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Moneyline News Hour
Dow Falls to 10,367.78; Nasdaq Plummets 200.28 to 3,384.73; Investors Dump Techs After Downgrade of MotorolaAired May 10, 2000 - 6:30 p.m. ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
WILLOW BAY, CNN ANCHOR: Tonight on MONEYLINE, the Nasdaq nightmare intensifies, the index plunging again, now near its low for the year.
STUART VARNEY, CNN ANCHOR: Behind the tech trauma: some of the biggest names in the business decimated. We'll tell you what sparked the exodus.
BAY: Cisco slammed as well, again, with investor faith deeply shaken. We'll hear from star CEO John Chambers.
VARNEY: And, Redmond strikes back: Microsoft asks the court to throw out the government's plan to rip the company in two.
ANNOUNCER: This is THE MONEYLINE NEWS HOUR. Reporting tonight from New York, Stuart Varney and Willow Bay.
BAY: Good evening, everyone.
In the words of one high-tech money manager, investors are just looking for a reason to sell.
VARNEY: And today they found plenty, the Nasdaq suffering its worst day since that 10 percent plunge back on April 14. And the tech trouble did not just rattle the Nasdaq, no. The Nasdaq did indeed tumble once again, down this time 200 points. But the trouble also tormented the Dow, down nearly 170 points.
Today's nosedive might be easier to take if it were just a handful of Internet upstarts leading the stock market down. But the culprits behind today's downturn are some of corporate America's biggest and most important companies: Intel, IBM, Motorola, Hewlett- Packard and more.
Susan Lisovicz reports.
SUSAN LISOVICZ, CNN CORRESPONDENT (voice-over): Tech-phobic investors punished the sector for the third-straight day and with such viciousness that all major indices succumbed to the sell-off. Upbeat talk on the street about tech bellwethers Cisco and IBM failed to lift the negative mood exacerbated by an analyst downgrade of Motorola. ROGER MCNAMEE, INTEGRATED CAPITAL PARTNERS: I think it tells you a lot about the market environment we are in. This is no longer your father's bull market. I think we are dealing with an environment now where time is the only remedy.
LISOVICZ: Both the Dow and Nasdaq opened lower, posting triple- digit losses within the first hour of trading. Trading curves kicked in at the NYSE around lunchtime when the Dow dropped more than 2 percent. The blue chip index pulled back from its intraday low to close at 10,367, but still plummeted 168 points.
So far this week, the Dow is down less than 2 percent. The damage on the Nasdaq, however, more significant, the composite finished at 3,384, down 200 points, it's off 11 percent so far this week.
Motorola, the most actively traded issue on the big board, one of the biggest casualties after Salomon Smith Barney cut its rating and price target on the stock. Shares of Motorola lost 16 percent, infecting other chip makers, including Intel, which said it would have to replace defective memory components. The Motorola downgrade reinforced fears that tech stocks are overvalued and could be further hit by a widely expected interest rate increase from the Fed next week.
ELAINE YAGER, HERZOG HEINE GEDULD: All of a sudden now everyone is saying, well, what if the interest rates actually do impact the economy, where does that leave these new valuations that have to come to pass?
LISOVICZ: Other stocks weighing on the Dow: Hewlett-Packard and General Motors, shares of the No. 1 automaker tanked after Merrill Lynch issued a downgrade for the stock.
LISOVICZ: Some analysts say investors still looking for clues on how aggressive Fed rate policy will be might turn to tomorrow's April retail sales and Friday's wholesale prices for the month -- Stuart.
VARNEY: All right, Susan Lisovicz reporting there from the big board, thank you.
Cisco, IBM -- they were also caught in this downdraft weighing heavily on the Nasdaq and Dow respectively. Cisco down 4 1/4, IBM down 5 and change.
BAY: Triggering the high-tech trauma today, as we mentioned, big blow-ups in bellwether stocks. Intel, for instance, losing roughly $39 billion, enough to land the company on our list of one-day disasters. Among the others, this year, as we noted, Cisco, AT&T, Bristol-Myers Squibb, and Microsoft, and none of those stocks have recovered. Cisco which plunged on Monday has continued to fall.
AT&T also continuing its decline since its blow-up last week after releasing lackluster earnings. Bristol-Meyers Squibb has bounced back from its mid-April explosion, but it is still nowhere close to its pre-blow-up level. And Microsoft is way down after its meltdown in early April when the blockbuster antitrust ruling came down.
VARNEY: Well, clearly, the Nasdaq has not recovered from its own big blow-up in mid-April. At one point today the index came within 50 points of its closing low for the year. Tech stocks are firmly in the clutches of a bear market.
And as Greg Clarkin reports, it's unclear when the former hotshots will reclaim their glory, if ever.
GREG CLARKIN, CNN CORRESPONDENT (voice-over): The Nasdaq still has the flashy sign in Times Square and there is still the glitz of the big name tech stocks, but the glamour is gone and so too are the buyers.
The Nasdaq Composite has lost more than 1,600 points since peaking in mid-March, down a whopping 33 percent in two months, and the bad news seems to be everywhere: Microsoft and its legal problems, Cisco and its valuation questions, and Intel and its circuit board recall.
On top of all this, tech stocks are heading into what is traditionally their slowest period.
ROBERT STOVALL, PRUDENTIAL SECURITIES: There is seasonality in the performance of technology stocks and they, over the years, have done their best in the fourth quarter and the first quarter and then they wait during the summertime for the big conferences and new product introductions.
CLARKIN: And while the companies are waiting, investors are selling, especially the big caps. Cisco is off 27 percent from its year high, Intel down 26 percent, Microsoft 43 percent, Qualcomm 46 percent, and Oracle 24 percent.
Biotech stocks have been particularly hard hit. The AMEX Biotech Index is down 40 percent over the last two months. And semiconductor companies have been pounded, the Philadelphia Semiconductor Index has lost 32 percent. While the selling is grabbing the headlines, strategists say keep the last few weeks in perspective.
SCOTT SINDELAR, STRONG INVESTMENTS: You do have to keep in mind that the prior five months -- in the prior five months, tech was very strong, and then we've had a slide for two months, and I think if you look at the whole seven-month period you're still well ahead of the game. You're really in trouble if you came in, in sort of the March- April time area.
CLARKIN: And volume on the Nasdaq has dropped dramatically to levels last seen six months ago and strategists say that's yet another sign that tech stocks have fallen sharply out of favor, and at this point no one is predicting a speedy return -- Willow, Stuart.
VARNEY: You know, six weeks ago everyone was saying, higher interest rates, they won't hurt tech stocks. Times have changed haven't they?
CLARKIN: They indeed have, Stuart. I asked a strategist about that today and he said, bottom line is higher rates, slowing economy, it effects most companies.
VARNEY: Turned full circle, haven't we?
Greg Clarkin, thank you -- Willow.
BAY: The question now for investors: Can you beat a bear market? Many believe it's the stock pickers on Wall Street that have a fighting chance, and later we'll talk with one of the best, David Alger, who as of last month had the best return of any fund manager over the past decade.
Up next on MONEYLINE, the latest legal grenade, this one from Redmond, Washington to the Justice Department.
VARNEY: The top brass at Microsoft ask a judge to reject the government's break-up plan. Will he listen?
BAY: Another CEO facing a critical challenge. We will hear from John Chambers of Cisco on winning back investor confidence.
VARNEY: And taking the pulse of corporate America, a special report from the Business Council Meeting has top executives descend on a West Virginia resort.
VARNEY: Microsoft today asked a federal judge to reject the Justice Department's plan to break it up. In its response, Bill Gates and company said the penalty is too harsh and instead offered up its own restrictions on its own business practices.
Steve Young has more on that.
STEVE YOUNG, CNN CORRESPONDENT (voice-over): In asking Judge Thomas Penfield Jackson to throw out the proposal to break up Microsoft, the software giant said the government's plan to rip apart the company is an extreme enemy not supported in the facts or the law..
STEVE BALLMER, PRESIDENT & CEO, MICROSOFT: It would be a little bit like breaking up Michael Jordan and Scottie Pippen because they won some titles or breaking up John Lennon and Paul McCartney because they had too many No. 1 hits.
YOUNG: Microsoft says 19th century antitrust law doesn't apply to 21st century digital technology, but Assistant Attorney General Joel Klein told a "new economy" forum Tuesday: "While technology changes, human nature, as Adam Smith taught us long ago, does not. There are, to paraphrase Paul Simon, only so many ways to illegally hurt your competitor."
To induce the judge to dismiss the breakup plan, Microsoft offered to modify its business conduct in the following ways: It would allow PC makers to feature a non-Microsoft Web browser; PC makers could delete Microsoft's browser from their desktops; Microsoft would not use Windows as a club to force PC companies to shun competing applications; and it would make Windows technical information available to competitors as quickly as the company gives it to its own software developers.
CHARLES RULE, COVINGTON & BURLING: Never before has a court imposed a divestiture remedy in circumstances like this. You would essentially be destroying a lot of value in the economy.
RICHARD STEUER, KAYE, SCHOLER: What the government is saying is it's necessary to go beyond these injunctions and to have an actual split, to have an actual breakup.
YOUNG: Microsoft is also offering a carrot and a stick. It wants to delay the trial seven months until December if Judge Jackson gives the breakup plan serious consideration.
YOUNG: The carrot comes if Judge Jackson agrees with most of Microsoft's proposed conduct remedy. Then says the company, the landmark but long trial could be all wrapped up by August -- Stuart, Willow.
VARNEY: Do you think that the judge could be offended by this carrot-and-stick approach from Microsoft?
YOUNG: This is a tough judge to read. He's blustery. He's no- nonsense. It's hard to know, but it looks like he's gotten some concessions here.
VARNEY: Fair enough. Steve Young reporting. Thank you, Steve.
BAY: Business practices at Microsoft are not the only thing that could soon change. According to the software giant, so would innovation. The company argues that if it were broken up, the world would be deprived of a number of new technologies.
Katharine Barrett has more from Redmond, Washington.
KATHARINE BARRETT, CNN CORRESPONDENT (voice-over): In this cluster of brand-new buildings, Microsoft's newest new ideas are germinating.
UNIDENTIFIED MALE: You then go ahead and then write. It captures through the capture bar. BARRETT: Gee-Whiz, artificial intelligence programs that allow computers to anticipate your wishes and respond to spoken commands.
(BEGIN VIDEO CLIP)
COMPUTER VOICE: (UNINTELLIGIBLE) want to see your calendar?
UNIDENTIFIED MALE: OK.
COMPUTER VOICE: Great.
(END VIDEO CLIP)
BARRETT: Programs to read and transmit handwriting on a board or notepad, though a test version was tripped up by this reporter's scrawl.
This work is designed to make using a computer more like straightforward, simple communication, and these are all products Microsoft says would not be widely available if the company were torn in two.
MARK MURRAY, MICROSOFT SPOKESMAN: We are trying to make computers easier to use and give people great new ways to interact with their computers just by talking to their computers. We think that under the government's proposal all of that innovation would stop. We wouldn't be able to put it into the Windows operating system and consumers would be -- would be hurt by that.
BARRETT: But some in the software business say Microsoft's creative genius is not in development, but in the masterful marketing.
Software publisher Greg James scoffs at Microsoft's mantra that innovation is at stake.
GREG JAMES, COUNTERTOP SOFTWARE: I believe that's hogwash. And I believe it's hogwash, because if you look at all of their major products right now -- Windows, which was copied form the Mac operating system, and Apple sued them because of that; Word, which basically was a derivative of WordPerfect; Excel, which came from Lotus 1, 2, 3; Money, which, you know, came out way after Intuit released Quicken; and so on and so forth -- they don't innovate at all.
BARRETT: That fierce battle about whether remaking Microsoft would ultimately hurt or help consumers, competitors, even the national economy will rage at the heart of court proceedings in this case in coming weeks and months -- Stuart, Willow.
BAY: Katharine Barrett from Redmond, Washington, thank you.
VARNEY: And coming up, a sour note in the music industry may actually be good news for consumers
BAY: Will a deal between the Federal Trade Commission and major music companies cut prices on compact discs? That story when MONEYLINE continues.
VARNEY: Checking tonight's "MONEYLINE Movers," we have McDonald's gaining more than a point-and-a-half. Sales for the first four months of the year jumped 7 percent to nearly $13 billion. McDonald's cited new products and promotions.
The Hain Food Group, well, that really plunged, down 6 1/4 points. That's 21 1/2 percent. That came despite meeting Wall Street's third-quarter profit estimates. It's a natural foods company, whose products include Weight Watchers and Terra Chips said, and it said it still faces capacity problems.
Then we have Abercrombie & Fitch. It was down more than 2 1/4 points. That's 19 percent lost. Several brokerages downgraded the clothing retailer after it warned that second-quarter profits will be well below what Wall Street is expecting.
BAY: The House Commerce Committee says inflated prices on dozens of drugs have caused years of gross overpayment by Medicare and Medicaid. Federal and state investigators have contacted several major drugmakers, starting with Bayer. The German pharmaceutical maker says it is in settlement talks over what is being called "deceptive pricing practices."
Bristol-Myers Squibb and SmithKline Beecham have also been contacted by the Justice Department and say they will cooperate with the law.
VARNEY: Elsewhere in Washington, music to the ears of compact disc buyers but a blow to the music industry. The Federal Trade Commission and major music companies have reached an agreement that could bring down CD prices at music stores.
Allan Dodds Frank has the details.
ALLAN DODDS FRANK, CNN CORRESPONDENT (voice-over): Compact disc buyers in the United States unnecessarily spent as much as an extra $2 per recording during the last 2 1/2 years thanks to an illegal industry practice that propped up wholesale prices.
UNIDENTIFIED MALE: One thing we were prepared is that as a result of these illegal arrangements, consumers paid something approaching $500 million at wholesale in higher prices for CDs over the past 2 1/2 years.
FRANK: The Federal Trade Commission announced a settlement with five major music companies that could soon lead to lower CD prices. But the companies did not admit any guilt in the settlement and are not required to pay any refunds to consumers.
The five companies, Time Warner, parent of CNN, Sony, Bertelsmann's BMG Group, EMI, and Seagram's Universal Music control 85 percent of the $15 billion CD market. The FTC said the five companies set minimum advertised prices and refused to give advertising and promotional money to any retailer or record distributor who tried to undercut those prices.
The practice began in the mid 1990s when record shops complained to manufacturers they were being run out of business in price wars started by Best Buy, Circuit City and other large retailers.
With the settlement, will price wars happen again?
MICHAEL FLORIN, GERARD KLAUER MATTISON: The potential for a price war may -- it's conceivable, but I just don't see it happening. So then for the consumer's stake, if in fact there are a little bit lower prices it's great.
ED CRISTMAN, BILLBOARD: It ultimately hurts the retailers and the labels the way that they feared they would when they enacted the MAP policies -- then in the long run, it might not be good for the consumer.
FRANK (on camera): The FTC settlements may actually bolster damage claims by music retailers who have a class action suit under way against manufacturers.
Allan Dodds Frank, CNN Financial News, New York.
VARNEY: It'll be interesting to see if that affects the bottom line in any of these companies. We shall see.
BAY: Coming up on MONEYLINE, is George W. Bush winning back key voters who helped Bill Clinton clinch two election victories?
VARNEY: A new poll says yes, he is.
We'll tell you about that after this break.
BAY: A major poll out today showing George W. Bush leading the White House race, and winning over key groups of voters. Wolf Blitzer has more on that now in the "MONEYLINE News Digest" -- Wolf.
WOLF BLITZER, CNN ANCHOR: Thanks, Willow.
That poll in "The Los Angeles Times" today shows George W. Bush winning support from groups of swing voters crucial to the Democrats during the last two elections. The survey found 51 percent of voters backing Bush, while 43 percent supported Gore. And among traditionally conservative married voters, where Bill Clinton made inroads, Bush holds a solid 21-point lead. The president today joined congressional Democrats to promote their plan for a prescription drug benefit for Medicare patients. He said those drugs are a matter of life and death for the elderly.
(BEGIN VIDEO CLIP)
WILLIAM J. CLINTON, PRESIDENT OF THE UNITED STATES: At this time of historic prosperity and strength, there is absolutely no reason we should force seniors to make a choice between their health, their food or their daily existence.
(END VIDEO CLIP)
BLITZER: The Democrat's plan would pay half the cost of drugs for Medicare patients up to $5,000. Republicans are proposing a $40 billion plan using insurance to make drugs more affordable.
Also today, New York Mayor Rudy Giuliani, who's running for the Senate against Hillary Rodham Clinton, announced he's seeking a legal separation from his wife, Donna Hanover. Giuliani's announcement comes after reports linking him with another woman whom the still unofficial Senate candidate describes as -- quote -- "a very good friend."
And wildfires have forced the evacuation of the entire population of 1,100 of Los Alamos, New Mexico, near one of the country's top nuclear laboratories. Firefighters have been trying to bring the flames under control now for a week. President Clinton has announced that the area is a federal disaster area.
I'll have more on those stories and the rest of the day's news on "THE WORLD TODAY." That's at 8:00 p.m. Eastern, 5:00 p.m. Pacific -- Willow:
BAY: Wolf, will the announcement of Rudy Giuliani's legal separation from his wife affect his Senate race?
BLITZER: His aides insist it won't. They say he's going forward. They point out only last week, his campaign has spent a million dollars in new TV advertising. But right now, the aides do admit the legal separation, the problems with Donna Hanover, his wife, as well as the prostate cancer which he's only announced in the last few days, as well that seems to be dominating his thinking right now, but they insist he is going to go ahead with the Senate race.
BAY: Wolf Blitzer, thanks.
VARNEY: We do not know who they are yet. But somewhere in Michigan and somewhere in Illinois, there are two very happy people, in fact groups of people, because that is where the two winning tickets for the Big Game were sold last night. For each winners, over $180 million. That, of course, is before taxes. So far, neither of the winners is known and officials are waiting for both to come forward before the big checks are handed out. As for the sellers of the tickets, one is also a big winner. Illinois law awards one percent of the price to the vendor, which in this case, will come to almost $2 million. No such luck, however, for the store owner who sold the other winning ticket. He'll get only $2,000, because that is the law in the state of Michigan.
Don't say anything. (LAUGHTER)
BAY: Coming up, full coverage of today's brutal sell-off on Wall Street.
VARNEY: The tide continues to turn against tech stocks as some new-economy heavyweights lose favor among investors.
BAY: We'll hear from a man whose company's stock put a chill over the market: Cisco's John Chambers on the defensive, despite another winning quarter.
VARNEY: And we'll check out whether an end's in sight to the market's wild ride and put that question for one of Wall Street's top fund managers, David Alger.
VARNEY: In tonight's headlines, the tech sector comes unglued, and once again, Motorola is a big culprit -- harsh words from a Wall Street analyst crush the stock. Another trouble spot: Intel. The great profit machine faces a pitfall: a chip recall that could affect a million of its motherboards. And "Fortune" magazine has called it the one stock to own if you're stranded on a desert island. But is Wall Street losing faith in Cisco? We'll talk to chief executive John Chambers.
BAY: First, more on our top story: a day that brings back painful memories for technology investors. The Nasdaq slid 200 points today, its worst sell-off since April 14, when it suffered the biggest point drop in its history. Today techs faced a double threat: a chip defect that could hurt Intel's bottom line and a change in Wall Street's attitude toward former high fliers like Motorola. The Nasdaq tumbled 200 points, the seventh biggest point drop on record. That is a loss of more than 5.5 percent. Today's decline puts the index down 33 percent from its high. Techs were an obvious problem for the Dow, but so were so-called old-economy stocks. The Dow Industrials fell 168 points, more than 1.5 percent. The hardest hit today: Intel, IBM, after analysts gave a lukewarm response to yesterday's meeting with chief executive Lou Gerstner. Hewlett-Packard, chip and chip equipment makers also suffered, including Texas Instruments and PMC Sierra.
Today was a setback for AT&T as well. The stock, pounded recently after the company warned about future profits, hit a new 52- week low. And its new tracking stock for AT&T Wireless is now trading below its IPO price.
VARNEY: The negative tone was set early for technology, when a Wall Street analyst turned sour on one of the Big Board's best performers, Motorola. Salomon Smith Barney downgraded the wireless phone maker, sending the stock to its lowest level in more than seven months. The firm also cut its price target to $120 a share from a very lofty $200. Motorola was the most active stock on the Big Board, down more than 17 points. That is a $13 billion hit to its market cap. Bruce Francis has more on Motorola's miserable day.
BRUCE FRANCIS, CNN CORRESPONDENT (voice-over): Investors rung Motorola out of their portfolios after a Salomon Smith Barney analysts downgraded the stock, slashing his 12-month price target to $120 a share, down from $200.
Analysts Alex Cena said that he now thinks that Motorola's China business won't grow as quickly as he originally hoped. The expected improvements in telephone handset profits won't come about soon. And according to the analysts, Motorola lost the bidding for a key wireless infrastructure contract in Britain. Motorola declined comment.
ALEX CENA, SALOMON SMITH BARNEY: Motorola will eventually win some third-generation wireless contracts. There's just too many of them, $60 billion worth for 70 networks. They're going to win some, but I just don't think they'll be one of the early winners.
FRANCIS: The stock has been a big loser since its peak in early March at over $180 a share. With the latest downgrade, the stock has lost more than half of it value since then, and has retraced a spectacular rally that began in November.
But Motorola still has it's fans, including Chase H&Q analyst Ed Snyder, who maintains a price target of $150 a share.
ED SNYDER, CHASE H&Q: We met with Motorola management for four hours last night at our conference here in San Francisco and went over the entire business model once again, and things look very strong. The company is very bullish, and so are we.
FRANCIS: And Cena believes that Motorola won't repeat past its mistakes.
CENA: Motorola missed the migration to digital. They're absolutely not going to miss the migration to data-enabled phones. That's the positive message. The negative message is they have a big task at hand this year, but they will get it done.
FRANCIS: Cena's $200 price target was aggressive. The recent decline in Motorola's stock and the tough market for techs in general was making it hard to achieve that level. So while no analyst likes to be out on a shaky limb, investors hate to see a bull pull in his horns.
Stuart and Willow.
VARNEY: Certain just.
Bruce Francis reporting. Thanks, Bruce. BAY: We already told you about the other source of trouble for techs today: Intel The stock was the biggest Dow loser after Intel announced what could be a costly product replacement. The chip maker is offering to replace up to one million motherboards in mid- to high- end personal computers. The problem: a defective chip that could destroy computer files. Intel says the chip flaw could have a "material" impact on earnings, but it would not get more specific than that. Analysts were sobered by the news.
(BEGIN VIDEO CLIP)
It's another black eye for Intel. The publicity is going to be fairly negative, and it's going to drive at least some consumers, and even some potential PC makers into the arms of Advanced Micro Devices. So from that perspective, I think that's where the real game is, not from a direct financial point of view.
(END VIDEO CLIP)
BAY: Even with the mad scramble to sell the stock today, Intel was held up as well as the rest of the tech world crumbled. It's still up a healthy 29 percent on the year.
VARNEY: After the bell, Applied Materials met second-quarter profit forecasts, but missed the so-called whisper number. The chip equipment maker said Net income shot up more than 220 percent to 55 cents per share. Sales also strong, jumping to more than $2 billion. In a conference call with analysts, the company's chief executive also said he expects third-quarter results to beat estimates. But that was not enough for Wall Street. In very active after-hours trading, Applied Materials slid more than $8, after falling six point during the regular trading session.
BAY: Market psychology already pretty fragile, even before today's disturbing tech slide. Whether it's earnings worries or fear of the Fed, few investors seem willing to buy right now.
But as Lisa Leiter reports, that doesn't mean investors are in a panic.
LISA LEITER, CNN CORRESPONDENT (voice-over): Selling gripped the market for the third straight day and traders left Wall Street wondering when they can declare the worst over. Not yet, says Prudential's Clark Yingst.
CLARK YINGST, PRUDENTIAL SECURITIES: I don't think we've had sufficient give-up, sufficient capitulation to constitute a real good bottom.
LEITER: He says the Nasdaq may be in a bear market by definition, but if it doesn't feel like one, here's why, the big-name stocks are still technically overbought, people aren't shifting record amounts of 401(k) money to cash from stocks, and investors are just too complacent. He describes a true market bottom as: YINGST: Unnerving, anxious, frightening. You get a sense of a panic among your client base, give up. We've had a day or two of that during this decline, but I don't think there's been any sustained period during which those emotions have dominated.
LEITER: A gauge of investor sentiment measures complacency. The ratio of bullish financial advisers to the total surveyed is now 60 percent, still well above the 45 percent it was at the end of the Nasdaq's last bear market. Translation: This market may have much further to fall. But the bulls are putting their faith in a fast- growing economy and strong corporate earnings.
GREGG HYMOWITZ, ENTRUST CAPITAL: I still think you're living in very good economic times. Technology companies are doing very, very fundamentally. It's a matter of fears about valuation, fears about where rates are.
LEITER: Only three more trading days of waiting for the Fed to make its anticipated next move on interest rates.
(on camera): And if the Central Bank doesn't raise rates by a half a point, as the market expects, some analyst say prepare for even more selling.
Lisa Leiter, CNN Financial News, New York.
VARNEY: Our guest is a money manager who usually has 3 percent, maybe 5 percent of his portfolio in cash. After the recent tech tumble, his cash holdings have grown to as much as 16 percent. So how and when will he be putting that cash to use? Joining us now is David Alger of the Alger Funds.
David, welcome back.
DAVID ALGER, THE ALGER FUNDS: Wonderful to be here.
VARNEY: If you're watching those big-name tech stocks slide and you're waiting buy, when do you jump in? What's the signal for you to jump in?
ALGER: Well, I think it's going to be very volatile between now and maybe the end of June, because we've got two Fed meetings, and I think that basically is going to drive the market. I think there are going to be huge drops and huge surges, kind of depending on whenever the economic statistics come out. So you have to be very careful about it.
But I thought today was really absurd. I mean, none of those bits of news were bad. Motorola, you know, if it went to 120, it would be a very large gain from here, so that's not such a bad downgrade, and he's only downgraded his earnings by 10 cents.
Intel -- a million motherboard sounds like a lot, but there a 100 million PCs produced each year, so it's really minor. In fact, I think the impact on earnings is going to be very, very small actually, and if we calculated it, it's very small. And lastly, Cisco just couldn't have had better results, and neither could have Applied Materials. So this is really getting absurd, and maybe time to buy really soon.
VARNEY: Really soon, do you think?
ALGER: I think so.
VARNEY: Would you buy Motorola at 87?A
ALGER: I do. I would buy Motorola. And Motorola is selling at a very low multiple. It's down below 40-times earnings, and I think it, you know, could very well get to 120. The company is doing very well. And their new phone, which is incredible, is like this big. It's fantastic.
VARNEY: Cisco, despite yesterday's very good earnings report, that's what I read into it, at least, down today, back to 57. Do you buy that?
ALGER: I think Cisco probably is still under the affects of the "Barron's" article, which was negative, and I think it does have a very high valuation. So we own a full position of Cisco, so we probably wouldn't be buying anymore.
VARNEY: But you're not selling it, right?
ALGER: Certainly not.
VARNEY: Intel at just 100.
ALGER: Intel I think is a great buy here. Intel -- this motherboard thing, it's just a red herring. There's nothing to it. It's very minor. And it's going to be a nonrecurring charge to earnings of a very minor sort. It's just one of those -- part of the crazy psychology.
VARNEY: All right, David Alger, we'll take that advice.
Thank you very much, sir.
BAY: Just ahead on MONEYLINE, more on those trying times for a tried and true tech stock, Cisco. Is it still too expensive with a new price to earnings ratio of 75?
VARNEY: Chief executive John Chambers on Wall Street's valuation concerns and Cisco's latest profit report, all of that coming up next.
VARNEY: Microsoft today asked a federal judge to reject the Justice Department's plan to break up the company. In its response, Microsoft said the penalty is just too harsh. Now, just a few minutes ago, the Justice Department defended its plan. In a statement, the government said its break-up proposal would promote competition and innovation, and lead to lower costs for consumers. Microsoft has offered to change some of its business practices, but the government says that's not enough to keep the company from using its monopoly power to crush its competitors.
BAY: The phrase "teflon tech" was coined to describe stocks like Cisco, a company that beats Wall Street expectations quarter after quarter and delivers stunning returns year after year. But is the teflon wearing thin? The stock has lost nearly $65 billion in market value so far this week. First, "Barron's" questioned its high valuation. Then, Cisco reported better-than-expected earnings, but expressed concern over component shortages in the wireless market.
Earlier, I spoke with the man who has been called the best chief executive of the digital economy: Cisco's John Chambers. I began by asking him about that parts shortage.
JOHN CHAMBERS, PRESIDENT & CEO, CISCO SYSTEMS: I think you're going to see this industry do very well over the next one to two years, and when you have earnings growth of 55 percent that's a great problem to have. I think anything with wireless or cellular will have some challenges, flash, SRAM, DRAM, et cetera.
And even some of the foundry semiconductor issues are a little bit challenging. But what we try to do in our call is level set our shareholders with where we see our opportunities and also some of the challenges. I think we can manage the challenges, but we always fully disclose what are the issues.
BAY (on camera): So is it likely, then, that these shortages might impact your earnings?
CHAMBERS: Only if we get surprised with our suppliers not being able to meet our requests, or if we misforecast our capability. Again, we are very optimistic about the future, probably the most positive call we've had in the year, year and a half, in terms of our messaging.
BAY: Do you think the market over-reacted today to the news of that shortfall?
CHAMBERS: I believe the market always gets it right in the long term. I personally don't worry about if it goes up or down in a day or weeks. That's why we give our employees five-year stock options. We keep people focused on the long term, and this is the right industry to be in, in the long term. The question is, how well can Cisco execute in this area?
BAY: Now, as you noted, your growth is tied to the Internet, that industry is growing 30 to 50 percent over the next several years.
CHAMBERS: That's our belief. BAY: Are you really confident that Cisco can match that growth, that you'll be in that 30-plus percent range for the next several years?
CHAMBERS: I think any company that believes its own press is already in trouble. We have the confidence that we can do almost anything and we usually do. We set very few objectives we don't meet. And at the same time, we have a healthy paranoia that makes Andy Grove look relaxed. So worry about all the challenges in front of us.
So if we execute well, then I think there is a good chance we'll be in the 30-50 percent range, but that comes down to how well we execute versus that of our competitors. It's not going to be a market problem. The opportunity is going to be there with or without Cisco, and so far, we've done pretty well.
BAY: When you look at your future growth, where is it coming from? How much of it is coming from home-grown products and how much of it is coming from acquisitions?
CHAMBERS: I'd say probably in excess of two-thirds of the products come from internal developed products. We often use acquisitions as insertion points into new market opportunities, but we often acquire a company with 40 engineers and three years later they have 300 engineers. So was it a result of the acquisition, or was it the result of internal development? Our balance is very good there.
I think we mentioned yesterday on the call eight product areas alone that had very close to billion dollar run rate in terms of orders. The majority of those were internal developed.
BAY: I know you noted that the market always gets it right, but on Monday you took a hit because of a "Barron's" article. Today you took a hit because of the warning yesterday on the call. Despite your performance, given today's climate, the market climate, are you more vulnerable? Is Cisco stock more vulnerable today because of your valuations?
CHAMBERS: I don't think necessarily that's the right answer. I think it's more, we are in a growth market of 30-50 percent. Our increases or decreases -- we tend to normally increase more than the market does when it goes up, and today was an example of when the market goes down, we go but down pretty much in line. It would not affect our acquisition strategy nor the prices we pay for the acquisitions. So I think over the next three to five years, if we can achieve our growth objectives, I think the stock will take care of itself.
BAY: Checking that stock today, Cisco finished the day down 4 1/4. And even though Cisco is off sharply from its high, down 29 percent, it is still doing OK for the year, up 9 percent.
VARNEY: In tonight's other headlines, International Paper upped the stakes in its bidding war for Champion International. The Dow component sweetened its offer to $75 a share, just over $7 billion in total. And Champion's board called that offer a "superior proposal." I.P. decided to raise its bid after its Finnish rival UPM-Kymmene decided to boost its all stock offer to $70 per share. UPM has until Friday to raise its bid, as part of an original deal it reached with Champion in February. Shares of Champion soared nearly 6 1/2 points today, International Paper fell almost 1/2 point, UPM-Kymmene up nearly 2.
BAY: In tonight's "Sector Focus," a bright spot in today's sell- off on Wall Street: consumer stocks. Consumer goods companies tend to benefit from a sell-off in technology, as investors look for a safer spot to store their money.
(BEGIN VIDEO CLIP)
NOMI GHEZ, GOLDMAN SACHS: The prospects of the Fed tightening and the economy slowing is good for this industry. This is a defensive industry, and its prospect for less growth and earnings for other corporations surfacing, investors are rotating toward the more defensive names.
(END VIDEO CLIP)
BAY: The charge into consumer stocks ranged from household goods to cosmetics. Unilever up more than 2. The maker of Lipton tea and Dove soap moving higher on merger speculation with Bestfoods and a better-than-expected first quarter. Wal-Mart rose nearly 3 3/4 after reporting better-than-expected earnings yesterday. Budweiser beer's parent company, Anheuser-Busch, jumped above 2. Hershey Foods gained more than 1 1/4. And cosmetics giant Estee Lauder up nearly 1 1/2.
VARNEY: Coming up, what is the outlook for economic growth and inflation? Who better to ask than corporate America's top chief executives.
BAY: The nation's business leaders convene in White Sulphur Springs, West Virginia. A live report from this year's Business Council, when MONEYLINE returns.
VARNEY: Some of corporate America's most powerful figures descended on a West Virginia spa today. Their mission: to diagnose the health of the U.S. economy and come up with some preventative medicine to keep the long-running boom on track.
Kitty Pilgrim was on the scene for us.
KITTY PILGRIM, CNN CORRESPONDENT (voice-over): So many CEO and corporate chieftains wearing polo shirts and khakis. While the affair is casual, the topics require pretty heavy lifting, ranging from global trade and the elections to Internet strategies for the next decade. The Business Council is 300 current and former chief executives and government officials who converge three times a year to swap ideas. They also take a temperature reading on the economy as old economy veterans brainstorm with new economy hotshots.
This year's consensus, starting with the negative, most believe growth will slow this year, inflation will pick up, and the labor market will remain tight.
SANFORD WEILL, CITIGROUP: Members expect what the cost of debt financing and equity financing will increase somewhat in the next six months, which means that I think they think that interest rates may go somewhat higher and that equity prices may go somewhat lower.
PILGRIM: On the sunny side, the higher oil prices are having little effect on business, e-commerce continues to raise productivity and decrease costs.
RALPH LARSEN, JOHNSON & JOHNSON: Business is good. I mean, there's no question about it. And while all of us have parts of our business that may not be hitting on all eight cylinders, the fact is business is good.
PILGRIM: Well, for this three-day conference, from the morning danish to the afternoon divots, they talk and talk and talk. It's not like they agree on all topics, though. They didn't agree on tax cuts, for one -- Stuart.
VARNEY: Well, former Treasury Secretary Robert Rubin will be joining us from that meeting tomorrow, I believe, and Kitty, you have the good fortune to be staying there for the next couple of days. So we'll check back with you over the next couple of days, too.
BAY: Robert Rubin tomorrow, but just ahead, the six-figure price tag that shocked the art world.
VARNEY: Ah, but the final destination of this painting may provide the biggest surprise.
BAY: It may be the first art scandal in cyberspace. As we told you last night, a Dutch man bid $135,000 for a painting on eBay, hoping it was the work of acclaimed California artist Richard Diebenkorn. But now it looks as if the deal is off.
Late today, eBay suspended the seller, Ken Walton of California, for having bid on his own painting, which could artificially drive up the price. Walton told MONEYLINE that he bid on behalf of a friend, but this came after he admitted that he had lied when he claimed that his son damaged the painting. Walton has no children. The eBay ruling means that both buyer and seller are free from their contract, and Walton is now saying that he'll probably hang on to the painting and have it appraised on its own to see whether it's the real deal.
Paintings by Richard Diebenkorn have sold for nearly $4 million on the open market.
Up next, "Ahead of the Curve": some of what you need to know tonight before the markets open tomorrow.
VARNEY: You're watching MONEYLINE.
VARNEY: Investors will keep a close eye on some key reports tomorrow. After the bell, Dell Computer set to announce first-quarter results: 16 cents a share expected, the same as a year ago.
Also tomorrow, profit reports from The Gap. The street's looking for 27 cents a share. That would be five cents better than last year.
Kmart's expected out with profits of five cents a share. That, if it came to be five cents a share, would be half of what it earned last year.
And also tomorrow, another read on the health of the retail sector: April retail sales expected, and they're expected to show a rise of 1/2 of 1 percent after a small increase in the month of March.
BAY: That is MONEYLINE for this Wednesday. I'm Willow Bay.
VARNEY: And I'm Stuart Varney. And we thank you for joining us. Good night from New York.
"CROSSFIRE" is next.
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