, 305 stores spanning the
continent, including Mexico and Canada, Costco has built another 13 of
its so-called clubs so far this year. They`re planning 10 to 12 more,
and for fiscal 2001, 35 to 40 new clubs, 60 percent of which would be in
areas never served in bulk.
JIM SINEGAL, CEO, COSTCO: We think we have a window of opportunity to
open units across the nation, most particularly in the U.S., and I
think that we`ll continue on that schedule.
PILGRIM: But expansion is expensive. Up until now, the stock had been
a retail runaway, up steadily for the last year. But this week, when
Costco tried to trim its outlook to account for expansion costs, its
botched briefing to Street analysts landed with a thud in the market.
Despite third-quarter profits up 14 percent, investors felt let down.
They slammed the stock, knocking it down nearly 22 percent on Wednesday,
the worst point drop in eight years, trimming $4 billion in market value
off the company.
SALLY WALLICK, LEGG MASON WOOD WALKER: Certainly it was a very extreme
reaction, but if you were to say to me, therefore, do you think the
stock is likely to bounce right back? The answer is no. What`s happened
is Costco has become a bit more of a wait-and-see stock now.
PILGRIM: Costco`s woes are not unique. Rising interest rates may slow
down shopping carts and the economy as a whole, but analysts say
Costco`s wide range of price and product mix makes it resistant to
DANIEL BARRY, MERRILL LYNCH: They have an outstanding club. It`s
regarded as the best in the business. There`s only two others. There`s
Sams , which is a part of Wal-Mart, and they generally have a better
operation than BJ`s (URL: http://www.bjswholesale.com/) , which is the
PILGRIM (on camera): This Costco in Queens, New York is 100,000 square
feet. It sells everything from fine china and crystal to disposable
diapers to watermelons.
(voice-over): If the China doesn`t sell, the watermelons will.
But one thing in tight supply at Costco is labor, and that costs big.
Costco says they plan to raise entry level wages 20 percent in June.
SINEGAL: High wages, in our mind, is synonymous with good quality
PILGRIM: And a good operation is what analysts ultimately focus on.
BARRY: Everything was going great. And what happened is I think they
didn`t realize that that step up, that expansion was going to cost them
as much as it did.
PILGRIM: And with that kind of expansion, the future looks, well, at
Kitty Pilgrim, CNN Financial News, New York.
VARNEY: And up next, "Ahead of the Curve," some of what you need to
know tonight before those markets open up again next week.
VARNEY: Looking ahead to next week, the markets are closed on Monday
Memorial Day, but on Tuesday, regular trading resumes. Here`s a preview
of what`s on tap: more on the Microsoft decision. The company is
expected to reply late Wednesday to the government`s latest breakup
proposal, and Judge Thomas Penfield Jackson could make his decision on
the company`s penalty as early as Thursday,
Several economic reports are expected next week, and they include the
May employment report, new home sales, the latest on the manufacturing
sector and consumer confidence.
Also next week, Hewlett-Packard will hold its annual analyst meeting
in New York City.
And just a quick programming note: tune into MONEYLINE on Monday for a
special Memorial Day edition, as we go inside several companies
undergoing dramatic evolutions. We`ll talk in-depth with the chief
executives of Oracle, Larry Ellison, plus, the third-generation leader
of Motorola, Christopher Galvin, and last, but by no means least, the
mogul behind Viacom, Sumner Redstone. Their take on where their
businesses are going and what`s happening in the economy. That`s Monday
at 6:30 p.m. Eastern Time.
And that is MONEYLINE for this Friday. I`m Stuart Varney. And we thank
you for joining us. And please, enjoy that holiday weekend.
"CROSSFIRE" is next.
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