[Announcer:] From the world headquarters of CNNfn, the financial news network of CNN, this is MONEYWEEK, with Terry Keenan.
[Terry Keenan, Cnn Anchor:] Hello, everyone, and welcome to MONEYWEEK, where we aim to keep you ahead of the curve for the upcoming week on Wall Street, including a look ahead to a busy week on the earnings front. Dell, for one, will be out with earnings. As always, our MONEYWEEK insiders will be here for a roundtable. But first, the market starts the month of May with a slide. Stocks end the week lower on concerns about rising interest rates. AT&T; raises a warning flag, saying earnings will fall short of expectations. And two media titans clash Time Warner and Disney in a cable turf war. And, as always, we'll have stock picks for the coming weeks and months on Wall Street. We begin, though, with the outlook for stocks and for interest rates. The Dow and the Nasdaq rallied on Friday, but overall it was another tough week, investors concerned that the Fed will aggressively raise interest rates when it meets on May 16. The market also rattled following an earnings bombshell from AT&T.; That company warning that earnings and revenue growth will be lower than expected this year, the stock plunging sharply, falling to the lowest level in more than a year. And so far this year, AT&T; is down 20 percent. AT&T;'s decline is just the latest in a string of recent big blow- ups. On Tuesday, AT&T; lost about $22 billion of its market value. A few weeks ago, Bristol-Myers Squibb lost $30 billion in market value. Last month, Microsoft lost about $80 billion in one day, ahead of the antitrust ruling against the company. And in March, Procter & Gamble shed about $35 billion, following a profit warning. Lucent lost $50 billion for the same reason. So the big question: Who will be next? Our insiders this week say there may be more big stock blow-ups down the road. Joining me now is Todd Eberhard of Eberhard Associates and Doug Cliggott at J.P. Morgan, he's the chief equity strategist there, and Jim Grant of "Grant's Interest Rate Observer." And, gentlemen, welcome. Todd, let me start with you. More big blow-ups on the way? Where do you see them coming?
[Todd Eberhard, Eberhard Investment Association:] Well, certainly I do think there are going to be more with THE earnings front continuing and Dell coming out shortly and a lot of other numbers that we're going to see, specially inflationary pressures, could very much hurt some of these big stocks, even the good-quality companies with earnings.
[Keenan:] Doug, are you concerned by these big blow-ups.
[Doug Cliggott, J.p. Morgan:] We are, and I think what's a little bit surprising about them is they're occurring in an environment where overall corporate earnings are actually very strong. And so as we look forward, our guess is the U.S. economy will be slowing, corporate earnings will be slowing. So we might actually start seeing more, rather than fewer earnings disappointments.
[Keenan:] Jim, I'm not going to ask you if you're worried, but I would like to...
[Jim Grant, Grant's Interest Rate Observer:] I've been petrified for the last 10 years.
[Keenan:] I would like to know, though, what you're looking at in particular behind some of these big sell-offs.
[Grant:] Well, what we're trying to look at is the 10 [k] s, and the Qs and the documents. Footnote reading and general securities analysis have gone out of fashion during the preceding five or so years. It has not paid too much to focus on the details because so great was the momentum or liquidity and the fervor that microanalysis was actually generated negative returns. But if you begin to look closely at some of these big-cap companies, for example, you see trouble. IBM is a case in point, buying back over the past five years, in dollar terms, 30-odd billions of dollars worth of stock, more than it has earned. So its debt is up, its equity is down, its business prospects are diminished. It is buying stock at 10 times book, it earlier bought it at two times book, and yet the Street is nonplused. The Street is happily keeping a buy on IBM. That to us is a potential disaster in the wings.
[Keenan:] And, Todd, given the sell-offs in these companies and how they've been punished by Wall Street, are you seeing any value there, or are you going to await it out?
[Eberhard:] There's a word we haven't heard in a while: value investing. That's been out of focus for a bit. But I do think there are positions out there to be looking at. We look at buying on dips, or major dips, but it really has not been a stock-by-stock dip. It's really been the markets overall, to a great degree, that have sold off, with certain stocks that have sort of stood out Microsoft being a case, or AT&T.; So we're looking at positions that we like that actually have earnings, which is something, again, many people haven't focused on, and picking up companies that we think have good quality prospects for the future.
[Keenan:] Any of those on our list...
[Eberhard:] They are.
[Keenan:] ... the AT&Ts;, the Microsofts that you like?
[Eberhard:] Well, I think certainly the Procter & Gamble is on the list, certainly, and I think that's something for the future. Though it may not happen in three or six months, I do see a very rosy picture for that. We still have to brush our teeth and wash our hair.
[Keenan:] Doug, where are you seeing value?
[Cliggott:] Same exact place. We think.
[Keenan:] That worries.
[Eberhard:] I knew I liked you.
[Cliggott:] The stocks that are broken down in the consumer staples sector we're very attracted to, because we think one of the themes going forward is we're going to get a little bit more rather than a little bit less inflation. And that tends to help beverage stocks, household products stocks, food stocks. And so that's where we're going to be looking for bargains here.
[Keenan:] Any names in particular?
[Cliggott:] Sure. In foods we like General Mills, in beverages we like Budweiser, we like Pepsi. Actually, a pharmaceutical stock that took a pretty good hit that we like is Schering-Plough.
[Keenan:] OK, we're going to take a quick break. And just ahead, our rate debate. Interest rates look like they're heading higher. we're going to tell you how that could impact your portfolio. And a bit later, we'll get some stock picks from our insiders. You're watching MONEYWEEK on CNN. Cisco Systems this year has been vying with GE and Microsoft to be the world's biggest company in terms of market cap. Next week, a potentially market-moving report comes out as the company reports its fiscal first-quarter earnings. Cisco is expected to earn 13 cents a share. The stock has bucked the down trend this year, posting a gain of about 20 percent. Also due out, Dow component Wal-Mart is expected to report earnings of 28 cents a share. On Thursday, Dell Computer's numbers are out. And on the economic front, we're going to get retail sales figures on Thursday. On Friday, the all-important Producer Price Index report for the month of April. And, of course, the week after next we get the Federal Reserve meeting, and a widely anticipated hike in interest rates. Let's talk about how big that hike could be. Jim Grant, what do you think?
[Grant:] I'm in the 50 basis point, or one half a percent, camp. And I think there's an important reason for expecting the Fed to do something more than its usual incremental step, that being that there's been a great confusion about productivity. Chairman Greenspan has hung monetary policy on the perception of a breakout to the upside in productivity. Wall Street has use productivity as its great skyhook for the valuation of tech stocks. The economists Jim Medoff and Andy Harlis in my sheet have shown, I think quite persuasively, that the 5 and 6.9 percent numbers from the last half of 1999 were statistical illusions generated by the some innocent assumptions by the government that people were working 37.4 hours a week in the run-up to Y2K. They were working, in fact, 1,337.4 hours a week, and some adjustments to computer prices having to do with the perceived quality. So productivity is nowhere near as strong as advertised, and we saw some of that this week.
[Keenan:] And we also saw it in your op-ed piece in "The New York Times," the outline, that argument this week. The market seems to buy what Jim is saying because we saw this week a 50 basis point hike factored into the stock and bond markets, arguably. Do you think that that's what the Fed is going to do come May 16?
[Eberhard:] I do. We were more the quarter point believers going back about three or four weeks ago and have shifted dramatically towards the 50 basis point move, which I think is going to happening also. The question, really, at that point is what's next. And that's really the market does not like uncertainty at all. It's fine, I think, at this point built in for half a point, but past that it's going to be a question.
[Keenan:] And the market might even be relieved if we got it, right?
[Eberhard:] I think it will. I actually look at it as being, possibility a short-term, but a relief nonetheless for the markets to go up on that news.
[Keenan:] Doug, your take on all this?
[Cliggott:] Same view. I think it's tough to argue that incrementalism, you know, the nudging up rates a quarter of a percentage point has been a successful policy, so I think they have to get more aggressive.
[Keenan:] But that's...
[Grant:] This is Morgan bank talking. They're going to do it.
[Keenan:] It's official now. Well, you know, Alan Greenspan hasn't raised by 50 basis points in five years. So is he behind the curve? Does he realize it?
[Grant:] Well, burden of proof falls on those who predicted he will. It is highly out of character. But he has been taken in by the statistical illusion of this supposed upside break-out in productivity. And I think when he is disabused of this, he will feel that he is farther behind than he he will know that he is far behind, and he will act decisively.
[Keenan:] OK, Grant and Morgan say it's so. Coming up next, we're going to wrap it up with our MONEYWEEK insiders. We'll get some predictions up next. Time now for predictions. And we're joined as always by CNNfn's financial editor Myron Kandel. And, Myron, we just had the interest rate discussion here. What's your prediction?
[Myron Kandel, Cnn Financial Editor:] Well, I really hesitate to disagree with three such wise men, but I think the Fed raises interest rates by a quarter point, not half a point. And, of course, the only thing that could change that, in my view at any rate, is a major increase in the PPI and the CPI, which we are yet to see. I think the figures that came out on Friday on employment were a little better than expected but not enough to really panic the Fed. So I'm looking for a quarter-point increase when the Fed meets on May 16th.
[Keenan:] And that's based primarily on Mr. Greenspan's cautious nature?
[Kandel:] Yes, partly largely on that, you're right. I think he's a gradualist. The pattern has been quarter-point raises. I think he's going to stick to that.
[Keenan:] Jim, a prediction from you.
[Grant:] Yes, I predict continuing a continued renaissance in the art of security analysis. We'll make even greater strides next week, and, therefore, I predict my investment strategy for this idea to be long CNN and short
[Cnbc. Keenan:] And it will make greater strides next week because of some of those...
[Grant:] Even greater strides.
[Keenan:] ... some of those reports. OK, we'll take that trade. Todd, how about you your predictions.
[Eberhard:] How could I disagree with any of that? I'm sorry. I, as we said, still think it's a half a point, due to the economic nature of what's happening. But predictions on stocks, we're looking at some of the companies like a Procter & Gamble, which we think are a decent bargain at this point, and General Electric, which is a 3-for-1 split candidate. In the technology arena, there's a company called Metromedia Fiber Networks which we think is excellent and provides very good service and good value at this level.
[Keenan:] Any of the Internet stocks appeal to you at these levels?
[Eberhard:] We really were never big believers in the e-Net or e- commerce game. We really like the suppliers, the Ciscos, Lucents and the MFNXs out there.
[Keenan:] Doug.
[Cliggott:] I think looking beyond, you know, two weeks out and how much the Fed moves interest rates, I guess we feel interest rates will continue to move up over the next three to six months because inflation will continue to move up, and so a very sort of defensive approach to equities, really for the first time since 1994, makes sense here.
[Keenan:] And we've gone nowhere on the Dow and Nasdaq this year except south. How do we finish out the year?
[Cliggott:] Our S&P; target for then end of the year is 1300, so we're on 1400 now.
[Keenan:] OK, we'll leave it on that cautious note. Thanks, gentlemen And coming up next, a new twist on the phrase "May sweeps." ABC's programming earlier this week was swept off Time Warner cable systems. We'll find out if it could happen again. A clash between two media titans played out on the airwaves this past week. Time Warner, the parent of this network, blocked ABC programming in 3.5 million homes during the crucial May sweeps. At issue, Disney wants new channels featured for 'Toon Disney and its soap opera network, as well as the Disney Channel, put on Time Warner's basic cable service. A temporary truce was called on Tuesday, ending a 39-hour blackout. The Federal Communications Commission ruled on Wednesday that Time Warner cable violated an FCC rule when it blocked the ABC and Disney programming during the sweeps. Time Warner said that it objected to the ruling because, in its view, it gave broadcasters more power rather than less, adding that the company didn't, quote, "think that it was the intent of Congress," unquote, and vowed to pursue further review of the order. Shares of Time Warner and ABC's parent, Walt Disney, ended the week lower. While ABC programming is back on, the companies still face the task of working out a deal. Joining me now is a media consultant who says this is the first of many conflicts that will affect the industry. Joining me now is the chairman and CEO of the Myers Group, Jack Myers. And, Jack, welcome back. Good to have you with us.
[Jack Myers, The Myers Group:] Good to be here, Terry.
[Keenan:] A wild week in the battle between these two media giants. Who won?
[Myers:] Short term, Disney won in the public relations battle that was being fought. Really, there were no winners and losers. There were two losers, because what it sets up is a continuing battle between media giants, among media giants, for primacy and who's going to have that pipeline to the viewer, who's going to control the content. Disney's looking for assurances that in the AOL-Time Warner combination, they'll have access to the viewer and they'll control their content and control the rights. This is really an interactive television battle that's being fought. It's for digital, it's for broadband, and there are no winners and losers here. I think the government to a certain extent is the loser here, because they did set up regulations and Disney is Time Warner is right in saying this was not the government's intent. By the same token, it was the government's intent to protect that local broadcast signal to get through, to the viewer and to get through in its full component. So the question is how that will shape up for the next few years.
[Keenan:] What about investors? Because for years now we've heard that content is king. And yet this seems to be a real battle between content and distribution, and the lesson, at least one of them, to be learned from this week was that Disney didn't have the distribution, and it didn't get its content to three and a half million viewers.
[Myers:] Well, it may not have got its content to three and a half million viewers, but "Millionaire" on Monday night, despite the blackout, still did its biggest rating to date, 38 million 38 12 million homes reached. So it was very strong. On the other hand, the issue really, Terry, I think, is how this whole battle shapes up for digital and broadband content. Now that you have competition to the cable operator from the satellite distributor, from Echostar and DTV, those are two very strong plays, very strong competitors who now carry the broadcast signal. The viewer, the consumer, has an option. The cable operator has to fight for the right to maintain their pipeline into the home and to keep these investments that they've made and billions of dollars in their control and with their revenue streams. On the other hand, Disney and Viacom and others putting billions of dollars into programming content that now that local operator can interrupt with all types of intermittent signals coming over a number of different streams, taking people to the Internet, to interactive content, away from the programming, has to make sure that it's protected well. I don't think we've seen either the beginning or the end of this battle yet.
[Keenan:] And long term, you also think that perhaps some of the over-the-air broadcasters will come out winners, right?
[Myers:] I think the local broadcast segment, especially companies like Hearst-Argyle and Bilo are very strong players for the future. But I also think Time Warner-AOL's combination is the new AT&T; for the future in terms of a blue chip. And Disney's a very strong player in its content as well.
[Keenan:] OK, thanks, Jack, as always.
[Myers:] Thanks.
[Keenan:] Jack Myers of the Myers Group. And just ahead, a final look at what you need to know for the coming week on Wall Street. "The Last Word" is up next. Volatility expected to continue on Wall Street next week no surprise there. But joining us for a final look at some of the items that could move the markets is CNNfn's Susan Lisovicz Susan.
[Susan Lisovicz, Cnn Correspondent:] Hi, Terry. Well it seems there's no end in sight for the volatility. As you mentioned, investors are nervous the Fed will hike rates by half a percentage point when it meets on May 16th. Investors will also be keeping an eye on shares of AT&T.; The stock sold off this past week following an earnings warning. And Cisco Systems will be in the headlines. It's expected to report earnings on Tuesday. You may recall, the company beat the Street last time around. Attention will once again turn to Microsoft, as the company hands its proposed remedy to the government that's on Wednesday. And finally, investors will be looking for any signs of inflation in Friday's report on producer prices Terry.
[Keenan:] And it's interesting because we'll get that report on Friday, then on Tuesday we'll get the Consumer Price Index report, right before the Fed goes behind closed doors that day to decide rates.
[Lisovicz:] And, of course, we've had some economic reports that have really shown that there is some inflation pressure. So this could be the final straw, really.
[Keenan:] OK, thanks a lot Susan Lisovicz. And finally, we'd would like to hear from you. Please e-mail us your questions or comments to MONEYWEEK@turner.com. That's going to do it for this week. I'm Terry Keenan. Have a great weekend.