Article 21 of 200
Stuart Varney, Steve Young, Ceci Rodgers, Bruce Francis, Fred Katayama, Susan Lisovicz, Terry Keenan, Kitty Pilgrim
CNNfn: Moneyline News Hour
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STUART VARNEY, CNNfn ANCHOR, MONEYLINE: Tonight on MONEYLINE, the government delivers its final word on how to punish Microsoft -- break it in two. Will the judge listen?

A strong hint that six rate hikes are finally working: Orders plunge for

big-ticket goods. We`ll look at fears the economy may slow too much.

Business is certainly slowing for some top retailers, as Office Depot (URL: sets off a profit alarm. We`ll take a "Bottom Line" look at another retail disaster this week: Costco (URL: .

And we told you last night he was selling his prized possessions. Today he sold off his biggest asset of all: a stunning twist in the saga of Saul Steinberg.

ANNOUNCER: This is THE MONEYLINE NEWS HOUR. Reporting tonight from New York, Stuart Varney.

Good evening, everyone. Willow is off tonight.

The most important antitrust battle of the high-tech era is fast approaching its climax. The government today made its final move in the U.S. versus Microsoft (URL: , asking a federal judge to split the company in two. The Justice Department made only minor revisions to its original punishment plan, even though the judge questioned whether a two-way split would just create two monopolies rather than one. Now the fate of one of the world`s most valuable companies is in the hands of the court.

Steve Young has the latest.


STEVE YOUNG, CNNfn CORRESPONDENT (voice-over): In sticking with the two-part breakup plan, the government made some technical changes and accused Microsoft of cynicism in court and distortion. The company is expected to file a final comment late next Wednesday, and Judge Jackson could enter his final judgment as soon as the next day.

Microsoft hopes to win a reversal from the D.C. Circuit Court of Appeals on procedural grounds.

C. BOYDEN GRAY, COUNSEL FOR MICROSOFT: It isn`t that Microsoft didn`t have a chance to know that there might be a breakup. The issue is whether there`s anything in the record to support it. And the government`s "evidence," so-called, is untested, un-cross-examined.

YOUNG: Judge Thomas Penfield Jackson expressed admiration for a brief calling for a three-way Microsoft break up. But many antitrust experts say it would be a real stunner if he ordered that on his own.

SPENCER WILLIAMS, BROOKLYN LAW SCHOOL: I think it would be highly unlikely that without doing more hearings or hearing any witnesses he would just go with an amicus brief rather than the position of the government.

YOUNG: In a concession, the government eased one restriction that would have hammered the Microsoft stock holdings of co-founder Paul Allen. He left Microsoft back in 1983, when the company had fewer than 500 employees.

Supporting its argument for a breakup, the government unsealed an e-mail Wednesday that Bill Gates sent after the main part of the trial was over. It said, "Microsoft should make products that`s don`t work as well with the competing operating system from Palm computing.

DAN WALL, LATHAM AND WATKINS: The recently uncovered evidence is perhaps the most damaging evidence to Microsoft in the whole case. This notion that we`re going to intentionally design a product so that it doesn`t work with others is inexcusable from an antitrust standpoint.


YOUNG: Microsoft says it will delay by three weeks a crucial meeting with financial analysts and reporters that had been set for next Thursday. The all-day session is scheduled to explain how the company hopes to duplicate its PC success with an operating system for the Internet. It`s now tough for Microsoft to continue to maintain that despite the momentous trial it`s business as usual -- Stuart.

VARNEY: That`s a surprise, isn`t it? I mean, it has some significance, right?

YOUNG: Yes, this is not the first delay, but this is probably the most important thing that Microsoft is set to do since 1995, when Bill Gates said the company would be hard-core about the Internet.

VARNEY: Fair enough. Steve Young, thank you.

On Wall Street today, Microsoft shares fell fractionally after a steep slide yesterday. The stock is down more than 40 percent since the beginning of April, when the judge found that Microsoft had broke antitrust law, about $235 billion in market value wiped out.

The proposal today from the government is just a prelude to the blockbuster decision by the judge, which could come as early as next week. CNN, MONEYLINE, and will be following all the developments in this story with coast-to-coast coverage and in-depth analysis. We`ll have it all when that decision comes down.

As for Wall Street today, it seemed less fixated on Microsoft and more concerned with making a Memorial Day getaway. Trading slowed to a crawl on both the Big Board and the Nasdaq.

The Dow did shoot higher as the day began, but retreated just as quickly, and then dipped in and out of negative territory, finally ending down 24.

The Nasdaq, which has been regularly making 100-point moves this year, ended the day off less than a point.

A bit more drama in the bond market, where bonds scored their fourth winning session out of five in a shortened pre-holiday session. The 10-year note up half a point, the 30-year long bond up 26/32.

Triggering the bond market rally today, a possible sign that history`s longest expansion may just be losing some steam. Orders for durable goods -- big-ticket items, like refrigerators for example -- plunged in April in the biggest monthly drop since December of 1991. And that wasn`t the only report out today suggesting that six interest rates hikes may finally be working to slow the economy.

Ceci Rodgers reports.


CECI RODGERS, CNNfn CORRESPONDENT (voice-over): Can it be? The long-awaited slowdown in consumer spending may be at hand. Incomes outpaced spending for a second straight month in April, the first time that`s happened in two years, personal income rising a strong 7/10 of a percent while spending rose just 4/10. And April`s drop in orders for big-ticket manufactured goods was the largest in almost nine years.

A record decline in electronics and fewer orders for automobiles reflected weakness in the consumer sector, while business spending on capital goods remained strong. That adds to recent evidence of a slight slowdown in economic activity.

MARIO DEROSE, EDWARD JONES: We may have saw it yesterday. The existing homes sales were down a bit. I mean, that`s the most interest-sensitive sector of the economy.

RODGERS: Existing home sales fell in April, as did retail sales. And private surveys show retailers see more weakness this month. In fact, analysts say auto sales may post their first monthly decline in 18 months.

A weaker economy would be welcome at the Federal Reserve, but analysts say the signs are still too tentative to head off more interest rate hikes.

DAVID BLITZER, STANDARD & POOR`S: Income continues to be strong. Consumer spending continues to be strong. And the Fed, which has been worried about these, will continue to be worried. RODGERS: The best predictor of such hikes, the Fed funds futures contract, has seen a retreat in its implied forecast for short-term interest rates, now pointing to just a quarter-point hike at the June Fed meeting after pricing in a half-point move last week.

(on camera): Economists and the Fed will know more in a week, after they take a look at the first indicators for May: a key manufacturing survey and always-crucial employment report.

Ceci Rodgers, CNN Financial News, Chicago.


VARNEY: Well, today`s modest retreat on Wall Street caps a rough two weeks for the markets, a steady sell-off that followed the Fed`s decision to hike interest rates another half point. The Dow has taken a triple-digit dive in four of the past eight sessions, losing more than 630 points. The index is now off more than 12 percent from its high and back firmly in a correction.

The Nasdaq has taken a bigger tumble, ending lower in seven of the past eight sessions. It is down more than 36 percent from its high, the worst bear market for the Nasdaq in the past two decades.

Well clearly the Fed`s anti-inflation crusade has hurt the stock market over the past year. Since the first of six rate hikes back in the late June of last year, the Dow is down more than 6 percent. One critic argues that the Fed`s approach simply isn`t working. In a recent editorial, Eugene Ludwig, former comptroller of the currency, warns that Mr. Greenspan is taking a hatchet to the bull market, even threatening the economy needlessly. Well, Mr. Lugwig says there are better ways to keep inflation at bay, and he joins us now to explain.

Sir, good evening and welcome to MONEYLINE.

EUGENE LUDWIG, FORMER COMP. OF THE CURRENCY: Stuart, it`s nice to be on your show.

VARNEY: If you`re not going to raise interest rates to head off the threat of inflation, what are you going to do?

LUDWIG: Stuart, I think there are a lot of different policy options we ought to be exploring here. The economy`s been getting an A. I and many of my colleagues would like to see it continue to get As. We don`t want to sort of see it get Bs and Cs.

The policies I would recommend are labor policies. I think that we have a very large pool of labor that`s not being counted in our labor statistics which we could take advantage of, and I think we ought to be exploring policy alternatives that take advantage of the American worker.

VARNEY: So there is a potential here for some wage-push inflation, but you would head it off by changing labor policies, perhaps to bring more people into the labor force? LUDWIG: That`s exactly right. The current economy`s done a wonderful thing. The more people you have employed, the less social ills you have. The thing that correlates best with lower crime rate is strong employment, so having strong employment is a very good thing.

There are really tens of millions of Americans who could be employed who are currently not employed and not counted in the labor statistics...

VARNEY: Sir, that is a very...

LUDWIG: ... I`ll bet...

VARNEY: That`s a very high number. Tens of millions of Americans who are not currently employed who could be in the labor force? That`s a very high number.

LUDWIG: Oh, yes. I -- even Labor Secretary Alexis Herman has said that if you count the people who currently need child care and transportation as well as the people who are working part-time and would like to work full time, the employment pool would jump from 5.5 million to 12 million. But in addition, there are people sitting at home that may well want to work. Senior citizens -- I`ll bet that you know someone in your family or a friend who is a senior citizen who is currently not working, who could work, and has a lot of skill that would help our labor supply.

VARNEY: We keep them working in my family, Mr. Ludwig, but that`s another story entirely.

Now let`s suppose that the Fed raises interest rates, say, another two times a quarter point a piece, briefly, what kind of shape will this economy be in by the end of the year if the Fed does that?

LUDWIG: Well, these interest rate hikes do cause pain. There`s no doubt about it. When they`re absolutely necessary, it`s sort of like chemotherapy. There are times that interest rate policy certainly is necessary. But rather than employing chemotherapy, we ought to be looking for the scalpel, not the hatchet -- to mix metaphors a bit. There are scalpels we can use, and labor policy is a very important opportunity for us. It`s not just repairing damage, but increasing the supply of labor. It`s tremendously advantageous.

Just think of the senior citizens again.


LUDWIG: If you`re a senior citizen, historically, Stuart, you would have your Social Security benefits taken away for working. We don`t want to see that.

VARNEY: Fair enough. Eugene Ludwig, out of time, it was a pleasure having you on MONEYLINE. Thank you, sir.

LUDWIG: Pleasure, pleasure being here this evening. VARNEY: OK. Now, still to come on MONEYLINE, the meltdown has spread past those e-tailers. E-brokers have also taken a huge hit, and the future looks even weaker. We`re going to cover that for you.

Plus, profit worries at a brick and mortar retailer: Costco embarks on a costly expansion, and investors pay the price. "The Bottom Line" on this

retailing giant and its problems, still to come on MONEYLINE.

ANNOUNCER: From CNN`s New York headquarters, this is THE MONEYLINE NEWS HOUR.


VARNEY: Qualcomm (URL: tops our "MONEYLINE Movers" tonight. Shares of the company fell nearly three, but they were down more than six points intraday. It was the most actively traded stock on the Nasdaq. Analysts have expressed concern over how normalized trade relations with China would affect Qualcomm, but the company says the measure will actually help, allowing it to deploy new technology in China which had been previously suspended.

Immunex (URL: lost more than 4 1/2 -- that`s 15 1/2 percent. PaineWebber (URL: cut the company`s 12-month price target to $30, after the company said its experimental asthma drug, Nuvance, failed to show an expected benefit in weekly results.

But Lucent (URL: Technologies gained 3 3/4. An analyst at ABN Amro (URL: reiterated Lucent as a top pick. He expects the stock to reach 90 in a year.

And Goldman Sachs (URL: fell more than three points on top of its seven-point loss yesterday. That came on news of a downgrade by Merrill Lynch (URL: and Bear Stearns (URL: , Ameritrade (URL: and DLJdirect (URL: all declined to comment for our story. The quarter is still two-thirds of the way through, though, Stuart.

VARNEY: With an average decline of 70 percent, I`m not surprised there`s no comment there. Bruce Francis, thank you.

FRANCIS: My pleasure.

VARNEY: All right, coming up on MONEYLINE, the music phenomenon that`s rocking the industry and rolling out a legal battle. We`ll bring you the details on downloading the sound and the fury, coming up.


VARNEY: We`ve been hearing a lot lately about the debate over downloading music from the Internet. It centers on music-sharing services like Napster. Some accuse them of piracy. Others say they`re giving the industry a welcome shakeup. The fight has led to lawsuits and this week, to congressional hearings.

Fred Katayama filed this "Briefing Book" on how downloading works and why it`s got so many people so worked up.


FRED KATAYAMA, CNNfn CORRESPONDENT (voice-over): Nate Dulley, a freshman at USC, has collected more songs than a jukebox. But you will not find a huge stack of CDs here. The 350 songs reside on his computer, like this tune from the heavy metal band Metallica. And he got the songs for free, using software called Napster.

NATE DULLEY, STUDENT: I don`t even play my CDs anymore. I`m on this so much, like honestly, lately.

KATAYAMA: Like Nate, more than 70 percent of U.S. college students surveyed use Napster every month to get free songs from the Internet, according to the research firm Webnoize. The problem, critics say, most of the hundreds of thousands songs posted are illegal, and so groups ranging from Metallica to the recording industry have sued Napster.

LARS ULRICH, METTALLICA: We own the rights to those, we have paid for them, and we want to be in control of what happens to them.

KATAYAMA: What made online music a reality: the advent of MP3 (URL: , a file format that allows users to download near-CD-quality sound. To listen to digital music, users need a player such as Real Jukebox or Music Match, which they can download for free. Then they go to web sites such as and scour to find the songs, or they download the Napster software.

We`ll focus on Napster, since it`s the most popular method. Users type in their request. Nate looks for "I Disappear" by Metallica. Seconds later, a list of other Napster members who have the song on their computers pops up. Nate double clicks, connecting his PC with that of another person who has the song. Minutes later, the song is copied onto his hard drive.

DULLEY: I`m going to download another thousand songs.

KATAYAMA: Nate found everything from the USC fight song to "Smoke on the Water."

The recording industry has been winning the early rounds in the courts. A federal judge has ruled that`s database violates copyright law. And earlier this month, a federal judge issued a preliminary ruling against Napster. She rejected the company`s contention that it was a "mere conduit" for songs online and was therefore not liable for its users` actions.

Now even Congress is getting involved, holding hearings on Napster. But tech experts say legal victories will not solve the industry`s woes, since new ways to download music keep surfacing.

ARAM SINNREICH, JUPITER COMMUNICATIONS: It`s like a hydra -- you cut off one head and 12 more spring up.

KATAYAMA: Experts say the free software Gnutella poses a bigger threat. Gnutella software shared freely online that allows users to download music files. But unlike Napster, Gnutella has no centralized server and no company owns it.

JOHN COFFEE, COLUMBIA LAW SCHOOL: There`s really no one to sue. There`s just a faceless sea in this online community of hackers who are using this new technology.

KATAYAMA: One analyst said the recording industry should provide an alternative to Napster that offers things like virus protection and better sound quality that would compel users to pay for something.

(on camera): For now, the legal battle is over music. But as more consumers get faster Internet access over the next few years, experts say the next battleground will be over downloading bootlegged movies.

Fred Katayama, CNN Financial News, New York. (END VIDEOTAPE)

VARNEY: It`s Friday, and there`s much more to come on MONEYLINE. We`ll be right back after this.


VARNEY: Now here`s what we have for you in our next half hour. End game in a landmark case against Microsoft. We`ll get a preview of what may be a decisive week, waiting for a federal judge to determine Microsoft`s penalty for breaking antitrust law. And the corporate raider who already put his home and furnishings up for sale; he`s now unloading the company that he led for decades.


VARNEY: In tonight`s headlines, Wall Street gets signs that the blazing U.S. economy may finally be cooling off, but is the boom really over, or just pausing for breath?

And another big retailer warns of weaker profits ahead: Office Depot feels the pinch of weaker sales and gets a rough response from investors.

Plus, an in-depth look at a discounting kingpin that this week sank into the market`s doghouse. Is the selling justified? We`ll check out "The Bottom Line" at Costco.

First, though, more on our top story: another step closer to what could be one of the most important legal decisions of the digital age. The Justice Department today filed one of the last legal briefs of the two-year Microsoft antitrust trial, setting the stage for a penalty ruling as early as next week. As expected, the government did not push for the most dramatic punishment against Microsoft, a three-way split.

Steve Young has been following the trial since the beginning and has more on this final phase -- Steve. YOUNG: Stuart, the government stuck to its

original game plan, having told the judge Wednesday a three-way split would be less efficient, would take longer and would be more disruptive to the company.

The only changes were purely technical. The government said Microsoft`s complaints about being denied due process are -- quote -- "a cynical ploy calculated to raise diversionary issues on appeal." The company will file its final comment on what it calls a corporate death penalty Wednesday, and Thomas Penfield Jackson could enter his final judgment as soon as the next day, which is Thursday, the very day Microsoft had planned to explain to the world its strategy to be more relevant in cyberspace by creating an Internet operating system. That session has now been delayed three weeks, the company acknowledging that no one would pay attention if it occurred as Microsoft faces its antitrust day of reckoning -- Stuart.

VARNEY: All right, Steve Young reporting. And thank you, Steve.

Our guest tonight asked this question in today`s "Wall Street Journal": What`s worse than two baby bills? His answer: three. Joining us now, Nicholas Economides , economics professor at the Stern School of Business.

Nicholas, welcome to the program.


VARNEY: Why don`t that you think that a breakup into two or three parts is a good idea?

ECONOMIDES : It`s a bad idea, it`s a very bad idea. First of all, it won`t increase competition. It won`t make things better. Second, it has a huge cost on Microsoft and the U.S. economy. And third, it`s not necessary, it`s really not necessary given whatever Microsoft has done.

VARNEY: What impact on consumers?

ECONOMIDES : I think the impact on consumers is going to be very bad. The prices of software are going to increase. The prices of Windows or something that is a substitute for Windows, the operating systems, is going to go up, and that`s not something we want.

VARNEY: But wait a minute, back in 1981, when AT&T was dismantled, prices actually for long-distance phone calling went down. Why wouldn`t the same thing happen with Microsoft?

ECONOMIDES : Well, there are a number of reasons. There are a number of differences between the companies. First of all, Microsoft is a new company, a young company, flexible, with few managers. AT&T was 100 years old, many managers, many divisions running separately from each other so they could easily be separated. That`s the first problem. The second problem is that right now, Microsoft is a very innovative company. AT&T at that point in time was an old, regulated company, easy to break up. We didn`t really have big losses because of the breakup. We expect to have big losses because of the Microsoft breakup.

VARNEY: What impact on the over all high-tech industry in America, which has been so successful, if there is a break up?

ECONOMIDES : If there is a breakup, things are going to be very much uncertain for the rest of the industry. People wouldn`t know what to expect from antitrust. This, in my opinion, is a very radical move by the government against Microsoft. The same radical moves could happen against AOL, against Yahoo!, against other big names in the area, and we don`t really know if that`s going to happen. It`s creates uncertainty for this industry.

VARNEY: Nicholas Economides , we thank you very much for being with us tonight on MONEYLINE. Thank you, sir.

ECONOMIDES : Thank you.

VARNEY: Microsoft lost another 6 percent this week, as Wall Street shuddered at the idea of an even harsher penalty than expected. Today the stock slipped only fractionally, but that was enough to set another new low for the year for Microsoft.

Now the markets overall drifted into the holiday weekend, as a woeful week closed with a whimper. It was an up-and-down Friday for the Dow before closing down 24 points, back at 10229. For the week, it was a far uglier picture, down more than 3 percent, or 327 points.

As for the Nasdaq, turbulence reigned there, but the index closed basically as it began, off less than a point at 3205. On the week, however, the Nasdaq dropped nearly 5.5 percent, 185 points.

Checking some of today`s big movers: We had Lucent up 3 3/4. Intel gained nearly 2 1/2. But ALCOA (URL: was down nearly 3. Coca-Cola up 2. Applied Materials fell nearly 2 1/2.

Looming over Wall Street today, signs of a slowdown in durable goods --that`s orders for big-ticket items -- which dropped 6.4 percent. It was the biggest monthly drop in nearly nine years.


VARNEY (voice-over): Today`s economic numbers threw a new wrinkle into the outlook for interest rates, capping a week that many on Wall Street would really like to forget.

Nervous investors unsure of the Fed`s next move. The uncertainty made for a week of market gyrations.

DAVID POWER, EDWARD JONES: Investors are waiting to see whether or not the Fed can, you know, generate a soft landing for the U.S. economy. And until investors get some sense that the Fed has accomplished that goal, there`s a lot of people that`d just rather sit on the sidelines.

JOHN MANLEY, SALOMON SMITH BARNEY: You have a situation where people don`t have firm convictions, so it takes very little to get them off-center. You have, you know -- you`ve greased the floor, so to speak. So any little thing moves things tends to move things around.

VARNEY: Several events shook investors this week.

General Motors (URL: , that stock plunged more than 10 percent on Monday after GM disappointed investors by offering to swap fewer Hughes Electronic tracking shares. Wednesday, United Airlines proposed buyout of US Airways (URL: stalled with investors who balked at the regulatory hurdles. Thursday, analysts downgraded the big brokerage stocks, citing slow trading. Goldman Sachs led the decline, losing nearly seven points. It fell again today, sinking more than 3 1/2. Other big financials followed suit. General Motors shares fell, again. General Electric (URL: shares, Home Depot and Wal*Mart (URL: slid as well. And all of this understand the pall of a looming proposal to break up Microsoft.

UNIDENTIFIED MALE: People are very nervous right now. There`s been a lot of damage done in the technology sector. And there`s a lot of people out there right now that just don`t want to stand up and catch a falling knife. And so for the most part, trying to the forecast bottom is extremely difficult in that type of market environment.


VARNEY: Well, that leaves investors on rather shaky footing as we head into the Memorial Day weekend, especially as light volume amplifies the volatility that has plagued these markets.

Well just ahead, we`ll take the market`s pulse with strategist Tim Hayes and check out the prospects for a rebound when all of this selling is done.

We`ll be back.


VARNEY: In tonight`s "MONEYLINE Focus," a closer look into the ongoing slump in stocks. Our next guest sees Wall Street stuck in a cyclical bear market. One sign of trouble: the meager volume on the exchanges.

We`re joined now from Tampa, Florida, by Tim Hayes, global equity strategist at Ned Davis Research.

Tim, welcome back.


VARNEY: With the Nasdaq closing today at 3205, do you believe that`s anywhere near a bottom?

HAYES: I don`t believe so. I think the low volume is a sign that we may see more volume on the downside and we`ll break the current levels, not only unsuccessfully test them, but go down to new lows.

VARNEY: Is this volume sort of a key signal to you of the state of the market now and where we`re going in the future?

HAYES: Yes, I think it`s a dangerous sign. What you want to see is especially with the market drifting lower, you want to see very high volume, putting in a lasting low that will indicate that there is enough fear in the market, that there`s enough negative sentiment for that low to last, but this kind of light volume is not a good situation.

VARNEY: So what you`d want to see then, to show that the selling is over would be a high-volume, big-day sell-off, or a big-week sell-off, with a volume that`s very, very strong, sort of a capitulation by the sellers, right?

HAYES: That`s right. You want to see very high volume, and also there`s going to be downside volume relative to advancing volume, say a ratio of about nine times downside volume to upside volume, and then after that, for the confirmation that the bottom`s in-place to have the opposite situation happen on the upside.

VARNEY: And that would be a high-volume rally, I take it.

HAYES: A high volume rally with heavy upside volume relative to downside volume.

VARNEY: Is the key to all of this the Fed and what the Fed is doing with interest rates.

HAYES: It really is. We`re in an environment right now where it`s going to be hard for the market to break out of this situation. The -- inflationary pressures and the Fed raising rates are going to make it difficult to know when to bottom out and stay bottomed out, but to have any kind of rally that`s going to last beyond more than a very short amount of time.

VARNEY: Tim, you sound rather bearish for the next few months. Do you have any safe heavens to recommend for us?

HAYES: Well, I think the traditionally defensive areas like foods and energy stocks and utilities and health care stocks, drug stocks would be

something to keep an eye on, especially a large position of cash. We are at actually 40 percent stock, 30 percent bonds, 30 percent cash, which is a very defensive position and a very high cash position.

VARNEY: It`s a totally different market from what it was like in, say, January, February, March, isn`t it? The mood has completely changed, hasn`t it?

HAYES: That`s right. In fact, that`s somewhat of a good sign, because the sentiment has gotten more pessimistic. I don`t think we`re at the pessimism levels that would really indicate that we`re ready to bottom out. But certainly, there probably is some light at the end of the tunnel now as opposed to where we were earlier in the year.

VARNEY: Well, we wish you could have delivered a different message as we head into the holiday weekend, but we thank you for what we`ve got.

Tim Hayes from Ned Davis Research, thanks very much for being with us, sir.

HAYES: OK. Thanks, Stuart.


Next on MONEYLINE, a dramatic follow-up to a story we brought you last night: Saul Steinberg today selling something even more valuable than his famed art collection. We`ll bring you the story next.


VARNEY: Last night, we told you about a very unusual case of downsizing. Saul Steinberg, a corporate legend of the `80s, selling off his enviable art and furniture collection at an auction today at Sotheby`s. And today that downsizing took a stunning turn: Steinberg selling the company he has long led, Reliance Group Holdings, to Leucadia National.

Susan Lisovicz has the story. (BEGIN VIDEOTAPE)

SUSAN LISOVICZ, CNNfn CORRESPONDENT (voice-over): Reliance made money by insuring clients against natural disasters, injuries in the workplace, and other unwelcome events. But with increasing operating expenses and losses, experts say Reliance itself was a disaster in the making.

Its stock crumbled nearly 90 percent from $19 two years ago to just a bit more than $2 1/2 today, close to its 52-week low. Analysts say Reliance --like many insurers -- is a victim of the times. Tenacious competition has pushed down premiums, which have plummeted from more than 20 percent in 1986 to less than 3 percent this year.

But many analysts say the man who has led the company for decades, Saul Steinberg, did not help the bottom line. They say he and his family, who own more than 40 percent of the stock, ran the company with little accountability.

BOB HARTWIG, INSURANCE INFORMATION INSTITUTE: Reliance had some unique features in terms of how it was run. It was essentially a family-owned operation for the most part, which is very unusual in this industry where most companies would have a fair number of outside directors.

Leucadia National Corporation is buying Reliance in a stock swap valued at $293 million. Some analysts say that`s about one-third of Reliance`s book value. But Steinberg said in a statement that the sale represents the best alternative for shareholders, employees and customers.

As a corporate raider, Steinberg made failed attempts at Walt Disney and Chemical Bank. This time Steinberg`s company was the target.

CHRISTINE LAI, J.P. MORGAN: I think it`s unlikely that Reliance would have decided to sell itself if the property-casualty insurance industry was really going to improve materially over the next six to nine months.

LISOVICZ: The sale of Reliance came on the same day that Steinberg unloaded $12.5 million of his art and furniture in an auction at Sotheby`s.


LISOVICZ: Steinberg stepped down as CEO earlier this year, but remained as chairman to focus on strategic planning. One of the company`s turnaround steps was to sell its most profitable unit to Travelers for $580 million. But Reliance still carried more than half a billion dollars in debt due later this year, debt that Leucadia is now assuming. VARNEY: Quite a switch.

Susan Lisovicz, thanks very much.

Now, checking some of tonight`s "MONEYLINE Movers": S1 jumped nearly seven points after several analysts came out with positive comments on the financial software maker. Late yesterday, S1 received a $244 million investment from several financial services firms. S1 software helps financial institutions offer online banking.

Deere fell 3 1/4. Morgan Stanley Dean Witter downgraded the farm equipment maker to a neutral rating. It said Deere has passed its $49 price target and currently trades at a large premium to its competitors. And Federal Mogul down nearly 2 1/2 to a 52-week low. It`s an auto parts manufacturer, and it warned late yesterday that second-quarter and full-year results will fall sharply below estimates due to the strong dollar. Shares of Federal Mogul have had a rough year indeed and are currently down more than 80 percent from the 52-week high.

Federal Mogul is just the latest company to blame its profit shortfall on currency troubles, and it probably will not be the last.

Terry Keenan explains why in tonight`s "Behind the Numbers."


TERRY KEENAN, CNNfn CORRESPONDENT (on camera): Stuart, we`re only a little more than halfway through the second quarter, but the strong U.S. dollar is already getting a bum rap from companies who say their results are being hurt by the currency`s amazing strength against the single European currency.

Since its creation 16 months ago, the euro has lost more than 25 percent of its value against the dollar. This year alone, it is down nearly 10 percent. For U.S. companies with big European operations, this can mean weaker sales since the almighty dollar makes it harder for U.S. manufacturers to sell their products at competitive prices.

Today Office Depot shocked the Street when it said earnings would come in sharply below expectations due to the dampening effect of the strong dollar on its overseas sales. And Office Depot is not alone. McDonald`s was the first to warn earlier in the month. With 40 percent of its operating earnings coming from European sales, McDonald`s CEO Jack Greenberg warned that the weak euro has -- quote -- "an insidious effect."

Last week, Coca-Cola Enterprises (URL: plunged more than 25 percent due primarily to currency concerns. Economists say while many companies do hedge their currency risk, it`s not enough.


ED YARDENI, DEUTSCHE BANK SECURITIES: They do have hedging programs to offset some of the strength of the dollar, but at the end of the day, it doesn`t help them. And many of them are already under a lot of pricing pressures here at home and in lots of other markets around the world.


KEENAN: Today, the euro did rebound a bit, trading above 92 cents on the dollar, a level many say is key to stabilizing the currency`s value. Still, don`t be surprised if other companies cry currency concerns in advance of their second-quarter results.

Among those with high European exposure, Coca-Cola, Clorox (URL: and Colgate-Palmolive (URL: -- Stuart.


VARNEY: All right. Thanks very much, Terry.

Well, as Terry reported, Office Depot disappointed investors with a second-quarter profit warning today, saying weak sales and a strong dollar will squeeze profits 4 to 6 cents lower than analysts expected.

After that profit warning, several analysts downgraded Office Depot. And that, in turn, weighed on other retailers.

Checking investor reaction in tonight`s "Sector Report": Office Depot sank to a 52-week low, down more than three points. It was the most active stock on the big board. Staples lost nearly a point and a quarter. And also lower today, electronic retailers like Best Buy, Circuit City and Tandy.

Still to come on MONEYLINE, Costco in the bargain bin. We`ll have the bottom line on the warehouse club retailer that has crushed --it was crushed this week on Wall Street. That story in a moment.


VARNEY: Turning now to our special Friday feature, "The Bottom Line": a close-up look at a company and the role it plays in the overall economy. Tonight: Costco. The wholesale superstore that sells everything from toilet paper to computers is seen by some as a proxy for the economy. If that`s the case, this economic expansion could be in trouble. This week, Costco said future earnings would be disappointing, and saw its market capitalization shrink by more than $6 billion.

But as Kitty Pilgrim reports, Costco`s problems have less to do with the changing economic landscape than with its own jumbo-sized ambitions.


KITTY PILGRIM, CNN CORRESPONDENT (voice-over): Costco does nothing small --the bulk packages, sprawling selections, acres of aisles. America buying big and living large. Cheaper by the dozen, if not by the gross, it`s an outsize company. With double-digit growth, 305 stores spanning the continent, including Mexico and Canada, Costco has built another 13 of its so-called clubs so far this year. They`re planning 10 to 12 more, and for fiscal 2001, 35 to 40 new clubs, 60 percent of which would be in areas never served in bulk.

JIM SINEGAL, CEO, COSTCO: We think we have a window of opportunity to open units across the nation, most particularly in the U.S., and I think that we`ll continue on that schedule.

PILGRIM: But expansion is expensive. Up until now, the stock had been a retail runaway, up steadily for the last year. But this week, when Costco tried to trim its outlook to account for expansion costs, its botched briefing to Street analysts landed with a thud in the market.

Despite third-quarter profits up 14 percent, investors felt let down. They slammed the stock, knocking it down nearly 22 percent on Wednesday, the worst point drop in eight years, trimming $4 billion in market value off the company.

SALLY WALLICK, LEGG MASON WOOD WALKER: Certainly it was a very extreme reaction, but if you were to say to me, therefore, do you think the stock is likely to bounce right back? The answer is no. What`s happened is Costco has become a bit more of a wait-and-see stock now.

PILGRIM: Costco`s woes are not unique. Rising interest rates may slow down shopping carts and the economy as a whole, but analysts say Costco`s wide range of price and product mix makes it resistant to economic upsets.

DANIEL BARRY, MERRILL LYNCH: They have an outstanding club. It`s regarded as the best in the business. There`s only two others. There`s Sams , which is a part of Wal-Mart, and they generally have a better operation than BJ`s (URL: , which is the other competitor.

PILGRIM (on camera): This Costco in Queens, New York is 100,000 square feet. It sells everything from fine china and crystal to disposable diapers to watermelons.

(voice-over): If the China doesn`t sell, the watermelons will.

But one thing in tight supply at Costco is labor, and that costs big. Costco says they plan to raise entry level wages 20 percent in June.

SINEGAL: High wages, in our mind, is synonymous with good quality workers.

PILGRIM: And a good operation is what analysts ultimately focus on.

BARRY: Everything was going great. And what happened is I think they didn`t realize that that step up, that expansion was going to cost them as much as it did.

PILGRIM: And with that kind of expansion, the future looks, well, at least, large.

Kitty Pilgrim, CNN Financial News, New York.


VARNEY: And up next, "Ahead of the Curve," some of what you need to know tonight before those markets open up again next week.


VARNEY: Looking ahead to next week, the markets are closed on Monday for Memorial Day, but on Tuesday, regular trading resumes. Here`s a preview of what`s on tap: more on the Microsoft decision. The company is expected to reply late Wednesday to the government`s latest breakup proposal, and Judge Thomas Penfield Jackson could make his decision on the company`s penalty as early as Thursday,

Several economic reports are expected next week, and they include the May employment report, new home sales, the latest on the manufacturing sector and consumer confidence.

Also next week, Hewlett-Packard will hold its annual analyst meeting in New York City.

And just a quick programming note: tune into MONEYLINE on Monday for a special Memorial Day edition, as we go inside several companies undergoing dramatic evolutions. We`ll talk in-depth with the chief executives of Oracle, Larry Ellison, plus, the third-generation leader of Motorola, Christopher Galvin, and last, but by no means least, the media mogul behind Viacom, Sumner Redstone. Their take on where their businesses are going and what`s happening in the economy. That`s Monday at 6:30 p.m. Eastern Time.

And that is MONEYLINE for this Friday. I`m Stuart Varney. And we thank you for joining us. And please, enjoy that holiday weekend.

"CROSSFIRE" is next.



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