Moneyline News Hour

Tech Tumble Ends One of Worst Weeks Ever for Nasdaq; Blockbuster Economic Reports Rekindle Fed Fears; Court Grants Napster Reprieve

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

STUART VARNEY, CNN ANCHOR: Tonight on MONEYLINE, a frightening tech tumble to end one of the worst weeks ever for the Nasdaq. The summer rebound now in reverse.

WILLOW BAY, CNN ANCHOR: Triggering the slide, a blockbuster economic reports. Investors consumed by one fear, that rate hike no. 7 is dead ahead.

VARNEY: A last-minute reprieve for Napster, avoiding a midnight shutdown. The legal eagle behind the battle? We'll talk with David Boise.

BAY: And they may be out on Rodeo Drive, but they are all the rage at the Chicago Merc. Why platform shoes have caused a fashion fight for frenetic traders.

ANNOUNCER: This is the MONEYLINE NEWS HOUR, live from New York and Los Angeles.

BAY: Good evening, everyone. I'm Willow Bay.

VARNEY: And I'm Stuart Varney in New York. Welcome to MONEYLINE.

Our top story tonight, another drubbing for tech stocks. Wall Street punished them with a vengeance, sending the Nasdaq plummeting nearly 5 percent, it's worst sell-off since May. Well, that pushed the index down 10 1/2 percent on the week, one of the worst weekly performances ever for the Nasdaq. Behind the selling, well, more profit concerns and renewed fear of the Fed, after a report on economic growth this morning showed surprising strength.

Greg Clarkin reports on day that went from bad to worse.

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GREG CLARKIN, CNN CORRESPONDENT (voice-over): The sell-off sent two clear messages: Investors are fed up with profit warnings, and spooked once again by the prospect of higher interest rates. So they sold, driving the Nasdaq down 179 points, a whopping one-day loss of 4.6 percent. For the week, the Nasdaq lost 10 1/2 percent. THOMAS GALVIN, DONALDSON LUFKIN & JENRETTE: People were clearly taking profits. Too many questions, not enough answers, and that forces people to the sidelines, and that's Happened pretty quickly here.

CLARKIN: One of the day's biggest losers was American Power Conversion. The maker of surge protectors jolted investors with a profit warning. Shares fell almost 50 percent. Big names fell as well. Cisco and Juniper Networks tumbled. And Internet stocks, such as Amazon, moved lower. Semiconductor stocks such as Rambus held strong, but even they have not been immune to the disappointment sweeping the tech sector.

JORDAN KIMMEL, MAGNET MANAGEMENT: Now the earnings are coming in, but almost each company is coming out with a little warning about don't be so bullish about the next quarter and the following quarter.

CLARKIN: The Dow also fell, losing about 75 points on the day, and 222 points, or 2 percent, for the week. Today, the Big Board had its share of big losers as well. Nordstrom warned of lower profits, and its stock tumbled. Cox Communications fell on a poor earnings report. And Nortel suddenly slipped out of favor on word its buying Web-hosting company Alteon for almost $8 billion in stock. Bankers and brokers, including Merrill Lynch, fell. But Qwest Communications was up on a positive analyst report. Despite the sell-off, some were convince all will be well in the fall.

GALVIN: My guess is people will come back after Labor Day, brimming with cash, recognizing 2001 will have lot of these product transitions out of the way. The stocks have been thrashed 30 percent 40 percent or more very quickly. I think we will get people back in these fairly strongly

(END VIDEOTAPE)

CLARKIN: But there are still five weeks to go before Labor Day, and investors have plenty to worry about: a Fed meeting next month and critical economic reports, such as the July employment report, which is due out next week -- Stuart.

VARNEY: And then there's an election.

All right, Greg Clarkin, thanks very much.

Now very few sectors were immune to this tumultuous sell-off for tech stocks, very few sectors indeed really escaped this. In fact, virtually none did. From software to semiconductors, this year's highest flyers have now fallen on hard times. Indeed, there are some stocks, big name, blue chip stocks, that have literally been cut in half. there are several examples of this. And as we said, today was massive sell-off for the Nasdaq which created a huge downside move for the week, down 10 1/2 percent, again, we say one of the worst weeks ever.

Allan Chernoff has more on the Nasdaq roller coaster ride.

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ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): It's enough to make your stomach turn. Nasdaq stocks whipped up and now down. Some investors no longer want to hold on for the ride.

TIMOTHY GHRISKEY, PORTFOLIO MGR., DREYFUS CORP.: I think in a momentum-driven market like the Nasdaq, once you start getting selling, it gets exaggerated by a lot of momentum investors that are in these names.

CHERNOFF: From May 23 to July 17, the Nasdaq composite soared 35 percent. But in past nine sessions, the Nasdaq has tumbled 14 percent. That's a correction in Wall Street language. As the Nasdaq has fallen, selling pressure has intensified. Volume has been well above average the past few days -- a fact fueling further selling. Investors are desperate to preserve profits as star performers dive from peaks.

Software companies have been reporting disappointing sales for the second quarter. Veritas Software is down 22 percent in the past month. Though for the past 12 months, the stock remains up 251 percent.

Semiconductor stocks are also suffering, victims of predictions that personal computer and wireless phone sales are heading for a slump. If sales do fall, there will be less demand for components.

GHRISKEY: With the economy slowing in general, technology is a bit of a cyclical industry. It is impacted by the economy. And as economy slows a bit, technology demand, the demand for technology, will also slow.

CHERNOFF: Vitesse Semiconductor is down 23 percent in the past month, though the stock remains up 77 percent for the past 12 months.

(END VIDEOTAPE)

CHERNOFF: It's true for other once-high flying sectors as well. Biotech and Internet stocks. After this week, it appears the summer rally has come and gone. Now investors are confronting a big summer setback -- Stuart.

VARNEY: Now what about volume? Because that's kind of important. When you've got a 10 1/2 percent drop in the Nasdaq, what about the volume? Big, or small or medium?

CHERNOFF: Exactly. Well, as we mentioned, the last two days, it really has picked up. It's been well over 1.7 billion shares, and that means there's conviction behind the selling. A few days ago, we talked about relatively low volume for the beginning of the week. Not too many investors were very worried. Now you've got heavy volume, and especially on a Friday during the summer, that's got people concerned. They will not rest easy this weekend.

VARNEY: OK, Allan Chernoff, thank you very much -- Willow. BAY: Stuart, now to that economic report that set the stage for that dismal day on Wall Street. The Commerce Department today offered a first glimpse at the economy during the second quarter, and it was not what inflation-phobic investors wanted to see. Gross domestic product grew at a blazing annual rate of 5.2 percent, much faster than economists had expected.

The news is sure to weigh heavily on the Fed when it makes the next decision on interest rates, as Bob Beard reports.

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BOB BEARD, CNN CORRESPONDENT: Slowdown? What slowdown? It appears to have been full steam ahead from the economy from April to June, despite the Federal Reserve year-long campaign of higher interest rates.

SUSAN HERING, CHIEF ECONOMIST, UBS WARBURG: The effects of interest rates, as the Fed likes to say, are long and variable on the U.S. economy, and obviously they're quite long. So I think the Fed has more to do here.

BEARD: Gross domestic product grew 5.2 percent in the second quarter, more than a full percentage point higher than Wall Street expected. The first quarter's growth rate was revised downward to 4.8 percent from 5.5, making the latest numbers that much more substantial.

The spring surge came on an unexpected jump in federal spending, inventory building by businesses, and investment in new plants and equipment, which helps worker productivity.

But two key inflation indicators were seen as encouraging.

GORDON RICHARDS, NATL. ASSN. OF MANUFACTURES: The high productivity growth basically offsets growth, and wage cost and other cost. As a result of which, the inflation rate remains pretty much contained.

BEARD: Also taking edge off today's report, consumer spending, which accounts two-thirds of economic activity, rose at a rate of just 3 percent in the second quarter, less than half of the first quarter's rate. That could reassure Fed policy makers. In Rhode Island today, the president reveled in the economy's prosperity.

WILLIAM J. CLINTON, PRESIDENT OF THE UNITED STATES: Growth over the past seven and half years has now averaged 4 percent. That's the best growth rate America has had since the Kennedy-Johnson years.

BEARD: The GDP report reverses a two-year trend of second quarter slowdowns which were followed by growth spurts.

(on camera): And some economists even now predict 3 1/2 to 4 percent through next year, with low inflation continuing this economy's astounding performance.

Bob Beard, CNN Financial News, Washington.

(END VIDEOTAPE)

BAY: The headlines about GDP sent a chill throughout the bond market. But the precipitous slide in the Nasdaq helped soften the blow, money flowing out of tech and into bonds. The 10-year issue lost a quarter point, the yield at 6.03 percent. The 30-year down seven ticks, the yield there 5.78 percent -- Stuart.

VARNEY: All right, Willow. From Wall Street to Washington politics, convention season is upon us. Republicans open their four- day event on Monday. Wolf Blitzer joins us now with the latest news from the convention site in Philadelphia -- Wolf.

WOLF BLITZER, CNN ANCHOR: Stuart, you remember that yesterday a CNN-"USA Today" Gallup poll had George W. Bush 11 points ahead of Al Gore in a national poll among likely voters.

Well, today there's a new poll, a CNN/"Time" magazine poll. And take a look at these numbers. George W. Bush with 52 percent of vote among likely voters. Al Gore with 36 percent. Ralph Nader and Pat Buchanan way down below.

And take a look at this, as far as the question of whether Dick Cheney has helped the Bush ticket, 66 percent of those who were questioned said it has no effect, smaller, much smaller numbers, said it has had an affect on the Bush-Cheney ticket.

Now the Republicans were on the road today. They did a sort of in-your-face move. They went to Arkansas, President Clinton's home state, to try to rally Republican support there. That state is one of the battlegrounds. Polls in that state show it's going to be a close race between Bush and Gore. Before the governor arrives here in Philadelphia the middle of next week, he's going to be visiting five other states, all seen as battleground states, although all of these six states went Democratic both times in '92 and '96. As a result, the Republicans have their work cut out for them. But polls in all of those states show that the race right now, Stuart, is very competitive -- Stuart.

VARNEY: Now, Wolf, when we go back to that poll that we just mentioned there, would it be really pretty accurate to say that Nader's votes come mostly from Mr. Gore and Mr. Buchanan's votes come mostly from Mr. Bush? Is that accurate?

BLITZER: It's accurate to say most of Nader's supporters probably would vote for Gore. and most of Buchanan's supporters probably would vote for Bush. If Buchanan and Nader wind up neutralizing each other of course that would be a nothing for either of the candidates. But in some of the close states like California and Michigan, Nader could do a lot better than Buchanan. And that would represent a net negative, of course, for Al Gore.

VARNEY: All right, Wolf Blitzer at the convention site in Philadelphia. Thanks very much, Wolf.

BLITZER: Thank you.

VARNEY: Wolf -- Willow.

BAY: Stuart, next on MONEYLINE, the music plays on, Napster wins a late-day break in appeals court, but is it just a temporary victory? That's the question. We'll ask the company's high-powered lawyer, David Boies. He beat Microsoft. Will he beat the record business, too? And the bottom line on a Houston heavyweight that's somehow become a Wall Street darling. How did Enron do it?

Stay with us.

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BAY: A dramatic development in the battle between the music industry and Napster. With less than 10 hours to go before its service was supposed to shutdown, Napster won a reprieve today in the Court of Appeals.

Casey Wian has been following the legal maneuvering all day, and he joins us now from San Francisco with the very latest -- Casey.

CASEY WIAN, CNN CORRESPONDENT: Willow, two days after Napster was given what many said was a death sentence, the online music- swapping service received new life from the U.S. Court of Appeals. Just this afternoon, two judges granted Napster's motion for a stay of a temporary injunction, one by the record industry, that would forced Napster to shutdown. The judges ruled that Napster raised substantial questions about both the merits and form of the injunction. The court is scheduled to hear arguments from both sides from a period lasting from mid August to mid September. So Napster has a new lease on life, at least until then.

Napster had argued that the judges, the federal district court judges, decision was unfair, because it would force them to track the habits of the members of its services online, which it says it didn't have the technology to do. It also said that district court ignored legal precedents that were in Napster's favor. The interesting question that this races now is whether this strengthens Napster's hand in potential settlements with the recording industry. They have indicated in the past that they may be willing to settle. This may give Napster a stronger position in those settlement discussions if and when they occur -- Willow.

BAY: Casey Wian in San Francisco, thank you.

Ahead of the Appeals Court decision today, there was a flurry of activity. Fans preparing for a shutdown, and Napster continuing to fight. A spokeswoman for Napster says there has been a noticeable increase in people using its system. The rush to download occurred after the judge ruled against Napster on Wednesday. There was also a rash of online chat, including a lot of talk among users about which Napster alternatives work best.

Napster, meanwhile, launched an all out P.R. offensive, the company offering links to the e-mail addresses of top record execs, urging fans to protest. It also promoted a so-called "buycott," calling on the Napster faithful to go out this weekend and buy the music of artists who support the company.

And later on MONEYLINE, he's the legal whiz who brought Microsoft to the brink of a breakup. Now he's determined to keep the music playing at Napster: We'll talk with David Boies. That's later in the program -- Stuart.

VARNEY: All right, Willow, coming up, as Republicans flock to Philadelphia to nominate formally George W. Bush, we're going to look at how corporate America is footing the bill for both sides of the aisle. And we'll check out what this election season means for Wall Street and investors with political analyst Greg Valliere.

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VARNEY: As you might imagine, there were quite a few stocks that hit 52-week lows today, and they included Amazon.com, and look at this, AT&T, At Home, Circuit City and Nordstrom.

Politics involves big money these days, and conventions are no exception. The Democratic and Republican conventions this year will cost more than $100 million. But the U.S. Treasury contributes just $13.5 million to each party. Who's making up the difference? Kelli Arena followed the money to Philadelphia.

(BEGIN VIDEOTAPE)

KELLI ARENA, CNN CORRESPONDENT (voice-over): Free Tasty Cakes at the GOP convention in Philadelphia. What more could a delegate ask for?

CARL WATTS, CEO, TASTY BAKING COMPANY: Nothing goes on in Philadelphia that taste is not involved in.

ARENA: Whether its food or cold hard cash, corporate sponsors keep conventions equipped from everything from planks in the platform -- the wooden kind -- to bunting and balloons. Tasty jumped on the Republican bandwagon because it rolled through Philly. But the really big money flows in both directions.

ANTHONY CELLUCCI, AT&T, RNC CONVENTION DIRECTOR: We are affected very much by legislation, and we want to make sure the policy makers know, again, what our industry is all about.

ARENA: In case any conventioneer ever forgets what AT&T does, there are lots of free phone cards as reminders. AT&T is on the short list of big money donors to the conventions this year, along with insurance giant AIG, BP Amoco, Bell Atlantic, and Philly law firm Ballard Spahr. DaimlerChrysler rented 35,000 square feet to show off its cars. It's giving away one of its American-made models to make sure everyone knows the company is still, sort of, American.

(on camera): To lure delegates in, DaimlerChrysler is giving away one of its new PT Cruisers in a visitors sweepstake. And about half dozen senior executives will be working the crowd here in Philadelphia. But barely audible beneath the frenzied hammering out of yet another deal in the making, the charge from some that companies sponsor convention just to curry political favor. DaimlerChrysler says there's nothing special about the conventions.

ROBERT LIBERATORE, DAIMLERCHRYLSER: A company of our size and long history of activities in Washington and state capitals could have access to virtually any politician we want whenever we want.

ARENA: But marketing gurus says it's worth every penny.

MARTIN BLACKMAN, CEO, BLACKMAN & RABER: I think it's brilliant. I think it's a smart stroke.

ARENA: For the big boys, every four years the conventions are just another showcase for brand building.

For others like Tasty Bakery, this is a one-time gig.

WATTS: We're getting this interview with CNN, which is terrific, so.

ARENA: Kelli Arena, CNN Financial News, Philadelphia.

(END VIDEOTAPE)

VARNEY: The markets will also be turning their attention to politics now that the presidential race is heating up. And here to talk about market and politics is Greg Valliere, management director at Schwab Washington Research Group.

Greg, welcome back.

GREG VALLIERE, SCHWAB WASH. RESEARCH GRP.: Great to see you.

VARNEY: Does thus presidential election make any difference to the performance of the stock market? In other words, should investors really care?

VALLIERE: I think they should care. Obviously we've got concerns about the Fed and earnings. But I think once the conventions are over, once we get past Labor Day, I think the markets have to focus on the possibility that this could become a real horse race.

VARNEY: Does the market have a favorite in this election?

VALLIERE: Well, I'm going to sound like an economist -- on the one hand, on the other hand. On the one hand, I think the fixed- income market might not mind Al Gore, because he's very stingy with tax cuts. He wouldn't stimulate the economy. He'd pay down debt. On the other hand, I think that the equities market, the stock market, would prefer a George W. Bush. I think for a lot of sectors, whether it's tobacco, utilities, energy, I think Bush would be better for stocks.

VARNEY: Is there a pure play in this election? In other words, a group of stocks that would move significantly depending on the election results?

VALLIERE: Absolutely, Stuart. I really think that it's health care in general and drug stocks in particular. In if around Labor Day, it looks like Gore is making come back, I think the drug stocks could be very vulnerable. Why? Because he has hinted that he would look at price controls, and that's anathema to that industry.

VARNEY: Would it be true to say that Wall Street is perhaps more concerned about the vote -- the race for the House, control the House of Representatives? In other words, more importantly -- House of Representatives vote more important than the White House vote.

VALLIERE: That's good point. And to be contrarian, I think Wall Street would like to see Congress stay divided. The Senate, I think, almost certainly will stay Republican. If the house goes Democratic, and it's possible -- only a six-seat swing would do that, I don't Wall Street would mind, because Wall Street loves gridlock. Gridlock has given us our greatest story of the last few years, and that is the surplus. And debt reduction would be the big story if you have gridlock.

VARNEY: So gridlock means it's a do-nothing Congress, and that's exactly what investors want.

VALLIERE: I think one of my favorite clients said the other day, when they do nothing, it means they do less harm.

VARNEY: A quick prediction, who's going to win?

VALLIERE: I think Bush will win narrowly in the popular vote, but pretty comfortably in the electoral college.

VARNEY: Greg Valliere, always a pleasure, thanks for being with us.

VALLIERE: Great to see you.

VARNEY: OK, Willow.

BAY: Stuart, coming up on MONEYLINE, they were once fashionable, and in some financial circles, even functional. But platform shoes are now getting the boot from one of the world's busiest exchanges. We'll tell you why.

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VARNEY: Coming up in our next half hour:

BAY: A surprise development in the battle over online music. We'll have an interview with Napster attorney David Boies. Plus, we'll have full coverage of a horrific day for tech shares.

VARNEY: We'll look at what sparked the sell-off and take a tally of how much was lost during a week to forget.

BAY: Plus, we'll check in with John Metaxas, who's been following the action down at the Nasdaq marketsite -- John.

JOHN METAXAS, CNN CORRESPONDENT: A faster economy, but expectation of slower corporate growth all sent the Nasdaq to a grinding decline, down 4 1/2 percent today, 10 percent for the week. We'll have the story coming up next on MONEYLINE.

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ANNOUNCER: THE MONEYLINE NEWS HOUR continues. Here again, Willow Bay in Los Angeles and Stuart Varney in New York.

VARNEY: In tonight's headlines, a Friday flogging for tech shares, as the Nasdaq ends the week in a swoon, sending that index to its third worst weekly showing ever.

And a last-minute reprieve in the war over swapping songs online: Napster wins the latest battle to let the music play on, at least for now. We'll talk to attorney David Boies.

Plus, we'll check out the transformation of an old-line gas giant into a new-economy powerhouse: "The Bottom Line" at Enron.

BAY: But first, more on tonight's top story: Tech stocks take another tumble, closing off a miserable week for the Nasdaq, as investors flee from new-economy names yet again.

The Nasdaq got off to a rough start today, and closed near its session lows, ending down 179 at 3663. For the week it was down 10 percent. In percentage terms, that was the third-worst performance in history, as the Nasdaq was hammered by three triple-digit losses out of the five sessions.

It was also a poor showing today for blue chips. The Dow slipped nearly 75 to 10511. For the week, the Dow slid 2 percent.

Checking some of the worst hit, Intel lost nearly 8, Cisco slumped more than 5, Amazon.com dipped more than 1 1/4, a 52-week low, and JDS Uniphase sank more than 12.

Financial shares also fell, led by Merrill Lynch, off 5 1/4, the financial sector weighed down by signs that the economy is still roaring, growing by a whopping 5.2 percent in the second quarter, an even faster clip than at the start of the year. Investors had expected growth to slow.

VARNEY: Ah, but, Willow, you know, it was the downdraft in the Nasdaq that really frazzled all those nerves on Wall Street.

John Metaxas has been at the Nasdaq all afternoon, and he joins us from there now -- John.

METAXAS: You know, Stuart, it was an oddd dichotomy: concerns about that faster-than-expected economic growth but concerns that corporations will be growing more slowly than expected.

The Nasdaq having another grinding session, down 4 1/2 percent, 179 points. The Nasdaq was actually down close to 200 but dipped, came back up in the final moments of trading.

Every sector as the Nasdaq defines it lower today. Telecommunications continuing weakness with a 6 percent loss, computers down almost 5 percent, biotechs the same. The industry sector down 3 1/2 percent.

Oddly, the chipmakers attempted a rally. The Philadelphia semiconductor index up about 1 percent on the day, but it was a mixed experience for the chip stocks. Those with exposure to the telecom market, including PMC Sierra and Broadcom continmuing to continuing to decline. Those with little exposure to the wireless market rebounding, among them Altera and Xilinx.

Finally, let me show you a lesser-known stock that is perhaps emblematic of what happened in this market. American Power Conversion, the company's earnings met expectations, but they warned Wall Street that the third quarter will be below expectations. We've heard that story before from other companies. They were punished, down 44 percent, a predictable reaction.

And finally, the IPO of the day, Corvis, a company with no revenues and large losses. They surged from their $36 dollar IPO price up 135 percent. Their secret: They're in the fiberoptics sector. The term fiberoptics still has magic on Wall Street.

The Nasdaq was down 10 percent this week, but without the panic we felt in April when it lost 25 percent in that one week. After all, we've been through territory before. It's starting to look a little familiar -- Stuart, Willow.

VARNEY: Yes, I think this is one of those weeks that you could say truthfully you're you're glad it's over. Thanks very much, John Metaxas.

Our next guest, Guy Pope, is riding through the market's downswell, posting a 7 percent return year to date. His Columbia Common Stock mutual fund has nearly 40 percent of its holdings in tech stocks, and Pope is still positive on the sector's outlook. His top holdings: Pfizer, Intel, Micron Technologies, General Electric and Citigroup.

We're now joined from Portland, Oregon, by Guy Pope.

Mr. Pope, welcome to the program.

GUY POPE, COLUMBIA FUNDS: Stuart, it's great to be here with you tonight.

VARNEY: There are many, many people in our audience who are holding tech stocks that have been really badly beaten down. What's your advice to those people right now?

POPE: I have three simple pieces of advice for those people. The first one is to have conviction in your holdings. It's never a smart idea to sell stocks just because they're weak. Nothing's worse than getting washed out on weakness. The second thing to do right now is to do your research. Figure out what stocks you want to have in your portfolio for the next two to five years.

And the final thing to do is accumulate your stocks on this weakness right now.

Having said that, though, the market looks technically very bad right now, and we could easily have another 10-15 percent correction from here, putting us at the May lows, which we'll re-test.

But beyond that, I'm very positive on the market and in technology shares as well.

VARNEY: Why do you think the technology stocks are going to come back at some point later on this year, third or fourth quarter? Why?

POPE: Basically, I think it's the most dynamic growth area of the market. It's a corporate imperative for corporate America to spend on technology going forward, and the fundamentals are great there. So eventually they will come back. The market as a whole right now I think will have decelerating GDP -- decelerating earnings from a 15 percent level down to an 8-10 percent level. And I think the economy is decelerating, despite the higher-than-expected economic data that we got this week. And that's basically a robust environment for the market as a whole.

VARNEY: So, Guy -- let me jump in, Guy. I just want to summarize this. Your advice is watch this market, do your research, do your homework, but be ready to buy at these new, very low levels for tech stocks. That's your advice?

POPE: Absolutely have conviction and by shares on the weakness.

VARNEY: Would you buy some of those big-name, blue chip tech stocks that have been truly badly beaten down? I'm thinking of the Amazon's in this world, maybe Xerox, American Telephone, Citrix System, for example?

POPE: One stock I like a lot right now is Microsoft. The stock's corrected 40 percent this year. I think two reasons for that. One is sluggish earnings growth in the short term here, as well as the DOJ case. I think on the DOJ case, that will definitely go to the appeals court here, and that will be tied up in appeals court for the next two years.

Given that, investors will be able to refocus on the fundamentals, which I think will accelerate here. I think we'll have a seasonal uptick in PC demand in the fall, and that will accelerate earnings growth for Microsoft. So with Microsoft selling at 35 times next year's earnings versus its peers selling for anywhere from 50 times to 90 times, I think it's a great value with accelerating fundamentals.

VARNEY: Guy Pope from the Columbia Group of funds, thank you for joining us. POPE: Thank you, Stuart. It's great to be here.

VARNEY: Willow.

BAY: Stuart, next on MONEYLINE, score one -- a big one -- for Napster. The music will play on after a last-minute reprieve from a California court. We'll talk with the legal legend who helped engineer this surprise victory, David Boies.

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BAY: More now on the battle over Napster. The company today scored a last-minute victory, with an appeals court putting a shutdown order on hold. We should member that our parfent company, Time Warner, is a parent of the Recording Industry Association of America, which is fighting Napster.

Today's ruling was yet another legal win for the man leading Napster's defense, start attorney David Boies. Boies was the lead attorney for the government in the most important antitrust case of the digital age: the U.S. versus Microsoft. It was Boies, who led the 20-hour deposition of Bill Gates, which was a legal and public relations disaster for Microsoft.

With a stunning victory against the software giant under his belt, Boies began to attract a slew of publicity for taking up Napster's cause. He won today's battle, but will he win the war?

David Boies joins us now from San Francisco.

Mr. Boies, welcome.

DAVID BOIES, ATTORNEY, NAPSTER: Thank you very much. Pleasure to be here.

BAY: No doubt you're pleased by the victory, but will you admit to being a bit surprised?

BOIES: No, I think this was the right decision by the court of appeals. Remember, this decision is not a decision on the merits. This is not a decision that we win or we lose. This is a decision that says we're going to hold everything in place. We're going to preserve the status quo, we're going to let Napster continue to serve its listeners and users until we have a chance -- that is we, the court of appeals -- have a chance to consider the case on its merits. So it simply stays everything, holds everything in place, until the ultimate appeal is decided.

BAY: Would you acknowledge then that when the merits are considered, you are facing an uphill battle?

BOIES: No, I think we're right on the merits. All I'm saying is I think that this decision is not a decision as to whether we're right or wrong on the merits. I think we're clearly right on the merits. I...

BAY: What's your strongest argument on the merits for why this isn't stealing?

BOIES: Well, I think there are two arguments. One is, remember, Napster is a peer-to-peer system -- that is, all Napster does, is it provides a directory service that tells music lovers around the country what other music holders are prepared to share their files. Napster doesn't copy the files. Napster doesn't distribute the files. Napster permits individual users to make the choice to share music. Now sharing music that way by consumers, first, has always been considered fair use under the copyright act.

And second, the American or Audio Home Recording Act -- in that act, Congress said noncommercial sharing of music by consumers is lawful.

And the 9th Circuit Court of Appeals, which is the court of appeals that is going to decide this case, talked about the Audio Home Recording Act just last year in a case brought, ironically, by the record industry --by the Record Industry Association of America against Diamond Multimedia Systems Incorporated. So, this is a question in which there are many reasons to believe that the individual consumers have an absolute right to share music.

Second, even if the users were sometimes engaged in improper activity, the United States Supreme Court in the Sony Betamax case -- where they held it was not contributory infringement to offer VCRs, even though VCRs were primarily used to copy copyrighted programs -- the Supreme Court held that a supplier of product or service is not guilty of contributory infringement, which is all Napster is accused of being guilty of, merely because it offers something that consumers can use in a variety of ways.

BAY: David, let me ask you this: You do have a battle on your hands. Would you consider, would Napster consider settling this before it goes to the court of appeals?

BOIES: I have said, on a number of occasions previously, that I believe that this is a case that should be settled. I don't believe the record industry is well served by this. I don't think my client Napster is well served by being tied up in court. I don't think that music lovers in this country, consumers of music, are well served by this litigation. I think this is the kind of case that ought to be resolved. A number of prominent people in Washington have said the same thing.

The problem is that the Record Industry Association seems determined to kill this new medium. And if that's so, we're not going to go quietly into the night. There's going to have to be a fight about it.

BAY: And that seems clear with you at the helm.

David Boies, thank you very much for joining us.

BOIES: Thank you very much.

BAY: MONEYLINE will be back right after this. (COMMERCIAL BREAK)

VARNEY: A day after Nortel called off talks with Corning, the telecom equipment-maker said it will buy Alteon WebSystems for nearly seven billion dollars in stock. Nortel says this deal will help it build telecom systems that will speed up content delivery over the Internet. Nortel will pay 1.8 shares for every Alteon share. That works out to just one dollar above yesterday's closing price -- investors disappointed that a premium was not paid. Alteon's shares sank 14 points, but are still up nearly 600 percent from their September IPO -- Nortel down more than six points today, and it's off nearly 10 percent this week.

BAY: Bank of America announced a major restructuring today. It said it will cut some 10,000 jobs in an effort to boost earnings. The nation's largest bank expects the move to save nearly $600 million a year. And its stock performed even worse. Over the past 52 weeks, it has fallen 34 percent -- Stuart

VARNEY: Uh oh, watch out: an earnings warning from Nordstrom, and it sent its stock tumbling today. The upscale retailer said it will miss second-quarter estimates by as much as 16 cents a share. Analysts were looking for it to earn 55 cents a share. It blamed the shortfall on disappointing sales and aggressive discounting. On that news, several brokerages downgraded the stock and investors bailed out. Nordstrom shares plummeted more than 4 1/4 points, all the way down to 18, and that is a new 52-week low.

Back with more MONEYLINE for you after this.

(COMMERCIAL BREAK)

BAY: Now, "The Bottom Line," our regular Friday feature inside one company commanding headlines -- tonight: Enron, a Texas-based gas company that has transformed itself into a new-economy giant. The company's second-quarter profits jumped 30 percent thanks to the Web. And just last week, Enron captivated Wall Street with its bold move into broadband, teaming up with Blockbuster to deliver movies on demand.

Fred Katayama has more from Enron's headquarters in Houston.

(BEGIN VIDEOTAPE)

FRED KATAYAMA, CNN CORRESPONDENT (voice-over): Houston has been linked with oil and heavy industry since black gold was discovered in 1901. But one company has transformed itself from a sleepy old- economy pipeline into a symbol of the new with pipes of fiber: Enron. Just look at its stock. It has blasted off faster than a rocket at nearby Johnson Space Center. It has outperformed its peers, gaining 69 percent so far this year.

JEFF SKILLING, PRESIDENT, ENRON: That was amazing.

KATAYAMA: Leading the transformation, Enron's visionary president, Jeff Skilling. SKILLING: We were B2B before there was B2B.

KATAYAMA: A decade ago, four-fifths of Enron sales came from its pipeline, the remaining fifth, oil and gas exploration. Today, those businesses make up roughly one-fifth of Enron. The remaining 80 percent are new businesses, wholesale trading of energy products, managing energy needs of corporate clients through retail and broadband.

This innovative company has become the largest wholesale marketer of natural gas and electricity in North American. And fueling that business is a new operation that launched last November, trading energy online.

UNIDENTIFIED MALE: That's 60 cents behind where we were.

KATAYAMA: This commodities trading floor symbolizes Enron's transformation into an Internet powerhouse. The company trades 800 products, ranging from natural gas to financial products that hedge against bad weather. Enron Online began just eight months ago, and it already average $1 billion dollar in transaction a day, making it one of the world's largest e-commerce Web sites. Sixty percent of Enron's transactions are now done online. Ten years ago, it would take Enron nine months to negotiate a gas contract and then deliver it to the customer.

SKILLING: A year ago, if you went down to floor, our trading floor, in any given week, we were probably doing 10 of those types of transaction with an average elapsed time of maybe five minutes. With the Internet, with Enron Online, we can do one of those in about something under a second.

KATAYAMA: It added trading of Internet bandwith in December, allowing customers to buy just the amount they need for a few hours or days, instead of committing to several years worth, as it were back then.

SKILLING: We think in the next five years, it could be as big as the gas electric business in North America. It's a big, big market, and it's growing very, very fast.

KATAYAMA (on camera): Last week, Enron wowed Wall Street with one of its boldest moves, getting into broadband. It signed an exclusive 20-year deal with Blockbuster, whereby Enron will use its fiberoptic networks and servers to deliver Blockbuster's lineup of movies to consumers at home on demand.

(voice-over): Its nationwide network of fibers will let consumers download movies and treat them like a movie tape, fast forwarding to favorite scene or pausing for a bathroom break. That Blockbuster deal finally nudged one of Wall Street's last holdouts to upgrade Enron to a buy.

RONALD BARONE, PAINEWEBBER: This is probably the first of several contracts we're going to see them announce to the level of video by Enron's fiberoptic system. I think this has the potential to be larger than Enron the company is right now in five years.

KATAYAMA: Enron reported nearly $17 billion in sales last quarter, most of it from wholesale and retail energy and its pipeline businesses. Broadband accounted for 1 percent. Enron will route movies to cities, but it will then rely on local telecom companies like SBC and Qwest to take it the so-called last mile into homes. But Enron's partners will have to upgrade their pipes.

Wall Street's bulls the predict fast growth of broadband and its energy trading businesses could drive the stock up another 20 to 30 percent over the next year. Those businesses are expanding so fast, Enron is building a 40-story tower to accommodate them.

Fred Katayama, CNN Financial News, New York.

(END VIDEOTAPE)

BAY: Up next, why the Chicago Merc is clamping down on a popular way of standing above the crowd.

VARNEY: Plus, "Ahead of the Curve," some of what you need to know tonight before the markets open again come Monday. You're watching MONEYLINE.

(COMMERCIAL BREAK)

VARNEY: A full plate of economic and profit news for investors to chew on next week. On the economic front, expect a key report on the labor market with July's employment data. Also next week, personal income and spending figures, the NAPM Index, factor orders, and new homes sales. Full plate, indeed.

Another round of earnings next week with Dow component Procter & Gamble and Walt Disney expected to report. Also, watch for Aetna, Bell Atlantic, Royal Dutch Petroleum and Viacom. Plus, chip giant Intel will splits its shares two for one before Wall Street opens on Monday.

Now next week, join the Republican convention. Look for a special MONEYLINE update each night, and for a full half hour of MONEYLINE, turn in to CNNfn at 7:00 p.m. Eastern -- Willow.

BAY: Stuart, as casual Friday's become commonplace, corporate America seems less concerned with how employees dress than with how they perform. But a major financial exchange is taking aim at one particular fashion choice, even though it helps traders get a leg up on the competition.

Lisa Leiter has the story from Chicago.

(BEGIN VIDEOTAPE)

LISA LEITER, CNN CORRESPONDENT (voice-over): On the jam-packed trading floors of the Chicago Mercantile Exchange, traders will go to just about any length to stand out -- booming voices, wild hack hand signals, even snazzy jackets. But now Merc officials are cracking down on the most popular way for traders to rise above the crowd -- platform shoes.

BUCK HAWORTH, CHICAGO MERCANTILE EXCHANGE: We're very concerned that people are going to break their ankles or hurt their knees.

LEITER: Starting Monday, shoes with heels more than 2 inches tall will be banned. For some, the high heels are just fashion statement. But for traders like Jordan Dolin, they're 3 1/2 inches of competitive edge.

JORDAN DOLIN, INDEPENDENT TRADER: It's about being able to see over people's heads, and having the advantage of trading and seeing to the other side of the pit.

HAWORTH: People started out with just a half-inch platform, and over the last year they've grown to where we're probably at five inches now. It will take a while for people to understand that we're really serious.

LEITER (on camera): Merc officials are so serious they came up with this. If the platform are any higher than bottom of the red line, the traders are off the floor.

HAWORTH: It sounds a little ridiculous, but we've forced to go to that extreme.

LEITER (voice-over): The rules apply to everyone who works on the floor, men and women, traders and clerks. But some question whether the idea of taking away such a vital trading tool will take money out of traders pocket.

STEVEN FOLINO, FLOOR SUPERVISOR: I don't care if they wear 6- foot stilts, if they need to. They're the ones who are herding the business into this place.

LEITER: So Dolin is preparing to downsize.

DOLIN: I'll cut them in half. Rules are rules, and we're just going to have to abide by it.

LEITER: Lisa Leiter, CNN Financial News, Chicago.

(END VIDEOTAPE)

BAY: Big business now in shaving those platforms off, Stuart.

That is MONEYLINE for this Friday. I'm Willow Bay.

VARNEY: And I'm Stuart Varney, indeed, yes. Good night from New York.

"CROSSFIRE" is next.

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