Dow Gains 51.81 to 10,957.60; Cisco Beats Earnings Estimates
VARNEY: Tonight, a record run that's leaving even the most bullish tech investors breathless. Score another point for the new economy: compelling evidence that a more productive worker can indeed help keep this great expansion going. And a MONEYLINE special report about a problem that could affect the quality of your health care. Why some say medicine does not pay? First, though, the top story of the day: a one-two punch from the backbone of the Internet. After the closing bell, Cisco Systems hit Wall Street with news it loves to hear: better-than-expected profits and the ninth stock split in Cisco's history. Investors jumped on the news: The stock gained more than six points in very active after-hours trading. And if those gains hold up tomorrow, that would make Cisco the second-most valuable company after Microsoft. Bruce Francis now on the power behind Cisco's profits.</s>BRUCE FRANCIS, CNN CORRESPONDENT (voice-over): Cisco's balance sheet blazed with the wildfire growth of the Internet itself. Revenues surged 53 percent to $4.35 billion. Profits, excluding special items, were up 49 percent to $906 million, or 25 cents a share. Despite what it called a slow start to the year, Cisco shook off the Y2K slowdown that has hurt other tech companies, and it avoided product problems like the one that tripped up archrival Lucent.</s>PATRICK HOUGHTON, TECHNOLOGY ANALYST, SUTRO & CO.: Cisco has got the opportunity here to become a Nortel- and Lucent-size company -- we're seeing with this quarter with 53 percent year-over-year growth. Just to put that in perspective, this is the eighth quarter that they've had accelerated growth rate. And this is -- and it get harder every time you had another billion dollars to the top line.</s>FRANCIS: Cisco continued to go on a buying binge during its second quarter, even snapping up a profitless optical networking company, Cerent, for some $7 billion in stock. And on a conference call, CEO John Chambers vowed to continue that binge, warning, though, that "We are buying companies sooner than we like, before they're clearly profitable." That makes acquisitions more risky than before, at a time when rapidly changing technology makes those deals necessary. But overall, analysts see few risks for Cisco and continued strong performance for one of technology's most reliable stocks.</s>PETER ANDREW, A.G. EDWARDS: Where else are you going to go? Cisco has got the size. It's got the execution track record and the management team that I think knows what the future holds. And they're aggressively positioning themselves to benefit from that.</s>FRANCIS: Cisco's after-hours gains make it the world's second- most valuable company in terms of market cap, at $452 billion: just behind Microsoft and ahead of -- get this -- General Electric. Not bad for a business that this month is celebrating its 10th anniversary as a publicly traded company: just 10 years ago, Stuart.</s>VARNEY: It's a knockout, isn't it? But who competes directly with Cisco?</s>FRANCIS: Increasingly you see Cisco competing with Nortel and Lucent, much bigger companies in terms of revenue. But in the highly competitive area of optical networking will probably be where the game is decided.</s>VARNEY: Watch that stock tomorrow. Bruce Francis, thanks. Now even before the Cisco news, the mood was clearly bullish on Wall Street. For the first time in three sessions, both the Dow and the Nasdaq took part in the buying. The Dow industrials recovered some of yesterday's lost ground, up 51 at the close, 10,957. But while the Dow's gains were modest, the Nasdaq's were again spectacular. That index climbed 105 points, one of its biggest point gains ever. The new record high for the Nasdaq is 4,426. That puts the Nasdaq up nearly 500 points since the beginning of February. That is just six trading sessions ago. Rhonda Schaffler has more on that.</s>RHONDA SCHAFFLER, CNN CORRESPONDENT (voice-over): For investors weary of worrying about inflation, today's stronger-than-expected report on worker productivity provided some relief and reason to buy stocks.</s>LARRY WACHTEL, PRUDENTIAL SECURITIES: It kind of comes under the heading of "you can have it all." You can have rapid growth while at the same time productivity does limit the inflation spiral.</s>SCHAFFLER: Investors flocked first to those stocks behind the new economy: technology issues. The Nasdaq powered its way to a third-straight record. Even more impressive, the Nasdaq is up 14 percent in the last seven trading days. Analysts say high-growth techs are a safer bet in a higher interest rate environment.</s>JOHN MANLEY, SALOMON SMITH BARNEY: You want to own big liquid stocks so you can sell them later on if you have to. They have to be big so everybody owns them so they don't underperform. At the same time, you have to have good growth longer term and very good positive surprises short term. It's the perfect recipe for tech.</s>SCHAFFLER: Powering the tech sector today, healthy gains from Qualcomm, IBM, Microsoft and WorldCom, as well as CMGI. Blue chips also muscled higher, helped by gains in everything from retailers to drug stocks and financials. JP Morgan, Citigroup and American Express all gained ground.</s>ALAN SKRAINKA, EDWARD JONES: I think there's very good value in the financial stock if you're a patient investor. They're going to remain under pressure as long as the Fed is taking action to hike rates.</s>SCHAFFLER: Small caps also rallied, boosting the Russell 2000 into record territory for the sixth time this year, an encouraging trend analysts say the market needs to continue powering higher. Rhonda Schaffler, CNN Financial News, New York.</s>VARNEY: And now to the news that ignited that stock rally and may be the best evidence yet of a so-called "new economy." Productivity, how much a worker produces per hour, rose 5 percent in the fourth quarter. That is the fastest pace of growth in seven years. And labor costs -- now there's a key inflation gauge -- down 1 percent. Many believers in this new economy say that the strong productivity is what allows expansion with little or no inflation: just the kind of scenario the bond market absolutely loves. The 30-year Treasury issue soared nearly a point-and-a-half. That drove the yield down to 6.22 percent. But traders say the Treasury's planned buyback also played a role today. But shorter-term Treasuries far more subdued. The 10-year did go up 9/32; the five- year, though, was down three ticks and the two-year was off just slightly. There was another reason for that huge rally in the 30-year bond: Bill Gross, and rumors -- speculation really -- that the Pimco fund manager was snapping up long-term debt. Mr. Gross had traders talking last week as well when he said the bear market in the 30-year is over. All right, joining us now from Newport Beach, California, Bill Gross, the biggest bond buyer in the U.S. Bill, welcome back to the program.</s>BILL GROSS, FOUNDER, PIMCO: Thank you, Stuart, nice to be here.</s>VARNEY: I have to ask you, are -- if indeed you are one of the biggest if not the biggest player in the Treasury market. You run $180 billion. Do you in fact have the power to move the market with your trades?</s>GROSS: I don't think so. You know, the Treasury this week is offering $30 billion to $35 billion worth of new issues, and the $1 billion to $2 billion that we might buy certainly is significant but it's not enough to move the market.</s>VARNEY: Would you confirm that you were indeed a significant buyer today of longer-term Treasuries.</s>GROSS: Yes, we've been buying. We bought close to a billion dollars worth of long bonds, and we've been buying for the past four weeks based upon this great Treasury shortage that the market now senses.</s>VARNEY: Let's look at the fundamentals for a second. Are you sure that the Fed is going to continue raising interest rates bearing in mind these productivity gains?</s>GROSS: Well, that's my sense. The productivity gains are important, and they give the Fed some room not to raise rates. But on the other hand, the CPI and commodity prices, oil and the like, have been moving higher, and the stock market as well is an important indicator for the Fed. So my sense is, is that Alan Greenspan and the Fed will be raising rates in March and will be raising rates perhaps one or two more times in the balance of the year.</s>VARNEY: Now, when the yield on the five-year and 10-year Treasury securities is higher than on the 30-year Treasury, everybody knows that's called an "inverted yield curve."</s>GROSS: Right.</s>VARNEY: And traditionally, that's supposed to point toward a recession. Do you think we're heading toward a recession?</s>GROSS: No, I don't. I don't think it follows typical cyclical patterns of indicating recession. I think the inversion this time around is more of an indication of a lack of supply on the long end of what we call the "Treasury curve." What that means is that the Treasury, because of the surpluses that are being generated by the government, is now in the process of issuing fewer long-term bonds and in fact buying back perhaps $30 billion worth of long-term bonds. And that has created a technical and structural situation which may persist for some time.</s>VARNEY: If the surplus persists for many years to come, do you think we'll get to the point where they start buying back the 10-year as well as the 30-year?</s>GROSS: Well, Larry Summers has indicated that his range is between 10 and 30 years. So if the 30-year bond gets down to ridiculous levels -- and we're getting close to that point relative to some of the alternatives -- then certainly the Treasury has the option to move in closer to the 10-year area or even inside of that. So, that's a possibility. And for those that are continuing to point toward lower and lower long-term yields, they should consider that option.</s>VARNEY: Last real fast question, does it worry you, does your position worry you, Bill, that you can sometimes move the market with your stock trades and also by what you say in the media? You worried by your influence and your power?</s>GROSS: Well, I have to proceed on the basis of what's best for my clients, and that I will do. I again don't think that the power that is suggested is really there. It's a trillion -- several- trillion-dollar market, and Pimco's $180 billion is a small piece of that.</s>VARNEY: Bill Gross from Pimco, we thank you very much for joining us. Thank you, sir.</s>GROSS: Thank you, Stuart.</s>VARNEY: Here's what's still ahead on</s>MONEYLINE: cigarette makers under legal fire yet again, this time accused of rigging prices for decades. Can the industry handle the latest assault? We're going to talk to analyst Martin Feldman about the future of the tobacco sector. He joins us next.