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Microsoft Posts Another Strong Set Of Results, Does Not Know How To Invest Its Profits ((HOT))

Microsoft MSFT, +0.67% reports earnings later this week, on July 19. And if the past is any indication, the company will once again prove that it is successfully making the transition to a cloud-computing giant with a stable stream of enterprise revenue. Shares have been trading around record highs after an impressive report in April, and investors should expect another strong showing in a few days.

Microsoft posts another strong set of results, does not know how to invest its profits

WILLOW BAY, CNNfn ANCHOR, MONEYLINE: Tonight, an unexpected inflation scare doesn`t hold back jumping tech stocks: The Nasdaq powers ahead to its eighth record in nine sessions. STUART VARNEY, CNNfn ANCHOR, MONEYLINE: It`s the biggest package UPS (URL: ) has ever delivered: a massive IPO that values the company at more than $81 billion. BAY: As investors consider the possibility of a Microsoft (URL: ) breakup, they get the chance to buy the first baby Bill: Microsoft Expedia (URL: ) makes its stock market debut. VARNEY: And just outside Seattle, Bill Gates speaks to the faithful for the first time since a judge called Microsoft a predatory monopolist. ANNOUNCER: This the MONEYLINE NEWS HOUR. Reporting tonight from New York, Stuart Varney and Willow Bay. BAY: Good evening and welcome to MONEYLINE. Investors shake off a potentially frightening inflation report. VARNEY: And send the Nasdaq to a record high, its eighth in two weeks. Money simply plowed into technology, helping the Nasdaq to continue to outshine the rest of the market. But the Nasdaq was not the only record setter. Investors clamored for the biggest IPO in American history, from a company that today became an instant blue chip, United Parcel Service (URL: ) . Rhonda Schaffler has the details in today`s "Street Sweep." (BEGIN VIDEOTAPE) RHONDA SCHAFFLER, CNN CORRESPONDENT (voice-over): Billed as the largest initial public offering in U.S. history, shipping giant United Parcel Service (URL: ) delivered. UPS rocketed to $68, a gain of $18, or 36 percent, above its offering price of 50. JOE CANGEMI, FRANCES P. MAGLIO: The energy level, the amount of order flow that was entering crowd, and as well as it ran and as efficiently as it ran, it only foresees where the markets are heading. SCHAFFLER: The feeding frenzy spread to other issues: Expedia, Microsoft (URL: ) `s online travel arm, gained 281 percent, to more than 53. Communications equipment maker Next Level (URL: ) shot up 153 percent. And iBasis (URL: ) soared 153 percent. Despite the impressive performance, some market watchers are wary of the market`s exuberance. ROBERT BALENTINE, CHAIRMAN, BALENTINE & CO.: Typically, when we see this type of activity in the IPO market, that would signal some type of speculative bubble in the market. SCHAFFLER: A roaring rally in technology stocks lost steam midway through the trading day. The Nasdaq composite squandered a 61 point lead, closing up nearly 31 points to 3,155. But that was enough to give the index its eight record in nine sessions. The Dow Jones industrials slipped 19 points to close just below 10,600. That didn`t discourage one of the bull market`s biggest skeptics. BARTON BIGGS, MORGAN STANLEY ASSET MANAGEMENT: All mood swings by manic-depressives ends in gloom and depression. But in the short run here, I think we could have -- you know, I think the market`s going higher. We could have a meltup. SCHAFFLER: One stock to watch closely tomorrow, Rite Aid (URL: ) . The stock was halted at 5 3/8, a new 52-week low, after the company warned investors not to rely on earnings and cash flow guidance released a month ago. (END VIDEOTAPE) SCHAFFLER: A mixed bag of inflation data at the wholesale level may have caused a slowdown in the market`s momentum today and spooked jittery investors about the Fed`s intentions at its policy meeting next week -- Stuart. VARNEY: Rhonda, does the broader market have to wait for its rally maybe until after next week`s Fed meeting? SCHAFFLER: There`s a lot of debate about that. Some people are saying that investors are waiting for this Fed meeting to be over with. But there`s increasing talk here about the fact that investors might decide to take profits ahead of what`s been the end of a very good year here. So there`s real debate on whether there will be enough after the Fed meeting to bid the market up higher, especially since the gains have been so strong this year. VARNEY: All right, Rhonda Schaffler at the Big Board. Thanks very much, Rhonda. BAY: November has been an incredible month for the Nasdaq composite. The index has climbed in nine out of the last 10 sessions, cracking eight all-time highs. The record run has added 353 points, or 12 1/2 percent, to an already impressive return. In fact, it`s shaping up to be the Nasdaq`s best year since 1991, if it holds onto its gains. So far, it is up 44 percent year-to-date. VARNEY: Well, you could say definitely that the Nasdaq is the index of the year and crude oil is the commodity. Prices raced higher again today, boosted by comments from the Mexican energy minister who said he would stick to production cuts until mid-year 2000. Also, industry reports show that OPEC is keeping its promises to reduce the world`s oil supply. On top of all of that, light sweet crude rose 44 cents to $24.47 a barrel. Prices have more than doubled since February, when they dropped to their lowest levels in some 12 years. BAY: Oil prices did pull back a bit last month, keeping a lid on wholesale inflation. The Producer Price Index fell unexpectedly in October. But minus volatile food and energy prices, it rose 3/10 of a percent. The surprisingly strong core rate set off inflation fears in the bond market. The 30-year Treasury lost a quarter of a point in price. The yield tonight at 6.08 percent. From Chicago, Ceci Rodgers has the details. (BEGIN VIDEOTAPE) CECI RODGERS, CNN CORRESPONDENT (voice-over): The jump in wholesale prices other than food and energy was almost all due to rising costs for cars and light trucks in the new model year. But bond traders still saw reason to worry about inflation and a possible rate hike next week from the Federal Reserve. Prescription drug prices surged, even more than autos, and costs for goods in the production pipeline also climbed. ANDREW WALLACE, R.J. O`BRIEN: The Fed made it clear last week that they are paying very close attention to the economic data they see this week. They now have PPI behind them. Perhaps it has made them a little more concerned about inflation. RODGERS: After rising to the highest levels in two years, interest rates set by the bond market have been falling the past two weeks. Signs of some cooling in housing, and auto sales, plus little bad news in the way of inflation had many analysts reversing their predictions for a third Fed rate hike this year. Economists are now less certain than ever about the outcome of next week`s Fed meeting. HARVEY HIRSCHHORN, STEIN ROE & FARNHAM: It`s still a tough call. I still believe it`s less than 50-50. But as you can see by the market action today, I think they thought the odds were even lower and now have marked them up a little bit today. RODGERS: In the tell-all Greenspan Fed, uncertainty about which way the Federal Open Market Committee will vote is unusual, especially less than a week before the meeting. (on camera): The Fed`s decision could come down to a key report due out Friday, a favorite of the proponents of the new high-tech economy, worker productivity in the third quarter. Ceci Rodgers, CNN Financial News, Chicago. (END VIDEOTAPE) VARNEY: So the obvious big question next for the markets is will the Fed hike rates or hold them steady next week. Joining us now, Jim Bianco from Chicago. Jim, welcome back to MONEYLINE. JIM BIANCO, DIRECTOR OF RESEARCH, BIANCO RESEARCH: Thanks for having me. VARNEY: The question stands: Do we have an inflation problem, and if we do, will the Fed raise rates next week? BIANCO: I think if you take those two separately, no, I don`t think we have an inflation problem. I don`t think we have had an inflation problem this year. But yes, I do think the Fed will raise rates next week. VARNEY: Hold on a second, Jim. Hold on a second, Jim. If we do not have an inflation problem, but yes, the Fed you think will raise rates next week, what`s going on here? BIANCO: Well, they`ve raised rates twice before. And it`s been very hard to pin down whether or not we`ve had an inflation problem to begin with. I think that it`s more about the stock market, it`s more about nominal growth in the economy. The Fed doesn`t want to be in the position of fostering a boom in the stock market. It`s doing very well without them. They`ve raised rates. And as you mentioned, the Nasdaq`s up 44 percent this year. If they were not to raise rates or if they were to refrain or give people the idea that they`re done, they`re afraid it`s going to be a green to speculate and the stock market could launch off into much higher levels. Maybe it`s not a bubble now, but the fear is if that happens we then definitely would have a bubble as we move forward. So for that reason and the reason that the stock market is doing so well right now, I think that the odds slightly favor them raising rates next week. But it is a tough call right now. BAY: A tough call. So if they raise rates next week, is that the end of it? BIANCO: No, I don`t necessarily think it would be the end of it, because if we accept the assumption that they`re raising rates because the growth of the economy is very fast, that the stock market`s moving higher, what they would like to see is a moderation in both of those. So if they raise rates and the stock market keeps moving up to new highs, it keeps going, I think it keeps the heat on the bond market, keeps the heat on the Fed to continue to raise rates until things cool down a little bit. BAY: Let`s say we do see a rate hike next week. How does the market react? BIANCO: I think as far as stocks go it`ll probably be a relief rally, because the perception within the stock market is going to be that the Fed is done. And that`s widely held right now, that next week is a moot point for them. If the Fed moves or doesn`t move, they`re done. In the bond market, I think it`s going to come down to the statement that they issue with a rate hike, if they have one. Will it be a hawkish statement, suggesting that there will be more rate hikes, or will it be a dovish statement saying now that they`ve taken back the 75 basis points of cuts last year they`re done? And that will be the key for bond market. Right now, I`m leaning toward a little bit more of a hawkish statement. And the bond market might have some problems with it. But I don`t think the stock market will. VARNEY: We`ll be watching it. Jim Bianco, joining us from Chicago, thanks for being with us on MONEYLINE, Jim. BIANCO: Thank you. BAY: Much more ahead on MONEYLINE. Time now to check in with some of our other reporters. We begin with Susan Lisovicz -- Susan. SUSAN LISOVICZ, CNN CORRESPONDENT: Willow, it sounds like a broken record. Yes, the Nasdaq broke a record for the 37th time this year. I`ll tell you why investors can`t seem to get enough of technology. ALLAN DODDS FRANK, CNN CORRESPONDENT: I`m Allan Dodds Frank. So far, investors do not seem worried that a breakup of Microsoft (URL: ) could reduce the company`s value. Are they right or is there a downside? FRED KATAYAMA, CNN CORRESPONDENT: And I`m Fred Katayama. Pfizer (URL: ) now says it`s considering an unconditional bid for Warner-Lambert (URL: and its blockbuster drug Lipitor. And now, Pfizer wants total control over another drug as well. We`ll tell you what`s on the drawing board at Pfizer -- Willow. BAY: Thanks, Fred. VARNEY: Coming up on MONEYLINE, after last week`s legal hammering, Microsoft shareholders stand up as one to show Bill Gates how they feel. BAY: And Compaq (URL: ) boots up a new computer line, but will it be enough to turn the company around? (COMMERCIAL BREAK) VARNEY: After the bell tonight, Bank One (URL: ) issued its second profit warning in less than three months. The nation`s fourth-largest bank says this year`s earnings will come in between $3.45 and $3.55 a share, below previous estimates. The problem: continued weakness at the -- at its First USA Bank credit card business. Bank One has tried to overhaul the unit, and took over management of First USA after the chief executive resigned in October. The stock lost $2 in after-hours trading, after being down more than 4 in the regular session. BAY: It`s been a trying few days for Microsoft (URL: ) shareholders, as pundits from Silicon Valley, Wall Street and Washington have debated the impact of a harsh antitrust ruling against the company. And while the stock hasn`t suffered serious damage, it wasn`t -- it hasn`t exactly flourished either. Today, Microsoft lost another 1 3/4, and it is now down more than $4 this week. Shareholders today spoke out about the case at Microsoft`s annual meeting, and greeted the company`s executives with a standing ovation. Steve Young is there in Seattle, and he joins us now -- Steve. STEVE YOUNG, CNN CORRESPONDENT: Willow, they came from all over the country, about 2,500 of them. Mr. Gates is on his home turf, and he`s before an audience that likes his moves. The shareholders heard Bill Gates say that the company would like to settle the case, he mentioned that briefly. He said that they`ll go a long distance to helping meet the government`s needs. But we got a rather sarcastic Bill Gates also today, who said if we do what the prosecutors say they want, if we come up with development that`s good but somebody else had, they`ll say oh, you can`t do that. If we do something that`s too good or too cheap, they`ll say you can`t do that. The shareholders got to speak and it was a rather short meeting. All were very appreciative of Gates, the man, and Microsoft (URL: ) , the company. However, toward the end one shareholder rose and said: I`m proud to be a shareholder in Microsoft, but I was humiliated by the weak legal defense. And some of that was echoed outside as well -- Willow. BAY: Now I know you mentioned, Steve, that Mr. Gates said something about a settlement. Did shareholders raise that issue? Did they push that issue? YOUNG: Yes. It did come up once or twice. And interestingly there was not very much reaction from the hall. It did not sound like a very popular idea, although shareholders I talked to said they`d rather see the company settle than be involved in a very, very long fight. BAY: Steve Young, thank you for that report. We`ll have more from Steve later in the show, plus we`ll talk to Microsoft (URL: ) `s chief financial officer, Greg Maffei about Microsoft`s legal dilemma and about today`s spinoff, Expedia (URL: ) . VARNEY: Now some say that Microsoft`s stock has held up so well because investors think even the worst outcome of this antitrust trial would not be so bad. By most accounts, that would be a forced break- up of Microsoft. But as Allan Dodds Frank reports in tonight`s "Leading Edge," breaking up is hard to do. (BEGIN VIDEOTAPE) ALLAN DODDS FRANK, CNN CORRESPONDENT (voice-over): Would a breakup of Microsoft be a bust for shareholders? Given the company`s current market value, that`s the $445 billion question. And in the three trading days since the court`s findings, the stock is off about $3, suggesting shareholders are not too rattled. Under one scenario, the company might be broken into three parts. One handling the Windows operating system, another, applications such as Microsoft Office, and the third dealing with the Internet. Or the operating-system monopoly might be broken by splitting into three similar companies, each with the Windows operating system. Some investors say splitting Microsoft might not be as successful as other breakups such as the dismantling of AT&T (URL: ) . DAVID DREMAN, CHAIRMAN & CIO, DREMAN MGMT.: Microsoft has one core business, which is the Windows, and -- for PCs -- but other than that, there are really no strong businesses, and no really major cash cows. So it seems to me, though, there are many parts that seem exciting but over time they`re probably not going to produce the same kinds of cash vote. FRANK: Some economists agree. PROF. NICHOLAS ECONOMIDES , NYU/STERN BUSINESS SCHOOL: Shareholders will be hurt because Microsoft will not be able to be run flexibly as an entrepreneurial company anymore. At the same time, consumers will be hurt, and antitrust laws are there to protect consumers, not shareholders. FRANK: And if Microsoft did break apart, would the part that lands Bill Gates really be better off? DAVID NADLER, CHAIRMAN, DELTA CONSULTING GRP.: That company would also have a lot of the baggage that Gates brings in terms of perceptions to the industry, in terms of relationships, and that baggage without the power of monopoly could be a major drag on them. FRANK (on camera): And some Microsoft watchers wonder whether the company has enough management talent to run several companies; on the other hand, Bill Gates` track record might be enough for investors to ignore any downside. Allan Dodds Frank, CNN Financial News, New York. (END VIDEOTAPE) BAY: Coming up on MONEYLINE, we`ll tell you about the day`s biggest market movers. VARNEY: Plus, with Y2K now less than two months away, some places still are not ready. We`ll be back. (COMMERCIAL BREAK) BAY: Stocks hitting 52-week highs today: British Telecom (URL: ) , Sony (URL: ) , Cisco (URL: ) Systems, Gateway (URL: ) and Lands` End (URL: ) . Tonight`s MONEYLINE movers: Lehman Brothers (URL: ) up nearly 2 3/4. Salomon Smith Barney raised its price target to $85 a share, saying the investment bank is a good value relative to its peers. Staples (URL: ) up 2 1/2. DLJ upgraded the stock and said it is undervalued. Yesterday, shareholders approved a plan to create a separate tracking stock for Copper Mountain (URL: ) Networks up 4 7/8. It plans to split its stock 2 for 1. The company makes products for DSL Communications. And NextCard (URL: ) soared 9 3/8, trading at 26 times its daily volume. It will launch a co-branded credit card with (URL: ) . Under the five year deal, Amazon will buy a 10 percent stake in NextCard. VARNEY: Compaq (URL: ) shares up as well, more than 7 percent, as the company unveils a new line of low-priced business PC`s. The iPaq computer is designed to give office workers easy access to the Internet. Question, will the move be enough to fix what is a broken stock? Bruce Francis reports. (BEGIN VIDEOTAPE) BRUCE FRANCIS, CNN CORRESPONDENT (voice-over): At the end of a disastrous year, you`d think that the last thing that Compaq (URL: ) would want to do is to undercut its bread and butter business PC market with a cut-rate $500 model. But Compaq believes that its new iPaq can help in the war against Dell (URL: ) , and the in the war to revive its tarnished reputation. With a far simpler design, fewer parts, and just four different versions, Compaq says the iPaqs will be easier to manufacture. That should make them more profitable than on the typical desktop PC, even at the at $500 price tag. Compaq says computers like the iPaq can make up more than 50 percent of corporate desktop sales in three years. MICHAEL CAPELLAS, CEO, COMPAQ: The design of this product and the way we`ll manufacture it protects our margin. We actually look to see higher margins on these products, particularly since we`ve really simplified the distribution. FRANCIS: But analysts are unwilling to raise their ratings on Compaq until the company posts more consistent results. WALTER WINNITSKI, HAMBRECHT & QUIST: Compaq is looking at ways to reduce their cost. By narrowing down this product to only four separate skews, they can produce these products a lot cheaper and avoid a lot of the costs that have really hurt them in the past. FRANCIS: A hurt that shareholders have felt most of all. Compaq has plunged from a high of over $50

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