Dow Rises 135.70 to 9,959.11; Nasdaq Climbs 60.27 to 1,951.18; Investors Await Fed Action
WILLOW BAY, CNN ANCHOR: A late day surge on Wall Street. Investors hoping Greenspan tomorrow will do what he's never done before: slash interest rates by more than a half point.</s>ALLAN CHERNOFF, CNN ANCHOR: What is Greenspan's good friend at Treasury doing to calm world markets? Critics of Paul O'Neill say not much.</s>BAY: The California energy crisis flaring up again: rolling blackouts ordered for the first time in months. And, we kick off a special series, "Oscars Inc." with a look at the movie marketing blitz, studios pulling out all the stops to grab those coveted trophies. Welcome to MONEYLINE. I'm Willow Bay in Los Angeles.</s>CHERNOFF: And I'm Allan Chernoff in New York. We'll have complete coverage of a late session buying binge on Wall Street with Terry Keenan and John Metaxas. And we'll get the expert opinion on what Alan Greenspan might do tomorrow with a man who knows the Fed inside and out, David Jones.</s>BAY: But we begin here in California with an escalation in the state's power crisis. The first rolling blackouts ordered in months and the first to affect southern California as well as northern. Casey Wian joins us now with the very latest -- Casey.</s>CASEY WIAN, CNN CORRESPONDENT: Willow, blackouts weren't supposed to happen in California until this summer, but today power was cut off to hundreds of thousands of customers up and down the state. Traffic lights in some neighborhoods were out, businesses, including a Sun Microsystems plant, had to shut down temporarily. Even one fire station was operating on backup generators. Power grid officials say several things went wrong at once. First, more than a third of the state's power generating capacity was down for scheduled maintenance or malfunctioning equipment. Then a fire knocked out a plant in southern California. Also several small, so-called green power plants have stopped running because they haven't been paid by the state's nearly bankrupt investor-owned utilities. Finally, temperatures in some places approached 90 degrees, that means air conditioners and more electricity demand. President Bush issued this warning.</s>GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: There are no short term fixes, that the solution for our energy shortage requires long-term thinking and a plan that will implement that will take time to bring to fruition.</s>WIAN: Governor Gray Davis has been struggling to manage the power crisis. He has part of a rescue plan in place, but a deal to rescue utilities from bankruptcy is still in the works. Even if that succeeds, California, and some say the rest of the nation, should be prepared for more blackouts in the months ahead.</s>BAY: So who else? What other places are vulnerable?</s>WIAN: According to Energy Secretary Spencer Abraham, New York for one.</s>BAY: Casey, thanks. Speaking of New York, on Wall Street, stocks took a late day bounce ahead of the Fed's decision on interest rates. For most of the session today it seemed like investors were stuck in a Fed limbo as the suspense continued to build going into tomorrow's meeting. But stocks snapped out of the funk in the last two hours of trading; the Dow and the Nasdaq enjoying a much-needed rebound. We begin our market coverage with Terry Keenan at the New York Stock Exchange -- Terry.</s>TERRY KEENAN, CNN CORRESPONDENT: Well, Willow, with the market on full Fed alert, many traders didn't expect much action here today. So they were pleasantly surprised at the nice snap back rally that we had after last week's 800-point drubbing of the Dow Industrials. The Federal Reserve has never cut interest rates by as much as 3/4 of a point in one fell-swoop, but that was what many were betting on today, at least in the afternoon. This morning, the Dow did sell off, briefly trading as low as 9,800 before mounting an almost 200- point turnaround by the close -- pretty impressive there. The S&P; 500 closed up just over 20 points. Leading the way in the Dow: Hewlett Packard, by far the Dow's biggest winner up 8 percent, IBM also rebounding from Friday's $9 swoon; also to the upside today, Corning, the stock bucking a warning from the fiber optic company that it will miss its numbers for the year. Lucent also having a great day after it signed a $5 billion deal with Verizon wireless, and Merrill Lynch reflected the positive sentiment on Wall Street today; Lehman Brothers saying it sees value in the brokers. All in all, a positive day, but one that sets the stage for the Fed to disappoint. Now lets go to the Nasdaq where the party was even a little bit more rowdy than here at the Big Board -- John.</s>JOHN METAXAS, CNN CORRESPONDENT: Whether you call it bargain- hunting or short covering, the Nasdaq managed a nice snap back, 3 percent rally. In the morning, we hit new session lows, as you can see from the intra day chart, and the market hugged the flatline for much of the day before rallying in the final two hours for that 2 percent gain of 60 points back above the 1900 levels. Intel was actually down on the day; concerns about the PC market contracting this year for the first time ever and the analyst in the U.S. Bank Corp says he sees no sustainable recovery until the second half of next year. But the chips rallied, despite Intel. There was bargain-hunting in many of the beaten down big caps, including Oracle, which was up 10 percent on the day. PSI Net trading pennies on the dollar now; down 73 percent on the day and it may soon be worthless. The stock, according to the company, they've asked Wasserstein to restructure their debt. The hope is for 75 basis points in cuts tomorrow. Said one analyst, echoing the view on Wall Street, that it will be the right thing to do -- Allan.</s>CHERNOFF: John, thanks very much. The hot debate on Wall Street today revolves around one question: just how aggressive will Fed policy makers be in cutting interest rates? It is a debate over fractions, but fractions that have a crucial importance to the nation's economy which some say is already in recession.</s>CHERNOFF (voice-over): Fed Chairman Alan Greenspan will preside over the meeting where central bank policy-makers are almost certain to provide medicine for the economy. But how much? A MONEYLINE survey of 23 economists finds 70 percent predicting the Fed will cut the Fed funds rate by 50 basis points, which is 1/2 percent; 30 percent are looking for an unprecedented 75 basis-point cut. That's a 3/4 of a percent in the rate that banks borrow money from each other overnight. But some economists say the risk is that the Fed will appear to be panicking if it takes the more aggressive step.</s>STEPHEN SLIFER, LEHMAN BROTHERS: They have been sounding fairly upbeat about the economy, so if you do 75 then you must be worried about something, so either you weren't being truthful and you were more worried about the economy then what you were letting on or, B, you are really concerned about the stock market and you don't really want to create that impression of being concerned about the stock market particularly.</s>CHERNOFF: But Fed watchers point out the central bank needs to take strong action. Japan's economic turmoil is presenting a threat as America's economy and corporate profits are slowing. And the sinking stock market has eliminated more than $3 trillion of investor wealth, which could squeeze consumer spending.</s>BRUCE STEINBERG, MERRILL LYNCH: These relentless declines in the stock market threaten the health of the economy. They are beginning to feed on consumer confidence and business confidence, and they've created a tremendous negative wealth effect potentially. The Fed has to stem the decline in the market at this point.</s>CHERNOFF: The Central Bank raised the Fed funds rate six times beginning in June of 1999, all the way to 6 1/2 percent in an effort to slow the economy. Some argue it went too far. And in January the Fed cut the rate twice to 5 1/2 percent in an effort to revive the economy.</s>CHERNOFF: Joining us right now are two top economists you agree on what the Fed will do tomorrow, but disagree on what's ahead for the struggling economy and who's to blame. Diane Swonk, chief economist at Bank One, joins us from Chicago. And David Jones, chief economist, at Aubrey G. Lanston is here in New York. David, let's start with you. First of all, let's imagine we're behind those huge wooden doors in conference room right next to Alan Greenspan's office. What's the key issue that will dominate tomorrow morning's debate?</s>DAVID JONES, AUBREY G. LANSTON: The key issue is the economy. I think they'll be a lot of opinion that will say, look, the economy held up a bit better than we thought in the first part of the year. We're not in a recession; a major slowdown to be sure, but not in recession and thus the right rate cut should be a half percentage point or 50 basis points. Those who want to listen to the market will be the other side of the debate and they'll say we have to do more. It's true we never cut rates by 75 basis points or 3/4 in one fell- swoop but the markets are demanding it. That's the essence of the debate.</s>CHERNOFF: Diane, what's the Fed going to be listening to, the economy, the markets? What do you say?</s>DIANE SWONK, BANK ONE: I think the economy will be weighing in the strongest; I agree with David on that. The issue on the markets will be really highly debated in terms of the last time when they did the inter-meeting move on January 3, they were really disappointed at how the markets reacted with the panic; some people thought the Fed was in then. I think 75 basis points will send two wrong messages. One, either the Fed is panicking or, two, they pandering to financial markets, that are throwing a temper tantrum. I don't think those messages are ones the Fed wants to sound right now; the Fed doesn't believe we're in recession, We're hedging against recession. And given that, they're willing to do whatever necessary so this boat doesn't sink and their verbiage will reflect that after tomorrow's release of a 50 basis point cut. But also, I think it's important to know, if they're hedging risks -- if the risk of recession is say only 20 percent, 80 percent of the time will be wrong and overshooting.</s>CHERNOFF: David, has the stock markets decline really damaged the economy very much thus far, is there a negative wealth effect?</s>JONES: There will be. But I think the key that the Fed will note is look, confidence is down. The stock market is down and yet at least in January and February to some degree in early March, consumer spending is not as weak as some would have thought. And indeed, it's strong enough to keep the economy at least in the first quarter out of recession; I think that will be the Fed's judgment. The problem is, if psychology in the markets starts to feed on itself and starts to feed on consumer confidence as well, there could be trouble ahead. So the Fed, I think, will cut a half a point and the wording of their announcement will be very important. They'll say the risks still are weighted toward an economy that could weaken further and may even say like they said last December that they will be especially vigilant with the regard to the economy. That could give you a possibility of a cut between meetings.</s>CHERNOFF: Diane, is there trouble ahead? Are we going to remain in a dark tunnel or do you see light at the end of the tunnel?</s>SWONK: I see light at the end of the tunnel. That doesn't mean the Fed won't stop hedging its risks every session. And I agree completely with David that the Fed will remain vigilant; yet, I see already -- here I am in the middle of the economic malaise in the Midwest and auto production schedules for the second quarter are simply stunning. We've gone through the vehicle cycle in terms of inventories; as soon as April we're going to see big increases in vehicle production. Frankly, I haven't factor them all to my forecast because I just don't believe they can ramp up that quickly again. They've been so low. It's a major turnaround in vehicle production. But that's one of the largest swing factors; it will take a lot out of growth this quarter but add right back in the second quarter, as long as vehicle sales settle down from recent highs, but not fall in cliff, you have got a nice setup for finally the auto industry driving growth again, rather than dragging it down. That doesn't cure the high-tech problems out there but that, combined with the recent, sort of, rebound -- albeit mild rebound in consumer sentiment -- that points to good news going forward. We've got mortgage refinancing picking up again and all that money coming back in the economy with utility bills going away, it will be a much stronger second half and second quarter than many people think.</s>CHERNOFF: So, in one sentence, Diane, has Alan Greenspan blown it or not.</s>SWONK: I don't think he blew it at all. He's hedging risks here. When you hedge risks, you overshoot. I think it's appropriate for him to hedge risks. I don't think he blew it on the upside either.</s>CHERNOFF: David, what's your opinion?</s>JONES: I think the surprise here it's corporate recession not a consume recession, profits down two consecutive quarters, over investment which means that companies will cut back in investment spending. That could leave us in a very slow growth mode, maybe for the first three quarters of this year, and a very weak recovery after that.</s>CHERNOFF: David Jones and Diane Swonk, thanks so much. Ahead on MONEYLINE, late breaking news on the inquiry of a U.S. submarine and a Japanese fishing boat. A live report from Hawaii. Plus: More on the markets from a bullish voice in a sea of bears; we'll ask fund manager David Alger while he's forecasting a market turnaround.