Dow Falls 63.81 to 10,502.40; Nasdaq Climbs 35.08 to 2,160.54; GDP Growth in First Quarter Revised Down to 1.6 Percent
LOU DOBBS, CNN ANCHOR: Tonight, the Nasdaq stays open an hour late, after suffering a technical breakdown. An extraordinary rift between GE and Honeywell: Bonsignore and Welch in a public spat over how to salvage their deal. A "CEO on the Edge" tonight: Linda Wachner of Warnaco, once praised for her hard-charging style, now blamed for driving the company into bankruptcy. And "A.I." fiction. (</s>BEGIN VIDEO CLIP, "A.I.") HALEY JOEL OSMENT, ACTOR: I'm a boy.</s>DOBBS: Versus fact. A reality check on the business of artificial intelligence.</s>ANNOUNCER: Live from the heart of New York City, this is Lou Dobbs' MONEYLINE. Here now, Lou Dobbs.</s>DOBBS: Good evening. We begin tonight with an economy that continues to surprise and defy economists. The government today reported that gross domestic product grew 1.2 percent during the first three months of 2001. The original report was 2 percent. White House economic adviser Lawrence Lindsey today forecast second-quarter growth of just 0.6 percent. He said the chances of recession are very small. Today's GDP report illustrates the push and pull in the economy: corporate profits taking the biggest plunge in three years, but consumer spending strong, and consumer sentiment continues to improve. The University of Michigan index rose in month of June, the second- straight month in which it has done so. On Wall Street today, traders were hit, by the way, with their second big technical breakdown in three weeks. The Nasdaq took an extraordinary move, extending trading until 5:00 p.m. Eastern time, that after computer problems halted regular trading for hours, and those problems continued into the extra hour. On June 8, a software glitch shut down the New York Stock Exchange for 80 minutes. Greg Clarkin joins us now from the Nasdaq marketsite, and he tells us just what's going on there -- Greg.</s>GREG CLARKIN, CNN CORRESPONDENT: Well, Lou, we saw a very messy end to the trading day today. In essence, what happened here, was about 2:30 this afternoon the Nasdaq became aware of some technical difficulties -- they termed it a network problem -- and what they did was suspend trading in two of their electronic trading systems. Now, one is designed for small retail investors, the other is for much larger orders. They suspended both of those, again, at 2:30, and they expected to bring them back online at about 4:00. Well, at 4:00 all things didn't go well, and the Nasdaq was not able to bring back on those systems, and now being at that time was only the larger system, at about 4:30. So by 4:30, you had the big system up and running, but what we saw for much of the afternoon was a composite that was virtually at a standstill. Now, about two-thirds of the trading was under way, but still it was sporadic and light, and we didn't see the composite really budge for much of the afternoon hours. So, the Nasdaq expended trading until 5:00, and they say that they hope to have everything lined up and in order by Monday morning. And by the way, Lou, this problem was traced to a technician at Worldcom, which services the communications backbone of the Nasdaq. He or she was running a diagnostic test which basically shut down the network and those electronic trading systems -- Lou.</s>DOBBS: Now, was that problem related to the one as well yesterday, which shut down the system for about 20 minutes?</s>CLARKIN: No, Lou, Wick Simmons, the CEO of the Nasdaq, tells us that these are two separate problems, actually yesterday with Microsoft coming back on trading at about 3:00, they were hit with a tremendous surge in volume. That was a separate issue. Today what they had was an entirely another issue with the network, but he assures us that these things -- that all systems should be go by Monday morning at least.</s>DOBBS: Well, it's what they say, everybody can make a mistake, just don't make the same one twice. The Nasdaq found a way not to. All right, Greg Clarkin, thanks. When trading did conclude at 5:00, the Nasdaq composite had gained more than 1.5 percent on the day, the eighth winning session of the past nine. The Dow higher for most of the session as well, but it slipped in the final half-hour of trading. Jennifer Westhoven brings us up to date from Wall Street.</s>JENNIFER WESTHOVEN, CNN CORRESPONDENT (voice-over): The last hour of trading turned into two hours of mayhem after Nasdaq shut down its trading systems. The disruption didn't stop tech-stock buying, with the Nasdaq rallying 34 points, to 2,159. It gained every day this week, rising more than 6 percent. Stock analysts said they were worried techs may be jumping too early. Chips rallied, including PMC-Sierra, even after it warned of disappointing results.</s>BRIAN BELSKI, U.S. BANCORP PIPER JAFFRAY: Right now, we feel very good about tech stocks, because tech stocks have led in the second quarter. Microsoft's up, the Nasdaq's been up the last couple of days, and I think it's kind of a false sense of reality.</s>WESTHOVEN: The Dow had a tamer day. It stayed in a tight range before heading near a session low at the closing bell. The average closed down 63, at 10,502. With Friday's losses, that made it sixth straight week of losses. The selling has come despite some positive recent signals for U.S. economic growth. But it was really the final two hours of trading that had Wall Street talking. Even early in the day, traders said rumors were flying that volume at the closing bell could be Homeric.</s>NED RILEY, STATE STREET GLOBAL ADVISORS: End of the quarter, end of the month. I mean, this wasn't a good timing for this one at all before the 4th of July weekend. The implications are that if they didn't get all the trades off, there are a lot of mutual funds out there that will be very upset that transactions didn't take place. It would really goof up the pricing of the mutual funds.</s>WESTHOVEN: Keep in mind, it was also the last trading session before big changes are made to the index of 2,000 small-cap stocks, the Russell 2000. That sounds harmless, but investors have been quietly building up massive bets on which stocks will join and be bumped out of that index. And keep in mind too, the Russell has beaten the Dow, the Nasdaq and the S&P; 500 so far this year. It's gained more than 5 percent -- Lou.</s>DOBBS: Pretty good. Now, volume was Homeric, did you say, Jennifer?</s>WESTHOVEN: Those are the words of Arthur Cashin, the PaineWebber floor trader, and really he said that this morning even before the opening bell.</s>DOBBS: I love it when the humanities come into play on Wall Street. Thanks. Well, aside from the technical breakdown at the Nasdaq today, investors watched a very different drama unfold. The chief executive officers of General Electric and Honeywell engaging in a public spat over how to save their deal. Once they were fighting European regulators, now they seem to be fighting one another. It's a development few would have expected or predicted eight months ago when Jack Welch and Michael Bonsignore announced their deal with smiles and big handshakes. Allan Chernoff has the story.</s>ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): In an unusual exchange of public letters between merger partners, General Electric's Jack Welch on left, and Honeywell's Michael Bonsignore, leading to a split.</s>BILL FIALA, EDWARD JONES: This one of the strangest merger stories I have ever seen.</s>CHERNOFF: In a "Dear Jack" letter this morning, Bonsignore wrote: "We owe it to each other and to our respective shareholders and other constituencies to make a last-minute best effort to ensure approval and consummation of this important transaction." The plan: cut Honeywell's price tag by about $1.8 billion, to just under 40 billion, in return for GE agreeing to spin off nearly 20 percent of GE Capital Aviation Services, which leases aircraft to airlines, as well as divest more than $2 billion of assets from the combined company -- terms that Honeywell believed would be acceptable to the European Commission. GE's Jack Welch shot back in a "Dear Michael" letter: "What the commission is seeking cuts the heart out of the strategic rationale of our deal. The new deal you propose in response to the commission makes no sense for our share owners, for the same strategic reasons." Honeywell said it was disappointed.</s>STEVEN COHEN, KELLNER, DILEO & CO: Honeywell may very well have been looking at making a record for itself, that it expected GE to do everything that it was required to do under the merger agreement.</s>CHERNOFF: In fact, Honeywell executives have been under tremendous pressure to push the deal through from shareholders who have been counting on a buyout.</s>KENT NEWCOMB, AG EDWARDS: It may be a case where they are looking to -- you know, to cover themselves from a legal standpoint, and prove that they have done everything they can.</s>CHERNOFF: The European Commission still has to formally vote on the merger plans, scheduled for next Tuesday. But at this point, with the partners disagreeing on concessions, it does appear that this deal is truly finished -- Lou.</s>DOBBS: Allan, I can't remember of a time in which we've ever seen this kind of development in this stage of a negotiation.</s>CHERNOFF: Exactly, and no one on Wall Street could today as well.</s>DOBBS: No one has an explanation for this? Because, I mean, the Welch -- the Jack Welch letter is about as strong as one CEO would write a letter to another, especially who is going to be partner.</s>CHERNOFF: And Lou, what makes it even stranger is that the two CEOs did talk yesterday, and they bid -- they both talked together with the EU commissioner, Mr. Monti, as well, so they knew what the other was thinking.</s>DOBBS: Well, they certainly understand one another better today. Thank you, Allan. General Electric's stock today up fractionally, Honeywell down strongly, down $3 a share. And the maneuvering continued today as well in a different corporate battle, this one for control of Computer Associates. Texas billionaire Sam Wyly added two candidates to a slate he has proposed as an alternative to the company's current board. Wyly also said today that Computer Associates officials filed suit Monday to try to stop him from installing that board. Today marked the end of the second quarter, and the picture is considerably brighter on Wall Street than at the close of the first quarter, the worst in more than a decade, by the way. The Dow gained more than 6 percent over this quarter, and the Nasdaq surged nearly 18 percent, the first quarterly gain since the beginning of last year. Peter Viles has the good news.</s>PETER VILES, CNN CORRESPONDENT (voice-over): They had too wait an extra hour to say it, but tonight, for the first time in 15 months, investors can say that the Nasdaq just finished a solid quarter. The composite gaining 17 1/2 percent, after suffering four straight quarterly declines, including losses of 32 percent in the fourth quarter of 2000 and 25 percent in the first asking of this year. The quarter was full of disastrous corporate news, Lucent and Nortel come to mind, but investors also heard hints of a recovery, even in technology.</s>ART HOGAN, JEFFERIES & COMPANY: If you had to pick any date pick, pick Intel or Cisco or Oracle coming out, and saying, yeah, we're going to miss our numbers, but we've built down -- we've got our inventory levels down to normal levels, our capacity is back to normal, and our customer base is re-engaging us, we're seeing new demand.</s>VILES: Other positive turns in the quarter, three more interest rate cuts from the Fed, a huge tax cut now on the way, a market- friendly ruling in the Microsoft case, and a decline in energy prices.</s>BRIAN WESBURY, GRIFFEY, KUBICK, STEPHENS & THOMPSON: When you combine all of those things together, they were all negative for the market last year. Now they've all turned positive, and that's why I would say that the tone is really changed in just the last couple of days.</s>VILES: Among the best-performing industries: computer software, helped by Microsoft, up 31 percent in the quarter; trash haulers; specialty retail, because consumers have held their ground; and money center banks, boosted by those interest rate cuts. Communications equipment continued to suffer, down 19 percent, and energy stocks pulled back sharply. Power producers, natural gas companies, and oil and gas drilling and equipment companies all posting double-digit losses.</s>VILES: Economists say it is very likely this market will be tested in the coming weeks and months by continued evidence, however sporadic, of economic weakness: the consensus forming in the market, however, is that the economy and corporate profits will be recovering, if not in the third quarter than by the fourth quarter -- Lou.</s>DOBBS: Peter, I don't know that we should ignore the fact that these same economists are the ones who said that this revision that came this morning would probably see us well below 1 percent or even flat. This has been...</s>VILES: The first-quarter performance is much better than the economists predicted. Now you're hearing predictions that the second- quarter performance will be weaker, that from the White House today, and it could be the economy will surprise us all and not go into the weakness that is already priced in, in the second and third quarters.</s>DOBBS: This economy -- I don't know how you feel about it, Allan -- but this economy, it seems to me, continues to defy all of the projections of nearly every economist.</s>CHERNOFF: Certainly have been a lot of worries about the possibility of recession, and sectors of the economy, like manufacturing and tech, are in recession. But other portions have held up.</s>VILES: The consumer, the American consumer has not done what the economists kept saying he and she would do, which is pull back a bit. The consumer has really held in there.</s>DOBBS: Go, consumers, all right. Thanks, Pete. Thank you, Allan. Coming up next, "A.I." on the big screen, and in reality: the actual business of artificial intelligence. Microsoft savoring victory in one court, but the legal saga appears to be far from ended. I'll be talking with one man who played a key role in that saga, Netscape co-founder Marc Andreessen.