Senior Writer

Brett D. Fromson, chief markets writer, and Aaron L. Task, senior writer, chatted on

TheStreet.com

Wednesday, Feb. 21 at 4 p.m. EST.

beastieboyz-guest:

Hey Aaron, I enjoy reading your updates on Don Hays' predictions. I'm curious what you think about his current stance of Nasdaq rallying here before we see the final leg of this bear market?

RM_Aaron:

I think after the past few days people will take any rally they can get! But seriously, I think there's so much despair and bearishness building up here, we may be setting up for a bounce, perhaps with another rate cut as the catalyst.

firefire-guest:

Brett, Any thoughts on pipeline related companies such as Shaw Industries (Canada) that do the coating, weld inspect and so forth including deep water projects?

RM_Brett:

Still like the gas plays very much. Don't know Shaw per se. But you could do a lot worse than to overweight the energy sector.

beastieboyz-guest:

Guys, do you think

Alan Greenspan

is going to make an unexpected cut or what?

RM_Aaron:

If everybody is looking for it, is it unexpected? I think the CPI and PPI data puts the Fed in a bind, but the stock market is pleading for a rate cut. Alan Greenspan can't be having much fun today. Still, I think they will lean toward easing vs. not.

RM_Brett:

I don't think it matters longer term if he does or does not. That said, I do not think the PPI and CPI numbers we got last week and today will put him off further rate cuts. Why? I do not see a return to stagflation unless we see a run on the dollar. That is the wild card.

RM_Aaron:

Well the dollar has weakened on a trade-weighted basis, Brett, leading to higher import costs in the CPI.

RM_Brett:

I am talking a run, something that is not a nice move over 12 months that helps us exporters, but a real momentum-induced panic based. That is unlikely but possible.

RM_Aaron:

Roger. Thanks for the clarification.

don5x-guest:

OK, for B&A: Naz is toxic, that's clear. But is it equally clear that S&P is toxic?

Helene Meisler

reports its close to breaking down thru long-term trend. With this morning's data, is it 1973/4 all over? Time to bail?

RM_Aaron:

Well, tech stocks have become the largest component of the S&P 500 in recent years. Thus if tech is "toxic" it's going to negatively impact the S&P, for sure.

RM_Brett:

Not 73-74 all over again, IMHO. Don't see the stagflation, despite today's CPI and last week's CPI. That said, I do worry that the S&P, in fact the entire market, is a bit hostage to a further decline in the Nasdaq.

RM_Aaron:

Agreed re: hostage, but I think stagflation is a risk.

RM_Brett:

Bad for confidence. Bad for consumption. Bad for corporate earnings. Need to see more before I say stagflation. But agree that something in back of our minds now and that is bad for stock prices.

don5x-guest:

B&A: Warren Buffett pulled out of his partnership in late 60s, and came back in 2-3 yrs later for unbelievable bargains, good strategy for today?

RM_Brett:

Yes, Buffett did do that. Should you? That is the question. I do think people should hold a lot more cash than they do, but should they go entirely to cash or bonds? I'd say, you probably want to reduce overall exposure to the big-cap growth stocks that in my view are still trading at far above historic multiples.

jucojames-guest:

Inflation on the rise, economy decelerating or in contraction, still a real estate bubble in major metropilal areas, negative savings rate, what do you guys think of European Gold Stocks?

RM_Brett:

LOL.

RM_Aaron:

Got to say that question got a laugh from both Brett and I. I've written positively about gold in recent years and been burned badly, as have many investors. That said, the scenario you laid out does suggest an improvement for precious metals, but we're just not seeing it in the market, at least not yet.

RM_Brett:

In fact, I do think some gold's not a bad idea. My preference would be for low-cost producers. I have not done a lot of work on this, but you are thinking in a nicely contrarian manner. Also look for the Canadian companies and do not forget South Africa.

Brad-guest:

I know that it is a little after the fact, but do you think that if Greenspan had lowered the interest rate by 0.75 percent

75 basis points, the market would have acted more favorably or would there have been a major panic?

RM_Brett:

I think it would have spooked folks. That said, the 50 basis-point cuts have not been working so well.

RM_Aaron:

Depends on if you're talking about on Jan. 3 intermeeting or at the meeting on Jan. 30-31? Either way, I think 75 bp would have spooked more than helped. The real "spooky" thing now is it looks like the Fed was pushing on the proverbial spring with its 100 bp of cuts in January.

stock-guest:

What is your outlook for the market if the economy and earnings do not turn around in the second half of the year?

RM_Brett:

Down. How far?

RM_Aaron:

Agreed.

RM_Brett:

You pick a number. Would not surprise me if Nas below 2000, Dow 9000.

RM_Aaron:

Still you can argue the market is now pricing in that scenario so by the time we get to the second half it may be in "recovery" mode.

beastieboyz-guest:

Hey Fellas, can you make a few suggestions on safe places to park cash besides a money market account?

RM_Brett:

MO

RM_Aaron:

CDs

RM_Brett:

MO

MO

RM_Aaron:

I think Brett likes MO.

RM_Brett:

I have to say that I have been pounding the table for MO for mo than 6 months. Despite its real good rally -- new highs regularly -- I still like it.

RM_Aaron:

Tell us how you really feel about MO, Brett.

bob-guest:

Is deregulation of the power industry a good thing or a bad thing?

RM_Aaron:

Well out here in California I don't think anybody thinks it's "good." That said, states like Pennsylvania, where they're really done deregulation, instead of half way, it has worked out well.

RM_Brett:

It's a necessary evil. Only way to get added supply is via some pricing discovery and for that you need a market. That said, there will always be some regulation not simply for political reasons but because we are talking the power to people's homes.

Belle-guest:

Do you think the market will trade in a sideway fashion, and not show a strong rally until the second half of the year?

RM_Aaron:

I think most investors would LOVE to see sideways action for a while after the past few days.

RM_Brett:

Who the hell knows. Depends on what investors see as far as economic recovery. I am in the camp that doubts the second-half recovery.

RM_Aaron:

As for the "strong" rally in the second half, that will depend on how the economy performs. Too early to say now, unfortunately.

jwess-guest994:

Could we have some historical reference for the market P/E's, for example in previous slowdown cycles such as we are having now.

RM_Brett:

In 1990, the median P/E for the board technology sector, as measured by the folks at Leuthold, was a bit north of 20. Today it's about 30, that is one historical measure. In 1974, that P/E was the mid-teens, if you really want to lose sleep.

capy07a-guest:

Isn't the problem is that too many people have lost all their money in NAS and now DOW/S&P? No capital left.

RM_Brett:

Not so much a question of no capital left as much as a loss of appetite for risk.

RM_Aaron:

Agreed. Meanwhile, despite the carnage many investors still had paper gains in their portfolios, believe it or not.

johnfd15-guest:

Is there any concern whether we can avoid what happened to Japan after the bubble there burst? How is our debt compared to their debt back then?

RM_Brett:

We are not another Japan. If we go into depression it will be not so much because of overleverage as much as overcapacity. That said, I think the U.S. will take the hits needed to work thru the excesses at the household and corporate levels.

RM_Aaron:

I don't have the debt figures handy although our level of debt among consumers has got to be far higher than in Japan, where they actually save. That said, our banking system is structurally stronger by far. And as overvalued as real estate has gotten here (in NY, SF, etc.) it hasn't approached Tokyo in the late 80s.

don5x-guest:

B&A: Is it too late for Treasuries? What alternatives to equities? Reits? CDs? Mattress?

RM_Aaron:

Cash is king!

RM_Brett:

Never too late. For the retail investor, TIPs are a decent option, given the economic uncertainty.

RM_Aaron:

Wow, when did you think anybody would ever recommend TIPs?

RM_Brett:

In stocks, just stay away from anything selling above historic P/E or price/ebitda levels.

RM_Aaron:

TIPs, which are Treasury securities geared to hedge against inflation. If inflation is making a comeback, commodity producers should fair well, which gets back to the gold discussion earlier.

twicesouls-guest:

Hi guys, regards from Italy! The market seems in a double bind. Anything is read on the ugly side. Do you really think any FED ease will spark more than a brief rally 'til earnings REALLY start to rise again?

RM_Brett:

I don't.

RM_Aaron:

Me either. Next!

john-guest:

Is it time to load up on Retail stocks while they're still cheap? Which retailers are the best-positioned to benefit from a series of rate cuts and why?

RM_Aaron:

Many retailers already got a bump in anticipation of the first Fed ease. There's also the argument that many of the big names -- WMT, HD -- are "overstored" heading into the economic slowdown. I'd recommend

Herb Greenberg's

work on this on our site.

RM_Brett:

I have been more cautious on retailers than many others. I have feared more and longer term econ weakness. As for names, the best ones are the only ones -- but at what price? Again, do not pay up now. Costco and, say, American Eagle Outfitter are good. But again, you must get these

at cheap levels, and they have had a bit of a rally in recent months. I am still cautious.

lolden-guest:

A question on the markets being "oversold". What differentiates a market legitimately selling off on bad economic news/outlook from excessive selling (i.e. these oversold levels become ok levels)?

RM_Brett:

Oversold means the market has gone down very fast. Whether an "oversold" market is undervalued is another thing. Right now, we still have some areas -- tech and big-cap growth -- that are not yet at recent historical lows. So, I would call them oversold but not undervalued.

RM_Aaron:

The problem with trying to marry technical indicators such as oversold/overbought and fundamental ones such as economic news is sometimes they work in tandem, sometimes they don't. Eventually they'll dovetail but you might get a time when the technicals say buy b/c it's oversold but the fundamentals say sell. I believe in the fundamentals. Now, if

Gary B.

were here...

jared-guest:

Why is so much attention placed on a company's P/E? Companies that aren't even making a profit (no P/E) have stronger buy ratings than those who actually have a P/E (making a profit)?

RM_Aaron:

This is one of the great scams committed by Wall Street in recent years. If a company has no earnings (and thus no P/E), it can't be valued on traditional basis. Thus, you can come up with all kinds of other metrics to justify strong buy ratings.

RM_Brett:

Listen, no professional investor ever takes the buy ratings literally. The fact is most sell-side guys say "hold" or "accumulate" when they mean "sell." It's a shill's game.

don5x-guest:

B&A: Some people say that the excess inventory problem was caused originally by too easy money. How do rate cuts help that problem? Nada, I think.

RM_Brett:

Good question. Rate cuts cannot by themselves help the situation. If we have overcapacity, it will have to be worked off over time. The problem with folks who think rate cuts can by themselves get us out of the current mess is that much of the new plant and equipment will not generate profits even if the cost of capital were zero.

RM_Aaron:

Agreed, but why is the Fed cutting now? Because it tightened too much in 1999-2000. And why did it have to tighten? Because it eased too much in 1998 and flooded the system with liquidity in pre-Y2K months.

Some say the Greenspan Fed has been one of crisis management, which makes me wonder why he's held in such absurdly high regard by most.

RM_Brett:

He should have stepped down after two terms.

RM_Aaron:

Yep.

don5x-guest:

B&A: Meisler sees long term S&P trend being broken downside...confirmation of extended pain (1-2 years)? Maybe Naz is just early to the hanging?

RM_Aaron:

First to the party, first to leave.

RM_Brett:

That is my fear, that after they crush the obvious excesses, they shoot the next guys. That is why I like value stocks, small caps, all the places that money has not flowed in recent years. And cash too.

RM_Aaron:

The Naz is the leading indicator right now. It's what Greenspan seems to be focused on the most b/c of its direct effect on consumer sentiment.

chat-guest:

Is the future good for Compaq and any of the high tech stocks?

RM_Aaron:

There's a compelling argument to be made that the recent carnage has brought valuations for some tech stocks back to levels where they are now INVESTABLE for the first time in years. Many bellwether names are now trading at more reasonable valuations...

RM_Brett:

Good question. As for the boxmakers, I would say they are possible trades here. I know some good hedge fund managers who have been renting them for a trade, not necessarily Compaq. That said, tech is no longer THE place to be for stock investing. Yes, it will be again. But not now.

RM_Aaron:

Exactly, the momentum is (clearly) against the techs right now.

RM_Brett:

I want to see growth return to higher levels before I buy tech-oriented growth companies. There is simply no percentage in speculating in tech in the current uncertain environment when investors are getting more anxious by the month as the market does not go up. Remember, as bad as things have been over these past 10 months for tech investors, they could get worse.

RM_Aaron:

So even if certain stocks look attractive, that doesn't mean they'll be getting inflows of capital. Sort of an inverse of what the value stocks went thru in the late 90s.

don5x-guest:

B&A: That leads to a killer question: If Big Al is so important, what happens to the market when he does, in fact, step down?

RM_Aaron:

Greenspan got nominated to another 4 yr term last summer, so unless his health deteriorates (and he seems pretty hearty) I don't think he's going anywhere. I think a more important question is what happens when/if the market starts to lose faith in Greenspan.

RM_Brett:

Not scheduled for a long time. I think that by the time he does retire, in about 3 years, we will have come to realize that the market and the economy are bigger even than Big Al.

TheStreet-guest:

Thanks Brett and Aaron for a great hour? Any final thoughts?

RM_Aaron:

You won't hear many commentators say this, but I think almost nobody has a real good handle on where we're at right now. This is a very critical juncture for the markets and the economy and I hope we've given you some insight.

RM_Brett:

Today the market started off in the red, rallied back, then ended down. That is what's happening these days. So wise up. Find stocks that are going up consistently and are not wildly priced on historical basis. There are opportunities out there. They just ain't CSCO.

RM_Aaron:

But there are no "easy" answers here. Anybody who claims to have them is deluding themselves.