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CNN MONEYLINE NEWS HOUR
Dow Advances 154.59 to 10,951.24; Nasdaq Climbs 45.33 to 2,191.53; Rise in Unemployment Fuels Investors' Hopes of Interest Rate Decrease
Aired May 4, 2001 - 18:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
WILLOW BAY, CNN ANCHOR: More Americans heading to the unemployment lines. This is MONEYLINE for May 4th, 2001.
A much worse-than-expected report on jobs shows payrolls dropping and unemployment rising: Is a recession still a possibility? But investors put their faith in the Fed and send stocks sharply higher. The bet: that Alan Greenspan will make another bold move.
A former art-world powerhouse accused in an global price-fixing conspiracy says, "I didn't do it."
ANNOUNCER: This is MONEYLINE. Reporting tonight from New York, Willow Bay.
BAY: Welcome to MONEYLINE. We begin tonight with a deeply troubling report on the state of the American job market. The unemployment rate during April moved higher to 4.5 percent. Even more disturbing: payrolls took their biggest plunge since the last recession, a surprise to even the most bearish of economists.
The implications stretch well beyond the job market: Consumers have been holding up the economy in recent months while businesses have been struggling. And when job security is threatened, so is consumer confidence, consumer spending and the entire economy.
We begin coverage tonight with two reports, starting with Peter Viles in Washington.
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PETER VILES, CNN CORRESPONDENT (voice-over): The heavy rains and flooding in the Upper Midwest played a small role, discouraging construction, but the government today depicted a nationwide slowdown in the labor market that goes far beyond bad weather.
The nation's jobless rate spiked from 4.3 to 4.5 percent, the highest level since 1998.
MAUREEN ALLYN, ZURICH SCUDDER INVESTMENTS: I think this is going to go on for quite a while. We're looking for 5 percent unemployment by the end of the year, probably at the minimum, because the profits deceleration is so sharp. VILES: But the stunning headline was job losses: 223,000 jobs disappeared in April. That's 7,400 jobs a day. It marks the fastest rate of job losses since February 1991, during the last recession.
ANTHONY CHAN, BANC ONE INVESTMENT ADVISORS: We have not hit the bottom in the economy. These numbers clearly tell me that it's not going to be a V-shaped recovery. These numbers clearly tell me that the second quarter will be significantly weaker than the first quarter.
VILES: The job losses were widespread: 108,000 from "help supply services," which includes temporary workers; 104,000 from manufacturing, including 31,000 from electronics equipment manufacturing: the worst job losses in that category since the 1970s; and 13,000 from hotels.
JERRY JASINOWSKI, NATIONAL ASSOCIATION OF MANUFACTURERS: I think it shows that we've still got a lousy economy. And firms in manufacturing, for example, although they've adjusted some on inventories, they're still getting rid of inventories, and they're cutting back on jobs in order to try to restore profitability.
VILES: The jobless report is based on research conducted three weeks ago. Separate reports since then on weekly jobless claims indicate the job market may have weakened further in those three weeks.
Peter Viles, CNN Financial News, Washington.
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(BEGIN VIDEOTAPE)
LISA LEITER, CNN CORRESPONDENT (voice-over): This is Lisa Leiter in Chicago, where the buy orders flew through the bond pits after news that the job market deteriorated faster than anyone expected.
Bond traders sent prices sharply higher and yields lower, hoping that when Alan Greenspan and policy-makers meet on May 15th they will slash interest rates for the fifth time this year.
CHARLES LIEBERMAN, ADVISORS FINANCIAL: This is the first report that we've seen in this entire weakness that I would consider even a recession-class type of report. So, the Fed has been very responsible, very aggressive. I expect them to continue to do so.
LEITER: The Fed has been aggressive because it wants desperately to prevent recession, but economist Brian Wesbury says it's too late.
BRIAN WESBURY, GRIFFIN, KUBIK, STEPHENS & THOMPSON: The manufacturing sector has been declining. The service sector is now declining. Initial unemployment claims are rising, and the unemployment rate is going up.
It's not good news to report, and I think that the only way to talk about is to talk about what it really is, and that is a recession.
LEITER: This jobs report comes just as people thought the worst was over. One week ago, a report showed the economy grew at a surprising 2 percent in the first quarter. Some warn the contraction could now come in the second quarter, but others say that's not case.
CARL TANNENBAUM, ABN-AMRO: This morning's number does not necessarily indicate that we are in a recession. After all, there's still 130 million Americans at work whose wages are growing by 4 percent or more per year. That's a lot of spending power.
LEITER (on camera): The fear is that people will keep that power in their pocketbooks. Economists say nothing affects consumer behavior more than the state of the job market, which is looking weaker each day.
Lisa Leiter, CNN Financial News, Chicago.
(END VIDEOTAPE)
BAY: Those buy orders, as Lisa said, flew in during the morning, but they flew out in the afternoon. The 10-year ended up four ticks, the yield at 5.19 percent. The 30-year actually fell a quarter point: The yield there at 5.65 percent.
So why did bonds take a hit? A key reason: the stock market, which tumbled in the morning and quickly rebounded on faith that today's report will force the Fed to take another bold step to head off a recession.
Let's go to Allan Chernoff at the New York Stock Exchange. He tracked the dramatic turnaround as it happened -- Allan.
ALLAN CHERNOFF, CNN CORRESPONDENT: Thank you, Willow.
When a company issues bad news and the stock is able to shake it off, it's a bullish sign. That's exactly what the stock market as a whole did today.
Wall Street shrugged off negative implications of the jobs report, viewing the economic glass as half-full rather than half- empty.
(BEGIN VIDEOTAPE)
CHERNOFF (voice-over): The market sold off on the opening bell. Economically sensitive cyclical names led the retreat on the idea that the deteriorating job market could hurt consumer spending and the economy as a whole.
The Dow at its worst was off 123 points before beginning its turnaround 24 minutes into the trading day. The Nasdaq hit bottom six minutes after the open, down 57 points before starting to climb back.
DAVID BRIGGS, FEDERATED INVESTORS: The market had a real nice rally and I was surprised at the rapidness and the strength that it had.
CHERNOFF: Investors decided the poor jobs report virtually guarantees the Federal Reserve will take another step to boost the economy.
ANNETTE GEDDES, M.D. SASS: I think the market acted well, because it expects now the Fed can loosen rates and lower interest rates again. And also, the chances of us getting a tax cut through have probably increased.
CHERNOFF: The turnaround was most dramatic in deep cyclical stocks, which suffered losses in the morning only to end with gains: paper and forest companies, like Georgia Pacific; manufacturers, such as Danaher; electrical equipment makers, like Solectron; and chemical firms, including Dow.
Today's performance provided new confidence that the stock market has bottomed out.
CHRISTINE CALLIES, MERRILL LYNCH: Most of the bad news is reflected in current stock prices or current valuations. So when additional bad news comes out there is no further negative response.
CHERNOFF: Also providing support, individual investors have been putting money back into equity funds: $8 1/2 billion in the latest week, according to AMG Data Services. And as the market continues to rise, pressure builds on mutual fund managers to put the money to work.
(END VIDEOTAPE)
CHERNOFF: For much of the year, traders have been afraid to hold stock positions going into the weekend. Not so today. The major indices ended near their highs of the day, and traders agree that's one of the most positive tones the market has had in weeks. Now, next week comes another test. The Dow is now 49 points away from 11,000, and that has been a very tough resistance level for the index.
If the industrials can break through convincingly, that would be a very bullish sign -- Willow.
BAY: Allan, is there anything on the horizon that might hold the markets back?
CHERNOFF: Well, certainly, we can still get some very negative earnings news out there, and you never know. I mean, the sentiment here can be very fickle. But at the moment, as I said, the tone going into the weekend, going into next week, extremely positive.
BAY: Allan Chernoff, thanks, and you have a good weekend.
Today's rally closed out a winning week across the board on Wall Street. The Dow industrials had a bit of bumpy ride, down in three out of five sessions. But they still ended up more than 1 percent at 10,951, the highest level in months. But it was the Nasdaq that stole the show this week, losing ground in just one session. For the week, it jumped nearly 6 percent to close at 2,191, up more than 30 percent in a month.
Greg Clarkin joins us now from the Nasdaq marketsite with a look at today's big movers -- Greg.
GREG CLARKIN, CNN CORRESPONDENT: And Willow, the Nasdaq really performing very nicely today, shaking off that early selling that Allan was speaking of and coming back nicely. Investors again, after basically a one-day breather, returning to put money into those Internet stocks and some of those networking stocks. And today, we saw some of the biggest gainers being some of the biggest names on the Nasdaq.
Let's take you back here to the wall, give you an idea of some of those names and how they performed today. Microsoft was up 3.2 percent. Henry Blodget, the analyst at Merrill Lynch, out with what has to be described as kind of a mildly bullish report. That contributed to the strength in Microsoft shares, and that stock gained nicely.
Cisco Systems up 5.3 percent. Keep an eye on these guys next week. They're out with their earnings early in the week, and they could accompany, you could get some word from Cisco on when they expect to see a bit of a turnaround in their business.
Now, Dell Computer rose today 3.7 percent. On the downside, though, shares of Rambus, the chip company, which was weaker throughout the day -- late in the day, it did get a legal setback and that drove the stock even farther down, and it lost almost 20 percent on the day.
And then IDEC Pharmaceuticals, a nice gainer here, up almost 15 percent on the day. That company getting -- rising basically on speculation or optimism that the FDA will not delay its review of a drug, a cancer-fighting drug that IDEC is developing. So, that stock popped nicely on that.
Now, that's a look at some specific issues. Let's take a look at some of the sectors and how they performed today. The AMEX networking index rising 2 1/2 percent. Goldman Sachs Internet index up better than 2 percent. The Philadelphia semiconductor index -- well, the chips were really the only major sector that we saw losing ground today, and that was just slightly. It was down better than 1 percent.
All in all, a very strong finish to the week here at the Nasdaq for a very strong, strong week that the saw the composite gain nicely. And rolling into Monday it looks like it's in pretty good shape right now.
Willow, back to you.
BAY: All right, Greg, we'll take it. Greg Clarkin at the Nasdaq, thanks.
Ahead on MONEYLINE, consumers in the crosshairs. They have been carrying the economy for months. Will that continue if their jobs are threatened? A look back at a busy week for President Bush. He reached a budget and tax-cutting deal, but when will it clear Capitol Hill?
And going into the Kentucky Derby, we'll look at why the big business coming down the stretch is off the track.
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BAY: Secretary of Energy Spencer Abraham today traveled to California and said the state should not expect anymore help from Washington to relieve its power crunch, one day after the White House ordered federal facilities in California to cut their energy use. Abraham made sure the administration was not about to put a cap on wholesale energy prices. Instead, Abraham said California needed to generate more energy and build more power plants to work its way out of trouble.
California officials estimate that demand will far outpace supply this summer, forecasting that they may have to call for rolling blackouts for as many as 35 days.
Back in Washington today, the House unexpectedly put off voting on the blueprint of the federal budget, this after debate was cut short by a technical problem. When the voluminous budget was delivered to the House, at about 2:00 a.m. this morning, it was missing a couple of pages having to do with the tax cut. The House resumes debate on the budget on Tuesday.
Now, headlining the blueprint is a 1.35 trillion tax cut over 11 years, including a $100 billion cut over the next two years. That's meant to stimulate the economy.
Along with that, the growth of discretionary spending will be capped at 5 percent next year.
To go over the budget and this week's events in Washington, we are joined from the nation's capital by Greg Valliere of Schwab Washington Research.
Greg, as always, good to have you with us.
GREG VALLIERE, SCHWAB WASHINGTON RESEARCH: Great to see you.
BAY: President Bush this week called the budget deal a victory. Would you call it a victory for the president?
VALLIERE: I think so, Willow, on two fronts. No. 1, on spending, which didn't get as much publicity, he wanted a 4 percent increase. The Democrats wanted 8. They settled at 5. I'd say that was a victory.
And secondly, on taxes, clearly there were -- there were several victories for Bush. The main one basically is that he got something very close to what he originally proposed in terms of the overall dollars.
BAY: A victory for Bush, but also a clear victory for moderates led by Senator Breaux?
VALLIERE: Yeah. I think you've got to say, Willow, that in the first few months of this new Congress John Breaux of Louisiana is the most powerful member of Congress. He is the power broker right now.
BAY: Gordon -- Senator Gordon Smith of Oregon said that the negotiation over this budget blueprint essentially telegraphed the battlelines. Where will the big battles be?
VALLIERE: Well, you could argue that we got the easy part out of the way this week. Now, you're absolutely right: We start the big battles over how you fit all the stuff they want, probably costing 2 1/2, 3 trillion, into this straitjacket of 1.35 trillion. It's going to require, I think, the president to abandon the abolition of the estate tax. He's going to have to abandon deep rate cuts at the top end. And they'll probably have to abandon the abolition of the much- hated alternative minimum tax.
BAY: All of this, of course, debate about tax cuts and immediate relief taking place as our economic picture changes, as the data comes in now. Wednesday, when we talked to economic adviser, White House economic adviser Larry Lindsey, he said he saw some data that suggested that the GDP number was going to be revised downward, and today, White House spokesman Ari Fleischer had this to say.
You know what, Greg: Apparently, we don't have that soundbite. But my question for you is, is this White House talking down the economy or is it simply being frank and realistic about what lies ahead?
VALLIERE: I think it's being frank, like it is being frank on energy issues. I think they're letting people know there's a problem.
You know, Willow, with today's unemployment number I think guaranteeing continued Fed easing and with this tax-cut approval this week, even though we had a lot of details to iron out, you could make an increasingly strong case that there is a lot stimulus coming.
BAY: Greg, I have to interrupt, because we have some breaking news. We're going to go to Los Angeles now and our reporter there, Charles Feldman -- Charles.
CHARLES FELDMAN, CNN CORRESPONDENT: Willow, CNN has just been told by sources close to the negotiation that a tentative agreement has been reached between the Writers Guild of America and the producers representing the motion picture industry and the television industry here in Los Angeles. They were, as you know, protracted negotiations that lasted well beyond the strike deadline. It has been touch-and-go all day.
We know that the mayor of Los Angeles, Richard Riordan, who is in Acapulco, Mexico, has been on the phone several times during the day to try to nudge things along.
We were told only minutes ago by sources close to the negotiations that they had been told about an hour ago that a deal was reached only to be informed a few minutes later that there was a pullback. Nobody know what the hitch was. But we were told moments ago again that a tentative agreement has now been reached between the Writers Guild of America and the producers representing the motion picture and television industry here in Los Angeles.
An announcement, we are told, is expected shortly. Of course, if there is in fact this agreement, as we are told by sources, this would be a major achievement. It would also head off what for many people believed would be a terrible economic impact on the economy of Southern California, which, Willow, as you know, is heavily reliant on the motion picture and television industry.
This was a strike that was very feared by people in the industry as well as people who make their living off of the industry. So this would be very good news indeed that this tentative agreement has apparently been reached according to sources close to the negotiations -- Willow.
BAY: OK, Charles Feldman there in Los Angeles. We're going to head now to Sherri Sylvester. She is, after this word of an agreement, we're waiting for a press conference, and she's standing by -- Sherri.
SHERRI SYLVESTER, CNN CORRESPONDENT: And we are watching the door closely, because we have been given a five-minute warning here at the Writers Guild and there are quite a number of media folks scrambling. So we'll try to move out of your way as soon as these sides come in so we can show you who is coming in.
We can tell you that they have been negotiating on two fronts, for both creative control and economic increases. They're looking for higher residuals for basic cable, overseas, DVD, videocassette, and Internet play of their week.
Again, a writers strike would cost the local economy an estimated $500 million per week. So everyone has been hoping that this strike will be settled.
Again, a big flurry here in the media room at the WGA. We had been given a five-minute warning, and we do expect negotiators from both sides to come in the room any minute now -- Willow.
BAY: Sherri, you walked us through some of the issues. When they announce, presumably, some of the details of this agreement, what should we be looking for?
SYLVESTER: Well, they wanted a basic raise of about 3 to 4 percent. They were looking at that. Fox Broadcasting was cited specifically as paying only 60 cents to the dollar to every network dollar to writers.
Fox years ago needed to establish a broader economic base. Now, that Fox has spent a lot of money for football and baseball, they're expected to up their rate to writers to compete on a more of a network level, with the other networks. We are also looking at cable runs. If you are a writer for "ER" or "Friends," and they sell reruns to that show to the basic cable networks, they want a higher residual rate for that.
Their current overseas contract goes back to 1970. Of course, there has been a huge export of American products overseas since 1970. They fell that that formula is way out of date. So, they're looking for higher rates.
It's been a tough economic time, I might say, though, because these major media conglomerates, as you know, have been laying off workers, and so it's been a tough time economically for them to negotiate.
These very producers who are working here will also go into talks with SAG, the Screen Actors Guild. They have set dates for early talks beginning next week.
All right, we have been told that they are coming in, so I am going to duck out of the way. We will keep talking as they're walking in. All right, they have gathered in the hallway, I am going to move out of the way.
BAY: OK, Sherri, can you let us know who's coming in?
SYLVESTER: ... and so we can see who's coming in.
BAY: Can you let us know?
SYLVESTER: Yes, I'm going watch here. Absolutely. It looks like we're going to have a pretty large group gathering. There are quite a number of folks walking in at this point. And as you know, Willow, they have been negotiating for some time. They've been working well into the night, many times until 3:00 -- until 3:00 or 4:00 in the morning to try to hammer out this deal.
BAY: And all the while...
SYLVESTER: We do see Nick Counter -- yes?
BAY: Go ahead, go ahead.
SYLVESTER: Nick Counter from the AMPTP, that's the Alliance of Motion Picture and Television Producers. We have Sherry Lansing from Paramount Pictures. And they have gathered at the podium.
UNIDENTIFIED MALE: Everybody ready here?
UNIDENTIFIED MALE: Roll camera.
MICHAEL MAHERN, WGA: The negotiating committee of the Writers Guild of America East and West has reached a tentative agreement with the Alliance of Motion Picture and Television Producers, ABC, CBS and NBC for a new contract, covering 11,000 theatrical and television writers. Almost four months ago, we entered into negotiations with a goal of achieving a contract that would generate increased respect for writers after successfully addressing our major economic and creative issues. People told us that it couldn't be done even if we stayed on strike for a year or more. Today, we are announcing an agreement that includes groundbreaking improvements, and it has been accomplished without a strike.
Joining me in this announcement are Charles Holland, co-chair of the Writers Guild negotiating committee; John McLean, chief negotiator; Mona Mangan, executive director of the Writers Guild East; Nick Counter, president of the Alliance of Motion Picture and Television Producers; Bob Hadl, consultant to the guild; and committee members John Furia, Irma Kalish, Callie Khouri, Tim O'Donnell, Paris Qualles, Carl Gottlieb, Nicholas Kazan, Chris Knopf, Dan Petrie Jr., Vicky Riskin, Phil Alden Robinson, Patric Verrone, John Auerbach, Penelope Koechl, Charlie Rubin, Richard Wesley, Tom Schulman, Ron Bass, Gary Ross and Stephen Schiff.
Also here are Jonathan Dolgen, chairman of Viacom Entertainment Group; Alan Horn, president and COO of Warner Brothers; Bob Iger, president and COO of the Walt Disney Company; Jeffrey Katzenberg from Dreamworks; Sherry Lansing, chairman and CEO of Paramount Pictures motion picture group; Barry Meyer, chairman and CEO of Warner Brothers; Les Moonves, president and CEO of CBS Television.
You're all probably wondering where John Wells is today. It gives me great pleasure to announce that John and his wife Marilyn are enjoying their first day with their new son Jack who was born last night. Now I would like the introduce Nick Counter.
NICK COUNTER, PRESIDENT OF THE ALLIANCE OF MOTION PICTURE AND TELEVISION PRODUCERS: Well, Jack sure picked the right parents, didn't he? Well, thank you, Michael.
I just want to say, this was one of the most difficult negotiations we have had in many years, because of the complexity of the issues facing the industry today, both for writers and for producers and our member companies. We have worked long and hard to achieve this deal. Both sides were committed to doing it. We thank the Writers Guild for their commitment and their long-standing effort to meet certain issues that were important to the companies, and we...
BAY: We're going to go to Charles Feldman while we wait to get that satellite linked up again.
FELDMAN: Oh, yeah, sure, put me on the spot while we are all waiting. Well, as we reported and as you just heard of course, at the press conference, a tentative agreement has been reached, as we've reported, between the Writers Guild of America and the producers representing the television and motion picture industry here in California. As we saw before that picture went -- oh, we're back with it. Here we go.
COUNTER: ... support of all the companies represented by the AMPTP, this deal was unanimously, unanimously accepted by the companies. It's now up to the guild and the guild leadership to take it to their representative boards and to the membership. So, we leave the ball in their court. And again, we thank them for their hard work and sensibility in reaching this historic agreement. Thank you.
MAHERN: I'll add that it was also the unanimous vote of the negotiating committee to recommend the contract to the membership. I'm proud to announce on behalf of writers the following terms as the highlights of this agreement.
For the first time in its history as a broadcaster, Fox will be considered a network under this contract and will pay 100 percent of network residuals two years from now. This is a 50 percent increase over the current residuals formula.
For the first time, foreign television residuals -- since the foreign television residuals formula was established in 1970, we have uncapped foreign television residual. The buy out is gone, and foreign residuals will be paid in perpetuity. Writers will receive 1.2 percent of foreign revenue after these revenues -- after the revenues have reached a specified thresholds. We estimate this will increase foreign residuals by 1.3 million over the term of the 2001 contract, and will continue to grow over time.
A critical issue has been video on demand, and protecting our fair share of revenues from the future distribution of films and television programming over the Internet. Writers will receive 1.2 percent of the exhibitor's payment for a right to exhibit movies and television programs for a fixed number of times, or a limited time period. This agreement covers all studio libraries, back to July 1, 1971 and all new productions.
The guild and companies have also agreed to continue negotiations to cover the evolving market for other exhibitions such as downloads for an unlimited number of viewings. We have succeeded in bringing the rapidly evolving marketplace for programs written directly for the Internet into the contract for the first time, allowing the guild and companies to cover on a project-by-project basis the employment of writers to write material for the Internet with guaranteed pension and health benefits.
We have also confirmed that writers whose work first appears on the Internet will be eligible for separated rights at their material -- separated rights if their material is later used as the basis for a television series or motion picture.
For the first time, we have negotiated a greatly improved residuals formula for the made-for-pay television area, covering such programs as "The Sopranos," and "Sex and the City," and "Soul Food" on Showtime. This will result in significantly increased residual payments to writers, increasing them from under $300,000 per year to almost $4 million per year.
Residuals for made-for-basic-cable programs, such as the Lifetime series...
BAY: We have (UNINTELLIGIBLE) of an agreement with the alliance of TV producers and the Writers Guild. There will be no writers' strike in Hollywood. They have reached a unanimously accepted agreement, which the writers will now vote on.
MONEYLINE will continue right after this.
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ANNOUNCER: MONEYLINE continues. Here again, Willow Bay.
BAY: In tonight's headlines, Wall Street stages a turnaround after investors decide the negative employment numbers may spur the Fed to cut interest rates.
And Hollywood studios have just reached a deal with the Writers Guild, heading off a strike in the entertainment industry. Plus, the Kentucky Derby, an old Southern institution, races into the 21st century: think simulcasting, off-track betting, and interactive television. We have the story.
But first, an employment report sends markets jumping. The April unemployment rate rose to 4.5 percent, a 2 1/2 year high. Non-farms payrolls dropped by 223,000 jobs, a 10-year high. But the employment numbers helped fuel today's market rally, as investors bet the Fed would continue to cut interest rates in light of this report.
Early on, the Dow dropped as many as 123 points, but then it reversed course to finish up 154 points, or 1.4 percent, to 10,951. A similar story on the Nasdaq. That index rebounded mid-morning to finish up more than 2 percent, or 45 points, to 2,191. The broader market mirrored the Dow: That also finished up 1.4 percent, to 1,266.
Tech stocks put on a strong showing this week, but the rapid recovery of a beaten-down sector is creating a new concern, that the run-up of some major new economy names has come too far, too fast.
Bruce Francis has the story.
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BRUCE FRANCIS, CNN CORRESPONDENT (voice-over): Another winning week for the Nasdaq. It's now up nearly 35 percent in a month and some are concerned that the tech bubble may be reinflating. Merrill Lynch's Steven Milunovich notes that his group of 100 tech stocks has a P/E in the low 40s, high by any standard.
STEVEN MILUNOVICH, MERRILL LYNCH: The investors are already starting to anticipate the next pick up, the next earnings improvement, but I'd still be much more comfortable with something in a low to the mid-20s.
FRANCIS: And many Nasdaq big caps are far away from those valuations right now. Just look at the trailing 12-month price/earnings ratios on Cisco, Dell, Intel, Qualcomm and Sun. Only Intel hits Milunovich's target.
Price/earnings ratios help investors measure the relative value of stocks. It's simple: Just divide a company's share price by its earnings over the past 12 months. The higher the P/E number, the more expensive the stock. Tech P/Es got down in the teens, some near 10, during the recession of the early '90s. And some P/Es zoomed well into the hundreds during the "Bubble of 2000." Somewhere in the 20s is considered the average for recent years.
You'd think that with stock prices down so much over the past year, P/Es would be low. But lately earnings have been dropping. And when the "E" drops, the P/E soars.
A recent Goldman Sachs report says don't hold your breath for a quick rebound in profits. The research firm says that "37 top-tier technology companies may have benefited to the tune of nearly $70 billion in above-trend revenues between 1998 and 2000." So Goldman cautions, "When the rebound comes, it may pack less of a punch than we originally expected."
But fund manager Marc Klee believes that when you look at traditional tech stocks, not dot-coms, over longer periods of time, prices now aren't out of whack.
MARC KLEE, AMERICAN FUND ADVISORS: The old economy technologies are marginally above levels that they get to at the bottoms. It would suggest to me that technology P/Es on a normalized basis are still in the very reasonable category.
(END VIDEOTAPE)
FRANCIS: But Klee isn't getting carried away. Investors will remember, he says, the "Bubble of 2000" for some time. And no one wants to have the distinction of being the last one in the second time around.
That wouldn't be a title anyone wants.
BAY: No, exactly. And so concerns about some froth entering this market -- very valid, very justified.
FRANCIS: When you see a market go up 35 percent in just four weeks it sounds like the bad old days again to some people. So tread cautiously here.
BAY: OK. Thanks, Bruce.
Joining us now for his take on the markets, Ned Riley of State Street Global Advisors. Ned, welcome. You share that concern?
NED RILEY, STATE STREET GLOBAL INVESTORS: I do, actually. And when you start to look at the Nasdaq and its power over the last four weeks, a lot of that power has been generated by the assumption that the economy was going to turn quicker and not longer for that recovery. So what we are going to see probably in this month of May is a retracement of sorts in the Nasdaq because of this notion that the turnaround in technology was going to be very quick.
It's going to be more protracted and this unemployment report today sort of solidifies the feeling that the consumer's not going to pull us out of this quickly.
BAY: Now investors seem to be placing a bet that the Fed is going to cut rates again and the Fed -- you know -- the Fed is going to get us out of this predicament. Is that a bet you would make?
RILEY: I would -- I'd make that bet but not like I'd -- would in the past. Matter of fact, there's about half of the economy that is not really in total control of the Federal Reserve right now. Chairman Greenspan would not like me to say that. But the wealth effect has created 25 percent of the growth in our economy recently, and 30 percent of the growth has been IT spending. So they've got to focus a little bit more on that than the traditional lines of consumer housing and the rest.
BAY: So where -- what do you expect then out of the Fed going forward?
RILEY: Well, I still expect the Fed to be very aggressive. They have to be on steroids over the next six months.
BAY: That means what?
RILEY: That means basically 50 percent -- 50 basis point cut in May, 50 basis point cut in June, and probably by year end, a funds rate of about 3 percent, at the very least. And they also must pump up money supply. We need a liquidity in the system right now, and companies right now are desperate to get some lending.
BAY: Now you're concerned about the month of May about short- term, but long term you're -- you're quite bullish. Why? What are the most important indicators that you are looking at?
RILEY: Well, for the average investor I'd tell them to ignore the next six months, because it's going to be horrendous in terms of the economy itself. But remember, interest rates are coming down. That's a positive for the market. Inflation should be lower the second half of the year. That's a positive. Liquidity is going to be incredible. So therefore, that's a positive for the market. And supply and demand for equities themselves is pretty positive.
The only negative is profits right now.
BAY: Which is the big one. Now, given your concern about -- about the run-up in the Nasdaq, does that mean that -- that you're going light on putting more money into techs?
RILEY: No, and I wouldn't put it in that category because I think technology right now is still extremely cheap on a valuation basis. I like it because Wall Street analysts don't like them right at the moment. I always am a contrarian, in that perspective.
But more importantly, a lot of institutional portfolios are neutral in their portfolios right now, and I think they're going to get more aggressive as they see the leverage and the profits in these companies, and the long-term growth is still great for the technology area. BAY: All right, Ned Riley, we'll take it, thanks.
RILEY: My pleasure.
BAY: Coming up on MONEYLINE, the consumer has been key to keeping the economy afloat, but will the growing number of job cuts scare shoppers away? We'll get a read on the economy with Bruce Steinberg, chief economist with Merrill Lynch. That's when MONEYLINE returns.
(COMMERCIAL BREAK)
BAY: We've known for months that corporate America has been suffering, but GDP for the first quarter was surprisingly solid, because consumers have continued to spend.
But after today's dismal report on jobs, will consumers loose faith and stop spending? Fred Katayama has the story.
(BEGIN VIDEOTAPE)
FRED KATAYAMA, CNN CORRESPONDENT (voice-over): It's thoughts like this that economists and Alan Greenspan don't want to hear.
UNIDENTIFIED FEMALE: We were thinking about upgrading our apartment, buying a new home. And right now we're putting that on hold.
KATAYAMA: For months, as companies from Cisco Systems to Newell Rubbermaid suffered profit problems and stocks swooned, consumers unzipped their wallets and kept spending, single-handedly holding up this economy. They're the engine of growth accounting for two-thirds of economic activity. But with the jobless rate spiking higher and payrolls plunging, some economists fear they will pull back on big- ticket items like cars and homes, and take the economy down with them.
RICHARD BERNER, MORGAN STANLEY: I think the real cornerstone for consumer spending is what happens to their paychecks, and this report today underscores the fact that those paychecks are at risk.
KATAYAMA (on camera): The bullish economists say consumer spending won't get hurt, because wages are still rising and the unemployment rate is still historically very low. And so, they say, don't worry about the jobless headlines.
KEN GOLDSTEIN, THE CONFERENCE BOARD: Unless we start to get a steady drumbeat of this over the next couple of months, I don't think that this is going to be the knockout punch for the consumer market.
KATAYAMA (voice-over): But in addition to the weakening job picture, consumers could face another threat this summer, higher gas prices. And economists fear the combination could threaten consumer spending and pressure an already weak economy.
Fred Katayama, CNN Financial News, New York.
(END VIDEOTAPE)
BAY: Here with his take on the economy: Bruce Steinberg, someone we turn to quite often, chief economist at Merrill Lynch. Bruce, welcome back.
Were you surprised by this report?
BRUCE STEINBERG, MERRILL LYNCH: Well, it was a really bad report, a lot worse than anyone had been looking for.
BAY: You had said after the March payroll that another decline would probably mean a recession had arrived. Are you prepared to say that now?
STEINBERG: I still don't think we're necessarily in a recession. Obviously, we may be when you have job loss at this level, but the other parts of the economy still seem to be growing just enough to keep us out of that contraction phase.
BAY: What in particular?
STEINBERG: Well, basically, the consumer, and that's why these negative numbers of jobs are dangerous. You may get to a point where the consumer begins to give it up, because their friends are losing their jobs.
BAY: And it's quite rare, in fact, to have two consecutive declines and not be in a recession, is it not?
STEINBERG: It's almost never happened that we had two month-to- month declines and we've not been in a recession. On the other hand, it's also never happened that the Fed has used policy as rapidly as they're using policy this year.
BAY: In terms of that job report and in terms of consumers, given that we report layoffs on a near-daily basis here, is it likely that the job numbers are in fact going to get worse?
STEINBERG: I think they're not going to get any worse than they are. The question is whether they keep declining at anything like the pace they declined at in April. If they do, then we're in a recession, but I don't think we can quite say that yet.
BAY: What -- does this change your expectations? I gather you think the Fed is going to cut 50 basis points at the May meeting. Changed after this report?
STEINBERG: No, that's what I thought they would do before today's report, and this report basically...
BAY: Because as you know, folks, some folks are saying, you know, this increases is the chance that we'll get 3/4 point cut. Do you think that's out of the question?
STEINBERG: I wouldn't rule it totally out, but it's unlikely. I think what's more likely is that the Fed will keep on easing after May 15. They'll take, you know, mid-May, we'll see a 4 percent Fed funds rate, by the middle of the year the Fed funds rate will be down into the 3 percent -- 3 percent-ish range.
BAY: And at what point will we start feeling the effects of this, as you describe it, very aggressive easing?
STEINBERG: It usually takes monetary policy at least six to nine months to affect the economy, so the soonest, really, we're going to see it, is probably the fourth quarter.
The question right now is when does the economy begin to turn. I think the equity markets action today shows that what investors are thinking that even if we're in a recession, it is probably going to be over with by the end of the year, if not sooner than that, and that what the focus really is at this point is when does the recovery begin and how strong of a recovery will we have.
BAY: So, that's what the economists are thinking, and the real question, of course, what are consumers thinking.
STEINBERG: Consumers, if they keep seeing these jobs disappear, well, they are not going to be happy campers.
BAY: Bruce Steinberg, thanks.
The former chairman of Sotheby's, Alfred Taubman, appeared in a Manhattan courthouse today and pleaded not guilty to federal antitrust charges. Allan Dodds Frank has that story.
(BEGIN VIDEOTAPE)
ALLAN DODDS FRANK, CNN CORRESPONDENT (voice-over): For Alfred Taubman, a long-time power in the art world, the scene at his arraignment was practically a still life. The 76-year-old former chairman of Sotheby's was silent, as his lawyer entered the plea of not guilty.
Taubman, a billionaire developer from Michigan, is charged with conspiring with the head of archrival Christie's to rig auction commissions in the worldwide art market.
ROBERT FISKE, TAUBMAN'S ATTORNEY: I can tell you this case is going to be vigorously defended. We're going to fight this tooth and nail. Mr. Taubman has every confidence that he is going to be totally vindicated.
FRANK: An indictment earlier this week charged that Taubman and Sir Anthony Tennant, the Englishman who was chairman of Christie's, secretly rigged commissions customers were charged to sell art.
Tennant says that as a British citizen, he is not subject to U.S. courts. But judge George Daniels issued a bench warrant for Tennant's arrest anyway.
JOHN GREENE, JUSTICE DEPARTMENT ATTORNEY: Well, he'd be arrested if he comes into the United States jurisdiction. FRANK: The indictment says Sotheby's and Christie's, from early 1993 through 1999, made more than $400 million in commissions. Together, the two venerable firms controlled more than 90 percent of the fine art auction market before the scheme unraveled. That happened when Christie's cooperated with prosecutors, and a top Christie's official confessed he frequently met secretly with his counterpart, Sotheby's president Diana Brooks.
She plead guilty to antitrust conspiracy charges and is cooperating in the case against her former boss. Already the case has cost the auction houses and Taubman dearly. Privately-held Christie's has paid $256 million to settle customer suits. And Sotheby's has paid a $45 million fine, $100 million to settle customer lawsuits and another $40 million in stock to settle shareholders' suits. Taubman himself paid $156 million to settle customers' suits and $30 million to shareholders.
FRANK (on camera): If convicted, Taubman faces as much as three years in prison and fines of $350,000 or more.
Allan Dodds Frank, CNN Financial News, New York.
(END VIDEOTAPE)
BAY: In other news, federal mediators have proposed a settlement for the pilot strike at Comair, a unit of Delta Airlines. Union leaders say they'll let the 1,400 pilots vote on the proposal. Comair has been grounded since the strike began on March 26.
Ahead on MONEYLINE: our "Sector Focus." Brokerage stocks are back in favor, but is business keeping pace? And one of horse racing's most coveted crowns. We'll take a look at the business behind the Kentucky Derby. Stay with us.
(COMMERCIAL BREAK)
BAY: In tonight's "Sector Focus": brokerages. Today, Merrill Lynch was the subject of takeover talk, resurgent rumors saying European banking giant HSBC may be mulling a bid. The combined company would be worth north of $200 billion, second only to the massive Citigroup in size. But most analysts dismiss the merger as, at best, a distant possibility. But Merrill added more than 1 1/2 in trading today. Rivals Lehman, J.P. Morgan Chase, Goldman and Morgan Stanley also gained a dollar or more. In fact, since the market rally began in April, the brokerage stocks have jumped 22 percent, significantly outperforming the broader market. But these rewards may be premature.
Although brokerages have benefited from a rise in bond activity, the bread and butter business, mergers and IPO's, continue to struggle. So far this year, merger activity is down 59 percent. And the money raised in IPO's, despite the highly-touted success of Simplex earlier this week, is still close to rock bottom, off nearly 70 percent.
Coming up on MONEYLINE, the big business of the Kentucky Derby. The action has moved from the track to your local sports bar. That story when MONEYLINE continues.
(COMMERCIAL BREAK)
BAY: The Kentucky Derby, an all-American event, steeped in tradition and nostalgia. This weekend, horses with names like "Song and Prayer," "Millennium Wind" and "Dollar Bill" will vie for victory, seeking to win the first race in the coveted triple crown. But beyond the track, horse racing is a big and growing business. Kitty Pilgrim has our report.
(BEGIN VIDEOTAPE)
KITTY PILGRIM, CNN CORRESPONDENT, (voice-over): The most celebrated two minutes in horse racing, complete with the green lawns of Churchill Downs, mint juleps, and broad-brimmed hats. But don't be fooled. These days the business is hardly Victorian.
It's moving with the times. Racing a short while ago looked like it was becoming obsolete, attendance dropping, betting at the track declining steadily, track patrons largely older males. But now, off- track fans, assembling at sports bars to watch simulcast of the race, are more diverse and younger. And that is what is keeping the business growing. Off-track betting volume, growing steadily.
ROBERT DECKER, CHURCHILL DOWNS: Much, much more betting off track. Right now, about 80 percent of all the betting in this country on racing is done off track, and that's been a migration that's continued to grow over the years. Churchill Downs' race tracks are certainly seeing that same migration, and about 80 percent of our business is off track.
PILGRIM: Churchill Downs simulcasts its races over 1,000 locations in 41 states. In order to boost revenues from more and more simulcast races, Churchill Downs and its chief competitor, Magna Entertainment, have been in something of a two-horse race to acquire some of the top race tracks in the country.
In addition, the industry is shifting to an at-home betting concept, hoping to use the Internet and interactive television to generate interest, luring the next, more media-savvy generation. Those who follow the racing industry are fairly confident that it will weather any economic slowdown. Betting, in fact, tends to pop up in hard times.
WILLIAM SCHMITT, CIBC WORLD MARKETS: Historically, the numbers have held up pretty well in a recessionary environment. It's mostly a discretionary spend for an elderly client or customer base. And historically, in the early '90's, the numbers didn't fall off at all after they were -- you know, they held pretty solid.
PILGRIM (on camera): Racing owners understand that the drama and the power of a live event will draw fans, but now they also understand that a good broadcast of the event will draw even more.
Kitty Pilgrim, CNN Financial News, New York.
(END VIDEOTAPE)
BAY: Up next: "Ahead of the Curve." Some of what you need to know tonight, ahead of Monday's trading. Stay with us.
(COMMERCIAL BREAK)
BAY: Taking a look at some of what could make headlines on Wall Street next week, earnings reports from Dow components, Wal-Mart, Home Depot and Hewlett Packard, along with Dell Computer and Applied Materials.
On Friday, watch for the producer price index for April. Leading up to that, we'll get productivity and unit labor costs, as well as retail sales and the University of Michigan's consumer sentiment report.
And Alan Greenspan speaks to the Chicago Fed Thursday morning on bank structure and competition. Plus, on Tuesday, the House will vote on the budget blueprint.
To stay a step ahead of the markets, tune into "AHEAD OF THE CURVE." That's at 5:00 a.m. Eastern, on CNN.
Finally tonight, the Darwinian struggle that played out last night in prime time. "Survivor" clearly lived up to it's name. More than 36 million viewers watched Tina Wesson win the million-dollar jackpot in the finale. That's far less than the 51 million who watched the final episode of the first "Survivor" series, but CBS isn't complaining. The gang in the Outback trounced "Friends" on NBC. And even the post-show interviews with the cast members beat "ER," the first program on any network to beat an original "ER" episode since the drama's first season.
And that's MONEYLINE for this Friday. I'm Willow Bay in New York. "CROSSFIRE" is next.
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