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Moneyline News Hour

Dow Tumbles 114.69 to 9,975.02; Nasdaq Falls 42.40 to 3,171.56; IBM's Revenue Disappoints Analysts; Microsoft, AOL, Sun Beat the Street

Aired October 18, 2000 - 6:30 p.m. ET

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

STUART VARNEY, CNN ANCHOR: Tonight on MONEYLINE: whiplash on Wall Street. The Dow plunges more than 400 points, then rebounds, only to head lower again. In the end, the blue chips kiss Dow 10000 goodbye -- Nasdaq, too on its own wild ride. It's all enough to give investors a good case of motion sickness.

WILLOW BAY, CNN ANCHOR: A flood of tech giants out with profits after the bell: Microsoft, Apple and America Online. We'll crunch the numbers, and talk with AOL boss, Steve Case.

VARNEY: Plus, we'll check out some stocks that have thrived during the market's downdraft: Sexy, they're not.

ANNOUNCER: This is MONEYLINE. Reporting tonight from Los Angeles: Willow Bay; and from New York: Stuart Varney.

BAY: Good evening, everyone, and welcome to MONEYLINE.

I'm Willow Bay.

VARNEY: And I'm Stuart Varney.

We start with the white-knuckle ride on Wall Street. The selling came early and often, as investors voted with their feet on a weak sales report from IBM. But Big Blue wasn't the only trigger to the sell-off, as the market frowned on a profit letdown at Chase Manhattan and a stronger-than-expected report on consumer prices.

The Dow took a beating at the opening bell, losing as many as 435 points. But strength in other big names, led by Intel, lifted the index back above 10000. Then it slipped again and ended down more than 114 points at 9975. The Nasdaq also slipped right from the get- go, falling to an intraday trading low for the year: 3026. But it battled back into positive territory, only to drop again. And it closed down more than 42 points at 3171.

In the broader market: the S&P 500 down nearly eight points. It closed at 1342. Now, let's hone in on some of the big movers today. As we mentioned, IBM plummeted 17 1/2 points. Hewlett-Packard slumped almost five. But Intel gained two on yesterday's earnings strength. WorldCom: Well, that stock jumped more than two points. But the highest trading volume was in Sun Microsystems, which inadvertently released its earnings several hours early. Sun fell more than one point, after some truly wild swings up and down. It was a dramatic day of twists and turns.

Allan Chernoff kept track of how it unfolded minute by minute, and he has this report.

(BEGIN VIDEOTAPE)

ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): Trouble before dawn: IBM stock collapses after reporting sluggish revenue growth. It drops as much as 14 in pre-market trading.

UNIDENTIFIED FEMALE: And that means the industrial average could open at near the 10000 level, the lowest level in half-a-year.

CHERNOFF: 7:19 Eastern time: Dow component, J.P. Morgan, reports earnings 14 cents above expectations. But five minutes later, merger partner Chase Manhattan drops a bombshell: investment losses causing the giant bank to earn 23 cents a share less than investors had anticipated.

Because Chase Manhattan is using its stock to buy J.P. Morgan, shares of the two banks move in tandem. 8:30: The consumer price index for September rises 0.5 percent. Inflation is on the rise. An hour later: the opening bell. An imbalance of orders delays trading in some key Dow stocks. At 9:38, the Dow falls below 10000. Six minutes later, the Dow is down 172.

At 9:45, Dow members IBM and J.P. Morgan both opened: IBM at 90 1/4, down 22 3/4; J.P. Morgan at 118, down 19 3/8. The two stocks together account for a loss of 249 Dow points, sending the industrials down more than 400. Within four minutes, the Dow is at its low of the day, off 435 points, a loss of 4.3 percent.

UNIDENTIFIED FEMALE; I'll buy 50. I buy 50.

UNIDENTIFIED MALE: Yes, you bought 50.

CHERNOFF: Meanwhile, the volatile Nasdaq composite is plunging more than 5.5 percent, down 181.

AL GOLDMAN, A.G. EDWARDS: Oftentimes, the best time to buy stocks for the long term is when you are most uncomfortable buying stocks. And I don't know anybody who is buying comfortably today.

CHERNOFF: 10:00 a.m.: Traders are buying more put options than call options, exactly the kind of anxiety analysts look for near a bottom. 10:15: Buyers step in for the old tech leaders: Microsoft, Dell Computer, and Yahoo!. J.P. Morgan's stock is climbing back.

THOMAS GALLAGHER, CIBC OPPENHEIMER: It's like being in a Category 5 hurricane. It is endless. You know, it feels like it is never going to end. And you are anxious. And you are afraid you are going to die. And this is the end. And all of a sudden the sun comes out. CHERNOFF: The sun comes out in the form of Sun Microsystems, which releases strong earnings on its Web site earlier than anticipated.

2:25: the Dow breaks back above 10000. For the next half-hour the indices keep climbing. By 2:49 the Nasdaq composite is up 43 points. But selling resumes during the final hour of trading, the Nasdaq and the Dow ending with losses of more than 1 percent.

(END VIDEOTAPE)

CHERNOFF: The volatility today was astounding. J.P. Morgan ended off only 3 3/8 and Sun Microsystems, it traded in an intraday range of nearly 17 points, ending down 1 1/16. Such volatility shows there is a heated battle underway between the bulls and the bears -- Stuart.

VARNEY: Allan Chernoff it never ends, does it? Thanks.

Rhonda Schaffler spent the day at the New York Stock Exchange during this down, up, down again session. So Rhonda, what turned this market around?

RHONDA SCHAFFLER, CNN CORRESPONDENT: Well, Stuart, first of all, some credit goes in part to good old-fashioned bargain hunting after both the Dow and Nasdaq touched new intraday lows for the year. As the Nasdaq pared its losses, banks started to recover, too. Take a look at this chart of Chase Manhattan which plunged on the open on weak earnings, then bounced back, mirroring the Nasdaq's recovery.

The volatility, though, took even seasoned traders by surprise. Just look at some of the swings in individual stocks. J.P. Morgan had nearly a $20 trading range. Goldman Sachs, AOL and Time Warner all in roughly a $10 range. And Juniper, over on the Nasdaq, that stock had a trading range of more than $22.

On the Big Board, decliners outpacing advancers by a nine to five margin, but even that was an improvement. And volume here topped 1.4 billion shares, the fourth busiest session ever. Some winners on the day: Viacom up more than 6 1/4. Dow component International Paper gained more than 3. Gap shares up more than 2 on a Merrill Lynch upgrade. And Home Depot higher by about 1 1/2.

All of those stocks had been beaten down in the last few weeks, a reminder that today's sell-off was really just a continuation of this year's downdraft -- Stuart.

VARNEY: And that is Rhonda Schaffler at the Big Board. Thanks, Rhonda -- Willow.

BAY: Stuart, a major earnings report out after the bell: Microsoft. Investors in the stock, one of the worst Dow performers this year, could use some good news, and that's what they got.

Microsoft beat the street. In after-hours trading, shares were up 3 1/4 to $55. They gained more than a dollar before the report came out. So let's go straight to Steve Young for the numbers and all the details -- Steve.

STEVE YOUNG, CNN CORRESPONDENT: Willow, it wasn't exactly high fives, but Microsoft didn't disappoint either. There was some progress to report, but also concerns about the big picture.

(BEGIN VIDEOTAPE)

YOUNG (voice-over): Microsoft's latest financial numbers hardly contradict the widespread conviction that the corporate PC market is still stuck in the mud. But the company says the market for business and consumer software did pick up a little.

As a result, Microsoft reported earnings before an accounting charge of $0.46 a share, a nickel more than Wall Street's diminished expectations, 18 percent better than the same period a year ago. And revenue of more than $5 3/4 billion, about $150 million more than anticipated.

The company says results were solid across all businesses, but it's still guarded about worldwide economic conditions. Because of that concern as well as the government's antitrust case, stock in world's biggest software company is hovering near a two-year low.

ULRIC WEIL, FRIEDMAN, BILLINGS, RAMSEY: Really, for an industry leader of the quality of Microsoft to be trading in the 50s, that is really hard to believe, but it is a fact. And they've got to show that they are not dead. Their legal situation is no longer a factor at all.

YOUNG: Some analysts are forecasting 12 or 13 percent revenue growth in the normally strong December quarter.

ROBERT WALBERT, BRIEFING.COM: If the technology sector is going to right itself, it needs the leadership from widely-held stocks such as Intel and Microsoft. Just the other day, Microsoft set a two-year low, so the fact that the numbers came in better than expected and overall is beginning to see momentum in its Windows 2000 products, I think that the news for Microsoft going forward looks better.

(END VIDEOTAPE)

YOUNG: And on the conference call, the company's chief financial officer said sales in Asia were strong and in U.S. as healthy as Microsoft expected. But Europe was weak, with no sign that will turn around in the December quarter -- Willow.

BAY: Steve Young, thank you.

Well another upside surprise after the bell, this one from AOL. Shares of the online giant tumbled 17 percent yesterday on nervousness about today's report, but those fears were not realized. AOL beat the street and came in with better-than-expected subscriber growth. The stock is trading up nearly $1.60 in after hours. In the regular session, AOL gained more than 3. Merger partner Time Warner, parent of this network, also up $1.75.

Greg Clarkin joins us now with more on this much-anticipated report -- Greg.

GREG CLARKIN, CNN CORRESPONDENT: And Willow, for weeks this has been the hot topic for Internet investors and analysts: Just how much advertising are the big players on the Web selling? Now fears of an ad slowdown have hammered some of the Net's biggest names. Today, after the bell, AOL told Wall Street just how those ad sales are going.

(BEGIN VIDEOTAPE)

CLARKIN (voice-over): America Online advertising and e-commerce sales shot up by 80 percent over year-ago levels to $649 million. That's right in line with Wall Street expectations. But it's unclear if even that's good enough to soothe nervous Internet investors.

Shares of AOL and other Internet powers have been under pressure in recent weeks as Wall Street worries over a possible drop in advertising. AOL CEO Steve Case tackled the issue on the company's conference call, telling analysts -- quote -- "AOL advertising revenue growth is right on target" -- end quote. But analysts say if an ad slowdown does materialize, the company could be hit.

JOHN CORCORAN, CIBC WORLD MARKETS: It has a smaller exposure to the dot.com players, because it started selling to the "Fortune" 500 much earlier than players like Yahoo!. But there is still some exposure there. And I think we learned, as of yesterday and today as well, AOL is not immune to what's going on in the advertising environment. It is not bulletproof.

CLARKIN: Slowdown or no slowdown, analysts say the ad game on the Internet has changed.

CHARLES BUCHWALTERS, ADRELEVANCE: Many online advertisers have gotten much smarter, much more experienced. And given the overall concern in the market, they're the ones that now have the power in terms of saying: Look, these are the way -- this is the way that I want to work with you. These are the terms I'm willing to pay at.

CLARKIN: Excluding extraordinary items, AOL profits jumped 46 percent to $340 million -- or 14 cents a share. That's a penny better than expectations. And subscriber growth jumped by 1.4 million. That's also better than expectations.

(END VIDEOTAPE)

CLARKIN: And that AOL net income, we should point out, was up 92 percent, not 46 percent, as that chart said. Now, AOL's merger partner, Time Warner, parent of CNN, posted earnings today as well. Time Warner earned 7 cents a share. That's 3 cents higher than expected. Revenue rose 2 percent to almost $7 billion.

And both AOL and Time Warner executives addressed today the regulatory scrutiny their companies are going through as they try to gain approval for their merger. AOL's Steve Case said the merger will close this fall as expected. And that's an opinion seconded by Time Warner chairman, Gerald Levin. (BEGIN VIDEO CLIP)

GERALD LEVIN, CHAIRMAN & CEO, TIME WARNER: Well, obviously, we can't comment on -- on our discussions. I think they've been very constructive. It's really been a lot of information-sharing. We're talking about new ideas. This is a rather profound concept: joining Time Warner and AOL. And I think it's going quite nicely, at this point.

(END VIDEO CLIP)

CLARKIN: And Levin wouldn't comment on reports the Federal Trade Commission may be preparing to try and block the deal if an agreement on providing access to Time Warner's cable lines isn't reached -- Willow.

BAY: Greg Clarkin, thanks for the update on AOL and Time Warner.

And we should point out that later in the program: an exclusive interview with Steve Case, the chairman and CEO of AOL on his company's stand-out quarter -- Stuart.

VARNEY: Just ahead: We'll have more on what set off the stunning swings on Wall Street today. A finance -- a financial fixture falls short of expectations as it embarks on a major merger. What went wrong at Chase Manhattan? And we'll check out the after- hours reaction to Apple, which failed to live up to already lowered expectations.

(COMMERCIAL BREAK)

VARNEY: After a crazy session, a lot of stocks moving in after- hours trading.

And Amanda Lang is tracking all the action for us -- Amanda.

AMANDA LANG, CNN CORRESPONDENT: And, Stuart, you mentioned Apple Computer.

It did disappoint the street with its earnings after the bell today, missing lowered expectations. It came in at 30 cents per share, excluding gains. But it also warned that next quarter, and possibly next year, would disappoint on the revenue front -- that Stock down 2 11/16 to 17 7/16 after the bell.

And Ariba posted a break-even quarter, its first, and its says, the first B2B company to do so -- but its stock off. It is trading down after the bell, 9 15/16, trading now at 117 1/8. And your two top stories, you mentioned AOL: It is up after the bell $1.59 at $48.50 -- and Microsoft gaining 3 1/4 on its good earnings report, trading now at 55 -- Stuart.

VARNEY: And that is Amanda Lang. Thanks, Amanda.

Now, one of the triggers for this morning's dramatic sell-off: disappointing earnings from Chase Manhattan. The company reported steep losses in its own portfolio, a victim of this year's weak markets. And Chase, which is in the process of merging with J.P. Morgan, did not downplay the shortfall.

(BEGIN VIDEO CLIP)

DINA DUBLON, CHASE MANHATTAN BANK: This quarter is actually not a small disappointment. It is a large one. And it is primarily driven by the private equity business, as you have just noticed. As to the merger, we are as committed as ever. And, in fact, if you look at the combined earnings of Morgan and Chase, you would see one more reason for the complementarity between those two businesses.

(END VIDEO CLIP)

VARNEY: Now, take a closer look at those reports, what happened to the stocks: Chase missed earnings estimates by a wide margin. Analysts expected earnings of 93 cents a share. They came in at 68 cents -- net income down a whopping 24 percent compared to last year. J.P. Morgan, on the other hand, beat the analysts' expectations. And quarterly profits rose, a gain of 16 percent. In the end, these stocks closed way off their lows. Chase finished down more than a point. J.P. Morgan fell nearly 3 1/2.

BAY: A steady stream of company report cards descended on the street today. And many of them came in ahead of analyst estimates. But the good marks weren't enough to calm the jitters on Wall Street.

Fred Katayama has the earnings wrap.

(BEGIN VIDEOTAPE)

FRED KATAYAMA, CNN CORRESPONDENT (voice-over): The company known for its computer programming language made a computing boo-boo, releasing its earnings results ahead of schedule on its Web site. Still, Sun Microsystems topped analyst estimates with profit growth of 85 percent. And investors initially drove up the stock.

But that positive investor reaction was the exception. For the most part, investors sold off stocks of companies even if they had beaten or met expectations for the third quarter. They focused on third-quarter sales or the profit outlook for the next three months instead.

ALAN SKRAINKA, EDWARD JONES: Companies, for example, are taking one-time profits from companies that they have invested in, and to get a better feel for what's going at the business, a number that you cannot really manage or manipulate at the top-line revenue number.

KATAYAMA: So investors initially sold off Eastman Kodak, despite higher-than-expected profits of $418 million, because film sales slowed and Kodak lowered its fourth-quarter earnings forecast. The other four industrial stocks on the Dow reporting today also beat estimates.

Airlines continue to post mixed results. American Airlines' parent AMR blew past forecasts with its best third quarter ever, while US Airways blamed high fuel prices and heightened competition for its larger-than-expected loss. Of the 183 S&P 500 reporting so far, 59 percent have beaten expectations, less than the 64 percent average over the last six quarters.

(on camera): Despite the tech stock sell-off, technology companies are posting the biggest profit growths so far: an average of 59 percent per company. The average for the entire S&P 500: 17 percent.

Fred Katayama, CNN Financial News, New York.

(END VIDEOTAPE)

VARNEY: And in tonight's "Tech Watch", another earnings report mistakenly released early in the day: on Monday, Novellus; today, Sun Microsystems. The server giant's earnings report was briefly posted on its Web site this morning, then quickly pulled down. On a conference call this afternoon, Sun executives acknowledged a mistake had been made. They apologized and said they are looking into it.

BAY: Still to come on MONEYLINE: The U.S. Navy honors the sailors killed in the attack on the USS Cole. We'll bring you the story on the memorial service in the "MONEYLINE News Digest."

(COMMERCIAL BREAK)

VARNEY: And turning now to the "MONEYLINE News Digest": honoring U.S. sailors killed in Yemen.

Wolf Blitzer joins us from Washington -- Wolf.

WOLF BLITZER, CNN ANCHOR: Thank you, Stuart. The 17 U.S. sailors killed in an apparent terrorist attack in Yemen last week were honored at a memorial service today in Norfolk, Virginia. Thousands of sailors attended, including some of the 39 injured in the explosion that damaged the USS Cole. President Clinton promised the attackers would be brought to justice.

(BEGIN VIDEO CLIP)

WILLIAM J. CLINTON, PRESIDENT OF THE UNITED STATES: To those who attacked them we say you will not find a safe harbor. We will find you. And justice will prevail. America will not stop standing guard for peace or freedom or stability in the Middle East and around the world.

(END VIDEO CLIP)

BLITZER: In Yemen, U.S. Navy divers recovered the remains of two more sailors from the ship's hull. The wreckage still holds the remains of four other sailors. FBI Director Louis Freeh left today for Yemen to oversee the investigation.

Elsewhere in the Middle East today, it was "wait and see" whether a cease-fire agreement would take hold. There were still clashes between Israeli troops and Palestinians in the West Bank and Gaza, but they were described as sporadic.

Israel announced that it had arrested eight Palestinians accused of beating to death two Israeli soldiers in Ramallah last week.

And New York City today was buzzing about baseball. The New York Yankees' victory last night over the Seattle Mariners set up a subway world series against the New York Mets.

Mayor Rudy Giuliani, an avowed Yankees fan, spoke to CNN earlier today.

(BEGIN VIDEO CLIP)

MAYOR RUDY GIULIANI (R), NEW YORK: I'm smiling because this is probably one of the greatest times in sports for the city of New York. We haven't had a subway series in 44 years. This is going to be absolutely terrific for New York sports fans.

So here in New York we're very, very happy, and we hope the rest of the country enjoys watching it.

(END VIDEO CLIP)

BLITZER: The series starts Saturday at Yankee Stadium.

Those are some of the top stories. Join us for on "THE WORLD TODAY": That's at 8:00 p.m. Eastern, 5:00 p.m. Pacific.

MONEYLINE will return right after this.

(COMMERCIAL BREAK)

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

BAY: In the tonight's headlines, a roller-coaster ride in the markets as the Dow plunges 435 points, battles back, then drops again, bidding farewell to the 10,000 mark. The Nasdaq, that also slides.

And we'll check out late-day reports from AOL, Microsoft and Apple. Will it bring a better tomorrow for the markets? And we'll go over AOL's numbers with chief executive Steve Case and ask him what spared a surprise in subscriber growth.

VARNEY: But first, more on our top story: a wild Wednesday indeed on Wall Street. From the opening bell to the closing gavel, investors held their breath: first in shock at a dramatic morning sell-off and then in awe of the market's resilience.

On the Dow. a heart-stopping morning sell-off as the industrial average fell more than 435 points. Its intraday low was 9,654. But it fought its way back up, though it closed down more than 114 at 9,975.

A similar story on the Nasdaq. That tech-heavy index off sharply in early trading, falling all the way down to 3,026, the lowest level of the year. Then it regained ground, ending down just 42 points at 3,171.

The S&P also avoided major losses, slipping nearly eight. It closed at 1,342.

Most of the damage to the Dow came from Big Blue: IBM down 17 1/2 points on news of weak sales. Hewlett-Packard also down sharply. It fell nearly five. Chase Manhattan, which missed earnings expectations by a wide margin, fell sharply this morning, but regained ground and closed down just over a point lower at 36 7/8.

And New York Stock Exchange techs: Nortel dropped more than four, EMC fell almost five points, that despite stronger-than-expected earnings.

Over on the Nasdaq, a few bright spots: Intel up two on its earnings report from last night. WorldCom and Dell also moving to the upside. WorldCom up more than two, Dell nearly two. Moving lower on the day, though, Cisco and Sun Microsystems.

Another issue in play today is the CPI, the Consumer Price Index. It rose 0.5 percent in September, higher than expected, once again igniting fears that the Federal Reserve may not be done raising rates.

Rhonda Schaffler watched today's action from the floor of the New York Stock Exchange. She joins us now with more on today's, shall we call it, intense trading session, Rhonda?

SCHAFFLER: That's a good word for it, Stuart. It was definitely intense and the market's wild swings just as dramatic as the wild emotional swings traders here were on. There was fear, relief, a little optimism, and by the end of the day, a lot of caution.

Traders obviously pleased that the market was able to have such a dramatic comeback, and there was what some call a whiff of fear this morning when the Dow quickly dropped more than 400 points.

Traders then were saying that it was just two stocks involved, IBM and J.P. Morgan, so there was a little relief there and some optimism when there was some buying in technology stocks, for instance. But by the end of the day, there was a little bit of caution and they were looking at that sell-off again and saying: It was only two stocks, and is the worst over? Will there be more losses ahead?

By the end of the day, nobody wanted to say the worst was over. One trader I talked to, who's been on this floor for 40 years, thought the selling would continue. He said the comeback today was just a little too easily -- Stuart.

VARNEY: That's Rhonda Schaffler at the Big Board. Thanks, Rhonda.

Now over on the Nasdaq, a blockbuster quarter for Sun Microsystems. As we told you, the server giant's earnings were mistakenly released earlier today, but that stumble could not change the surprisingly good news in the report. For the quarter, Sun reported earnings per share of 30 cents. That is 4 cents more than the analysts had expected.

Most impressive, though, just look at the bottom line. Net income up 85 percent.

BAY: The markets will have a full slate of earnings to digest tomorrow as a trio of tech titans served up quarterly profits after the closing bell. America Online beat out profit forecasts, earning 14 cents a share as profits nearly doubled to $350 million. We'll talk to CEO Stave Case in just a few minutes.

A disappointing showing from Apple, which fell short of already revised forecasts, earning 30 cents a share, or 108 million, on slumping September sales. But Microsoft blew past expectations, earning 46 cents a share, or $2.6 billion, on revenue of nearly 6 billion.

Checking the after-hours reaction, AOL up $2.90 at $49.81. Apple down nearly 2 3/4. Microsoft up more than 4 1/4 at 56 1/16.

But it's been a rough stretch for Microsoft stock, down more than 50 percent from its high. That was reached before a federal judge branded the software giant a predatory monopolist and ordered it to be split in two.

Joining us now for some perspective on the company, Rick Sherlund, software analyst at Goldman Sachs, who comes to us from his firm's New York office.

Rick, welcome.

RICK SHERLUND, GOLDMAN SACHS: Thank you.

BAY: You're off the call. It looks good on paper. But did you like what you heard?

SHERLUND: Yes, I think the tone was very positive. Their revenue number and earnings were above the Street estimates. If you adjust for some investment gains and the fact that they drew down deferred revenues, it was really more kind of in-line with expectations.

But nevertheless, the tone was very positive. They seemed upbeat that corporate PC demand was gradually getting better. They reaffirmed expectations for the future.

So I think it was a very good tone to the call, and I think it's a catalyst. I think it suggests that we've probably seen the trough in Microsoft's fundamentals and probably the trough for the stock. And I think it's a good catalyst for the stock as well as probably for the overall Nasdaq market.

BAY: OK, lots to digest here, Rick. I just have question for you about those revenue numbers.

When Steve Ballmer joined us last month, the Enterprise 2000 launch, he said he expected to kick Enterprise server business into high gear. Did they do that?

SHERLUND: Well, it was up about 30 percent, I believe, in the quarter. So they've launched some new products, and I think those products continue to be the bright spot for the company. They've got a lot of new products out. So I think that part of the business, it's about 17 percent of the total company. So it's a small part of the total, but it continues to do very well.

BAY: Now, you described today as a catalyst. What does that mean do you think we'll see tomorrow?

SHERLUND: Well, there were a lot of concerns the company would lower expectations going forward given the problems we've seen with other PC-related companies. But the company actually was quite positive about the outlook going forward. And I think investors like to see that you've made a trough and that things are getting better. So directionally, I think this allowed a lot of comfort. I think the stock is up at least several points tomorrow.

BAY: All right. We'll look for that. Rick Sherlund of Goldman Sachs, thanks as always for joining us.

SHERLUND: Thank you.

BAY: Stuart.

VARNEY: Willow, here's what's next: another earnings report that may well impress Wall Street. We're going to talk to Steve Case about his company's impressive quarter and what's next for the online giant. And that is when MONEYLINE continues.

(COMMERCIAL BREAK)

VARNEY: America Online posted a quarter to be proud of. The online service provider earned 14 cents a share. That is a penny above Street expectations.

Much of that can be attributed to strong subscriber and advertising revenue gains. But shares of America Online have been less-than-impressive of late. Yesterday, the stock closed just above its 52-week low.

Joining us now is Steve Case himself.

Steve, welcome back.

STEVE CASE, CEO, AMERICA ONLINE: Great to be here.

VARNEY: The market's concerned about advertising revenue. AOL turned in a 649 million revenue in this quarter. But what about the future? Can you give us some indication of what's going to happen in the next quarter?

CASE: Oh, it's going -- the future is terrific, both for AOL and soon for AOL-Time Warner. We're seeing very robust growth in advertising and e-commerce. Those numbers you talked about were up 80 percent over the past year. And what's happening is more and more companies are recognizing the Internet is real and they need to reinvent their businesses to become more Internet-centric. And there's a flight to quality, and thankfully, AOL is the leader in the Internet sector. So more and more companies are working with us.

And Jerry Levin this morning talked about the Time Warner growth and it was very robust there.

The most exciting thing, as we merge the companies, you look at the top 100 advertisers for AOL and for TIME Inc. and for Turner Broadcasting, only four of them overlap. So there's a huge opportunity to cross-sell across these different advertising bases. So we're very excited.

VARNEY: Now, what about the ad backlog. I think there's a dollar number that you can attach to that, and that shows how many advertisers are lined up to put money into AOL properties.

Well, how many are lined up, and what kind of dollar number do you have as a backlog?

CASE: It's, right now, it's about $3 billion as a backlog. So it's really quite significant. And, again, I think, as a function of this trend -- this irreversible trend as the Internet becomes more and more a part of everyday life, advertisers need to be on the Internet more and the company they generally turn to is AOL.

We're not the only company, but we're certainly the leader of the pack; and that helps us in terms of -- to continue to grow the advertising commerce at this kind of robust rate.

VARNEY: Everybody has been hurt by the crashing dot-com advertising -- you have not been?

CASE: Well, maybe we're a little bit different than everybody else. We've always felt that we were, maybe, a cut above. I don't say that arrogantly, but we have been doing this for over 15 years and we've kind of emerged as the blue-chip. And we have a little different business model -- different approach. I think we benefit from that.

One thing we do with advertising commerce, we try to partner with the leaders -- the leading companies that have been around for decades and the new companies that are well capitalized. I think that helps shield us from some of the risks that, maybe, other companies have suffered from.

VARNEY: Subscriber growth. You added 1.4 million in the latest quarter. What about the next quarter?

CASE: More. We're seeing very strong growth. When we went public 8 1/2 years ago, we had 200,000 customers, now we're knocking on the door of 25 million customers. We'll hit that in just a matter of days.

And the reason is more and more people want to get connected to the Internet, not just in the United States, but around the world; and, thankfully, many of them choose AOL because we really have worked hard over the many years to try to create a service that really is different and really is better.

VARNEY: When I said 1.4 million new subscribers, is that a net new...

CASE: Yes, net -- after turn; 1.4 million net new members were added to the service. Five years ago I think we got about 1 million customers.

So there's been very dramatic growth. We think that will continue both in the United States -- because, still, more than half the people are not yet connected in the United States, and even more true outside of the United States where there's many countries, China for example, where only about 1 percent are connected.

So the trend there is very significant. And for us the real power of our model is having the subscriber revenues and the advertising commerce revenues. There's too many companies, I think, that have, maybe, suffered because they were relying on just one revenue stream as opposed to a blended revenue stream.

VARNEY: Briefly, can you complete the deal on time without giving away any of AOL crown jewels?

CASE: Well, we announced in January that we expected to get stockholder approval in summer of regulatory approval in the fall. We're on track to do that.

We're having a good discussion, a good dialogue with the FTC and the FCC, and we are confident we can get this closed relatively quickly. And, hopefully, we can agree on some language that will make everybody comfortable.

We made a commitment to open access. We're going to do it one way or another. And if there's something we can agree to, that the language is something that would, maybe, make people a little bit more comfortable about our intentions, then we're happy to look at that.

We want to get this deal done. We want to have a constructive dialogue with the government of the United States, and we're confident that we're on the right track.

VARNEY: AOL's chief Steve Case. Thanks for being with us, sir

CASE: Thank you.

VARNEY: OK -- Willow.

BAY: Stuart, coming up defense stocks have showed strength year- to-date. We'll take a look at one in particular that's posted impressive gains.

That's next on MONEYLINE.

(COMMERCIAL BREAK)

BAY: Other big movers today: Copper Mountain Networks plunged more than 17, that's 63 percent. The phone equipment maker warned late yesterday that its fourth-quarter earnings will be lower than expected because of weakness among some of its customers. The 52-week high on this stock -- 125.

PeopleSoft jumped nearly 8 1/2, or nearly 26 percent. The software maker beat third-quarter earnings estimates today as licensing sales doubled. And Covad Communications plummeted more than five, one of the biggest losers on the Nasdaq today. The broadband service provider reported a wider-than-expected third quarter loss late yesterday.

Last night on MONEYLINE, CEO, Robert Knowling explained the revenue shortfall.

(BEGIN VIDEO CLIP)

ROBERT KNOWLING, CEO, COVAD COMMUNICATIONS: We have a couple of our channel partners, literally about less than a dozen, that are having some challenges due to the condition of the financial markets. Their inability to have access to capital has let them get behind in some of their bills.

(END VIDEO CLIP)

BAY: It has been a tough year for Covad; its shares have plunged nearly 95 percent from its 52-week high.

VARNEY: With so many stocks hitting 52-week lows and concerns already brewing over next quarter's earnings reports, it's very easy to get lost in the sea of red. But even in this very difficult market, there are still some sectors that are soaring.

Susan Lisovicz took on the challenge of finding those bright spots, and here's what she dug up for us.

(BEGIN VIDEOTAPE)

SUSAN LISOVICZ, CNN CORRESPONDENT (voice-over): When the going gets tough, the tough go shopping for defensive stocks.

The Standard and Poor's 500 has declined more than 8 1/2 percent year-to-date, but nearly half of the stocks in that broad index are up for the year. And some of the biggest gains are in energy.

Schlumberger and Global Marine are among stocks in S&P's oil and gas drilling group, which has soared 45 percent. Apache and Anadarco are catalysts in the exploration and production area, which has rocketed 53 percent.

ANNETTE GEDDES, M.D. SASS INVESTORS SERVICES: We have a major imbalance in this country between supply and demand for energy. And the price of both commodities, gas and oil, have been very, very strong lately. We think they will continue to be strong because we think this is a long-term problem.

LISOVICZ: Another traditionally safe area for investors, health care, is also benefiting from an aging population. United Health Care is among the HMOs that have pushed managed care stocks up 48 percent. Generic drug stocks, such as Watson Pharmaceuticals, have helped propel that group 90 percent.

SUBODH KUMAR, CIBC WORLD MARKETS: The Pharmaceutical companies have spent the last seven or eight years consolidating into just a few companies so, as businesses, they are much more tightly operated than before and they've got real products and visible earnings.

LISOVICZ: Unlike many tech stocks. But a select few are among the S&P 500's biggest winners year-to-date, Network Appliances and Mercury Interactive.

The performance of an old economy stock, Nabisco, shows strength in some foods and beverages, a traditional defensive area. And energy stock Dynergy and pharmaceutical Alza corporation are also on the list.

(on camera): Value investors who want to buy into stocks bucking the market's trend will find that the current winners are now expensive. But for every stock in the S&P 500 trading near its highs of the year, there is another just off its lows.

Susan Lisovicz, CNN financial news, New York.

(END VIDEOTAPE)

BAY: Another sector with impressive gains over the past year: defense stocks. Sitting atop that list Northrop Grumman. The company, today, posted third-quarter earning of $2.11 a share, or $150 million, blowing past estimates by 10 cents a share. This, for a stock that has nearly doubled since March.

Joining us now is Kent Kresa. Northrop's chairman and CEO; welcome.

KENT KRESA, CEO, NORTHROP GRUMMAN: Well, thank you, I'm glad to be here.

BAY: Quite a report today, yet your stock is down four. What didn't the market like about this report?

KRESA: I wish I knew. Everything about it, in terms of our earnings -- we blew past the cash estimate. We had very good acquisitions; and we talked about the fact that we'll go from about $7.6 billion this year to $9 billion next year, so...

BAY: Your sales were down a bit. How much of that is due to the end of the run for the B-2 bomber, and what do you do to replace that source of revenue?

KRESA: Well, that's was the only downward. In all of our other sectors we're up. The B-2 bomber clearly is ending; the program has ended. So we're having to replace that.

BAY: What will you replace it with?

KRESA: Well, we have the F-18, we have unmanned vehicles, which is growing very nicely. The surveillance aircraft, in particular. And we see this as a very important next generation step for the Defense Department.

BAY: Now, you said that you expect earnings for the year in the range of 870 to 880. Were you guiding the street a bit lower? They expected a little bit higher than that.

KRESA: What we did -- as you may remember, we had some pension income that we had to revaluate, because of the acquisition -- or the sale of our activity at -- in Texas. And, as a result of that, that was going to be down slightly. So we just guided it down. But it was all basically based on the pension income.

BAY: Now, in this election season, there's a lot of talk about increased defense spending. That's causing a lot of buzz around the sector. Wall Street seems to like what they hear there. But really, what does this mean for your business?

KRESA: I think, no matter how the election comes out, both sides have said they want to increase the top line of the Defense Department. And in particular, they want to increase the procurement account, which is what all of -- we all do. So I think it will be up no matter what happens. And, of course, Congress has been very interested in increasing the lines every year anyway.

BAY: Now, up no matter what happens, but would Northrop Grumman be better off with one president over another?

KRESA: It's hard to say. It really is hard to say. But we think that there will be growth no matter what. And again, we're in the technology areas of the next generation: information technology in very important systems, in surveillance, in precision weapons. So we we're there no matter what happens.

BAY: Mr. Kresa, thanks for joining us, CEO of Northrop Grumman -- Stuart.

VARNEY: Coming up: some perspective on market mayhem past and present. Yes, we are going to be joined by CNN's financial editor Myron Kandel. Yes, he's back.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: I believe we're pretty much down in the low. And it's a good buying opportunity.

UNIDENTIFIED FEMALE: I think it is a good time to buy, because I think the stock market will eventually make its way back up.

UNIDENTIFIED MALE: Well, it's eventually going to bottom. But I don't think it's going to bottom anytime really soon.

UNIDENTIFIED MALE: I was surprised the strength of recovery today. I really thought that it would go down the drain.

UNIDENTIFIED MALE: I'm still going to keep my money in an aggressive account. I have got a lot faith in the market overall.

(END VIDEO CLIP)

VARNEY: Well, faith in the market is a tough commodity to come by these days. And it is useful to remember that we've been through this kind of turbulence before. And we're now joined by a man who has watched the best and the worst that Wall Street has had to offer over the past half-century: Myron Kandel, CNN's financial editor. He comes to us for what will be a regular feature.

Myron, welcome back. What do you have tonight?

MYRON KANDEL, CNNFN FINANCIAL EDITOR: Well, Stuart, happy to be back with you and Willow.

You know, October can be a tough month. Remember what happened 13 years ago tomorrow?

VARNEY: Yes.

KANDEL: When we had that "meltdown Monday." The Dow fell 22 percent. But it also bottomed out. And October is a bottoming-out month. Ten years ago last week, when Iraq invaded Kuwait, 10 weeks later -- meaning in October of 1990 -- the market bottomed out. And it went up. It took five -- it went down 14.6 percent from its previous high.

Now look at today. Today, from the September high in the Dow to today's intraday low, the Dow was down 14.6 percent.

VARNEY: We used to have an expression. You heard it a lot on this program. And that was: Buy all dips. Sell no rallies. OK? And people used to do that. And they made money doing that. But this is a different market today, isn't it? There's not many people saying: Buy that dip aggressively. It's different.

KANDEL: Well, maybe we will find out. I think that buying is going to come in. I think the market rallies from here. And we are going to have a solid market from pretty soon -- maybe today was the bottom, maybe not -- but pretty soon, we are going to have a rally to the end of the year.

VARNEY: Well, we shall remember that on your first day back: something positive from Myron Kandel. And Mike, welcome back, indeed. Good to see you again.

KANDEL: Thanks, Stuart. VARNEY: OK.

Up next: "Ahead of the Curve." Willow and I will be back with some of what you need to know before the markets open again tomorrow. You're watching MONEYLINE.

(COMMERCIAL BREAK)

BAY: Taking a look at some of what could move the markets tomorrow: The earnings keep rolling in. On tap: Dow component McDonald's, online auctioneer eBay, Commerce One and Exodus. Also: drug companies Eli Lilly, Bristol Myers Squibb; airlines UAL and Northwest, as well as defense company Raytheon. And Alan Greenspan speaks to the Cato Institute tomorrow in Washington, D.C. The topic: monetary policy and the new economy.

To stay a step ahead of the markets, tune in to "AHEAD OF THE CURVE" at 5:00 a.m. Eastern, right here on CNN.

That's MONEYLINE for this Wednesday. I'm Willow Bay in Los Angeles.

VARNEY: And I'm Stuart Varney. Good night from New York. "

"CROSSFIRE" is next.

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