Moneyline News Hour

Dow Drops 162.26 to 11,560.72; Nasdaq Gains 60.54 to 4,130.81; Microsoft Beats Profit Expectations; Gap Between Rich and Poor Growing

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WILLOW BAY, CNN ANCHOR: Tonight, a double shot of after-the-bell news from Microsoft: beating profit expectations, and blasting back at the judge who branded the company a monopoly.

STUART VARNEY, CNN ANCHOR: On Wall Street, the Nasdaq comes within a point of a record, but the Dow tumbles as the bond market faces yet more punishment.

BAY: One reason bonds took a beating: Fear of a red-hot oil market turning white-hot today, as deep freeze whips the Northeast.

VARNEY: And it's an unprecedented economic boom, especially for those with a stake in the roaring bull market. But what about those left behind? We'll have a special MONEYLINE report.

ANNOUNCER: This is the MONEYLINE NEWS HOUR.

Reporting tonight from New York, Stuart Varney, and from Los Angeles, Willow Bay.

BAY: Good evening. Microsoft delivered two urgent messages after the bell today.

VARNEY: One to Wall Street, the other to Washington. The software giant issued a better-than-expected profit report on the last quarter of the 20th century. Then, just minutes later, Microsoft filed a formal response to the findings of fact in the U.S. versus Microsoft, in which a federal judge pulled no punches, calling the company a monopoly.

We begin with the financial outlook for Microsoft, which is trading lower in late trading, even though profits did beat predictions.

Bruce Francis joins us now to tell us why -- Bruce.

BRUCE FRANCIS, CNN CORRESPONDENT: Stuart, it certainly was a difficult quarter for Microsoft in the courtroom. But it was a record quarter for the company's top line. Microsoft's sales jumped 18 percent from a year ago to more than $6 billion. That helped Microsoft beat earnings forecasts by a nickel a share. Earnings came in at 47 cents, excluding a one-time charge to pay a legal settlement. Microsoft credited strength in its Office 2000 software and solid demand in Asia for the better-than-expected results.

But as is usually the case, Microsoft's strong results were coming with some warnings. Microsoft said it experienced slowing demand for PCs during the quarter, and the company's new CFO, John Connors, said on a conference call that he is cautious about PC demand in the near future, and he expects moderate sales growth for the fiscal year. And he told analysts not to raise their current estimates for the next two quarters. But analysts say it is not unusual for Microsoft to see a slowdown ahead of a big product roll- out. That's Windows 2000, and that will be available early next month.

Microsoft stock is trading down 2 3/8 in after-hours trading, after running up $3 in the regular session. I'll have more on the earnings report later on MONEYLINE -- Stuart.

VARNEY: They always try to talk it down for the future.

FRANCIS: Just a little bit -- cautions everywhere.

VARNEY: Every earnings report is always the same.

FRANCIS: Yes, although they were a little bit more upbeat last time, so a little bit of a change in tone.

VARNEY: Fair enough. Bruce Francis reporting -- thanks very much, Bruce.

FRANCIS: A pleasure.

BAY: While Microsoft's number crunchers were hard at work today, so were its legal eagles. The company filed a formal response 2 1/2 months after a federal judge sided with the government, finding that Microsoft is a monopolist that harmed consumers. The brief, no surprise, says the so-called findings of fact are unsupported by the record. It goes on to say that -- and I'm quoting -- "Having an extremely popular product does not make a company a monopolist."

We'll have more on this story later on MONEYLINE.

VARNEY: Well, as we told you, Microsoft is indeed down in after- hours trading, but during the regular trading session it was one of just eight lucky blue-chip stocks to end the day in the plus column. The Dow hastily retreated from Friday's record, crushed by soaring bond yields. But those yields did nothing to pry investors away from tech stocks, oh, no -- they brought the Nasdaq fractions away from another new high.

Susan Lisovicz reports.

(BEGIN VIDEOTAPE)

SUSAN LISOVICZ, CNN CORRESPONDENT (voice-over): Interest rates continued their steady climb higher, but Wall Street was split on assessing the impact. Technology stocks shrugged off the interest rate threat, especially Internet and computer-related issues. The Nasdaq composite surged 66 points to close at 4130, less than a point shy of its all-time high.

KEITH MULLINS, SALOMON SMITH BARNEY: The fundamentals for many of these technology stocks remain absolutely spectacular. Their earnings outlooks are terrific, and as a result, you know, I think that they will come through this period again establishing the leadership position, but I think that's sometime in the summer.

LISOVICZ: Smaller stocks put in another strong showing. The Russell 2000, which Friday set a new high on leadership from small-cap tech shares, surged nearly 2.5 percent to 513.43. But the Dow Jones industrials fell 162 points to 11,560 after setting a record Friday.

Economically sensitive issues General Electric, International Paper, and Alcoa got a shave, while top-flight financials American Express and J.P. Morgan withered. Cold weather pushed crude oil prices to the highest level in nine years, hurting transportation issues. The Dow Jones transportation index fell 38 to 2853. The 30- year benchmark Treasury lost 21/32 of a point, sending the yield up to 6.74 percent on concerns higher-priced oil may hint of inflationary pressures.

But some market watchers think the bond market is overreacting.

DONALD SELKIN, JOSEPH GUNNAR: If you look at the oil-futures market, it's actually signaling that oil prices will come down, because if you look at the current contract, it's around 28 and change, and if you look six months out, it's 24, and if you look a year out, it's 21. So I think the bond market's fear of inflation from the oil sector is a little misplaced.

(END VIDEOTAPE)

LISOVICZ: Those inflation concerns will compete for attention tomorrow as the landslide of corporate-earnings reports continues. Among the A-list set to report tomorrow: America Online, Chase Manhattan, IBM, and Apple Computer -- Stuart.

VARNEY: Susan Lisovicz right down there at the Big Board. Thank you, Susan.

BAY: The Nasdaq delivered an impressive performance today, even with bond yields at their highest point since June of 1997.

Charles Molineaux joins us now from the Nasdaq market site with a look at how tech stocks soldiered on -- Charles.

CHARLES MOLINEAUX, CNN CORRESPONDENT: It was earnings again, Willow. Last week's earnings from Intel were good news, and the expectations for Microsoft today were bullish -- correctly, it now turns out. So technology investors moved into buy, and sent the Nasdaq composite up to less than half a point away from a new record close. As big -- big cap, of course, Microsoft's strong performance played a major role in the lift in the composite today. But the rally also had some breadth to it. Stocks that went up outnumbered those that went down by 10-to-7. Biotechnology stocks led the market higher. They gained 2 1/2 percent. ViroPharma has surged amid excitement over a drug in development that could fight the common cold. Biogen gained, thanks to a bullish analyst upgrade.

Internets were mixed. As a group they gained only fractionally. Big names Yahoo! and CMGI fell. But domain-name registrar Network Solutions surged after the Supreme Court said fees it charges are legal.

Telecom stocks are up 1 1/2 percent, helped by JDS Uniphase and E-Tek Dynamics. JDS is buying E-Tek, and they both gained on the day today.

Tech stocks generally managed to defy today's deteriorating bond market and rising interest rates, but not the financials and bank stocks. Financials fell by 2 percent on the day today. Knight/Trimark and Zions Bancorp. shriveled on the day, and stock strategists say the bond market cannot keep falling and interest rates can keep rising without eventually bringing even these robust tech shares up short, but for the time being, earnings rule, and earnings certainly do look good -- Willow.

BAY: OK, Charles. Thank you, Charles Molineaux, at the Nasdaq.

VARNEY: It's that time for a look at some of the other stories that our reporters are preparing for tonight's broadcast, and we'll kick off with a preview from Steve Young -- Steve.

STEVE YOUNG, CNN CORRESPONDENT: Thanks, Stuart. I'll have the latest grenade tossed from Redmond to Washington. Microsoft's formal response after being labeled a corporate predator by the government and a federal judge.

ALLAN DODDS FRANK, CNN CORRESPONDENT: I am Allan Dodds Frank. Glaxo SmithKline will be the world's biggest drug company if the merger goes through, but that doesn't make the deal popular with investors. I'll tell you why.

KELLI ARENA, CNN CORRESPONDENT: And I'm Kelli Arena in Washington. The economy is roaring ahead, but some are being left behind. I'll have more on the widening gap between the richest and poorest Americans -- Stuart.

BAY: Actually, thanks, Kelli.

Also coming up on MONEYLINE, e-Toys fights to shake off its post- holiday slump. I visited the company's headquarters today and asked the CEO what he is doing to relight the fire under his companies shares.

VARNEY: Plus, an earnings bonanza for the banking sector. But what happens when you factor in bonds? We'll tell you after this break.

ANNOUNCER: The MONEYLINE NEWS HOUR continues.

(COMMERCIAL BREAK)

BAY: A blockbuster reaction today to a merger between two telecom equipment makers. JDS Uniphase said late yesterday it will buy E-Tek Dynamics for $15 billion in stock. The two companies said the deal stems from explosive growth in the telecom industry and will help bring products to market faster.

Earlier on CNN, the CEO of JDS Uniphase spoke about the prospect of its fiber optic products.

(BEGIN VIDEO CLIP)

KEVIN KALKHOVEN, CO-CHAIRMAN & CEO, JDS UNIPHASE: The reality is the bandwidth is the new, if you like, silicon of the next decade. I mean, as we saw, computers, and microprocessors and silicon dominate the '80s and '90s. It's my absolute belief that bandwidth is going to dominate technology and society in the next decade, and JDS Uniphase is a prime supplier of technology to that revolution.

(END VIDEO CLIP)

BAY: Checking Wall Street's reaction: E-Tek Dynamics soared 42 1/2 to a new 52-week high. JDS Uniphase gained 3 1/2.

VARNEY: In other merger news, Citigroup is expanding its presence in Europe. Today, the financial giant said it will buy the investment banking division of Schroders for $2.2 billion. Schroders said it will use the money to focus on its asset management and private banking divisions. The British bank's worldwide investment banking arm will be merged with Citigroup's Salomon Smith Barney unit.

BAY: Citigroup also making headlines on the earnings front. And it wasn't alone on this Super Tuesday, as Wall Street received a slew of results from the financial sector.

Greg Clarkin has more.

(BEGIN VIDEOTAPE)

GREG CLARKIN, CNN CORRESPONDENT (voice-over): Wall Street's version of Super Tuesday was a battle of bonds versus the bottom line. Banks and brokers reporting eye-popping profits, but rising bond yields keeping their stocks under wraps. Citigroup saw fourth-quarter profits almost triple, 5 cents per share better than expectations. J.P. Morgan, $2. 63 a share in earnings, well above estimates. And PaineWebber easily beat estimates.

DONALD MARRON, CHAIRMAN & CEO, PAINEWEBBER: Economic growth, low inflation and the flow of funds into the market have been driving the market. If higher interest rates are the function of inflation, that would be an issue. If they're the function of the Fed trying to moderate the economy, most people would think that that's relatively healthy. CLARKIN: But interest rates in the bond market have been climbing steadily for two months and are now at 2 1/2 year highs, and that's cast a cloud over many financial stocks.

TONY DWYER, KIRLIN HOLDINGS: At this point, the bond market is going to be under pressure, financial stocks are going to be under pressure until we get this meeting out of the way.

CLARKIN: That meeting, of course, is the Federal Reserve's, in the first days of February, and a rate hike is expected by many. Despite the near-term pressure on their stocks, large, diversified banks such as Citigroup are holding up well. Its shares are up more than 30 percent over the last few months, and deal-making could support others in the sector.

LISA WELCH, JOHN HANCOCK FUNDS: I think we're going to see more consolidation in the industry, in the whole financial services industry, and, sort of, type of company consolidation, meaning insurance company and bank, and brokerage and bank.

CLARKIN: Only a few, such as Wells Fargo and U.S. Bancorp, missed earnings estimates today, and their stocks sold off. But then again, so did the earnings winners.

(END VIDEOTAPE)

CLARKIN: And while the financial sector may suffer as interest rates rise, banks and brokerages at the top of the food chain may reward investors anyway, with profits fattened by service fees and trading income -- Willow.

BAY: Thanks, Greg. Greg Clarkin reporting.

Checking how some of those financial stocks fared today: J.P. Morgan down 4 3/4, Citigroup and PaineWebber ended fractionally lower. Wells Fargo down more than 2 3/4. And U.S. Bancorp lost nearly 1.

Here's coming up: a tough time in e-toyland -- sales are rising, but so are costs.

BAY: My interview with E-Toys chief Toby Lenk; that's when we come back.

(COMMERCIAL BREAK)

VARNEY: Raytheon tops tonight's "MONEYLINE Movers," down 6 3/8 to a new 52-week low. The defense firm issued another earnings warning. It expects fourth-quarter profits to miss estimates by more than 50 percent. Raytheon blamed production and shipment delays. And then there's Citrix Systems, up 17 to a new high. C.S. First Boston repeated its strong buy rating. It expects the software firm to report strong fourth-quarter profits first thing tomorrow morning. Entremed up 7 5/8. It will help fund cardiovascular research with the Children's Hospital in Boston. The research will involve endostatin protein, which blocks the blood supply to cancerous tumors. And then there's PSINet, up more than 7. The Internet service provider announced a two-for-one stock split. Robertson Stephens also raised its 2000 revenue estimates and repeated its buy rating.

BAY: Some changes at the nation's biggest mutual fund. As of the end of last month, Fidelity Magellan increased its technology investments to 27 percent of its assets. That's up from nearly 24 percent a month earlier. Manager Robert Stansky also cut back the fund's stake in the finance, health and utilities sectors. Here are the changes to Magellan's top-10 holdings: Exxon Mobil, Texas Instruments were added to the list, and Microsoft became Magellan's largest holding, which forced General Electric into second place. Two stocks got pushed off the top-10 list entirely, Merck and MCI WorldCom.

VARNEY: In tonight's other corporate headlines: It will move more natural gas than any other energy company in the world, bar none. El Paso Energy buying Texas Rival Coastal for nearly $10 billion in stock. El Paso already runs the biggest natural gas pipeline in North America. Together, the two companies will have more than 58,000 miles of pipe. Shares of coastal, up nearly 3. El Paso Energy down more than 2, and then there's ABN Amro. It plans a major restructuring. It's the largest Dutch bank, and it's going to cut 2,500 jobs; that's about 10 percent of its work force. It'll take five years to do that. ABN Amro will also close 150 branches as it tries to compete with Internet-based banks.

BAY: This past holiday shopping season was a make-or-break time for online retailers. And one company that came under particularly harsh scrutiny is E-Toys. The stock, which went public last May, took a nosedive last month and is now down 76 percent from its high. Earlier today, I caught up with E-Toys chief executive Toby Lenk and began by asking him, what happened to the stock?

(BEGIN VIDEOTAPE)

TOBY LENK, CEO, ETOYS: When you look at Internet stocks and their performance, there certainly is a lot of volatility, but the reality is, we're a long-run investment play, we're targeting over $250 billion spent on children worldwide, and the fundamental long-run opportunity that E-Toys is trying to tap is the same today as it was 8 months ago when we went public.

BAY (on camera): Did Wall Street overreact?

LENK: I, you know, I never criticize Wall Street. You know, I think what we try to stay focused on the fact we're trying to build a long-run brand, and the stock is going to go up, the stock is going to go down, and you know, investors should think about us a long-run investment play. They shouldn't think about us month to month. And that's how we try to focus on it around here.

BAY: I know you're releasing earnings next week, but can you give us a sense of how the holiday season was for eToys?

LENK: We accomplished a lot in the holiday season. We went in the leader in the children's space; we came out the leader in the children's space. We were the second-busiest e-tail destination overall. We crossed 1.5 million customers who purchased from us. That's over a 250 percent increase from just the end of September.

BAY: Now you also encountered some difficulties. You, going into the holiday season, had an absolute flawless reputation for executing those orders, then had some problems. Is that -- how do you repair that damage to your reputation?

LENK: The reality is, you know, as I said, we, you know, processed well over a million orders, and the vast majority -- well into the 90s in terms of percentages of those orders -- were on-time and accurately delivered.

There were some orders that weren't, and even if we had just one order out of well over a million that was not on-time or accurate, that's not good enough. But the quality of what we did in the holiday season can't be underestimated. We were very, very, very good.

BAY: Does it annoy you then, if that's the case, that the reaction to your problems was so dramatic?

LENK: My read on what happened is that there was a general -- general perception in the press that the entire dot.com industry was having trouble. And I think that in the case of leaders, like eToys, we actually were very strong. In fact, people thought that our last week before Christmas we finally ran into trouble after being good all season. Well, we were probably the best in our last 10 days before Christmas.

So there's a lot of misconceptions. And the reality is there are some dot.com companies that aren't ready to handle the volume. And I think they helped create a bad reputation for the whole industry.

BAY: So is 2000, given the current climate, going to be a tough year for e-tailers?

LENK: Well, I think it's going to be a great year for strong e- tailers and a tough year for not-so-strong e-tailers. And we clearly feel that we're one of the strong e-tailers.

Ultimately, you have to establish a brand, you have to mean something, you have to be doing something different, and you have to create a positive relationship with customers. And that's a qualitative concept in many ways. And we really accomplished that this holiday season.

(END VIDEOTAPE)

BAY: Lenk told me that while he is focused on building a strong brand, he's also keeping a close eye on costs. EToys plans on opening a distribution center in Virginia, which will cut the costs of shipping along the East Coast.

So Stuart, clearly a step, one of several, in a more profitable direction.

VARNEY: Well, with my vast family, I'm sure I can give some help to the toy business. Still to come on MONEYLINE, the gloom behind the boom.

BAY: In a country riding the gravy train, we'll tell you about the people who missed the ride.

(COMMERCIAL BREAK)

VARNEY: And now a look at some of the day's other top stories outside the world of business in the "MONEYLINE News Digest": President Clinton in Boston, asking Congress for $280 million to fight gun crime. Among his proposals, more agents for the Federal Bureau of Alcohol, Tobacco and Firearms.

(BEGIN VIDEO CLIP)

WILLIAM J. CLINTON, PRESIDENT OF THE UNITED STATES: In my new budget, I will call for hiring 500 new ATF agents and inspectors, the largest increase in ATF firearms enforcement ever.

(END VIDEO CLIP)

VARNEY: Just outside Boston, a water-main break causing an icy mess as the Northeast endures a blast of severe cold. Among the most frigid, one town in Northern Vermont shivering at a reported low of - 32.

And a key second test planned tonight for the Pentagon's missile defense system, built by Raytheon. If it passes this one and a third next spring, the defense secretary may recommend deployment, in spite of objections from Russia and China.

BAY: America just two weeks away tonight from its longest economic expansion ever. But the boom appears to be leaving many behind, widening the gap between rich and poor.

Two Washington think tanks report that between 1988 and 1998, earnings for the poorest Americans rose just 1 percent, and earnings jumped 15 percent for the country's wealthiest people.

Kelli Arena has more.

(BEGIN VIDEOTAPE)

ARENA (voice-over): Marie Lazenby is a single mom raising two children in New York City. Her rent is paid by the Partnership for the Homeless while she attends college classes in hopes of landing a good-paying job.

MARIE LAZENBY, SINGLE MOTHER: I want to find a steady job that's going to at least pay the rent and the bills.

ARENA: Ironically, in a city where more than 3,000 people working on Wall Street scored million-dollar-plus bonuses, poor families like Lazenby's are becoming more common.

ARNOLD COHEN, THE PARTNERSHIP FOR THE HOMELESS: More and more we're seeing men and women who are working, they're working at low- wage jobs, minimum-wage jobs with little or no benefits, and they're living in the shelters.

ARENA: The gap between rich and poor is widening across America. According to two Washington think tanks known for liberal leanings, income for the poorest 20 percent of families rose a mere $110 to 12,990 between 1988 and 1998. For the richest 20 percent, it increased by $17,870 to 137,480.

JARED BERNSTEIN, ECONOMIC POLICY INSTITUTE: Of course, the booming stock market has played a role. And in the middle, we've had the sharp decline in manufacturing jobs. We've lost over half a million manufacturing jobs over the past year and a half. And at the bottom of the income scale, the fall in the real value of the minimum wage.

(END VIDEOTAPE)

ARENA: Advocates for the working poor say the root of the wage gap problem is a skills gap, a gap people like Marie Lazenby, who will graduate with an accounting degree in June, are hoping to close -- Willow.

BAY: Kelli Arena from Washington. Kelli, thank you.

VARNEY: In our next half hour, a case of the blue-chip blues on Wall Street.

BAY: We'll look at why the Dow sagged along with bonds while the Nasdaq came within a hair of a record.

VARNEY: And we'll analyze Microsoft's late-breaking profit report and the latest salvo in the company's ongoing war with the government.

(COMMERCIAL BREAK)

VARNEY: A spike in long-term interest rates brings down the blue-chips, but the Nasdaq rallies, just shy of a record. Crude oil climbs to a new high and puts investors on high-alert for what they fear most, inflation. And in the latest sign the fiber optic networking business is on fire, JDS Uniphase uses its high-flying stock for a $15 billion deal.

BAY: First, our top story, Microsoft, above the mark with quarterly profits. The world's most valuable company posted record sales after the market closed today, and reported earnings per share far above analysts' forecasts. But as is usually the case with Microsoft, there were warnings beneath the upbeat headlines. And the stock traded down 2 3/8 in after hours.

Bruce Francis reports.

(BEGIN VIDEOTAPE)

BRUCE FRANCIS, CNN CORRESPONDENT (voice-over): Microsoft earned a record $2.4 billion last quarter, or 47 cents a share, five cents better than Wall Street was expecting. Sales of Microsoft's Office software and its database program helped produce the strong results.

WILLIAM EPIFANIO, SOFTWARE ANALYST, J.P. MORGAN: The good news is their products are quite strong, their profitability is terrific, and I think that most investors will look at that.

FRANCIS: But it wasn't all good news. Microsoft acknowledged that its core Windows business was weak, partly due to a slowdown, sparked by Y2K concerns, not what Microsoft expected three months ago.

In a statement, new chief financial officer John Connors said, "We remain cautious in our expectations for near-term PC demand and corporate software spending and continue to anticipate moderate revenue growth through the remainder of fiscal 2000."

That's not unusual in advance of the release of a major, new Windows upgrade for business users. Customers often slow down sales as they evaluate a new product. Called Windows 2000, the latest member of the software dynasty goes on sale next month.

NEIL HERMAN, SALOMON SMITH BARNEY: I believe that the impending release of Windows 2000 is going to ignite a tremendous amount of PC demand within corporations going forward.

MARK SPECKER, SOUNDVIEW FINANCIAL: I think the windows 2000 product cycle will probably drive some very strong revenue and earnings for Microsoft. Between here and there, obviously, there are some rocks in the water.

FRANCIS: Windows 2000 is aimed at corporations, which don't rush out and buy a new product right away, one major reason why Microsoft urged analysts not to raise their current estimates for the next two quarters.

(END VIDEOTAPE)

FRANCIS: The persistent speculation that Microsoft may be broken up doesn't seem to have cost the company any customers, but some say it is dragging down the stock, perhaps by as much as 20 points -- Willow.

BAY: Thank you. Bruce Francis reporting.

VARNEY: This afternoon, Microsoft was talking about more than just its bottom line. It flat-out reject a landmark court ruling branding the software maker an abusive and predatory monopoly. Microsoft maintained its innocence, saying it did not violate any antitrust laws.

Steve Young has more.

(BEGIN VIDEOTAPE)

YOUNG (voice-over): Microsoft says federal judge Thomas Penfield Jackson painted an unflattering picture of the company, but antitrust law is on its side and the judge is wrong. On the heart of the original case, Microsoft's dealings with Netscape, Microsoft says the government failed to prove Windows and Microsoft's Web browser are separate products or that the company forced the purchase of tied products.

Noting the judge said Microsoft pushed exclusionary contracts on other companies, Microsoft says it let them distribute some Netscape software and claims it isn't a monopolist because the market for Intel PC operating systems is defined too narrowly.

HARVEY SAFERSTEIN, FRIED FRANK HARRIS SHRIVER JACOB: What Microsoft is trying to do is two things: one is to show the judge that he used the wrong standard in making his findings, and then the other thing is to convince him that even if he used the right standard, he made the wrong -- he has to come to different conclusions.

PAUL ROTHSTEIN, MICROSOFT CONSULTANT: It very clearly, for lay audiences and law audiences, coincidentally, lays out every issue, every charge and every answer that Microsoft has in a very compelling manner.

FRANCIS: Settlement talks continue in Chicago, where a federal mediator is meeting separately with government prosecutors and Microsoft attorneys. But the mediator hasn't brought the parties together, an indication the talks are not going well. And time is running out. If there's no settlement, the sides will be back before Judge Jackson.

(END VIDEOTAPE)

FRANCIS: Both sides will take their last shot at oral arguments, and then Judge Jackson will decide how the law applies to his conclusions of fact. Late today, the Department of Justice said Microsoft's argument would -- quote -- "give a monopoly, virtually unlimited power, to use its position to crush competition, harm consumers and stifle innovation." -- Stuart.

And there you have it. Steve Young reporting. Thank you, Steve.

BAY: Microsoft was one of the leaders behind today's hard- charging Nasdaq rally, one that put the index within a point of an all-time high. Technology investors ignored ever-rising interest rates in the bond market and another spike in Crude oil prices.

Bill Dorman reports.

(BEGIN VIDEOTAPE)

BILL DORMAN, CNN CORRESPONDENT (voice-over): New York City's coldest day in three years added some heat to the oil trading pits at the New York Mercantile Exchange today. Crude oil prices shot to their highest level since 1991 in the Gulf War, partly because of falling inventories, partly because OPEC is still holding down production, keeping the market guessing.

BILL O'GRADY, A.G. EDWARDS: With the rise that we've seen recently, trying to predict the peak in oil prices is sort of like trying to predict where an Internet IPO will end up.

DORMAN: Rising oil prices helped drive the yield on the 30-year bond to its highest point since June of 1997. Higher interest rates cut into financial stocks in particular, and were one factor pushing the Dow Jones industrial average down more than 162 points. The high- tech Nasdaq index bucked the trend, closing with a gain of nearly 67 points, just shy of another record. Part of the reason behind that move, even though Alan Greenspan and his colleagues at the Federal Reserve's Open Market Committee seem ready to raise short-term interest rates, and possibly more than once, that may not spook the entire market.

LARRY JONES, KENWOOD GROUP: We think the market will treat those increases differently this time around, because the reason for the increases are very rapid growth in our economy. As opposed to trying to arrest runaway inflation.

DORMAN: Markets are already pricing in a couple of quarter-point interest rate increases by this spring.

(END VIDEOTAPE)

DORMAN: All of this as corporate earnings for the fourth quarter of 1999 are just starting to come out. One question for the market as this week goes on: How much encouragement to take from what looks like another good earnings season? So far, the answer, at least for the Dow, is not much -- Willow.

BAY: Bill Dorman, thank you. Taking a closer look now at that sell-off in the bond market, the Treasury's 30-year issue fell another 21/32 of a point in price, pushing the yield all the way up to 6.74 percent; that's a 2 1/2 year high. Behind the declines, a surge in crude oil prices. Light Sweet Crude jumped 66 cents, to $27.80 a barrel, a level not seen in nine years.

VARNEY: Well, that rise in oil prices helped push oil and oil service stocks sharply higher today. Here are some of the big gainers: Chevron, for example, up more than 2 1/2 points, and Schlumberger gained 4 3/4 after Goldman Sachs added that stock to its buy list. Halliburton, Transocean Offshore and Diamond Offshore, they were all higher as well.

Still to come, PaineWebber blows past fourth quarter profit estimates.

VARNEY: Chief executive Donald Marron on what's next for his company and its stock, when MONEYLINE returns.

(COMMERCIAL BREAK)

BAY: Checking some of tonight's other movers: Motorola down more than 6 1/2. Yesterday, it said fourth-quarter profits more than tripled, but the results still missed the most optimistic estimates on Wall Street. Today, Motorola said its acquisition of General Instruments will shave three cents from its first-quarter profits. Network Solutions soared more than 42 1/2. The Supreme Court upheld the fees it charges for registering Internet domain names. A lawsuit accused Network Solutions of charging an unauthorized, unconstitutional tax.

And Ford Motor up more than 2 1/4. DLJ upgraded the auto maker to a buy, and set a $65 price target.

VARNEY: From financials to airlines, it was indeed a busy day for earnings. Despite higher fuel costs, Delta Airlines soared past estimates, with profits of $1.24 a share. Net income actually fell nearly 10 percent from last year, but its stock still managed to jump more than 2 points.

It was a strong day for Tyco International, up nearly 4 1/4. Tyco beat estimates by a penny, and its board authorized a $2 billion share buyback.

Several financials also out with earnings on what Wall Street calls a "Super Tuesday." Citigroup beat estimates with an 86 percent jump in quarterly profits. Separately, Citigroup said it will buy the investment banking division of Schroders, and it will pay just over $2 billion.

Now, Wall Street really cheered the latest deal in the optical networking business. JDS Uniphase is snapping up E-Tek Dynamics, and it is a $15 billion stock swap. Both companies make products to boost the capacity and speed of fiber-optic networks, a red-hot market in the telecom industry.

(BEGIN VIDEOTAPE)

VARNEY (voice-over): The key to faster communications in the home of the future is said to be broader bandwidth, or how much data can be driven through the pipeline. Now, with the combination of two relatively little-known companies, the promise of broadband is closer to reality. The proposed acquisition of E-Tek by JDS Uniphase brings together two leading-edge companies that are boosting the amount of data that can be forced down a fiber-optic line.

KEVIN KALKHOVEN, CO-CHAIRMAN & CEO, JDS UNIPHASE: As we saw computers and microprocessors and silicon dominate the '80s and '90s, it's my absolute belief that bandwidth is going to dominate technology and society in the next decade, and JDS Uniphase is a prime supplier of technology to that revolution.

VARNEY: A revolution already under way. Until recently, a single strand -- and there are hundreds in a fiber-optic cable -- could carry 4 separate wavelengths. Now, because of technologies developed separately at JDS Uniphase and E-Tek, that same strand can carry 160 separate wavelengths. That means the amount of data carried has exploded from 2 1/2 billion bytes-per-second to 1.6 trillion.

And to analysts, it doesn't matter whether it's the Internet, cable television or the telephone, the data will be piped to your home over fiber-optic cables. MARK LANGLEY, ANALYST, GRUNTAL: Optics is the most robust terrestrial communication technology available today. It's not cheaper and better. It is the cheapest and it is the best technology available. At the end of the day, if I am a service provider, what matters to me is lowest cost per bit.

VARNEY: That appears to be a point not lost on investors. In the last 12 months, shares of JDS Uniphase have exploded too, up 1,022 percent.

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VARNEY: Now JDS Uniphase is paying a 55 percent premium to E-Tek shareholders, and that news sent E-Tek stock up 42 1/2 points, that's better than 30 percent. JDS Uniphase investors clearly not worried about the price tag -- that stock rose 3 1/2. Market forecasters placed the fiber-optic component market at $5 1/2 billion for last year, and they expect that market to balloon to over $21 billion annually in just four years.

BAY: In tonight's MONEYLINE focus, a stellar fourth-quarter at PaineWebber. Record brokerage commissions helped push its net income up more than 66 percent. PaineWebber earned $1.07 a share in the fourth quarter, and that was 15 cents better than Wall Street expected. But, like many financial stocks, it lost ground today, down 3/8. PaineWebber's stock is off more than 22 percent from its 52-week high.

Joining us now with more, Donald Marron, chairman and CEO of PaineWebber.

Donald, welcome back.

DONALD MARRON, CHAIRMAN & CEO, PAINEWEBBER: Happy to be here, Willow.

BAY: Fourth consecutive year of strong earnings and a strong quarter. Where, this quarter, is the growth primarily coming from?

MARRON: Well, also we're very pleased that we earned over $1 billion for '99 pretax. That's brand-new record for us.

The biggest strength here is in the growth of assets. In the fourth quarter, we added 12 percent to our client assets, up to 424 billion. More important, our EDGE product, which is our online service portal for retail clients, which had meant nothing two years ago and was 100 billion at the end of the third quarter, went up 40 percent in the fourth quarter to 140 billion with 170,000 households on the EDGE.

BAY: Donald, let me ask you about those net assets coming into the firm at something like $200 million a day. Is that -- are you adding new customers, or are your existing customers simply pouring in additional money into the firm?

MARRON: Well, as you can imagine, it's both. One thing that's happening with existing customers as we add these new services, the EDGE and Inside One (ph), is they're bringing in assets that they have at other places at other accounts. In addition, also new customers -- it's about 20 percent new assets, 80 percent expanded assets of existing clients.

BAY: So in terms -- well, I know one of the things that we spoke about last time that you were trying to increase is your fee-based assets to give you some sort of a buffer against volatility. Are you making progress there?

MARRON: We made great progress in the fourth quarter. Our fee- based income crossed $1 billion on annual-rate basis. And our new product, Inside One, which is a fee-based product, and just started really in the second half of the fourth quarter, is up to $5 billion already. So great progress is being made there. It's been a very good quarter.

BAY: Donald, real quickly before we go, should your investors be concerned about the future performance of PaineWebber given that we are likely to face a rising-rate environment?

MARRON: Well, I think rising rates can happen for several reasons. Right now you have low inflation, high productivity, and good earnings -- no sign that that's going to change. So long as that's the case, the rate level is not as important as the growth and profit level, and that looks very good.

BAY: Donald Marron, PaineWebber, thanks as always for joining us.

MARRON: Nice to be here.

BAY: Stuart?

VARNEY: And here's what's coming up, Willow. We're talking about the battle royal in Europe. It concerns a mobile-phone company from Britain trying to take out a German company. Battle royal indeed. Back in a moment.

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BAY: A big merger in the natural-gas business. El Paso Energy is buying Texas-rival Coastal Energy for about $10 billion. The combined company will own 58,000 miles of gas pipelines, and be the No. 3 producer of natural gas in the United States. That's behind BP Amoco and Exxon Mobil. Coastal up nearly 3, El Paso down more than 2.

VARNEY: Wall Street today got its first chance to react to the marriage of British drug giants Glaxo Wellcome and SmithKline Beecham. Didn't like it, big thumbs down. Investors showed very little enthusiasm for what would be the biggest drug merger on record. In New York, Glaxo Wellcome lost nearly 6 points, and SmithKline Beecham fell more than 8 1/2.

Allan Dodds Frank has more on this.

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FRANK (voice-over): Top executives from Glaxo Wellcome and SmithKline Beecham today defended their plan before a skeptical New York audience to create the world's biggest drug company.

DAVID SAKS, SAKS/GRUNTAL HEALTHCARE FUND: Share price I think is getting clobbered because the consolidation of two companies is not viewed by myself and other analysts as an earnings acceleration story.

FRANK: The chairman of Glaxo Wellcome, whose shareholders would get nearly 60 percent of the new company, shrugged off the market's lukewarm reception.

SIR RICHARD SYKES, CHAIRMAN, GLAXO WELLCOME: And I think there's a lack of understanding there. There's tremendous technologies and science and information within our companies, and all that's going to come through over the next few years. It might not come through tomorrow.

FRANK: Glaxo makes the ulcer treatment Zantac and the anti-flu drug Relenza while SmithKline Beecham sells antibiotics, the antidepressant Paxil, and over-the-counter products, including Nicorette gum.

The new company, to be called Glaxo SmithKline, would have 7.3 percent of the world market but would be even stronger in the United States and in Europe. The combined company would be headquartered in Great Britain. But its new chief, a SmithKline executive named Jean- Pierre Garnier, plans to move operational headquarters to the United States, which represents 45 percent of the new company's sales.

DR. JEAN-PIERRE GARNIER, CEO-DESIGNATE, GLAXO SMITHKLINE: And it will be important to operate from the U.S. and to completely benefit from all the technology and all the novelty and all the quick change that does occur in the U.S.

FRANK (on camera): Garnier says he will move his headquarters to the New York City area. That, of course, will enable Glaxo SmithKline's new boss to keep a closer eye on competitors, especially Pfizer and Warner-Lambert should they merge to form a company of near equal size.

Allan Dodds Frank, CNN Financial News, New York.

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BAY: Coming up, a proposed merger that would eclipse that drug deal, except that one side can't convince the other to make a deal.

VARNEY: Yes, we're going to talk to Chris Gent -- he's the chief executive of Vodafone AirTouch -- about what he can do to win over Mannesmann. We'll be back.

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VARNEY: Let's turn now to another mega-deal brewing across the Atlantic: Vodafone AirTouch's massive hostile bid for the German cell phone firm Mannesmann.

Mannesmann spurned the office, and the whole issue is now being voted on by Mannesmann shareholders. Vodafone's stock has surged during this time. It's up 63 percent over the past year.

For more on this, we're joined now by Chris Gent. He is the chief executive of Vodafone AirTouch.

Chris, welcome to MONEYLINE.

CHRIS GENT, CEO, VODAFONE AIRTOUCH: Good evening, Stuart.

VARNEY: Am I right in saying that by February the 7th, Mannesmann shareholders have to decide do they want 100 percent of Mannesmann -- status quo -- or 47 percent of the combined company? That's the choice they face by that date, correct?

GENT: Absolutely right, yes. I mean, we're saying tender early, because this has never been done in Germany before.

VARNEY: You've got 30 seconds to convince our audience that they should go with you.

GENT: Well, putting the two companies together builds a European-based world leader, and on the strategic rationale it's compelling. But so far as Mannesmann shareholders are concerned, getting 47 percent of that combined group means they get more profit growth than they could ever manage on their company alone.

VARNEY: Now, you're in New York and you're addressing some large institutional investors who own a large chunk of Mannesmann and you're trying convince them to go with your deal. Doesn't that raise a cultural issue? Here you've got a major German company with its business being dictated by Americans.

GENT: Yes, but that's the point: It's a shareholders decision, and 60 percent of Mannesmann shareholders are outside of Germany. In fact, if you count Hutchison, it's 70 percent outside of Germany. And that's point we're making to them: This is a global market. This is why it's a globally held company. And our case is a compelling one for global investors.

VARNEY: Do you have to be global in this -- the particular business, mobile phones?

GENT: Absolutely. With mobile phones, our customers can go anywhere in the world. It's more important in fact to be global in this business than it will be in the fixed business.

VARNEY: Can I ask what response you've gotten so far from institutional investors in America?

GENT: Well, they see the compelling strategic case for putting the business together and I think they like our commercial proposition, the economic proposition. And you're seeing the rise in our share price, I think indicates the market likes this deal. VARNEY: Is there some ego involved here, because Klaus Esser, who's chairman of Mannesmann, you've had some somewhat frosty meetings. Is it difficult to get a deal going, two powerful people going at it?

GENT: Well, the meetings have been courteous, but he wants to be independent above all. And we're saying his shareholders should decide do they want a European regional player or a global player. And that's the choice we're putting before the Mannesmann shareholders.

VARNEY: At the end of the day, do you think that you can convince overseas shareholders to go with your deal?

GENT: I believe we'll get the vast majority of the international shareholder base and good support in Germany as well, because they see the sense of creating this European-leading, world-leading company.

VARNEY: We'll look forward to the outcome February 7th, if not before. Chris Gent, a pleasure to have you with us. Thank you.

GENT: Thank you.

BAY: Up next, "Ahead of the Curve": some of what you need to know tonight before the markets open tomorrow.

VARNEY: Yes, you're watching MONEYLINE.

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BAY: Several big names due with their own earnings tomorrow: America Online, Apple Computer, IBM, Boeing, Chase Manhattan, DLJ, United Technologies, and UAL. And on the economic front, the latest figures on the housing market are due out.

VARNEY: A quick programming note for you: Tomorrow we'll talk with the founder of this network and the largest shareholder of Time Warner, Ted Turner. We'll get his inside perspective on the Time Warner-AOL megamerger and his take on the future generally -- 6:30 Eastern tomorrow night right here on MONEYLINE.

BAY: That's MONEYLINE for this Tuesday. I'm Willow Bay in Los Angeles.

VARNEY: And I'm Stuart Varney in New York. We thank you for joining us. "CROSSFIRE" is next.

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