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LOU DOBBS MONEYLINE

President Bush Proposes Expansion of NATO, Insists ABM Treaty Is Outdated; Dow, Nasdaq Decline After Nortel Announces Massive 2Q Loss

Aired June 15, 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.
ANNOUNCER: Live, from the heart of New York City, this is LOU DOBBS MONEYLINE. Here now, Lou Dobbs.

LOU DOBBS, CNN ANCHOR: Good evening. President Bush tells European leaders it's time not only to replace the Antiballistic Missile Treaty, but to expand membership in NATO.

And the president expresses concern that European Union is blocking the General Electric-Honeywell deal. The apparent collapse of that deal, overshadowed today on Wall Street, by the stunning announcement that Nortel will report a loss of $19 billion in the second quarter. The markets fell again today, the Nasdaq posting its worst weekly performance of the year, down 8 percent on the week.

We begin with a corporate warning that is nothing short of astonishing. Nortel Networks announcing it will report that loss of $19 billion. The telecom equipment maker said it will see no meaningful growth in demand until the second half of next year. When you take out special charges, Nortel will report an operating loss of $1.5 billion for the quarter. Nortel's announcement follows a warning last night from rival JDS Uniphase.

And even after those warnings, only two Wall Street firms have sell ratings on Nortel. None have a sell rating on JDS. Shares of both Nortel and JDS fell today. Both stocks are now down 87 percent or more from their highs.

Bruce Francis reports.

(BEGIN VIDEOTAPE)

BRUCE FRANCIS, CNN CORRESPONDENT (voice-over): Massive layoffs, unprecedented losses. Nortel says the collapse in telecom spending has worsened and won't rebound soon. The big problem area: equipment for large nationwide networks.

JOHN ROTH, CEO, NORTEL NETWORKS: It's a really significant downturn in the industry. Telecom companies around the world either can't raise money from the capital markets, or, if they have money, boy, they're sure protecting it and trying to optimize the efficiency of their networks. So right now we're not seeing a lot of purchases. FRANCIS: The numbers are staggering. The Canadian telecom giant will cut another 10,000 jobs. That brings the total now to 30,000 in the past six months. Along with the layoffs, Nortel will eliminate its dividend as part of an effort to cut $3.5 billion a year in expenses. Nortel will swing to a huge operating loss this quarter of 48 cents a share, eight times what Wall Street expected. Massive write-doffs for acquisitions and inventory will produce a loss of more than $19 billion.

PAUL SAGAWA, SANFORD BERNSTEIN: That is roughly equivalent to over half of their market capitalization, and if you look at this on a gap basis, this $19 billion write-off basically eliminates all profits the company delivered since 1983. I mean, this really is enormous.

FRANCIS: CEO John Roth says that he is planning to retire in March and would like to see his company profitable by then.

ALEX HENDERSON, SALOMON SMITH BARNEY: I think he can get there in the first half of next year, but marginal profitability, not meaningful profitability. And not through revenue growth, more through cost cutting.

(END VIDEOTAPE)

FRANCIS: Nortel's bright spot: networking equipment for major cities. That part of the market is still growing -- good news for competitors like Cisco, Foundry and Extreme Networks. And there's not a lot of good news in this business right now, Lou.

DOBBS: I can't see any whatsoever. This write-off in the second quarter, Nortel, buying up companies, basically, that was their R&D budget, right?

FRANCIS: Exactly. They used the inflated stock price that they had over the past few years to get into these new areas. Those -- a lot of those new businesses are worth either nothing or much less than what they paid for.

DOBBS: A little easier to get in than get out thanks. Bruce, thanks. Bruce Francis.

The Nortel warning rattled Wall Street, of course, in what was a volatile session. The Dow down more than 100 points at its low, recovered all of that, and then fell again. The Nasdaq, at its low, below 2,000 for the first time since April. The index rebounded, as did the Dow, before closing lower for the sixth straight session. The Nasdaq ended the week down more than 8 percent, making this the worst week of the year for the Nasdaq.

Allan Chernoff has our report.

(BEGIN VIDEOTAPE)

ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): Profit problems at companies, both high-tech and low, weighed on the stock market from the opening bell. The Dow sank as much as 124 points, but began climbing back after the Federal Reserve reported industrial production fell in May, for the eighth month in a row, increasing chances the Central Bank could cut interest rates another half percent.

JEFFREY BENTON, LABRANCHE & CO.: The mere fact that people are thinking about it and hoping that it's going to happen is probably going to put a little bit more life into the market.

CHERNOFF: The Dow industrial average closed with a loss of 66. The Nasdaq composite also bounced off its low, but still ended with a decline of more than 15. Nortel dropped to a new 52-week low of $9.86, after announcing a massive loss. It is down from a high of 89 last summer.

The fiber optic fallout hit shares of JDS Uniphase, Ciena, Corning and Tellabs. Profit warnings fried shares of McDonald's, as well as Interpublic Group, International Rectifier, Quanta Services and Pinnacle Systems.

Investors fear many more companies will deliver earnings confessions.

EDWARD VON DER LINDE, LORD ABBETT & CO.: If it keeps on coming, eventually they're going to be sort of like Wile E. Coyote, hanging out over the canyon, with no support underneath them, and that's going to be problematic.

CHERNOFF: The second-quarter earnings confessional season has been tough so far. More than 750 companies have issued preannouncements, only 18 percent giving positive guidance, 65 percent, negative. The average for the past five years is 20 percent positive, 56 percent negative.

(END VIDEOTAPE)

CHERNOFF: One factor boosting volume in today's trading: a quarterly rebalancing of the S&P 500 to adjust for changes in the number of shares outstanding in the various components. That caused portfolio managers who track the S&P to readjust their holdings. For example, AOL Time Warner traded very heavy today, triple its regular volume. It closed up 499 cents. J.. Morgan Chase gained a $1.31 on double its normal volume -- Lou.

DOBBS: I think we had just about all the adjustments we could stand today, Allan. Thank you.

Well, the latest economic news today fostered hope for more aggressive rate cuts by the Fed. The Consumer Price Index, up 4/10 of a percent in May. While that is the biggest increase since January, minus volatile food and energy costs, the CPI barely budged.

The headlines number, however: industrial production, which plunged 8/10 of a percent last month -- that's double the decline economists had expected. And the factories are running at just 77.4 percent of capacity. That is the lowest capacity utilization rate in 18 years -- the high-tech sector, undoubtedly, accounting for much of that decline. Semiconductor factories using only 68 percent of their potential. Just a year ago, running at almost full capacity.

Computer factories also operating well below a year-ago level, as are old-economy industries such as autos and primary metals do so as well. Following these reports, some economists are scrambling to revise their rate-cut forecasts. Merrill Lynch and Lehman Brothers among the firms now calling for a full half-point rate cut at the end of the month, instead of a quarter point cut by the Fed.

Well, coming up next here, the president addresses the transatlantic rift over the General Electric-Honeywell deal. Another deal in trouble: UAL and US Airways. We'll look at the leadership team at US Airways, "Executives All On the Edge."

Nortel's nightmare tonight, just the latest telecom disaster. We'll be talking with two Wall Street analysts who see more gloom ahead.

And the buzz of the Paris Air Show. Plans to build a supersonic plane for corporate jet-setters.

(COMMERCIAL BREAK)

DOBBS: In Warsaw today, President Bush delivered a major policy address, ahead of his meeting tomorrow with Russian President Vladimir Putin. Mr. Bush forcefully supports NATO expansion, and he stresses the common goals shared by the United States and Europe.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: The most basic commitments of NATO and the European Union are similar: democracy, free markets and common security. And all in Europe and America understand the central lesson of the century past. When Europe and America are divided, history tends to tragedy. When Europe and America are partners, no trouble or tyranny can stand against us.

(END VIDEO CLIP)

DOBBS: The president also said he would discuss "mutual security" issues tomorrow when he meets with the Russian president. Mr. Bush is expected to seek Putin's support for his missile defense proposal.

While the president today stressed common goals between the European Union and the United States, he also addressed a major dispute: the proposed merger of GE and Honeywell. Asked by a reporter, Mr. Bush said he was "concerned" about European objections to the $42 billion merger. That deal appears to have collapsed finally after the companies refused to bow to the demands of European regulators.

Honeywell's stock today gained more $1.5 after a huge loss yesterday. GE finished the day off fractionally. United Technologies is down $2.35, investors speculating that United Technologies might step in as a suitor. The European Union's opposition has sent a chill throughout the entire corporate world. And the president's comments suggest that the dispute may have a broader impact on relations between the United States and Europe. Tim O'Brien reports.

(BEGIN VIDEOTAPE)

TIM O'BRIEN, CNN CORRESPONDENT (voice-over): The president injected himself into the debate over GE's efforts to acquire Honeywell, an idea he and administration support, but speaking in Warsaw, he suggested is all but dead.

BUSH: Our government looked at the merger and approved it. The Canadian government looked at the merger and approved it. And I am concerned that the Europeans have rejected it.

O'BRIEN: They haven't rejected it yet, at least not officially, but there clearly is a snag. It centers on GE's Capital Aviation Services, the world's largest airline leasing company. Europe fears if the acquisition were approved, Capital Aviation would end up favoring Honeywell for parts to the exclusion of all other European competitors.

The Washington spokesman for the European Union told MONEYLINE that GE would not have to divest itself of Capital Aviation for the Honeywell acquisition to go through. But without being specific, he said the company would have to offer more than it has offered so far to keep competition going.

WILLY HELIN, EU SPOKESMAN: This is not a stance of anti- Americanism, this is not a trade spat. This is simply a merger case that has to be scrutinized on the basis of antitrust legislation full stop.

O'BRIEN: But U.S.-European relations could be affected.

CLYDE PRESTOWITZ, ECONOMIC STRATEGY INSTITUTE: I think it adds a little more tension. I mean, I don't think it is a disaster, I don't think that it is going to cause a rupture in U.S.-European relations, but it is another area of dissatisfaction.

(END VIDEOTAPE)

O'BRIEN: And late today, senior members of the Senate Subcommittee on Antitrust expressed their dissatisfaction over the GE- Honeywell matter. In a joint written statement, they asked this question: is this a legitimate difference of opinion, or evidence of a rift between U.S. and EU antitrust regulators -- Lou.

DOBBS: Tim, thank you. Tim O'Brien from Washington.

Well, if the GE-Honeywell deal does collapse finally, it will be the first time a merger between U.S. companies that has been approved by the United States government had been blocked by European regulators. The controversy underscores the fundamental differences between European and U.S. regulators, in terms of motives and process. Regulators here tend to focus on how a deal will affect consumers. European regulators focus more on the impact on competitors. When the Justice Department objects to a deal, it has to go to court to block it. European regulators are under no such obligation. In the United States, companies of course can appeal a court objection. In Europe, companies can appeal to the European Court of Justice, but that process can be so lengthy that critics say it's not a reasonable option.

My guest tonight says the rift between the United States and Europe is likely to widen. Kevin Arquit, who was an antitrust official during the first Bush White House joins us now. Kevin, let me ask you this: the -- this deal seems to have totally surprised Jack Welch, and he is a hard man to surprise. Were you surprised?

KEVIN ARQUIT, FORMER HEAD OF FTC COMPETITION BUREAU: Yes, I'm surprised, because the very fact which made this deal so attractive to the U.S. regulators is the fact that doomed the deal in Europe, the fact that GE, as a result of this merger, would have a whole lot more products and be that much more attractive to customers.

The Europeans were concerned, well, how will other competitors ever be able to compete? In the United States, that is considered an efficiency, which is a reason for letting a deal proceed.

DOBBS: And as you look at this deal, and you hear the announcements out of GE, give us your best read. Is it over, or are there other steps in this process now?

ARQUIT: Well, certainly from any kind of formal standpoint it's over, because the time to object ended last evening. However, there have been other situations -- remember a few years ago when Boeing was trying merge with McDonald Douglas, and the Europeans stepped in and made a lot of trouble with that too, and I think it was mere hours before the ultimate deadline that they actually came through with some concessions that the Europeans were willing to consider and accept.

And that drop-dead date here is something that occurs next month, so isn't necessarily dead, but certainly the problem here doesn't seem to be a lack of time, the problem here seems to be that the parties are so far apart, so I don't know that there is any reason to be optimistic.

DOBBS: The date, I believe, is July 12. And it's sort of interesting, and I would like to know what you make of this: Mario Monti is saying that -- and his staff saying that they don't take GE response to be a formal withdrawal. Should we read anything into that?

ARQUIT: Well, I think what he is saying is -- and he is really not supposed to completely make his mind up, what he is supposed to do is to take the concessions that GE has offered and put them out to what's known as a market test, see what competitors and others have to say, and to make his mind up after that. So, it really leaves at least a door open really for both sides. DOBBS: If the situation is as it is now stands, does this -- would you think this will provoke a tit-for-tat, a quid pro quo, between the United States and Europe?

ARQUIT: I don't think it will cause that at the antitrust enforcement agency places, because they are really nationality neutral, but certainly in Congress there may be loud cries. Remember even recently with some of these deals, VoiceStream, Deutsche Telekom, and so on -- there were noises about whether we should allow for ownership, and this plays right into those hands.

I think also, given that we have entered a new administration that may not be quite as aggressive as the last one on merger enforcement -- while you see the U.S. retrench somewhat in antitrust enforcement, and you see the Europeans becoming more aggressive, it is going to be very hard for them to paper over those differences. Historically, they have tried to act like they are doing the same thing just to create some level of certainty in the business community.

DOBBS: This is becoming, as the say on Wall Street now, more visible.

ARQUIT: Absolutely.

DOBBS: Kevin, thanks very much. Kevin Arquit.

Well, one more note on antitrust tonight: there is a new top trust buster in Washington. Today, attorney Charles James won approval from the U.S. Senate to take over the Antitrust Division of the Justice Department. The Senate voted unanimously. James served in the Department of Justice in Bush Sr.'s administration, on the FTC under former President Reagan. He replaces Joel Klein, President Clinton's choice for the job and one of the most aggressive regulators in decades.

Still to come here: drafting a new design. A supersonic plane chasing a market for elite business travelers. Also, "CEOs on the Edge": US Airways, an executive team that has backed itself into a corner.

And as the South recovers from a deluge of rain, other parts of the United States and regions around the world are desperate for even a drop of water.

(COMMERCIAL BREAK)

DOBBS: In tonight's "Tech Watch": an unusual new farming technique. Fruit growers in a southern Japanese town are growing square watermelons, and this is how they do it: When the fruit is still growing on the vine, the farmers force the melons into glass cases. This odd shape has, of course, a practical application -- thy don't do this just for the fun of it. They're designed to fit the dimensions of small Japanese refrigerators. Instead of rolling around and taking up much too much space, the watermelons now fit snugly and efficiently onto shelves. But don't expect these farmers to corner the market with this technical innovation: These watermelons cost about $80 a piece.

Just ahead here, we'll be talking with one tech fund manager about today's volatile markets. Also: drought conditions hitting parts of the globe, and sparking anxiety in commodity pits.

(COMMERCIAL BREAK)

DOBBS: A devastating drought is sweeping across large parts of Northeast Asia, from the Korean Peninsula, to China, to Mongolia. It is being called the worst drought in decades, and Asia is certainly not the only region suffering from hot temperatures and a lack of rain; parts of the United States are also suffering.

Kitty pilgrim has our story.

(BEGIN VIDEOTAPE)

KITTY PILGRIM, CNN CORRESPONDENT (voice-over): Hot and dry; dry as dust. This American wheat field is on the brink of drought. Drought conditions have cropped up in the United States in the Northwest, Texas, Florida and parts of the South.

All around the world severe drought conditions are plaguing Europe and North Africa, Iran, Afghanistan, and Pakistan. And there are particularly severe conditions in China and Korea. The Chinese drought has the attention of grain traders in Chicago.

THOMAS SHUFF, WHEAT TRADER, CHICAGO BOARD OF TRADE: We understand that this is a 100-year drought, or the worst drought they've had in 100 years.

STEVE BRUCE, GRAINS TRADER, CHICAGO BOARD OF TRADE: Basically, we're monitoring the dryness in Montana and the Canadian provinces, as well as in China. If we do get another month of hot and dry in China, we're going to have a real story, and we will see prices jump.

PILGRIM: North Korea has 1/10 of the rain it usually gets this time of year. Wheat crops will be reduced by 80 percent. The North Korean government is putting priority on feeding its Army. International donations are feeding up to 1/3 of the population at this point.

South Korea is suffering its worst drought in 90 years. The rice crop is so devastated government officials have called out the Army to irrigate the fields.

Brazil is rationing electricity because drought has crippled its hydroelectric system, which supplies 93 percent of the country's power.

Scientists say extreme weather patterns from global warming are getting more frequent.

JEFFREY SCHULTZ, CHIEF CLIMATOLOGIST, WEATHER 2001: We're seeing the intensity and frequency of El Ninos and La Ninas to be increasing because of global warming. And that will, in turn, affect the intensity and magnitude and frequency of these droughts.

(END VIDEOTAPE)

PILGRIM: The droughts have not yet had much impact of an impact on agricultural prices, but traders are keeping their eye on the situation. Scientists are concerned about this trend in the weather. La Nina is running out of steam, but computer models point to another weather shift, perhaps another El Nino, later this year -- Lou.

DOBBS: Are these cycles being disturbed, or is this just the normal...

PILGRIM: The cycles are increasing in frequency, and so it's causing a drought in one area and flooding in another. And they're increasing in frequency as the years go by.

DOBBS: All right, Kitty, thank you; Kitty Pilgrim.

Coming up next here, we'll have more for you on Nortel's warning -- a $19 billion warning that triggered the latest round of selling on Wall Street. I'll be asking a technology fund manager if weakness in the telecom industry is, perhaps, nearing an end.

ANNOUNCER: Up next, Lou talks with tech fund manager Marc Klee.

(COMMERCIAL BREAK)

ANNOUNCER: LOU DOBBS MONEYLINE continues. Here again: Lou Dobbs.

DOBBS: In tonight's "MONEYLINE Headlines": stocks tumble on Wall Street, with the Nasdaq posting its worst week of the year. Nortel shocks investors with reports of a $19 billion loss for its second quarter. And no signs of a pick-up for the nation's factories; industrial production dropping for the eighth month in a row. Factories are operating at their lowest rate in 18 years.

Taking a closer look now at today's market, another volatile session, both the Dow and the Nasdaq sinking, recovering, then falling. But stocks did manage to close well off their lows for the session. The reason, talk on Wall Street of a possible intra-meeting Fed interest rate cut and a growing belief that the next interest rate cut will be 50 basis points, not 25.

In the end, the Dow down more than 60 points, closing at 10,623. The Nasdaq managing to close down 15 points, but it was the sixth losing session in a row for the Nasdaq, and it made for simply a terrible week. The Nasdaq down 8 percent. That is its worst weekly performance so far this year. The S&P 500 this week lost 4 percent. Not as dramatic for the Dow: that index down 3 percent on the week. Still, a bad week.

Topping tonight's "MONEYLINE Movers": Microchip Technology adding almost $3 a share, the chip-maker reaffirming first-quarter guidance, citing a decrease in the number of customers delaying orders. True North Communications down more than $6 a share. The global advertising and marketing company warning its second-quarter earnings will miss estimates. The company is merging with Interpublic Group, which also fell on the day, down $5.25. In a separate statement, Interpublic warned second-quarter profits will also be short of forecasts.

And CVS tumbling nearly $7 a share on the day. Credit Suisse First Boston downgrading the stock, citing increasing concern about slowing pharmacy sales. Despite today's fall, CVS has gained 24 percent over the past 52 weeks.

Well, my guest says today's bombshell from Nortel Networks should come as no surprise. Marc Klee, fund manager of the John Hancock Technology Fund, joins me now, and let me ask you, Marc. You said it should come as no surprise: $19 billion?

MARC KLEE, JOHN HANCOCK TECHNOLOGY FUND: The magnitude certainly was a surprise to everybody, but of course, that includes write-offs and all. But we've been seeing this for the last few weeks and actually for the last few months.

I guess the last week it's been the J's and the N's. We had Juniper and JDS Uniphase...

DOBBS: Right.

KLEE: ... Nokia and now Nortel. And it's not over. We'll see more, particularly out of telecom sector. The equipment sector suffering harder than probably any other area of technology.

DOBBS: You just mentioned a range of sectors within the sector, those industries. I can't see a single positive amongst them. Can you -- can you identify a few?

KLEE: I don't think there are a lot of positives, but I think, you know, as a stock market investor, positives aren't necessarily what you're looking for. Valuation is. And actually, I'm starting to get intrigued by some of these stocks. And we don't own Nortel, for example, but having seen where this has gone, you know, the stock went down from $89 earlier this year. We've seen this happen almost throughout the industry.

DOBBS: Are you saying you're -- you're getting excited about getting into Nortel?

KLEE: I didn't say I would necessarily step up right now, but I think it's something to start looking at again, yes.

DOBBS: All right, let's talk about the PC makers. We're seeing every -- every quadrant of the sector get hit here. What excites you in terms of where you're ready to move money?

KLEE: OK. I actually own one stock in that space, and that's Dell. And to me, the PC business still is a commodity products business. DOBBS: Right.

KLEE: That's not going to change. And I think it's starting to evolve into almost an auto business. And what do I mean by that? Not the auto itself, but more the dealership: I want to sell you all the add-on stuff I can, because that's where I'm really making the money. I want to be with the lowest-cost operator and Dell is there.

But here, too, the valuations have become much more interesting, and companies like a Sun, which I have not liked for years, starting to intrigue me, down because of valuation.

DOBBS: Weigh down. How about -- let's talk about IBM, for example, a leader by any definition.

KLEE: Well, the two big leaders, IBM and Microsoft, to me are stocks that are about fairly valued and they both sort of fit the same way. Both of them are modest-growth companies in the context of what people have thought about as technology in the past few years.

People started having this belief that technology can grow 25, 30, 30 percent or more. Neither IBM nor Microsoft can grow that fast. IBM is maybe a high single-digit grower, Microsoft maybe a 13, 14 percent grower. Both of them seem about fairly valued to me in here.

DOBBS: What else do you like in technology?

KLEE: I think probably the most exciting area is software, and the spot -- and the spot there that I like are what I call the "second tier companies," BEA Systems, i2, Siebel, Veritas, Mercury Interactive. None of those stocks are dirt-cheap, so it's not the valuation there as much as it's the growth prospects. I think those have real prospects.

The other side, where the valuations are still good, I like some of the semiconductor companies and that end of the world.

DOBBS: Including Intel?

KLEE: Not particularly, but I do like -- I like the memory companies, Cypress, Micron, IDTI, companies like that.

DOBBS: Beaten down and ready for you.

KLEE: I think.

DOBBS: All right, Marc, thanks a lot.

KLEE: Thank you.

DOBBS: Well, coming up here next, tonight's "CEOs on the Edge": a troubled merger at US Airways putting that executive team under lots of pressure. And tonight, powering America, upgrading the system, the latest battle between the White House and the Statehouse in California. Also, Sony owns up to shady advertising for last summer's "The Patriot." We'll tell you all about it, when MONEYLINE continues. (COMMERCIAL BREAK)

DOBBS: Now "CEOs on the Edge." Tonight, an executive team on the edge, a chairman and CEO. It's a bonus package tonight. They've backed themselves into a corner. The company is US Airways, which struck a merger agreement last year with United. But that deal is languishing and US Airways doesn't have a backup.

Peter Viles is here and has the story for us -- Pete.

PETER VILES, CNN CORRESPONDENT: Lou, the United offer is $60 a share in cash. US Airways shares closed tonight below $25 a share, which tells you Wall Street believes this deal is all but dead.

(BEGIN VIDEOTAPE)

VILES (voice-over): For the past 15 years, Stephen Wolf has had a safe strategy in the brutal airline wars: take a battered airline, whip it into shape, and then sell it. He sold Republic to Northwest, Flying Tigers to FedEx, United to its employees. And then the fourth deal, last May, US Airways to UAL.

STEPHEN WOLF, CHAIRMAN, US AIRWAYS: Today, we have the opportunity to fulfill our goal of becoming a world global-class ass carrier in one single stroke.

VILES: But Wall Street has never believed it will happen. US Airways has never traded close to the $60 a share UAL is offering. The street is betting Washington believes United is powerful enough without a foothold in the Northeast.

GLENN ENGEL, GOLDMAN SACHS: The deal has been out there for more than a year, and yet Justice has never said anything specifically about anything. So we know they're not happy, but we don't know exactly what it will take to make them happy to get this deal done. And that makes it seem as if the odds of this deal happening are diminishing.

VILES: Wolf has argued USAir cannot survive in its current form. In a statement to MONEYLINE, the airline said, quote: "There are only two platforms for an airline in the U.S. today: that of a large- network carrier and that of a nimble low-cost carrier. US Airways as a mid-size carrier is neither."

CEO Rakesh Gangwall, a 20-year airline veteran, is running an airline that's in a strategic holding pattern. He has said there is no plan b if the merger falls through.

RAY NEIDL, ABN AMRO: I think US Airways might have two choices if the UAL deal doesn't go through. One is new management comes in, tries to restructure the airline, reduce costs to make them competitive with the new competition, or secondly, the current management tries to stay in there and tries to work out another deal, possibly breaking up the airlines and selling it in pieces to different airlines. VILES: Meantime, US Airways is getting squeezed from all sides. It has relatively high labor costs, has not hedged aggressively against rising fuel costs, is suffering from the slowdown in business travel, and losing share to low-cost competitors like Jet Blue.

(END VIDEOTAPE)

VILES: Now, analysts, for the most part, do not fault Wolf for trying to sell the airline. If there is second-guessing, it's that he didn't try to sell it sooner, before the economy hit a brick wall, before fuel prices started rising and before Washington turned bearish on these airline mergers -- Lou.

DOBBS: More than just a few problems there.

VILES: More than a few.

DOBBS: Any prospects for resolution here?

VILES: Well, the deal either has to be done or come undone, and then they can try to find another deal.

DOBBS: They've held it out there for a year. What's another year?

VILES: It's got to fall apart or happen. And they've got to try to find another deal. Wall Street is betting they'd probably sell it in pieces.

DOBBS: OK, Pete, thanks -- Peter Viles.

In other corporate news tonight, McDonald's warning second- quarter profits will be below expectations, blaming a strong dollar and concerns about mad cow disease in Europe. Procter & Gamble also pressuring the Dow. P&G says it will take a onetime restructuring charge of $1.2 billion.

Wall Street reaction? McDonald's losing $1.29, P&G down more than 2 1/4.

And another black eye for Sony, today admitting it used its own workers disguised, of course, as "ordinary people" in nationally televised ads for its film "The Patriot." Sony defended those ads, saying, quote, "We are far from the only studio to have done this." End quote -- a somewhat unusual defense. Universal, Disney and Warner Brothers declined comment.

In tonight's "Powering America," the dispute between the Bush administration and California Governor Gray Davis has moved beyond price caps. At issue, how to pay for the much-needed upgrade to California's electricity grid.

Casey Wian has our story from Los Angeles.

(BEGIN VIDEOTAPE) CASEY WIAN, CNN CORRESPONDENT (voice-over): This 84-mile stretch of power lines in Central California, known as Path 15, is a critical link between the state's power plants and customers. The lines can handle 3,000 megawatts, or enough electricity for nearly 3 million homes.

That's usually fine, but when supplies are tight, Path 15 becomes a bottleneck and limits the amount of power flowing from power plants in the south to the electricity-starved Bay area and Silicon Valley. Path 15 congestion contributed to Northern California's blackouts in January, and most experts believe more lines are needed.

But who will pay and who will control the wires is another matter. This week, the Bush administration asked for private companies to help finance a $300 million Path 15 expansion, in return for part ownership of the lines. Washington, D.C.-based Trans-Elect is considering a bid on the job.

ROBERT MITCHELL, CO-FOUNDER, TRANS-ELECT: This is an idea that's been around for many, many years, but there've been some real constraints in getting the utilities to be motivated to do it. Who's going to pay for the improvements?

WIAN: California Governor Gray Davis has his own plan to expand Path 15, which is owned by bankrupt Pacific Gas & Electric. It's part of his effort to have the state buy the transmission lines of investor-owned utilities.

(on camera): But Davis' plan faces huge obstacles. So far, only Southern California Edison has agreed to sell its power lines to the state, and state lawmakers have balked at approving that deal.

(voice-over): Still, there's opposition to giving private companies control of the wires.

FRANK WOLAK, STANFORD UNIVERSITY: It seems like much of what the Bush administration has been doing on this is, is unfortunately sort of doing things that look like they might be solving the problem to the uninitiated observer, but really seem to only benefit the industry.

WIAN: The federal government's plan for Path 15 seeks bids by mid-July. Then, the Bush administration will decide whether to go forward and trigger another likely confrontation with Governor Davis.

Casey Wian, CNN Financial News, Los Angeles.

(END VIDEOTAPE)

DOBBS: Next on MONEYLINE: telecom decimated. We'll talk with two network equipment analysts, Tim Luke from Lehman Brothers and Paul Sagawa from Sanford Bernstein. They join me next.

(COMMERCIAL BREAK)

DOBBS: In tonight's "Sectors Report": optical equipment. Nortel CEO today saying the telecom sector is undergoing what he called "a significant adjustment." That could be construed by some as an understatement. Nortel announcing it will post a $19 billion loss for the quarter -- that seems like a significant adjustment, or at least part of one -- and Nortel will cut an additional 10,000 jobs.

The warning from Nortel follows last night's warning from JDS Uniphase, its much smaller rival. Investors have seen their stock prices reduced simply to rubble, the biggest names trading at a fraction of their highs.

And joining me now, Tim Luke, who is senior hardware equipment analyst at Lehman Brothers; Paul Sagawa, who is a network equipment analyst from Sanford Bernstein, and two of the best on the Street. Gentlemen, good to have you with us.

PAUL SAGAWA, SANFORD BERNSTEIN: Thank you, Lou.

TIM LUKE, LEHMAN BROTHERS: Thanks.

DOBBS: This announcement from Nortel, Marc Klee said there was no surprise in it. Were you surprised, Tim?

LUKE: I think the environment has been difficult for a while. We had two or three years of huge boom times with companies, phone companies, spending a lot of money, and Nortel was right at the heart of that. Now, the music seems to have stopped, and much of that story is largely over. And you are seeing Nortel have to readjust to these tough times.

DOBBS: So, you weren't surprised?

LUKE: I think that's something we have been expecting, weaker sales, for some time.

DOBBS: Did you have a sell recommendation on this stock?

LUKE: Well, we had downgraded the stock back in October when the stock was at $65. Now, it's at $9. I think it's probably more of a value play for the long term, Lou.

DOBBS: All right, so, you had a -- what -- market perform?

LUKE: That is right -- we have a -- we now have an outperform rating on the stock.

DOBBS: Paul, how about you?

SAGAWA: Well, we downgraded in September. I wasn't surprised. I was surprised though at the magnitude of the loss. It was a huge write-off (UNINTELLIGIBLE). You know, if you look back, $19 billion, that is equivalent to the entire profit the company has made since 1983.

DOBBS: I mean, this is incredible. They have had I think an aggressive acquisition strategy -- it's an understatement, again, almost everything is an understatement in connection with Nortel today. But this basically says that much of their acquisitions are simply worthless.

SAGAWA: I think certainly not worth what they paid for them back when they made the deals. I mean, the frothy 1999 and 2000 timeframe was when all these things got signed, and they are probably worth a tiny fraction of what they paid.

DOBBS: Now, you gentlemen, look at obviously the public equity market, the private equity market, which has just focused on fiber- optics, and switching, and telecom, has also just taken a bath. What are the long-term implications? Is there an industry here?

SAGAWA: I think there is, but you've got to have -- the carriers have to make some money too, and if they are not making money, they don't have money to spend on new equipment, they are taking a bath, and it's going to be a long time before the industry rationalizes enough for price stability and for profitability to come out of the carriers. Then they buy, but that is two or three years away.

DOBBS: More bad news in store here, Tim?

LUKE: I think the key thing is that we do need to see some of the phone companies consolidate, more mergers there, and then I think we'll see a wave of consolidation, some mergers and acquisitions amongst the large equipment suppliers. You have already seen Alcatel and Lucent consider getting together, I think you will see more of that.

DOBBS: Well, we've got AT&T, for example, going the other way. They are divesting and splitting out in an interesting piece of financial engineering. That isn't quite consolidation, is it?

LUKE: I do think, though, for some of the smaller CLEC players on the phone company side, you will see a lot of those either go out of business or get acquired over the next 12 months, and even some of the larger long-distance phone companies do look like they may be candidates for some consolidation.

DOBBS: Right. Any recommendations here, anything that gets you excited in this general sector of telecommunications, Paul?

SAGAWA: Not particularly. I think you want to stay away from this for six to nine months, then we'll probably get a bottoming out, but look for value, look for bargains.

DOBBS: Tim?

LUKE: I think some of the more defensive investments, sort of investments that give you exposure to corporate spending rather than phone company spending, and there I would probably highlight Cisco Systems. 70 percent of their sales come from investments made by corporations, as opposed to phone companies.

DOBBS: Right. Gentlemen, thank you very much.

SAGAWA: Thank you.

DOBBS: Perhaps we won't have as interesting day for a some time. Thank you.

LUKE: Thank you, Lou.

DOBBS: Coming up next: as the Concord remains grounded, a new smaller supersonic aircraft is in the works.

(COMMERCIAL BREAK)

DOBBS: One of the biggest events on the aviation calendar kicking off this weekend: the Paris air show. With the Concord still grounded, several aircraft makers are drawing up plans for a smaller successor, one designed especially for business travel. Fred Katayama has our story.

(BEGIN VIDEOTAPE)

FRED KATAYAMA, CNN CORRESPONDENT (voice-over): Boeing's plans to make a superfast jet aimed at business travelers could fuel others to develop a much smaller plane that's twice as fast. The supersonic business jet: it would carry up to 15 people and fly more than 4,000 nautical miles.

PRESTON HENNE, GULFSTREAM AEROSPACE: We talk, for example, about leaving New York, conducting a two-hour business dinner in Moscow, and returning to New York, all in 12 hours. And so you can make that business trip in one day -- depart at 7:00 a.m. and you're back at 7:00 p.m. and you've had a business meeting in Moscow.

KATAYAMA: Seeing how quickly corporate business jets have taken off...

(on camera): ... manufacturers say there's demand for roughly 250 supersonic jets over 15 years. Even at a cost of $80 million each, twice the price of a Gulfstream Five. One potential customer: executive jet.

(voice-over): This business jet operator says it could purchase as many as 100 of them.

RICHARD SANTULLI, CHMN. & CEO, EXECUTIVE JET: We'd buy them. Speed sells. People buy airplanes because they go fast. The supersonic plane takes that to another level.

KATAYAMA: Gulfstream Aerospace and France's Dassault Aviation have drafted conceptual designs featuring jets with tapered noses. Boeing is in talks with a Russian jet maker. Developing a supersonic plane would cost roughly $4 billion. The biggest obstacle in their path: reducing the sonic boom it creates.

RICHARD ABOULAFIA, TEAL GROUP: Getting that sonic boom to go away would be very helpful for operations over land. And there are a variety of NASA and DARPA, as well as European programs designed to eliminate, or at least reduce, the sonic boom.

KATAYAMA: If they get the green light, Gulfstream executives say they could build a demonstrator model in five years, and if that satisfies environmental concerns, launch production at the end of the decade.

Fred Katayama, CNN Financial News, Teterboro, New Jersey.

(END VIDEOTAPE)

DOBBS: And to follow-up now a story we reported to you last Friday, the winner of a $46 million lottery jackpot has been found. Melvin Milligan, a 40-year-old computer technician from Passaic, New Jersey, turned in the winning ticket by mail just two days before it expired after holding it for almost a year.

(BEGIN VIDEO CLIP)

MELVIN MILLIGAN, LOTTERY MILLIONAIRE: You guys were saying something about the ticket being out there and I was saying, well, I had a ticket but I had I just looked at the date. I never looked at the numbers because I never even knew the numbers. And, like I said, I went in that night, and we had it validated and that was it.

(END VIDEO CLIP)

DOBBS: Even though lottery officials received the ticket after it had expired, they still honored it because it was postmarked within the one-year time limit.

Up next, some final thoughts on the day. Your e-mails and "Ahead Of The Curve."

(COMMERCIAL BREAK)

DOBBS: Taking a look now at what could make news next week: The House Energy and Commerce Committee to hold hearings on the safety of Firestone Tires and Ford Explorers. Watch for earnings from Oracle Monday. Chief executive officer, Larry Ellison will join us that evening.

Also reporting next week, Goldman Sachs, Morgan Stanley and Lehman Brothers. We'll also have reports on housing starts and international trade.

And while we all look forward anxiously to those reports next week, we'll still be digesting the tremendous decline in industrial production reported this week, and the lowest factory use in almost 20 years. And while the G.E.-Honeywell deal, or its collapse will continue to garner headlines, and deservedly so, the event that will most likely have the most profound impact is today's announcement from Nortel.

Even in the capital intensive, megascale business of telecommunications the Nortel loss of $19 billion is a seminal event demonstrating not only a management failure, but the staggering overspending and surplus of the telecom industry itself, and the all but stagnant market it now serves.

The public equity market has been crushed in the telecom implosion, but look for further devastation in the private equity market. It will be more difficult to see initially, but all those private equity firms and venture capitalists that turned from the Internet collapse and rushed lemming like to telecom, and particularly, fiber optics, are facing devastating losses.

Tens of billions of dollars in losses, and the only good news is that few of those deals have made their way to the public markets. But good news is good news, and we'll take even that as we head in to our weekend.

Now, your comments: Earlier this week we looked into whether Treasury Secretary Paul O'Neill had sold off his Alcoa shares as pledged. We learned he intends to divest the rest of them by June 22. That prompted one viewer to send us this question: "Did Dick Cheney sell his stock as he promised? You did such good job on Paul O'Neill I though I would ask you the same question of our vice president."

Well, a spokesperson from the White House tells us that Mr. Cheney has given his shares of Halliburton to a charitable organization in the form of a trust. Once that organization decides to sell, the vice president will receive money for any capital gains taxes that might be due, but nothing more. And she added, Mr. Cheney will take no deduction on his tax returns for that donation.

Pretty good. And we thought the next e-mail was particularly fitting, in light of the week's sell off. "When the Nasdaq broke 5,000 I told my friends I should sell everything and bank the cash. They looked at me like I was crazy. I chickened out. The rest is history. And all I ask for is one more chance. I know I'll get it right next time."

Michael, you are not alone.

Let us hear from you at moneyline@cnn.com. That's MONEYLINE for this Friday. We thank you for being with us. We hope you have a very pleasant weekend. Good night from New York. "CROSSFIRE" is next.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com

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