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Special Holiday Programe --- G.M.

>> general motors’ slumping sales illustrate the fundamental problem facing theed world’s number one automaker. g.m. is losing customers to rivals. g.m.’s u.s. car and light truck sales from fallen nearly 7% in the past decade. by contrast, they’ve nearly doubled at toyota. greg miles spoke with experts and consumers about why g.m. cars aren’t selling.

>> power windows, power doors.

>> the fleming family shopped for two months to find a car for their 20-year-old son, their pick, a $13,000 toyota corolla. the phlegmings say they chose the car because of superior resale value, fuel efficiency and economy. she didn’t consider buying a car from general motors because of quality.

>> they slipped for too long and they’re going to have to earn it back and they won’t earn it back on me.

>> david cole, chairman of the center for automotive research, says g.m. is paying the price for the 1970’s, 1980’s and 1990’s when consumer complaints were common.

>> perception is really reality and if you don’t have a consumer considering your product, that’s a problem. i think g.m. and the other domestics get their fair share of the consumers that scheck them out but the impact of the history of 10 and 15 years ago, of relatively poor quality, is a problem.

>> cole says this today’s quality improvements with general motors is insignificant. a survey with j.d. power ranked two in quality. but j.d. power says many issues won’t change until the company becomes more consistent. four fell below average―saab, pontiac, saturn and chevy. the chevy cobalt got the lowest rate in 19 models for driver’s protection in side crashes. g.m. announced a recall of saturn sedans and wagons from 2000 to 2004 to fix defective brake lights and “consumer reports” says the hummer 2 has suffered from suspension problems and electrical malfunctions. the hummer brand finishes last in j.d. power quality rankings in 2003 and 2004, while improving this year. maryanne keller says g.m. faces a product crisis, one that can only be solved by selling cars that change consumer opinions about quality, design, style and fuel efficiency.

>> they have to prove to the consumer that their products are not just as good as a toyota but better than a toyota at the same price. g.m. is not winning the hearts and minds of the american public at the moment.

>> another reason for g.m.’s declining u.s. sales, the car’s style is increasingly important to consumers and g.m. is falling short. five of its eight brands were ranked below average in a j.d. power survey measuring appeal. that’s how much consumers like a car’s style, interior design, driving performance and other factors. they are pontiac, buick, saturn and g.m.c. that sells trucks and s.u.v.’s.

>> they don’t have the products with the nuance. a simple, important thing american customers are looking for. the nuance makes the difference between cars. it’s not enough to be pretty good.

>> take g.m.’s new buick la crosse, although the quality is above average, analysts criticize the large steering while and seat recliners and bland styling. several analysts say this makes the la crosse uncompetitive against cars such as the chrysler 300 sedan with sales 80% higher than the locross this year. because g.m. is spread thinly, experts say the company can’t support its brands. g.m. invested $13.5 billion in capital spending and r&d worldwide last year, less than the $17 billion spent by toyota in its fiscal year. g.m. has 89 models to support in the u.s. market while toyota has 26. g.m., for example, redesigns many s.u.v. models every six to seven years while toyota does it every four to five years.

>> the driver in front, passenger air bag.

>> to lure more consumers back to g.m. showrooms, the automaker will have to win back customers like the flemings who once owned a g.m. car and were unhappy with the quality. given what many consumers say about g.m., analysts say that could take years. g.m. responded in an email to points raised in the story and says the four brands with below-average quality ratings suffered because of new product launches. a spokesman writes, “that’s not an excuse. we are working hard to improve the quality of our new vehicles.” regarding consumer perception, g.m. says “we are well aware of the perception problems and have been making progress in educating consumers.” g.m. points out that the chevy cobalt received an acceptable rating from the insurance institute for highway safety. for sheer outsized styling, few cars come close to the 1959 cadillac el dorado with three carberators, grills in the front and back, and oh, though fins! cadillac became synonymous with luxury and is now a bright spot in the g.m. story. coming up next, how g.m. is rebuilding cadillac.
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Listen Special Holiday Programe --- G.M.

today, general motors has manufacturing operations in 32 countries and last year had sales of $193 billion. to put that into perspective, g.m. sales account for $1.66 of every 100 dollars that the u.s. economy generates, making it bigger than the economies of hong kong, thailand and argentina. g.m. sells more in a month than xerox sells in a year. when today’s baby boomers were children, one out of two cars came from general motors. today, it’s one out of four. profits are also declining. g.m. lost more than $1 billion in the first quarter, its worst performance in 13 years. g.m.’s share price down more than 10% year to date. it did rise to a three-month high following reports g.m. is pressing the united auto workers union for concessions on healthcare costs. yet, since 2000, the stock has lost more than half its value. g.m.’s market capitalization is $20 billion, the same as the gap, but the gap only had 1/10 of g.m. sales. the market cap of toyota is more than $130 billion. g.m.’s debt has soared to almost $300 billion and of that, just under $200 billion is now rated below investment grade, or what wall street calls junk. there’s also g.m.’s healthcare tab. with more than a million employees, retirees and dependents, it’s the largest private healthcare provider in the u.s. and this year g.m. projects costs will rise almost 8% to 5.6 billion. to be sure, general motors is not alone. ford motor recently cut its 2005 earnings forecast for the second time this year. ford says it may need to eliminate jobs and reduce other costs to stop the decline in profits. as for g.m., the company’s executives declined to appear on camera to talk about the overall problems and strategy, but sent an email detailing steps to improve product quality. chairman rick wagoner recently told g.m. shareholders, it’s time to act. he unveiled plans to close plants and get more use from others and to cut 25,000 jobs in the coming three years for an annual savings of $2.5 billion. g.m. rowland out a new sale incentive program, buy a car at the same price employees say. pay. it’s increased the number of shoppers by as much as 1/3 in some dealerships. general motors spent more than $4 billion to recast the cadillac. we’ll speak with the head of that division about what’s to come. we will hear from workers and investors and size up the competition. first, history about general motors and its place in america. carol massar visited suburban toledo, ohio, and the home of one of this nation’s oldest family-owned g.m. dealerships this is grandpa dunn who began it in 1909.

>> tom and jim dunn are the owners of dunn chevrolet and buick in oregon, ohio, a family-owned dealership dating back three generations. business soared following the september 11 attack when g.m. flooded the market with zero% finances deals. since then, sales from slowed.

>> business is on a flat curve. we’ve come from a high echelon and now we have to try to maintain that status and it’s tough.

>> the dunns are not alone. g.m. dealers across the country have reported sales declines in each of the past four months. the problem centers around g.m.’s product lineup. this, according to brock yates, automobile historian and editor-at-large of car and driver magazine.

>> the issue is product, product, product. and general motors has fallen behind over the last 30 years in terms of staying up with product.

>> that wasn’t always the case. when the dunn’s grandmother -- grandfather, charles, started the dealership in the early 1900’s, g.m. was a pioneer in the auto industry. by the 1930’s, the g.m. chairman set up a ladder for g.m.’s divisions with chevy at bottom and cadillac at the top. the goal was to build a car for every purse and purpose and to keep customers buying g.m. cars throughout their lifetimes. the strategy worked and business boomed. by the 1950’s, g.m. had about 50% of the u.s. market . but that started to change in the late 1960’s when g.m. expanded its product offering.

>> they began to dilute those brands to a point where cadillac had cheap cars and chevrolet had expensive cars and everybody in the middle so suddenly general motors is producing 89 different models, all of which are blurred in terms of product identity.

>> they had so many models, i think they couldn’t change the cars very often and then we got into not hardly changing the cars for 10 years. well, that’s the problem.

>> that’s not the only problem. g.m. is facing other challenges, including soaring healthcare and pension costs as well as fierce competition from german rivals mercedes and b.m.w. as well as asian automakers hyundai, nissan and toyota. general motors was unprepared for the invasion of foreign automakers.

>> very quietly, in the middle 1950’s, the japanese began to enter the market and were laughed off the table. general motors thought they couldn’t build cars. suddenly, by the mid 1980’s, they were assaulted on the top side by the germans and bottom side by the japanese and they didn’t know what to do and still don’t know what to do.

>> the dunns noticed the shift of foreign cars in the 1970’s, at a time when soaring gasoline prices drove up demand for fuel-efficient cars.

>> these automobiles were; much, much larger, just in size. and i think when the outside competitors came from overseas, they brought in a much smaller product and it kind of changed the landscape of the automobile industry.

>> g.m. tried to compete with its own line of exact cars, including the chevy chevette and buick skylark. in 1980 with the economy in recession, g.m. suffered its first financial loss since 1920, and last quarter, they posted a loss topping $1 billion. g.m. now has about 25% of the u.s. market . asian automakers, meantime, have increased their share to about 36%. as g.m.’s share of the market declines, so does the number of g.m. dealerships. the automaker has about 7500 dealerships in the u.s. compared to over 13,000 in 1970. yet the dunns stand by g.m. as the company trying to fix the problem.

>> i think the futures bright. i think we’re going through a problem area here, you know. there’s a hiccup in the road. but general motors will be there. we’re banking on it.

>> even so, tom’s 38-year-old son, greg, general manager of the dealership, is not ruling out of the possibility to expand beyond the g.m. brand.

>> i’m relatively sure there will be a dunn dealership here in 50 years.

>> whether or not it’s exclusive g.m.?

>> that’s up in the air.

>> what the dunns need and hope for are vehicles that will light up consumers and ring up the sales. coming next, meet the skeptics. we’ll speak to customers about what it would take to turn them into a buyer.

>> as a long-time family owner of g.m. cars, people say american cars are not as good but i was born and raised in cadillacs and they always worked well for me.

>> “consumer reports” tells you to look at toyota and lexus and honda.

Interview: President of Automotive Data Service

>> the summer driving season kicks into high gear this holiday weekend and perhaps of e of the 33 million cars expected on the road are new thanks to general motors’ employee discount. that discount, opened to the general public, boosted sales 47%, making june sales the largest of any month for general motors since 1986. let’s put this in perspective to see what it means for the company and auto sales. jeremy anwyl is president of automotive data service, edmunds.com, joining us from our los angeles bureau as we take a closer look. hi, jeremy.

>> hi, how are you?

>> i’m doing well, thanks. i assume the general motors’ numbers are what stand out to you. what’s your reaction to the 47% figure?

>> obviously, it’s a huge number, and i don’t think anyone expected this program to work as well as it has. for june overall, it’s a record month for the industry as well as for g.m. sales last month were the largest for the industry as they have been since august 2002.

>> in terms of general motors, are they actually making money on these cars?

>> it’s really interesting. if you look at the money they’ve been spending to support sales, the incentives, it’s down in june, not by a major amount. in effect, they launched the program and it’s not costing them more than they were spending anyway.

>> how does that happen?

>> i think it worked on maybe three levels. one level, which isn’t talked about much, is that when people buy a car from the dealer, generally, the price will be a fixed price, the sticker on the car showing the discounts. so consumers feel comfortable they’re paying the same price as everyone else and the other part is that price is intuitively interesting because it’s the “insider” deal, which makes sense for people, too. they hit a home run with that one.

>> we have daimlerchrysler saying they will match g.m.’s employee discount program. what will that mean for july sales?

>> i think g.m. will announce beginning of next week that they’ll extend through july so our expectation is july will be another large month, as well. >> in terms of what you’re seeing on edmunds.com, what are consumers looking for? are they checking out new cars that they hadn’t checked out before? i’m trying to get perspective on if these are people just accelerating the purchase or consumers coming in because they believe the cars are being given away?

>> probably what we’ll see is if these programs that run through july, but august and september will be softer than you would normally see so there is a lot of the pull-ahead effect where late summer sales are occurring now. the other thing that’s happening is we see a continued drift away from the large s.u.v.’s over to smaller cars. if you look deep at the results, i think that’s clear. ford, for example, was up with car sales, down with truck sales. that’s an overall trend all year.

>> in terms of trends, i’m curious. do you see the davido-day changes, so, for example, when oil prices are higher, do you see consumers looking for more fuel-efficient cars on day when is crude prices fall, willing to look at the less fuel-efficient cars?

>> as i said earlier, that’s a trend we’ve been seeing for six months. traffic bounces from day to day but on a monthly basis, there’s definitely been a shift where people are more conscious of fuel economy.

>> you talked about how perhaps there’s a pull-ahead effect so that september sales may not be as strong as they otherwise would have been. what do you see coming down the pike from automakers in terms of the introduction of new models to attract consumers back to the showrooms?

>> that’s a big question. everyone hopes they have the next big hit coming out. obviously, the mustang, already in the market , is doing very well for ford and the 300-z -- 300 for chrysler. general motors will have an impala v-8 which hasn’t been around for a while. ford has the fusion coming out, a taurus replacement, a key car for them so there are major introductions coming up in september and october that are good to watch.

>> as we look out into the landscape into the fall area, what forecasts do you have in terms of sales we might see?

>> it’s all been changing based on what’s happened this month. what we’re looking at now is july will probably track close to what we saw in june and then we’ll see a big drop-off in sales in august and september. it usually takes 60 to 90 days for sales to return to trend so the critical introduction period could be soft.

>> in terms of softness, tell us what that might mean for incentives?

>> generally, what happens is, when incentives like this end, say, beginning of august, there will be a 30-day period where the market adjusts and what happens, of course, is manufacturers have to react and they’ll do that by pulling more incentives into the marketplace. so during the period when they would generally expect to pullback, when new models are introduced. this year will be interesting to watch.

>> jeremy, thank you. jeremy anwyl of edmunds.com. formula one racing fans getting tickets for free. the reason, tires. coming up, mike buteau with “money & sports.”
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Listen Market briefing --- Ellen (slow)
NYSE --- Deb (fast)
Oil prices --- Daniel (slow)

>> welcome back to “after the bell.” i’m ellen braitman. let’s recap the day on wall street. stocks climbed on stronger-than-expected manufacturing report, reinforcing the federal reserve’s suggestion that the economy can withstand higher interest rates. energy stocks led gains in the s&p 500. to get more details, while stocks were higher, not a lot of fanfare heading into the holiday weekend. deborah kostroun was there for the entire trading day, one of the few remaining at the big board and joins us with a wrap-up.

>> we did see bonds closing at 2:00 new york time. oil closed early, as well. commodities closed early but stocks were open regular time, trickling into the close. we did see below-average volume. as we get back into the swing of things next week, we are going to be looking at the s&p earnings, earnings for all companies. if you look at the first quarter, earnings rose in the first quarter. it was up 17%. in the second quarter, it looks like things slowing down a little bit, only up 6.6%. in the third quarter, of course, we just started the first day of trading in the third quarter, we’re looking at third-quarter earnings growth up 14.6% so after a lag in the second quarter, things ramping up for the third quarter. we kick off the second-quarter earnings season next thursday with alcoa reporting. that’s july 7. looking at today’s session, pfizer, the biggest drag in the dow jones industrial average. that’s mainly because pfizer and germany’s altana ended a partnership to develop an experimental treatment for smokers’ lungs that failed to meet a goal in a study. you did see pfizer and altana’s a.d.r. lower, as well. asbestos-related stocks lower on the day because a vote on a bill for a $140 billion fund for asbestos exposure victims may be delayed until next year according to one of the lawmakers. that’s one of the reason asbestos-related stocks lower. semiconductors with a mixed day. there was spill-over from the prudential analyst saying second-quarter revenue coming in at the high end of forecasts and computer chipmakers may beat analysts’ estimates because inventories are at low levels and the utilization rate are bottoming out. that should improve margins. back to you.

>> deb, thank you very much. as we look back, second-quarter earnings season kicking off next week. u.s. stocks may extend declines of 2005 and that’s because disappointing profit forecasts have been picking up for the quarter. so let’s get more perspective on the story, joined by bloomberg news reporter with this week’s edition of “taking stock.” you’ve talking to investors, looking at earnings expectations. set the stage for us. why is there concern?

>> i think one of the reasons, we’ve had eight or nine quarters where people have gotten used to companies coming in and beating expectations. so far, with companies that have already given outlooks for the second quarter, 65% of them have come in below what analysts were expecting. that’s a pickup from about 54% in the first quarter and about 53% from a year ago. also, one of the problems, you know, obviously we saw oil this year go to near $61 a barrel, a big concern for earnings. also, rates are going up. the fed didn’t give an indication that they’ll stop raising rates any time soon. also, the dollar had its biggest rally against the euro in the second quarter just ended, biggest rally since 2001. that’s also a concern for companies like mcdonald’s, colgate-palmolive with overseas business.

>> are there particular industry groups that investors are concerned about? >> right now, raw materials makers have stood out. of the 10 groups tracked by bloomberg, they have the highest percentage of misses, about 85% of the companies that have already given outlooks for the second quarter have missed expectations. some of them include nucor, second biggest u.s. steelmaker. they said that second-quarter earnings were likely to be at the low end of forecasts because of lower-than-expected steel prices. also, international paper had a miss this week, as well. in the second quarter, we’ve already seen those stocks slumping. u.s. steel was the biggest declining stock in the second quarter so investors are taking notice of that.

>> what about particular pockets of trends? you mentioned oil prices, certainly the energy expectations continuing really high for earnings expectations. any other group that looks particularly strong?

>> you mentioned energy and that’s obviously no surprise. right now, 56% of energy companies that have already given outlooks for the second quarter have beaten estimates. but obviously, that was something that investors could have assumed would happen. another interesting group is the technology sector. there is split opinion on that. some think, given that it’s a cyclical sector, it might be hurt by the fact the economy seems to be slowing down a bit from the first quarter into the second quarter. at the same time, a lot of people think that some of the estimates that analysts are giving are too conservative and we saw today that prudential, for example, came out with a note saying they thought all of the technology companies they look at will beat expectations for the second quarter. they raised their estimates on intel, as well. that’s going to be a factor to keep an eye on.

>> interesting thing about intel, coming in at the top end of the company’s forecasted range.

>> right, right.

>> daniel, interesting, thank you very much for joining us. when we return, we’ll look at the auto sector with automakers out with the latest sales figures. we’ll look at what is in store for the industry in coming months, speaking with jeremy anwyl.

Interview: Russell Investment Group

>> the s&p 500 higher today, but off 1.1% for the year and dow down 1.4%. ernie ankrim with russell investment group anticipates a turnaround. he joins us from washington. as we kick off the third quarter, why are you still optimistic?

>> my optimism is tempered somewhat by the news we’ve seen today, strength in the economy. i’m expecting that as the fed continues to increase interest rates in the short term, we’ll see some economic slowing with the weight of the oil price increases manifesting themselves somewhat. both of those will combine to allow the fed to see some degree of economic slowing as we get into september, november. at that point, when the fed stops increasing interest rates in the short term, i think the market is ready to take off. of course, it will take at least until november before we have that opportunity.

>> so seeing signs of slowing. we had that fed meeting yesterday. your target for the s&p for year end had been 1300. are you sticking with that?

>> i might have to change. but, i’ll tell you, last year, we went from january through the end of october and the market didn’t do a thing, the indexes almost exactly where they started and we ended the year up 12.5%. i think we could see ourselves in the same spot this time, if, in fact, we see market slowing in october and the market stops at 3.75. , then that possibility exists. if that happens, once we get to that end, i think the market looks at what haven’t been stunning earnings performances the last half of the year. we will see surprises on the upside this time but not strong but good enough in this low interest rate environment to propel the market ahead from 10% to 15% before year end.

>> am i hearing that basically you’ll sit tight with your forecast until the fall?

>> yes. if the economic numbers continue to come in really strong, if we see increasing employment numbers, personal income and spending starts to rise dramatically, i’ll be humble enough to step back from that. but as long as we see mixed indications, obviously optimism has been up but debt continues to be high and there’s slowing down in construction spending, we saw today. mixed bags are ok,,but if it’s consistently strong, i’ll step back.

>> we talk a lot these days about the effect of energy prices on the stock market . what do you think the key themes will be for the third quarter?

>> first, i think, before we get to november, we will see lower rather than higher oil prices. i agree with some of the people that said there is a structural bias built in toward higher oil but i think the slowing of our economy, europe is slowing, asia is slowing. these things will put pressure on oil prices and that will be a positive for the market but negative for oil going into fall.

>> so, energy, then, one of the themes continuing the third quarter in terms of what investors are reacting to?

>> i agree. but i don’t think it’s the big one. i think as we’ve seen this year―comparing last year to this year, we’ve seen oil go from the high 30’s to 60 and not have a substantial impact on slowing the economy. if we go from 60 back toward 50 or high 40’s, it won’t be such a stimulus because the economy takes off. that’s great, i think, for the market . it’s only the market responding to low and slow growth that will allow the fed to step off this continued increase in federal funds and that will be the ticker that causes the market to start recognizing the value in equities.

>> in terms of value in equities, i know, as an investor, you’re thinking that growth will start to outperform value, which is a theme we’re hearing from other investors, as well. what’s the rationale right here?

>> two things. you’ve been documenting it well all day on bloomberg. the first is, nothing goes straight up forever. if you look at the return performance of value versus growth stocks using the russell 1000 value and growth indices as you were doing this morning, the return differential has been astonishingly large, on the order of 14% a year over the last five years. at some point, not only value stocks will go up and second, in a low-growth environment, firms that can generate growing earnings become increasingly attractive and we think that, also, will be a catalyst for this portion of the market to take off.

>> in our last 20 seconds, tell us what kind of advances you expect from the group of growth stocks.

>> i expect growth to be up in the 15% to 17% range and value up in the range between 7 to 8, getting us to 12%, my target.

>> ernie, thanks so much for joining us. ernie ank ram of russell investment group. when we return, it was a banner month for auto sales. general motors led the gains. however, analysts caution that does not necessarily mean business is improving. suzanne o’halloran following the story and joins us.
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Listen Market briefing --- Ellen (slow)
Higher energy price --- June (slow)
Oil prices --- Deirdre (slow)
NYSE --- Deb (fast)

holiday-shortened floor trading session, up 4%, closing at $58.75 a barrel. the rise came after heating oil reached a record on continues concern refiners will not be able to meet demand in peak winter months. traders looking forward to what will happen in november and december. gains, as well, for unleaded gas as well as natural gas. however, for the week, oil still down. in fact, just about 2%. $58.75, the closing price for the week. looking ahead to next week, our survey shows more traders and analysts expect prices to fall than are forecasting a rise. here are the settling numbers -- let’s give attention on the manufacturing report that was released today showing first increase this year. at the same time, consumer confidence increased. we have june grasso following this story. june, certainly, so far, it seems that the economy shows signs of weathering the higher energy prices.

>> absolutely and the growth of the pace of u.s. manufacturing in june for the first time in seven months suggests factories are recovering. the institute for supply management’s index for june came in higher than expected. the factory index rose to 53.8 from 51.4 in may. economists weren’t expecting a change. readings higher than 50 indicate growth.

>> 53 represents an uptick from the prior month, which is a surprise. that’s encouraging because manufacturing is the weak link in the economy and the g.m. incentive program with auto sales is probably one contributor boosting the number.

>> manufacturing remains in an uninterrupted expansion that began in june 2003. orders and production increased last month. consumer confidence rose last month, as well. the university of michigan said today its sentiment index reached a six-month high in june. the index increased to 96 last month, up from a preliminary estimate 94.8 and higher than the reading in may. analyst patrick mckeever says confidence is translating into better sales.

>> it was warmer in june than in april and may. we had a late string but arrived with a―late spring but arrived with a vengeance, warm in many markets and favorable for spending.

>> the data supports the federal reserve’s statement yesterday that, although energy prices have risen firmer, expansion is firm. after the i.s.m.’s index for manufacturing for june rose more than forecast, u.s. treasuries tumbled, making it the worst day for the 10-year note in more than three months, dropping over a point. it was the world’s biggest mover among government debt. the report bolstered speculation the federal reserve is no closer to ending a series of interest rate increases.

>> let’s look, june, what happened on the other side of the yield curve. those prices making dramatic moves, as well. here’s the five-year, the price down 18/32, yield up to 3.72%. as for the two-year, look at the price decline, 6/32, yield up to 3.72%. dramatic moves, as well, in the currency market . the dollar surged to the highest in more than a year against the euro, rising against most major world currencies today. let’s return to the stock market and how the economic reports played out, as well. oil a theme for investors along with the economy. the price gains in oil not deterring equity investors. deirdre bolton followed the action and joins us now.

>> oil’s 4% rebound pushed energy stocks higher. exxon-mobil, chevron, occidental petroleum, all of these made the oil group the best performing in today’s session. conocophilips rising as much as 3% after completing a deal to invest in russia’s lukoil. some money managers say the energy stocks are attractive in the long term, but the short-term view shows some facing tough earnings comparisons.

>> the earnings growth rate of the energy companies aren’t sustainable because they did have high energy prices starting in the third quarter of last year. the comparisons get much more difficult in the third and fourth quarter.

>> earnings news has moved some stocks. red hat was up more than 10% on better-than-expected first-quarter results. the linux operating system distributor exceeded first-quarter targets by 30%. pixar’s 14% drop, at its worst, showed the market ‘s reaction to disappointing results. computer animation film studio cut its second-quarter forecast by 30% citing a shortfall from the sales of the crbility. overall, some say earnings season will be a positive catalyst for stocks. >> there is positive momentum building in the marketplace for the upcoming earnings season. we expect better-than-expected earnings season, with 10% growth ratherive to the consensus forecast of 7% growth. dow kicks off the―alcoa kicks off the official earnings season next thursday.

>> also focus on the fact that today was the start of the third quarter. deborah kostroun has this report from the big board.

> friday was the first trading day of the third quarter and second half of the year. looking at how he stand, the major averages year to date, the dow still down 4.5% for the year. the s&p 500 down 1.4% and the nasdaq down 5.4%. in friday’s session, some of the things that traders focusing in on, a stronger manufacturing report that came out. also consumer confidence increased for the first time this year and also we did have that below-average volume ahead of the three-day weekend. when traders return, we’ll probably look at the second-quarter earnings in earnest. gainers in the s&p 500 today -- energy, autos and utilities. remember that energy and utility stocks some of the best performers in the first half of the year and continuing with leadership in the first day of trading for the third quarter. auto stocks, general motors, biggest gainer in the dow jones industrial average. that after their sales last month jumped 47% from a year earlier and they sold the most vehicles in the month of june since september 1996, thanks to that extension of employee discounts for all buyers. daimlerchrysler reporting on friday afternoon that they will be offering the same employee discounts for its buyers starting july 6. you did see spill-over into auto parts makers. visteon, the biggest gainer in the s&p 500. crude oil with its first increase in four days. crude oil adding quite a bit. $2.25 a barrel tacked on. x.t.o. energy upgraded at goldman sachs on the day. looking at microsoft and i.b.m., or at least i.b.m. microsoft agreed to pay i.b.m. $775 million. the settlement with microsoft in claims stemming from the u.s. government anti-trust case in the late 1990’s. also, i.b.m. agreeing not to bring other claims per two years. i’m deborah kostroun at the new york stock exchange.

>> tonight does kick off the fourth of july weekend. but beer makers anheuser busch and s.a.b.miller may have nothing to celebrate. both companies, which cut prices at the end of may to boost demand, sold less beer in the month ending june 11 than the previous year. more consumers are turning away from budweiser and miller brands in favor of wine, spirits and higher end beers. the amount of wine sold in the u.s. rose 2.6% at the same time that spirit sales rose 4.1% and beer volume for cons flation -- constellation brands, importer of premium beers, rose over 8%. we see a one-year graph of anheuser busch in white, constellation brands in yellow and s.a.b.miller in red. miller making gains of 25% in the past 12 months, so falling sales have kept the stock relatively unchanged in 2005. looking at shares of constellation brands, up over 60% in the past 12 months. consumers may see further price cuts from anheuser busch and s.a.b.miller this summer, which industry consultants say is a sign that beer demand may not pick up for the rest of the year. energy, a major theme in the trading today. will that continue in the third quarter? ernie ankrim joins us next.

Interview: Oracle Chief Executive

>> oracle shares rose today in the wake of the company’s earnings report. sales up 26% last quarter, excluding one-time items, profit, 26 cents a share. three cents ahead of what analysts were expecting. for more on the performance as well as the outlook, erin burnett sat down with chief executive, larry ellison.

>> positive product cycle. our database businesses gaining market share. there are three studies out right now from gartner, i.b.c. and morgan stanley showing our database is taking share from our number one competitor in the database business, i.b.m. our middleware is taking share away from b.a.e. and our applications business is growing 52%. our applications business in north america grew 71%, so we’re taking share from s.a.p. and strength across the board from all of our businesses.

>> you mentioned a few of your key rivals. you mentioned database, the most profitable business, still. you mentioned i.b.m. will you take that number one spot back from i.b.m. in your fiscal 2006?

>> it’s interesting. gartner group has us in a virtual tie with i.b.m. at 35% apiece. gartner says we’re growing while i.b.m. is getting smaller. if you look at the i.b.c. report, i.b.c. has us at 41% market share, ahead of i.b.m. my personal favorite report is the morgan stanley report with us at 58% going to 70% and i.b.m. at 11% going to 9%. we think we’re well ahead of i.b.m. already. only gartner has us in a tie. but all three analysts agree we’re growing while i.b.m.’s database is shrinking.

>> if you’re growing there and you’re saying you’re number one. what about on the applications software side of the business when you’re competing with s.a.p. people are estimating you’re losing market share there.

>> our application business in north america grew 71%. we’re definitely gaining share now against s.a.p. there was an anomaly in the first quarter after we merged with peoplesoft. there was $275 million in peoplesoft application sales last year that were not recorded in either peoplesoft’s quarter or oracle’s quarter because we were in the middle of a merger that hadn’t closed yet. but, in fact, we have very strong applications growth. we’re at 52% this quarter, growing much faster than s.a.p. and in north america, we grew 71%. we’re number one in north america and taking share away from s.a.p. in that market . s.a.p. is clearly number one.

>> in terms of the actual numbers here, one report expecting your market share to be―how wrong do you think that number will be?

>> they’re going to are to revise those numbers because those are estimates before we reported this quarter that didn’t count that $275 million of peoplesoft revenue that went unreported last quarter so you look at our numbers now, drawing 52%. that’s much faster than s.a.p. is growing. we have to be taking share.

>> that was larry ellison, oracle’s chief executive. earnings out after the bell from 3com, reporting a loss of 15 cents a share, matching analysts’ estimates. sales were down 3.7%. however, they did come in stronger than analysts helping looking for, coming in at $177 million for the fourth quarter while analysts were looking for $172.5 million. sales down 3.7% but stronger than anticipated. keep in mind, for some perspective here, the chief executive has been slashing jobs, making acquisitions to boost profitable as the company loses out to cisco systems as well as juniper networks. also in focus after the close, comcourse. the company firing 16% of its u.s. work force at palmsource. palmsource, a company that makes software for handheld computers and mobile phones, said it would record another $2.7 million in restructuring costs in the current quarter. if you exclude the gain as well as costs, the company posts a loss of four cents a share and analysts expected a loss of two cents. shares down 9% in extended trade. shares into today’s close, down 26% this year. and there was a deal today involving darden corp. this is a company that makes mr. coffee appliances. it features the crock-pot. jarden paying $625 million to purchase holmes. headlines on the federal reserve, treasury secretary john snow and alan greenspan are to meet senator charles schumer to speak about china. they will meet senators. we are finding out this is on thursday on capitol hill. the headlines coming out just now. we know that treasury secretary john snow and fed chairman alan greenspan will meet senators schumer and graham to discuss china. it is scheduled to take place tomorrow on capitol hill. with that, we’re going to take a quick break. when we return, crude prices declining for the second straight day. we’ll bring you details.
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>> the independent chair continue is the capstone of a series of reforms that will foster a culture of a boardroom based on transparency, arm’s length dealing and protection of the interests of fund shareholders.

>> this sets up a legal showdown over the measured championed by william donaldson. peter cook, standing by in washington, will bring us details in a moment. first, let’s get you a check of how the markets settled. stocks did fall in anticipation the federal reserve will raise rates tomorrow and signal more rate increases are to come. we’ll have more on the markets in a few minutes. we want to bring you the details on the top story. certainly a contentious final meeting for william donaldson as he departs the securities and exchange commission. on a 3-2 vote, the s.e.c. adopted fund governance changes that had been rejected eight days ago by a federal appeals court. peter cook was at the s.e.c. and joins us with details. peter?

>> william donaldson not leaving the s.e.c. quietly. just one day before he leaves the agency and over the objections of fully on republican commissioners. donaldson today pushing through mutual fund governance changes he says are necessary to protect investors. the rule requires mutual fund boards to be 75% independent and board chairman to be independent, as well. the rule wasa adopted last year by the s.e.c., but challenged by the u.s. chamber of commerce. last week, a federal appeals court ruled the s.e.c. failed to adequately consider the cost of the changes and alternatives. donaldson scheduled today’s vote after concluding the problems identified could be remedied.

>> our failure to act, i fear, would throw the future of this rule-making into uncertain limbo until a new chairman is confirmed and he is able to familiarize himself with the rule-making record and policy consideration weighing for and against the decision we made last year.

>> as they did the first time, donaldson’s two fellow republicans on the commission opposed the rule again today, criticizing donaldson for bringing it up again so soon.

>> today’s action is nothing more than window-dressing. it violates the spirit, if not the letter, of the court’s opinion. which, in directing the commission to address the deficiencies, clearly contemplated that the commission would do so by applying its expertise and best judgment to bear.

>> the u.s. chamber of commerce calls the s.e.c. action outrageous and promises to challenge the new rule. overshadowed bue the mutual fund fight, the s.e.c. unanimously approved new guidelines for companies seeking to promote the sale of stocks and bonds, doing away with the quiet-period restrictions.

>> the change to the draft of offering communications, information dissemination and registration, will create a quiet revolution and make capital formation in the united states far more efficient and effective.

>> in addition to being donaldson’s last meeting as s.e.c. chairman, it marked the first meeting in the s.e.c.’s new headquarters. very memorable meeting at the s.e.c. today.

>> thank you. a u.s. judge considering whether to throw out a securities and exchange commission fraud case against former healthsouth chief executive richard scrushy. it comes after his acquittal on criminal charges yesterday. u.s. district court judge johnson setting a hearing date for july 7 and ordering the s.e.c. to show cause why she should not dismiss the civil suit filed against jush ne2003. recall, it was yesterday that jurors in birmingham, alabama, cleared scrushy of charges that he directed an accounting fraud in the company. the s.e.c. suit one of many that did occur while scrushy was chief executive. a―for its part, healthsouth does hope to oust scrushy at its shareholder meeting and that take place next year. research in motion, maker of the blackberry email passenger, saying first-quarter profit more than doubled to $132.5 million as sales increased 68%. shares are down 6% in extended hours. it comes after the company said it added fewer customers than expected and second-quarter sales may miss analysts’ estimates. as for the recent quarter just reported, net income climbing to 67 cents a share. it compares with 28 cents a year earlier. sales rising to $453.9 million from $269.6 a year ago. computer shares could not hold on to gains at the nasdaq today but transportation shares did. june grasso has details from the nasdaq marketsite.

>> transportation shares were the best performing group at the nasdaq today, as they were yesterday, with crude oil dropping more than $3 a barrel in two days. it was one of the few groups able to hold on to its advance today. one of the groups that started the day strong and bounced between gains and losses was computer shares, ending the day as one of the worst performing groups at the nasdaq. oracle was an advancer there. the most active stock on the nasdaq composite and among the top performer in the nasdaq 100 all day after fiscal first-quarter profit beat analysts’ estimates. microsoft also higher. bill gates saying that tokyo that new versions of the windows operating system and office word processing program will offer higher security and compatibility with other software, helping companies save costs. decliners in the computer group, apple computer, slashing prices more than 10% on some of its music players to defend its market share. today, it was one of the worst performing members of the nasdaq 100. google, trading below the $300 threshold reached monday, yesterday, also closing lower for the day and yahoo, one of the worst performers in the nasdaq 100. the two most used search engines are introducing software that lets independent programmers create customized online maps. monster worldwide was higher after the g.d.p. numbers. the operator of the most used website for employment advertising was rated overweight at prudential equity, which expects it to benefit from the shift toward online advertising and upswing in the employment market . i’m june grasso, bloomberg news.

>> let’s get more on today’s trading action with a report from deborah kostroun at the big board.

>> after seeing our biggest rally in five weeks yesterday, we did not see the followthrough in today’s session. a lot of reasons for that. one of the things that actually did help out the market , that was the fact that a.i.g. had better than expected earnings. then, of course, we have that fed decision coming out tomorrow. many traders waiting to see what the fed will say about interest rates. likely going to see interest rates going up a quarter of a percentage point. the big story on the day, the fact that oil dropped 94 cents a barrel, closing at $56.26, over the past couple of days, we’ve taken off 5.5% on crude oil. a mixed market with integrated oil. b.p. lower although raised to a buy at bank of america. other energy stocks mixed in the session but generally the s&p energy index was lower. speaking of indexes, the s&p insurance index, the biggest gainer in the 24 industry groups in the s&p 500. you look at the gainers in the dow jones industrial average, a.i.g. at the top of the list after their better-than-expected earnings. first-quarter profit rose 44% on asian life insurance businesses and gains from derivatives. financials taking a bullish cue from a.i.g.’s earnings. many of the financials performing quite well in today’s session. not only some of the insurance stocks related to financials, but other financials performing well. and 10-year yields below 4%. material stocks mixed on the day. many gold stocks performing well because the commodity increased the first day in four, but monsanto, number one developer of genetically engineered crops, retreating with a dropping third-quarter profit, related to write-offss for acquisitions of two feed companies.

>> one stock in focus after the close, b.m.c. software releasing fourth-quarter result, nine cents a share excluding items, a penny shy of analysts’ estimates. sales topping estimates, $395.1 million compared to the expected $391 million. this company makes programs managing corporate computer networks. on april 11, the company said it would cut 875 jobs or 12% of its work force in order to trim $100 million from costs this year. it was the second round of cost cutting for b.m.c. in the past few years. shares are down 6% over the past 12 months. after the break, we’ll have more on oracle. hear what the company’s chief executive has to say.

Interview: Deutsche Bank

>> big losses last week in stocks turned to gains today. both the dow and s&p 500 with their biggest advance in more than a month while oil had its biggest loss in two months. joining us for a look at where stocks may be headed is benjamin pace, chief investment officer at deutsche bank u.s. private wealth management group, joining us in our studio. ben, i want to start off with oil. it’s hard to talk about stocks and not look at oil. was $60 the key mark or is there a different mark where investors will be concerned?

>> i think there’s no doubt that $60 was a key level psychologically, particularly given the fact that the market has rallied so much since april so every level has met this resistance in the stock market advance and the fact that oil went down today was the catalyst for today’s market move.

>> give us a flavor for what you hear in your offices, are more people calling up nervous? what is oil doing for your clients?

>> there is concern, but i think the thing they know is that adjusted for inflation from the 1980’s, oil is still relatively cheap. it’s also not a supply shock type of environment as it was in the 1970’s and 1990 when oil prices went up because of artificial supply constraints. this is more demand driven, a function of how strong the economy is. is there a point in time when it will slow the economy down? yes, but not necessarily $60.

>> so the consumer confidence number today that boosted stocks, did that surprise you in terms that it was a three-year high and that it lifted stocks?

>> the consumer has surprised us all year because we expected more of a capital-spending driven economy but given the fact that rates are so low, it shouldn’t be a surprise. mortgage rates have stayed low so the housing boom has continued. refinancing options are there for consumers but most importantly, job growth is picking up. it’s been a lagging indicator for us the last year or so. but the fact that the consumer seems to be running on all cylinders is not so much of a surprise that you’ve seen that confidence number today.

>> let me challenge you on something. basically, you and others called it wrong, thinking that the business demand would have been stronger at this point than it has. why hasn’t that hurt stocks more? you look at that durable goods order report recently, it was weak taking out transportation. why doesn’t that spook investors more?

>> obviously, 2/3 of the economy is driven by the consumer so that’s the first reason that’s the case and it’s not that capital spending has fallen out of bed. this isn’t the 2000, 2001 environment. i.s.m. numbers are positive, although down from 60. it’s just a disappointment in magnitude of capital spending. it’s not that it’s in a recession.

>> in terms of, then, what to avoid or what you like, let’s start with what to avoid. in terms of the fact that capital spending hasn’t picked up as anticipated, are there picks you’re rescinding, saying that you’re wrong?

>> weave backed off of our overweight in industrials and moved that back down to an even weight but not underweight. the areas we are avoiding, we think utilities. with interest rates still, our forecast is that they’ll move up from the 3.90 level on the 10-year or maybe 3.95 today. so we’re out of that area pretty much in total and also it’s overvalued, we think, now, because it’s done so well. telecom, the intense price competition there, it’s still keeping us out of that sector. and we are underweight consumer staples. we think for two reasons, one, no reason to be overly defensive in these markets and the second, more important reason, is we see margin squeeze in that sector more than anywhere else, the inability to pass along raw material price increases to the consumer is really seen prominently in consumer staples.

>> if you’re underweight utilities and telecom and you don’t like traditional fixed income, what’s an investor who wants yield to do?

>> as far as the stock sectors we like, energy, with these high oil prices and high oil prices will stay high here, tends to have good yield, as well, particularly your large international integrated oil companies so you have yield in the stock market there. the other area where we’re overweight is healthcare and a slight overweight towards technology. a little bit of yield in healthcare, not so much and not so much yield in technology. outside of u.s. large cap stocks, though --

>> where specifically in healthcare? people have been talking about overweight healthcare for six months. where specifically?

>> it’s a broad sector. we’re underweight the large cap pharma companies which still have product problems but we like biotech and we think that biotech, because they have the better drug pipeline and also that’s recognized by the large cap pharmaceutical companies who haven’t been successful.

>> as an acquisition play?

>> acquisition play, yes, very much so.

>> who do you think is likely to be bought?

>> i don’t make speculation on that now but i think that the names we’re interested in are names like celgene. they have a good product pipeline, not so much because they’re going to be acquired. that could happen but that’s a name we like.

>> ben, thanks so much for joining us. ben pace is with deutsche bank u.s. private wealth management group. when we return, shares of a.m.d. rose today. the company filed an antitrust suit against intel having to do with p.c. chips. su keenan takes a closer look.
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Interview: GMAC

>> scrushy was found not guilty of all 36 charges in the indictment. he is the first chief executive acquitted of fraud charges since the government began prosecuting corporate wrongdoing after the collapse of enron. u.s. prosecutors accuse scrushy of inflating profit from 1996 to 2002 and propping up healthsouth shares in order to enrich himself.

>> we have five c.f.o.’s that said they had direct conversations with this man and he saw all of this income but no expenses. no, i’m shocked by the verdict.

>> 15 executives who pleaded guilty to the fraud, including five finance chiefs, did help the prosecution. the verdict came on the 21th day, including the judge having to replace one of the jurors. our other big story of the day was the decline in oil from a record high. crude down 3.9%. the biggest one-day decline since may 12. certainly that decline playing out for stocks. it did help boost the major stock indexes. here are your settling numbers as the market did close -- for more on the rally, here’s a report from deborah kostroun at the big board.

>> the dow jones industrial average closing right near its best level of the day, up 114 points, near its best level of 118 points. stocks gaining all day and not relenting as oil dropped a whopping $2.34 a barrel to $58.20, the first drop in four days. consumer confidence climbed to’s three-year high and questions among traders about how long oil can trade below $60 a barrel. looking at the laggards in the s&p 500, only one decliner of the 24 industry groups in the s&p 500 and that was energy as crude oil was lower. you saw real estate and insurance posting fractional gains. looking at oil-related stocks, exxon and pfizer, the only two laggards in the dow jones industrial average. you saw many oil-related stocks lower, also oil services. this index trading close to a record yesterday. it was lower in today’s session. many oil service stocks sharply lower. gainers in the s&p 500, transports, very surprising, since transport is the second worst performer this year behind autos. transport, that index down 14% this year. but as we saw that retreat in oil prices, helping out not only transports but consumer durables and also you did see many of the auto stocks performing well. the transports, as i mentioned, good performers. also the consumer doubles and retail stocks not only performing well in today’s action in oil as many retail names have been seeing prices going lower. that on concern over the pressures of higher energy costs on consumers. consumer confidence was at a three-year high, helping many of those stocks. gold stocks on the day were sharply lower. i’m deborah kostroun at new york stock exchange for bloomberg news.

>> residential capital corporation is a real estate finance company primarily focused on the residential real estate market with businesses including gmac mortgage, gmac bank and ditech.com. co-chief executive david applegate and bruce paradis join me for a look at the real estate market . we’ve had alan greenspan speak of froth in the housing market . any signs you see that things are slowing at this point?

>> it’s a pleasure to be here. in terms of the overall housing markets , we still see strength. overall interest rates, particularly on the long end, have driven good refinance activity and kept affordability at reasonable levels. we see demographic trends with immigration being strong. you have seen baby boomers buying second homes. fundamentally, we see reasons for the strength in the housing market to continue. there are areas where you want to pause and be more careful about the rapid rises but in general, we don’t see any broad-based bubbles. we see good, fundamental underpinnings in the housing markets overall.

>> if you are seeing pockets of concern, bruce, this question is for you, a lot of talk about speculators in the market , what are you doing to make sure the loans you make are safe loans, they’re not to speculators who might have a higher probability of defaulting?

>> rescap is a leading real estate finance company in the country and we’re looking every day at the local markets in terms of which are strong and soft as well as in underwriting loans. we’re constantly looking at the performance of our assets relative to underwriting standards, in terms of who qualifies.

>> anything you’ve done to tighten the standards?

>> as we’ve seen markets soften, frankly, we’ve cut back on the more aggressive types of underwriting practices in the industry and taken a more conservative --

>> give us an example.

>> higher loan devalues is a good example. there’s press on interest-only loans so we’ve been typically more conservative in entering these types of products.

>> i want to talk about your connection to gmac and g.m. about a week ago, you did a $4 billion offering of notes that you had to do at junk rates even though your company has investment-grade status. is that something you anticipate you’ll continue to have to do as you have bond offerings?

>> rescap is a significant player in terms of its overall size. we’re the sixth largest originator, seventh largest servicer and have operated under gmac independently. what we saw is a growth rate that required us to go to the external marketplace to enhance our capital alternatives and we wanted to reduce our cost of funding versus gmac so we did that successfully. we view the transaction as a very strong inaugural offering. $4 billion was a great transaction. we think over time as we continue to perform well, as rescap, continue to grow our market share and our presence in the real estate finance space, we’ll gain more separation from gmac and continue to reduce our borrowing costs and gain access to cheaper costs of capital through that performance.

>> were you surprised you had to pay these rates? you said you did it to have to pay lower rates but although you had the investment grade status, you had to pay the junk rates?

>> in proportion to where gmac borrows and versus a solid b.b.b. company, we were in the middle of that range so we would view it as an initial transaction as successful and as we gain traction in the marketplace as an independent company, we think the borrowing costs will come down.

>> bruce, one of the concerns investors had and one of the reasons you had to pay the rates is because some investors don’t believe there is that independence. how separate are your assets from gmac?

>> we’ve been working on this transaction the last year and a half, have had extensive conversations with all of the ratings agencies and have put together a separate, independent company, both from a capital and financial standpoint as well as from an operating agreement. we have restrictions with regard to dividends and have put two independent board members on the board so it’s with that independence that we put in place that we were able to achieve higher credit ratings than our parent and also gain access to this bond market at considerably cheaper rates.

>> in terms of the independence, the big million dollar question or bigger than million dollar question for investors is, are you going to be spun off?

>> gmac has been very clear on that. they’ve been a good steward of our business. we’ve been with them for 20 years and they’ve been very valuable as a parent and have no intention of selling us.

>> david, however, it does seem to be some kind of top or near the top of the housing market so if you were spun off, or if it were considered a good time to do that?

>> as bruce reverend, gmac is a great parent and this rescap structure and independent ratings allow us to access capital markets more independently so we think we have an optimal relationship. we think it’s a win-win for the shareholder, bondholder andres cap.

>> thanks to both of you.

>> thank you.

>> david applegate and bruce paradis. we are going to have a special focus on g.m. in prime time tonight, 10:00 p.m. new york time, called “g.m., retooling an american icon.” the drop in oil was good news for stocks. but how can the upward momentum in equities continue? we’ll put that question to benjamin pace, chief investment officer with deutsche bank u.s. private wealth management.

Interview: Bank of New York

>> paychex reporting 27 cents a share, three cents better than the average analyst estimates. sales coming in at $379 million, analysts looking for closer to $370 million. the company saying fiscal year 2006 revenue growth will be 11% to 12%. it sees 2006 revenue approximately 1.6 to 1.62 billion dollars, the average analyst estimates at 1.62 billion dollars. paychex out after the close, fourth-quarter earnings topping analysts’ estimates for profit and sales. turning our attention back to the market . you have oil near the $60 level, both a―breaking a five-week winning streak for stocks. kevin bannon is chief investment officer with bank of new york and joins us with his outlook for the market . kevin, why haven’t stocks reacted more to the current prices of oil?

>> the main reason is that oil hasn’t seemed to have a particular dampening effect yet on people’s behavior in terms of changing driving habits, vacation plans, and hasn’t had too big an impact on corporate profits so basically i’d say the market has reacted positively to the fact that oil doesn’t seem to be derailing the economy.

>> is that what you’re seeing? from the clients you speak with, are they saying the oil prices aren’t affecting what i’m doing?

>> everyone’s complaining about it but i don’t think it’s having a major impact on people’s actions quite yet. i think basically what we see among the companies that you talk to is there’s not a lot of conviction out there and there’s even less willingness to act on that conviction which is why the markets seem to be meandering here despite what i’d say is a combination of fundamentals.

>> in terms of no lack of conviction, you still thinks stocks will rise 10% this year. why so optimistic still?

>> there are a couple of reasons. one, the stock market , to us, just looks very, very inexpensive. with the markets trading at 16.5 times this year’s earnings, that’s 6% earnings growth, compared to a 4% bond yield, that really looks pretty interesting unless you really are concerned that the u.s. is going to slip into the japanese deflationary slump where you don’t count on profits rising every year, but we don’t see that happening. we think the economy has made a nice transition into an expansion that is hopefully sustainable but we recognize risks are on the downside.

>> is there anything that would change that scenario in terms of stocks versus bonds as an attractive --

>> i don’t think there will be anything major market moving in the announcement. we expect the fed to raise rates. we kidnap them to raise rates perhaps one or two more times past this and pause. and see what impact that level of rates has on the real economy. i don’t know why people are getting as exorcised as they are about what the fed is doing because the fed has no intent on pushing the economy backwards, but it’s trying to remove the excess stimulus and unless you think the fed is erring and should be pulling back already, i am encouraged by the fact that they are stepping. up to head off inflation before it’s a problem.

>> what’s interesting to me, when i look at your asset allocation, you recommend investors put a big chunk in alternative investment. what percentage of a portfolio are you recommending?

>> for investors who are able to invest in hedge funds and private equity, we’d say 20% is the right number. the old modeled portfolio was probably 65% stocks, 35% bonds. i think stocks are falling toward 50 and bonds are falling toward 25% and alternatives are picking up the balance.

>> why is that? it’s interesting hearing you recommend hedge funds when the chatter in the last month and a half has been about concern that hedge funds are on shaky ground.

>> we’ve been recommending hedge funds and will continue. i think they have a real place in portfolios on a long-term basis. they’ve gone through a tough spell right now, but i think the array of outcomes investors have to consider going forward is wider than they have been in the past. deflation is something we’ve not thought about forever but it’s something out there. people are, after the experience of the 2000-2002 period, much more concerned about protecting on the downside and i think the pendulum might have swung too far that way. people who forget about risk management in 1998 are entirely focused on risk right now and at some point they’ll come back and ask for a return in their portfolios and they’ll be on to the next new big thing.

>> kevin bannon, chief investment officer at the bank of new york. we’ll take a quick break. when we return, the supreme court handed out a host of decisions today. we’ll learn more about them, specifically, time warner and comcast among companies affected. peter cook will join us from washington with more.
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Listen Oil price --- Bob (fast)
Market today --- Deirdre (slow)
Nasdaq --- June (slow)
NYSE --- Deb (fast)

>> people were feeling pretty good about themselves when it came towards $50 and this made a dynamic move back up to $60, which has people nervous.

>> despite the all-time closing high for oil prices today, there was another story about volume. tim jennings, president of vantage trading, said there was remarkably light volume, which affects his view of where prices might go later this week.

>> the market is poised to move to $62 or $63 but i think we didn’t see followthrough, it wasn’t an aggressive rally today so i think a lot of people are thinking whether we’ll sustain the move or pull back from these levels.

>> besides volume, another indication where oil prices might go comes to us from phil roth, analyst with miller tabak. he says we’ll know when the run in oil prices has played out by watching oil stocks.

>> at some point crude will rise and energy stocks will fall, a message that equity investors believe crude has gone too high. that’s the signal i’m looking for.

>> over the last two weeks, ellen, oil up almost 9% in just 14 sessions. back to you.

>> certainly that’s a major focus for investors in the stock market . let’s find out what happened today, what the fallout was of the oil prices. deirdre bolton has the market story.

>> we did see those higher energy prices really keep a lid on stock prices. some say the market is reflecting concern about rising energy costs because they are so far-reaching.

>> the bad thing about high energy costs is it costs everybody, not just you and i in terms of filling up our gas tank and cutting down on the money we might be spending at wal-mart, certainly corporate america, puts pressure on their profit margins, whether to heat or cool a building or transport goods and services, energy touches everybody.

>> for stocks in the energy group, higher prices were a catalyst. valero, exxon-mobil, schlumberger, awful those advanced. energy indexes, by the way, the best performing group year to date. but elizabeth bramwell, she’s one who says that energy stocks can move higher. one reason for that, she cites the outlook for drilling. oil field contractors like baker hughes and weatherford international, also benefited from a bet on future earnings. r.b.c. capital markets upgraded those stocks, saying earnings could be higher than forecast. other groups, though, a little more uncertainty about the outlook for earnings. international paper traded down on the dow after saying quarterly profits would be below estimates.

>> the market is trying to say, we’re not sure how much growth we’ll have in the second half in terms of corporate earnings and also in economic growth and i clearly think the market is a bit confused.

>> on the s&p 500, we recalling grafts. saying the grafts could fray or tear during suregating, so the boston scientific headlines coming out after the close of trading. another focus stock today has been google where shares rose above $300 after less than a year as a public company. june grasso has details.

>> the nasdaq closed lower for the third session, but one stock that bucked the downtrend was google. its shares rose above that $300 level, closing at $304.10. more than tripling since its i.p.o. price of $85, and after less than a year as a public company. cementing the most used search engine status as world’s largest media company by market value. google has a market value of $83.4 billion, surpassing time warner. the telecommunications group was the worst performing economic group at the nasdaq today. the leading mover in that group, comcast, traded higher. on news that the supreme court reinstated federal rules shielding comcast and other cable companies from having to open lines to rival internet service providers. the decision resets the rules governing the nearly $16 billion market for high-speed web connections. earthlink declined. it and other service providers do not have their own direct connection to consumers and purchase wholesale access from phone and cable companies. transportation shares falling again today as oil trades above $60 a barrel. concern that higher energy costs may crimp profit growth, we see airline stocks leading the group down where the cost of fuel is the second biggest expense after labor. northwest airlines downgraded to strong sale from sell at matrix u.s.a. jetblue, ryanair and europe’s biggest low-cost air carrier, all lower. apple, maker of ipod music players, may face competition as cell phone companies and the music industry team up to transform mobile phones into portable music devices. that’s according to “barron’s.” i’m june grasso, bloomberg news, at the nasdaq marketsite in times square.

>> let’s get more on today’s trading from deborah kostroun, filing this report from the big board.

>> oil prices climbed to a record a third straight day, raising concern about higher energy costs and if that could crimp economic and profit growth. one of the things we saw by the close of trading, energy stocks, the best performers, not only today in the s&p 500, if you look at the 24 industry groups, but also, these are the best performers this year. also, oil services putting in a very strong performance. baker hughes and weatherford, third and fifth largest oil field contractors, actually upgraded by r.b.c. capital markets . then, of course, looking at the pipelines like dynegy, the supreme court refused to revive a lawsuit accusing dynegy and duke and other power companies of fixing electricity prices in california during that state’s energy crisis in 2000 to 2001. speaking of the supreme court, take a look at media stocks. media stocks lower even though the supreme court ruled that grokster and internet file-sharing networks may bear responsibility when users illegally download. that was a unanimous ruling by the supreme court. it also revived efforts by a lot of media companies to block unauthorized downloads. remember, that music and film companies lose as much as several billion dollars a year to piracy. although these media stocks were lower, dreamworks higher on the day. cardinal health, biggest drop in the s&p 500. this is the second largest drug wholesaler, saying profit growth in 2006 will fall short of its target for the second straight year as the company fails to increase distribution fees as fast as projected. cardinal stock had their biggest drop in a year. the company, the board of that company, cardinal health, also doubled the dividend to 24 cents a share annually and approved a billion dollar stock buyback.

Interview: BB&T Asset Management

>> oracle, built by larry ellison into the world’s number three software maker, has a new chief financial officer. former microsoft deal maker, greg maffei named c.f.o. and co-president. some say the move signals oracle may step up its acquisition spree. we spoke with maffei by telephone and asked him if that was why ellison hired him.

>> he has a great deal team in place already, and charles phillips has been involved, has a lot of deal experience, as well as larry himself so while i might be a contributor, that’s not my primary function.

>> checking oracle shares at the close. little changed. however, down 9% so far this year. for the last five years, small cap stocks have well outperformed their large cap counterparts. that could change this year. the russell 2000 index, a broad measure of small cap stocks, is down 3.25% so far. over the same period of time, the russell 1000 index of large cap companies down just .9%. john kvantas is portfolio manager with bb&t asset management. he joins us from his firm in raleigh, north carolina, for a closer look at small caps. this is part of our markets at hid year series―midyear series. i want to get a sense from you of why the small caps have started to lag.

>> i think they’ve started lagging earlier this year and continued through first three or four months. i think it goes back to what you said about the valuation differential that has been in place. the small caps were a lot cheaper than the large and that differential has narrowed and large caps have outperformed but we think going forward the rest of the year, as long as the interest rate environment stays the way it is, 10-year going below 4%, we think the fed is more towards the end of their increases than the beginning, we think small caps should do pretty well in the second half of the year.

>> how well?

>> well, i don’t think as well as they had the past four or five years. valuation differentials isn’t that great but we think relative to the midcaps and large caps, that small caps should still do pretty good.

>> in terms of that valuation differential you’re talking about, are there particular pockets where you still see value, where perhaps the gains haven’t been overdone yet?

>> some of the areas we like right now, the energy sector, while it’s done well, we still think there’s a major supply-demand imbalance that will continue to occur so we think there’s opportunities in the energy sector. also, we think consumer-related stocks should do pretty well in the second half. especially those that sell to the higher income consumer. energy prices still probably will continue to increase, we’re hitting $60 a barrel on the oil. but we think the higher-end consumer will not be hurt as much by that and should continue buying and those are a couple of industry areas we like. the bb&t small company value fund, we do a lot of focus on bottoms-up type approach where we look at each company individually so the overall sector outlook isn’t as important to us as the research we do on each company.

>> let’s talk about some of those companies. i know one of your picks that you own in the fund and i want to know if you own it personally, as well, is stanley furniture. do you own it personally?

>> i do not own it personally. we own it in the fund, it’s one of our top picks. it goes back to the consumer-related sector idea of the higher end, higher income consumer doing well and that’s who they sell to. they initiated dividend in 2003, doubled it in 2004 and increased it in 2005. produced solid operating margin and we think the stock is worth $30 and it’s trading in the low 20’s right now.

>> what do you think is the biggest risk?

>> the risk is, i think, the interest rate environment. if interest rates do go up, this is a consumer-oriented company and they may have a headwind if that happens. >> forest oil, another one of your picks. you own it personally. what you do like about it? >> new alliance?

>> forest oil.

>> forest oil. forest oil, i do noten. it’s another one of our top picks in the portfolio. that goes to our energy theme. that’s a company with new management, dag a great job with cost discipline, have deleveraged the balance shot and have made a couple of smart acquisitions in the past few years. we think the stock can get up to $50 and is trading in the low 40’s right now.

>> john, thanks for joining us.

>> thank you.

>> john kvantas of bb&t asset management. taking a quick break, when we come back, “money & sports.” the nba on abc’s tv network, good news for the san antonio spurs last night but may be not for abbas.  abc.
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Listen Market briefing --- Ellen (slow)
NYSE --- Deb (fast)

“after the bell.” i’m ellen braitman. let’s recap the day on wall street. stocks fell, closing at their lows of the day. the benchmark indexes having their steepest weekly decline since april. today’s declines came as oil prices neared $60 a barrel. a government report out early in the day showed an unexpected drop in orders for business equipment. the dow losing 124 points, the s&p today down nine, the nasdaq down 17. and late in the day, we had news on mad cow disease. a second case here in the united states. it did play out for some food stocks. details from deborah kostroun.

>> the u.s. confirming its second case of mad cow disease after a u.k. lab found traces of the illness in an animal that was actually cleared by earlier government tests so there was a discrepancy, one of the reasons they sent it to the u.k. some say the finding may delay attempts to revive the $2.5 billion in beef exports and force a review of the screening methods. however, that animal never entered the food supply, according to the department of agriculture. if you look at some of the food stocks, one of the things that you did see, a glitch in many of those in the last hour of trading when much of that news was coming out. looking at the bloomberg home building index, sharply lower, even though new home sales actually rose to the second highest level on record in may. in fact, home sales rose 2.1%. however that, didn’t impact, have a good impact on homebuilders. they were sharply lower. there’s a lot of concern right now about many of the homebuilders because many of their suppliers having a difficult time because they are dealing with higher petroleum costs and companies like trex lowered their expectations this week saying they wouldn’t be meeting their sales mainly because of higher fuel costs. it does take petroleum to make building products. looking at weekly changes we saw in some of the s&p 500. material stocks, the worst performers on the week. material stocks, as we’re talking about not only alcoa -- alcoa said they were cutting 6,500 jobs mainly because of higher fuel costs. material stocks, the worst performers of the 24 industry groups in the s&p 500. and a subset of those materials, steel stocks sharply lower, hearing not only that prices in europe and also in the u.s. sharply lower but in many of the steel companies saying they would not be able to make many of their extensions for the quarter for the year. back to you in the studio, ellen.

>> thanks so much. another stock on the move today, shares of legg mason. the stock surging to an all-time high. it added a hedge fund and billions of doctors in -- dollars in mutual funds to it’s  its asset management arsenal. legg mason purchasing hedge fund company permal group.

>> legg mason raises its profile with these two purchases, becoming the nation’s fifth biggest money manager. the company, which is based in baltimore, takes over the hedge fund group permal group which manages about $20 billion and puts itself in the fastest growing part of the asset management business. in a separate transaction, legg mason agrees to buy citigroup’s mutual fund unit, paying $21 million in stock and half a billion in cash, that part of the deal valued at $3.7 billion, marking the latest effort by citigroup’s charles prince to shuffle the businesses and sell less profitable parts of the company. one analyst said it’s significant legg mason is entering the booming world of hedge funds.

>> i think the market ‘s reaction says a lot. legg mason is up substantially today. this is a good deal from their end. they’re buying citigroup’s assets on the cheap. this is not going to have a lot of impact from citigroup’s angle in that it was such a small portion of net income but it is good in the sense that they’re going to be able to focus more on their core businesses.

>> david haas who raised legg mason to outperform says this is the biggest, most intox deal legg mason has done, virtually doubling their assets under management to $830 billion.

>> this is something they’ve been doing for decades and i think all the stars were in order for them to pull it off.

>> that’s the view of rick lake, co-chairman of lake partners, in the hedge fund business. banks, chers and―insurers and money management firms have been buying hedge funds to win more businesses from clients with at least a million to invest. this is considered a sweet spot.

>> speaking of sweet spots, we did an analysis and found something very interesting.

>> investors would have done best to invest in shares of legg mason rather than citigroup or even the well known legg mason value trust. the chart shows the 10-year return to legg mason shareholders, the top line in white, up 1,one 17 percent -- 1,117 percent, clearly outperforming the citi shares but what is particularly interesting, you would have been better off buying shares of legg mason the stock versus legg mason value trust run by the well known fund manager bill miller. the red line at the bottom, up 193% over the past decade. miller’s fund has outperformed the s&p every year since 1991 but as that chart shows, it has been trumpd by shares of the company, legg mason. taking a quick break, when we return, we’ll hear from the c.f.o. of oracle.
　

　

　



　

　

　

　

Interview: ABC

>> the san antonio spurs won their third nba championship in the past seven seasons last night but that did not translate into a big win for abc prime time. it was the second lowest ratings ever for an nba championship. and that brings us to this week’s “money & sports.” this week, we’re joined by our bloomberg news reporter. the ratings a surprise. what does it mean for the league and then what does it mean for abc?

>> ratings are relative these days. everything is down. there are so many distractions, on the internet, cell phones, people don’t watch like they used to and ratings inevitably fall even though the spurs have been winning, but they won the night by far, dominating last night, prime time game 7 got a huge audience but overall audiences and advertisers happy.

>> what about abc? abc and espn, $2.4 billion spending over the next six years for the right to air these games. are they getting their money’s worth?

>> probably because they had the seventh game and could sell ads at the higher rate they could charge and advertisers and the network both worry about a sweep. so fact that it went the distance, though the teams and markets weren’t the biggest, the ratings were ok for what they had.

>> other big news on the nba front had to do with the labor agreement. what are the highlights here? what was the surprise?

>> the surprise is that now greece athena highhigh schoolers won’t be drafted. after this year, you have to be 19 to be drafted. the commissioner, david stern, believes you should be more mature before you get into the grind of the nba, physically, emotionally, and every way, going through the glut of high schoolers as we’ve had through year’s past, also a tougher drug policy with more drug testing through the season for both veterans and rookies and a shorter contrast so salaries don’t run away as they have been.

>> let’s turn our attention in the last minute or so to baseball. you have rising advertising prices. why is that―why are they able do this?

>> there’s really nothing else going on, no football yet, basketball is done, hockey is done. everything’s done, just baseball. this is the all-star game, so they’re able to get maximum price, usually linking that ad to other sports events in the year so it’s a win-win, again, for advertisers, as you as they have that dedicated audience.

>> what indication do we have, if any, yet, what will come in the fall and winter in terms of ad rates?

>> ad rates should rise every year for every sport. college football, those are the advertisers sought―pretty good economy for pretty good ad rate increases.

>> now with concerns economic growth may be slowing, any talk they won’t be able to get those increases?

>> that takes a lot of catch-up. most ads are already sold for the super bowl in 2006 so maybe not until 2007 will that be felt. there’s a delay in how the economy today affects ad buying tomorrow.

>> allan, thanks for joining us. every friday we look at “money & sports.” now we’ll take a quick break. when we return, we’ll catch up on the latest world and national news headlines and the “world’s biggest mover” segment. today, tin.
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Listen Interview: Westwood Holdings

>> we’ve been talking about the oil price pressure on stocks. also, today, in terms of the declines we saw, a report showed an unexpected drop in orders of business equipment. this underscores what david spika has been saying about the stock market . david is an investment strategist with westwood holdings group in dallas and joins us as we wrap up our market at midyear series. david, want to start in terms of the oil backdrop. is that, in fact, the biggest stumbling block to investors in the stock market seeing gains from here?

>> i think it is right now. the rally you saw the past few weeks was the market realize that we could live with $50-a-barrel oil but the market is now wondering about $significant-a-barrel -- $60-a-barrel oil.

>> when you look at the declines from the major indexes, on a percentage basis, the biggest we’ve seen if 10 weeks, are you surprised by the extent? do you think it should have been cheaper?

>> i wouldn’t say i’m surprised. the market will be volatile transitioning from a high-growth phase of the recovery into a more moderate growth phase of the recovery. investors are grappling with that, with higher energy costs and grappling with the fed raising interest rates but we are bullish on the market in general, seeing 3% g.d.p. growth in the second half and think stocks can move up from here.

>> bullish, but are you changing your strategy, then, in the $60 environment?

>> no, the way we’ve hedged against high oil prices in the last couple of years is being heavily weighted in the energy sector. we’re bulls in the energy stocks, they’re producing a lot of cash flow, they’re sound and the market is not giving them credit for the price of oil. even if oil goes down to $40, energy stocks can produce.

>> are you boosting the weighting of energy stocks in the portfolios?

>> we haven’t at this point. if we see a significant run in the energy sector, we’ll review valuation levels but we haven’t seen that yet. the market is still not giving the stocks credit, but if we get to a point where we think investors are more bullish on energy, pricing in higher levels of crude oil, we may look to turn back our exposure.

>> what do you think heading towards the second half of the year, that the major themes will be?

>> energy will be a major theme. i’m hearing more people say get defensive, the market is getting weak, the economy is slowing down. i think that will be a theme. we don’t think that’s the appropriate theme. we still think the industrial part of the economy has strength. we’re still big believers in the growth coming out of china, india and emerging markets and the impact that will have on the industrial sector here so we think those things that worked in the first half will continue working in the second half.

>> let’s focus on the industrial theme you think will play out. certainly, it’s a contrarian pick and you had that report today on the durable goods orders indicating perhaps weakness there for the industrial sector. so what specifically are you thinking will 2k3w5eu7b?

>> we’re bullish on commodities. companies that produce copper and produce energy, of course, are industries we think will continue to do well that saw tremendous demand for commodities in the immerging parts of the world and we’re bullish from a general electric benefitting from demand in china and india. these are companies that will grow as china and india grow. it is a contrarian bet but as value managers, we feel pretty good about where we are right now.

>> what other contrarian picks do you have?

>> we are―i don’t know that it’s so much contrarian but we are underweight the healthcare sector and when people start talking about being defensive, a lot of times what they do is jump on to pharmaceutical stocks and healthcare stocks because they’re not necessarily economically dependent but we don’t see value this right now. we see a lot of headwinds for the healthcare sector and are significantly underweight in that sector.

>> overall, what gains are you anticipating in the second half?

>> from this point forward, we think the market can move another 3% to 5%. we’re not looking for huge outsized gains. we think the market will probably trade in a fairly stable range. the one thing that may drive stocks out of the range we’re in is an expectation that the fed is done. once investors believe the fed is done, if the economy is still growing at a reasonable rate of 3% or so, we think that will increase optimism and the market could break from this range and we could see higher gains than we currently expect.

> such as?

>> anywhere from 5% to 10% to higher. if you look to 1995, the market rallied 38% that year. we’re not looking for that but we’re looking for a gain that will be reflective of increased investor optimism realizing, yes, the fed’s done, they haven’t killed economic growth with increased rate hikes, the economy continues to be strong and stocks continue to be the best asset class among major financial asset classes.

>> david, thanks for joining us. our thanks to david spika, investment strategist with westwood holdings group. we’ll talk more about the economy and the bush administration still hopes to overhaul social security and tax code. but will the administration have to money to do this? coming up, we’ll speak with white house budget director josh bolten.



>> sales of new homes rose in may to the fastest pace since october, up 2.1% to an annual rate of 1.29 million. april’s number had been revised lower. that may increase spurred by mortgage rates below 6% and improving job market . also today, the biggest jump in more than a year for orders of durable goods. but it was only because of demand for aircraft. take out aircraft and transportation equipment, and bookings slipped .2%, the third decline in four months, all playing out in the bond market . what happened today, 10-year treasuries rising. reporting the biggest weekly gain in more than two months of the oil also a concern as investors worry the economy will slow. here’s the 10-yearr note, yield at―two-year note -- to get more on our special markets at midiary coverage -- midyear coverage, the bush administration still with hopes of overhauling social security and tax code but will the administration have the money to do this? peter cook is at white house, standing by with josh bolten, white house budget director. peter?

>> thanks very much, ellen. we are joined by josh bolten, white house budget director. thanks for your time today.

>> thank you.

>> i want to ask you at this midpoint in the year, the budget deficit situation, good news in may, the monthly figure, $35 billion, better than many economists expected and congressional budget office saying the figure for the year could be as low as $350 billion. do you have a figure in mind as to what the daest might be this year? >> we don’t have final figures yet. i’ll be announcing those in a little less than a month in our mid session review. all of the figures you cited are right. the deficit picture simm proving and it’s the result of what we see in better economic growth, stronger revenues coming in to the treasury, which is helping improve our deficit picture dramatically while we restrain spending.

>> is it possible the figure could be lower than the congressional budget office estimate of $350 billion?

>> i don’t want to speculate on precise figures yet but april and may were very good revenue months. people are making money and paying taxes, which is what we want to see and it’s coming from both the individual income side, from the corporate side, showing good, across-the-board economic growth in the country and when you go back, you have to credit the tax cuts the president put in place that help restore growth in the economy and are turning around our budget deficit picture so i think we will be headed well on the path toward cutting the deficit in half by 2009 as the president has committed.

>> any concern that some of the figures here may be due to one-time changes. for example, the repatriation, being able to bring back profits from abroad at a reduced tax rate. any indication that is helping?

>> our economists saying we have a bulge in revenue, we can’t count on that bulge year on year so when we put out the figures in a little less than a month, you’ll see a dramatic improvement in the budget deficit figures in 2005 and projecting a more moderate improvement in the out years but it will show us well on the path toward doing better than cutting the deficit in half by 2009. if we get that deficit down around 2% of g.d.p. range or lower, i think almost all economists will tell you that’s a very comfortable place for the country and this economy to be. we want it ultimately to be to zero but we’re on a good path.

>> let me ask you about the spending in congress. the highway bill, the president has threatened to veto a highway bill above $200 billion. is he still prepared to veto anything above $285?

>> i don’t want to talk about veto when they’re making such good progress. last year, the house passed a bill with $375 billion over six years and the senate came in at $320 billion and this year the president said we need to keep it

Nasdaq --- Robert (slow)
Oil market --- Su (fast)

>> stock indexes ending the day pretty much unchanged on the day. earlier, the nasdaq composite touched a three-month high. we’ll get the details from robert gray.

>> thanks. touching that three-month high right out of the gate, first couple of minutes of trading today, above that 2100 level, we’re bumping up against it and going through it for the first time since march 27. have not closed above that level. two of those times the first two trading days of the year and the last time, january 18. this is year-to-date on the nasdaq composite and you can see the peaks and valleys but not able to reach 2100. this was earlier this month, june 7, closing at the level just below it. but we did see 1.6 billion shares as there is afternoon buying coming in, the past several sessions, lifting the nasdaq composite higher .5% today. i spoke with steve massocca with pacific growth equities, talking about the 10-year note’s rally, yield below 4%. he said this is good for stocks as it’s counteracting higher crude prices and he says it’s really good because with such low yield, investors will have to move more money into equities to find better returns and help future earnings if yields are lower. some of the stories on today’s session, june talking about ameritrade, those shares surging 21%. google shares rising .5% as google officially announcing its payment service program in which you can go on line and buy goods using a payment service program. ebay shares falling as “wall street journal” say they may lose market dominance, facing competition from google. research in motion rising 6%, best performer on the nasdaq 100 as there were developments in its patent dispute with n.t.p. that’s all the time we have here.

>> we do have time to look at what’s happening with oil. we’ve heard all of our market reporters touch on the market story as it weaves through everything investors are doing these days. prices influenced as norwegian oil workers avoided a strike that might have slashed production in half. su keenan has the details.

>> the energy department’s latest survey of u.s. energy supplies is a big driver, showing gasoline stockpiles rose almost eight times what analysts predicted and supplies of crude oil fell by 1.6 million barrels last week, less than expected. supplies of distillate inventories, including heating oil and diesel fuel, were also higher, although they didn’t rise as much as forecast. a.g. edwards’ big o’grady says investors are focused on the winter demand for heating oil.

>> it’s running almost 7% above where we were last year. these numbers are indicative of a very strong economy and i think that’s what’s buoying the market , keeping it strong, not the inventory data which, frankly, inventory levels are pretty comfortable. it’s the demand numbers that are spooking people.

>> many investors are focused on the forward contract, the chart for the october nymex futures where prices have surged above $60 several times this week at a time when this has not happened for the august crude futures contract and just expired july contract. the analyst with john henry company says this is a signal of growing future demand.

>> if there really was a short-term supply congestion problem, you would have the opposite with nearby futures contracts higher priced than the back months. what we’re seeing is there’s expectation of stronger demand in the market and that’s what’s driving prices.

>> meantime, indonesi’s governor to opec said the cartel expects nymex furets to trade above $49 until the end of the year. wilbur ross says the world’s rising standard of living in countries such as china will be favorable for commodities in the long term. >> china has become the second largest importer of oil in the whole world after us and in many, many commodities, china is an important factor in the import market so there’s a new dimension added as that part of the world industrializes.

>> nymex crude oil futures up 52% from a year ago, down $1 today. back to you.

>> thanks so much for that story. also making news today, europe’s largest defense company will build an engineering plant in the u.s. eads has chosen a site in alabama and may be expanded to build airline re-fueling planes for the air force. boeing lost that contract because of impro prieties by the company. eads also competes against boeing and boeing shares are the best performers so far this year in the dow industrials. a world and national news update comes your way straight lady and we’ll look at morgan stanley earnings out before the bell.
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Listen Market briefing --- Ellen (slow)
Brokerage industry --- June (slow)
Interview: Chinese currency

>> ameritrade buying toronto dominion bank for $3.3 billion, surpassing charles schwab as the biggest online trader. it says the deal will add to earnings within 12 months. the company will be led by ameritrade chief executive joseph moglia. the other story is the decline in crude prices. oil fell after an energy department report showed u.s. inventories dropped less than forecast. to see how this played in the market today, how the numbers settled, you saw stocks little changed. keep in mind, this was a day when bond yields for the 10-year treasury fell below 4%. half the groups in the s&p ended the day higher and half declined. let’s start off by getting details on the ameritrade deal. the company buying rival t.d. water house for $3.3 billion in stock. june grasso has more on the takeover and imlications for the online brokerage industry.

>> shares of ameritrade, fourth largest discount broker, rose as much as 21% on news of the deal. this will be at least the seventh acquisition in four years by chief executive joseph moglia who will be the c.e.o. of the combined company. it comes after ameritrade rejected an offer from etrade financial.

>> etrade seems to be left out of the party. in terms of ameritrade, it depends on your perspective. for a short-term investor, you would have liked to see ameritrade take $17.50 a share but for a long-term investor, ameritrade, t.d. water house, may be able to provide better value down the road.

>> under the deal, ameritrade will purchase toronto dominion’s american brokerage for $3.3 billion. ameritrade shareholders will receive a special cash dividend of $6 per share. ameritrade cut its earnings forecast this year as trading fell 14%. rivals, including schwab and fidelity investments, cut fees to gain market share as internet trading in general flowed. ameritrade’s total customer accounts would rise to almost six million from the current 3.7 million. t.d. waterhouse’s 106,000 daily average trades in the first quarter would have help ameritrade surpass those schwab reported. fisher says the acquisition will have no real impact on customers, but online traders will see commissions get lower.

>> in general, commissions per trade are coming down. regardless of the merger, we think it will trend downward so as far as impact on the customer, we think any impact would likely be benign.

>> fisher says etrade may try to acquire smaller online brokers to increase scale, companies such as harris direct or scott trade if they come into play.

>> with that, let’s turn our attention to the markets to get more on what happened in stocks today. oil is a big part of the story and deirdre bolton has an overview.

>> although we see oil off these highs, it remains around $58 a barrel. one analyst says investors have nothing to focus on except higher oil prices and slightly slower industrial growth. other investors say that with the economy growing between 3% and 3.5%, high energy prices are no longer having the same effect on stocks.

>> i believe the market is no longer certainly trading on that inverse relationship between equity prices and oil prize and i think that’s truly a function of the market ‘s acceptance that energy as a percentage of total business costs might be 10%, a little less than 10%.

>> one group grapbling with increased business costs, u.s. automakers and suppliers of auto parts, they saw the largest declines today. ford declining after the company lowered its 2005 earnings forecast. moody’s and standard & poor’s say they may reduce the company’s credit rating. financial companies, on the other hand, rose. bank of america advanced after boosting its quarterly dividend 11%. other banks, including j.p. morgan, merrill lynch and citigroup gained. financials may be signaling investors’ confidence in the economy.

>> steady fundamentals in spite of short-term day-to-day trading volatility, the steady fundamentals of 3% to 3.5% economic growth, 8% profits and potentially the end in sight to the tightening, all these factors are keeping equities higher at this point.

>> stocks including exelon and edison international reached record prices. year to date, utilities with the second biggest percentage gain in the s&p 500, just behind energy stocks.

>> energy stocks up 21% so far this year. thanks so much. turning our focus to what investors can anticipate tomorrow. china in focus on wall street and in washington. federal reserve chairman alan greenspan and treasury secretary john snow both scheduled to testify before the senate finance committee to discuss u.s.-china relations. for a closer look at china, we’re joined by carla hill, u.s. trade representative under president george bush sr. let’s start off with the significance, what is the significance of both the fed chairman and treasury secretary speaking about china before congress?

>> congress is very interested in china. they’re actually quite exercised, bills this year to impose penalties on china for a range of activity, the currency and trade deficit and the like and i think they want the economic team to come in and talk.

>> what can we anticipate hearing from each of them. we’ve had each of them speak out, particularly the treasury secretary, on the china front. any sense of what we could hear specifically?

>> i would guess he would agree that the chinese currency is undervalued. in my own personal opinion, i wouldn’t assume to speak for him, it’s slightly undervalued, 10% to 15% but we ought not to look for a change in that as correcting the problems we’re focused on, our trade deficit and the imbalance in the world. it’s more complicated than that. if we were not to import anything from china in the year to come, we would still have a growing trade deficit.

>> in terms of the revaluation, when do you think, if it happens, it may come?

>> i don’t know when the chinese will decide to act. i do believe that all of our very loud public proclamations present a problem. china’s beset with a lot of hot money coming into its economy as speculators assume that, with the pressure from the united states, they will be forced to revalue. and that hot money creates liquidity which goes into the financial system and we have so many of the bank loans, about 40%, that are non-performing. you know, we don’t want china to have economic difficulty. we want china to be a second engine of economic growth. and were its banking system and financial setup to have an implosion, that would have repercussions that would make the asian financial crisis look like a tiny little problem.

>> in terms of the hot money, where, specifically, do you see it coming from?

>> globally, as people are speculating. first they believe, as do i, that the currency is a bit under valued, not the 40% that some have stated and some of the bills that are in congress would slap a 27.5% tariff on all chinese goods. this makes no sense at all. it would hurt the u.s. economy enormously and in fact it would violate our world trade organization commitments that we’re urging china to adhere to so it’s very bad public policy.

>> to clarify, what specifically do you mean by hot money?

>> going in, buying up the currency and hoping that it appreciates so you can get the differential.

>> we’ll thank you very much because we’re out of time.

>> a pleasure.

>> ambassador carla hill, chairman and c.e.o. of hill and company. we’ll carry that greenspan and snow testimony live tomorrow starting at 10:00 a.m. washington time. when we return, we’ll head to the nasdaq marketsite for an update. this is “after the bell.”

Interview: Jabil Circuit

>> earnings out after the bell from the contract manufacturer jabil circuit. what jabil said is, excluding items, it earned 33 cents a share in the company’s recent quarter. it had been expected to earn 33 cents so matching analysts’ expectations. sales coming in in line with analysts’ forecasts at $1.9 bill. the company saying that for the fourth quarter it anticipates earning 35 to 37 cents a share. analysts on average anticipating 36 cents. in terms of fourth-quarter sales, jabil is forecasting two to $2.1 billion in sales. analysts, just over $2 billion at $2.03 so sales potentially coming in stronger than anticipated. human genome sciences, a company with a mission, maker of gene-based drugs, trying to get it first drug to market , currently with seven candidates in clinical development. suzy assaad spoke with the chief executive, thomas watkins, about the company’s future.

>> on the vernal of having a couple of drug candidates about to move into phase iii and we’re very excited. our focus as a company is on commercializing promising drug candidates, all of which come out of the genomic discovery that our company was founded on 13 years ago.

>> tell us about when you expect these products to get into phase iii and of course, the question, when will you have the first drug on the market ?

>> predicting when a drug will be on the market is sometimes difficult because there are many factors that come together. but we have our two lead compounds in terms of time, at a stage where we are just now unblinding phase ii results. some earlier this year and some later this year, that will allow us, together with the f.d.a. and our partners, make decisions about moving the candidates forward. i would say, in the next few months, we will likely be a company with at least one phase iii candidate moving forward.

>> the company was founded in 1992 by the former c.e.o. why did it take so long from 1992 up until this point to get a candidate into phase iii?

>> well, as you know, the company is based on or founded on the genomics technology or area of genomics and our founder, my predecessor, distinguished scientist and pioneer in research, had the vision of taking the power of genomics and translate it into promise therapeutics and all of us have realized that doing that takes a lot more time and a terrific combination of scientific skills brought together so it’s taken us longer, as all companies have found, to harness the power of genomics and we’ll do it.

>> when you say “harness the power of genomics,” what treatments eventually do you think you will be able to produce?

>> we have three programs, now, one in immunology, in the area of immune suppression. one in the area of hepatitis b treatment and one in cancer. two of those three programs are based on genomic technology, genomic targets from our original work in genomics research more than a decade ago, very promising areas that a number of companies are working on but are exciting for providing new therapies to patients in need where we’re very excited about moving them forward as quickly as we can toward commercialization to help patients.

>> can you give us a ballpark of when commercialization may happen? five years, a couple of years?

>> i’d say within the next few years. it’s difficult to predict when we’re still unblinding clinical results. within the next few years, we have two of these compounds that we’re very excited about for the near term and that depends upon what the phase ii and early phase iii drugs show us. are the drugs safe, are they effective? how do they compare to existing therapies in the market ? i would tell you, within the next relatively short period of time, hopefully measured increasingly in months, not years, we’ll be a commercial company.

>> that was thomas watkins, chief executive of human genome sciences. sticking with healthcare stories, americans with private health insurance got no reprieve from cost increases last year. medical expenses for each person rose 8.2%, the same rate of increase seen in 2003. this, according to a new study. and for the fourth year in a row, employers in 2005 increased workers’ share of the cost of health insurance. employees paid high deductibles and co-payments. prescription drug payment accounted for 21% of the overall increase in healthcare spending. drug costs rose at a rate of 7.2%, slower than the nearly 9% pace in 2003. the study was conducted by the center for studying healthcare system change. taking a break, when we return, a little more than a week from the next federal reserve decision on interest rates. big names disagreeing about what the fed in fact will do and after the break, we’re going to hear from pimco’s bill grows and morgan stanley―bill gross and stephen roach.
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Listen Market briefing --- Ellen (slow)
Trade today --- Deirdre (slow)
NYSE --- Deb (fast)
Nasdaq --- Robert (slow)

bell.” ford motor cutting its 2005 earnings forecast for the second time since april. profit expected to be $1 to $1.25 a share if you exclude costs, compared to the company’s previous forecast of $1.25 to $1.50 a share. the company said it would cut 5% of salaried positions in north america and eliminate bonuses for salaried management employees. ford cited expectations for lower vehicle sales as well as weaker results in the north american region. the other big story this tuesday, crude oil. prices fell but not before reaching a record price for a third straight session. there is speculation the energy department report, due out tomorrow, may show inventories of diesel and heating oil did, in fact, rise. prices have surged on concern there will not be enough supplies to meet peak demand in the fourth quarter of 2005. futures went from a session high of $59.70 a barrel to a session low in the final hour of floor trading. other energy prices today where we saw declines for gasoline, heating oil, as well as natural gas futures. and in terms of stocks, certainly the influence of oil was felt. the s&p declined as energy shares were the biggest drag on the index. the nasdaq ending the day up .1%, lehman brothers upgraded the telecommunications chip industry. let’s find out more about the influence of oil during the trade today. we have deirdre bolton joining us with a closer look. deirdre?

>> we did, in fact, see, about, well, 15 of the groups we track on the s&p 500 closing lower. that would leave us with nine that closed higher. some say oil at these levels is holding the market back.

>> oil gets into record territory, definitely puts a brake on the stock market . you look at how oil has impacted the stock market in the last year. when oil is up, the market really can’t go up. and we’re subject to the potential for a type of shock.

>> counter intuitively, energy stocks were the biggest drags on the market . exxon-mobil, conocophillips and marathon oil moved down on the session but the group is the best performing year to date, up 22%, versus the s&p 500’s unchanged level for the year. higher energy prices hurt retail stocks. home depot, lowe’s, limited and target declined, the thinking that more consumers pay at the pump for gasoline, the less they are likely to spend elsewhere. higher energy is not the only factor influencing trade. some say markets have resisted further declines in the face of higher petroleum because the fed might soon stop raising rates.

>> the other news is good if you look at where we are in the interest rate cycle. we are close to the end of fed tightening. that’s why we see an underpinning of demand for securities.

>> bank such as washington mutual, fifth third bancorp and bank of america all rose. semiconductor stocks closed up, intel, texas instruments and broad broadcom advanced after lehman brothers upgraded its investment rating on the industry. part of the reason for the call, compelling valuations.

>> we’ll continue the look at the market . we have deborah kostroun file this report from the big board.

>> crude oil touched another record high but we didn’t close on that. we saw a reversal in crude oil. it closed lower. this is on ideas that maybe the energy department report tomorrow may show rising u.s. inventories of oil and so one of the things we also saw, our largest one-day slide for the s&p 500 energy index in almost six weeks was also the biggest drag of the 24 industry groups in the s&p 500. 28 members of that index were lower, only one was higher on the day, that was unocal. unocal at a record high. that after cnooc saying it may bid $20 billion for unocal, challenging chevron’s bid for that company. a lot of questions about supplies and china using a lot of fuel supplies as their g.d.p. growth and in fact we just heard yesterday that china increased their production of steel by 38% during the month of may. now, it looks like nucor, which is the number two u.s. steel producer, saying their second-quarter profit will be near the low end of their april forecast, because of a decline in the price of scrap steel and all of this comes as china is actually increasing their production and it’s really causing price declines not only in the u.s. but also in europe. looking at the biggest gainer in the dow jones industrial average, that was hewlett-packard on the day. shares at their highest price since late january 2004. hewlett-packard rated a new buy in coverage by an analyst at solay securities, with the price target of $29 a share. a jury says boston scientific stents infringe on two patents owned by johnson & johnson which may cost boston scientific almost $2 billion in damages. that stock was higher while other medical device makers were lower on the day. i’m deborah kostroun at the new york stock exchange for bloomberg news.

>> at the nasdaq, tech and telecom stocks helping lead the nasdaq higher. robert gray filed this report.

>> the nasdaq higher in the session, the only one of the three major averages to post gains in the session which saw crude oil rise to record levels on the nymex before closing lower on the day. looking at the trading in industry groups, computer-related shares the best performers. telecom stocks rising and transports were higher. the big weakness in the biotech group today. one of the calls helping boost stocks in the session came from lehman brothers raising semiconductor stocks to a positive from a neutral. that pushed the philadelphia semiconductor index higher on the session. the s.o.x. had risen 15% from april 15 through june 2 and had been―is now down still some 2% for the month of june. lehman says they see improving profit margins for the chip stocks and chip companies and improving stock performance for the chip shares. pmc-sierra rising on the day, lehman upgrading it to equal rate, raising the target to $10 for p.m.c. intel and broadcom rising, as well. peter boockvar from miller tabak saying lehman’s call helped the action but the trading was more that the market drifted to the path of least resistance, which was higher for nasdaq stocks and reality will come with preannouncements in the coming few weeks and earnings come in no better than in line because a stronger dollar will be a headwind to upside surprises. thomson financial saying the ratio of s&p 500 companies lowering earnings forecasts to those making positive surprises is the highest since the first quarter of 2003. biomet, one of those, came out disappointing investors with its forecast and those shares falling. gilead with a negative as merrill lynch saying they expect negative growth there. at the nasdaq, i’m robert gray.

>> deal news to report. china’s biggest offshore oil and natural gas producer may make an offer for unocal and if so, it would top the bid by chevron. cnooc may offer $20 billion in cash, according to those familiar with the plan, topping an offer from chevron by 15%. the offer of $71.50 a share, also 8% higher than unocal’s closing price yesterday. cnooc would have to pay chevron a half billion dollar breakup fee. even with the high price, investor marc faber says cnooc has nothing to lose.

>> would look in the future very smart and if the price goes down, it still forces the american hand in approving it and showing the chinese can acquire assets that are part in the u.s.

>> china is the world’s second largest user of oil after the u.s. and the chinese government is allowing companies to expand abroad in order to gain access to raw materials to meet demand in the $1.65 trillion annual economy. even more news out of china on the deal front. higher group, refrigerator maker, has partnered with two buyout firms to offer about $1.3 billion for maytag, a 13% premium over the offer maytag accepted may 19 from a group led by ripplewood holdings. the latest offer comes from a partnership between higher along with bain capital and blackstone group. a.g. edwards’ analyst bill o’grady says the move reminds him of the japanese move about 15 years ago when japanese firms turned from investing in treasuries to u.s. companies.

>> i think it’s a broader theme we’ll see accurate in -- accelerate in coming months as china tries to diversify its dollar-based asset class away from just holding treasuries to more direct investing in other assets.

>> when we return from the break, human genome sciences has seven drug candidates in clinical development but yet to get his first product to market . what does the c.e.o. have to say? we’ll tell you straight ahead.