James Cramer and John L. Steffens on Yahoo!

Two financial pooh-bahs for the price of one.
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TSC's James J. Cramer and John L. Steffens, Merrill Lynch Vice Chairman and Head of U.S. Private Client Group, chatted about the pros and cons of online investing, Monday, April 12 on Yahoo!

ChatYahoo_Lisa:

Welcome to Yahoo! Chat.

TheStreet_JSteffens:

Hello and welcome to the chat! The information revolution has become a decision-making revolution with major impacts on personal investing. Individual investors take for granted free access to financial info that used to be precious and scarce. They manage personal portfolios previously available only to professional managers. There are right ways to use these new powers to become a successful investor in the digital age, and there are wrong ways to use them that can lead to extremely disappointing results. The key to successful investing in the coming years is to make determinations of where the world is going to be and get there ahead of time.

Creme_Delacramer:

I believe that the online trading revolution is one of the most exciting and potentially lucrative changes in the American financial firmament. I believe that the positives far outweigh the negatives. But I believe that Mr. Steffens is right that when it is misused, it can be lethal to your portfolio.

NYCSKATER asks:

It seems obvious to me that the investment public demands online discount trading. Even though some at Merrill consider it a "peril," don't you have to concede that it is truly the wave of the future, especially when we are facing upcoming 20-hour global trading? After all, the Internet is bringing margins down in many industries. Do you really believe full-service brokerage commissions can be exempt from that downward pressure in prices due to competition?

TheStreet_JSteffens:

It's clear there is a growing segmented market where people who have the ability and inclination to do research themselves and have the discipline to be successful investors will seek out a less expensive alternative. The ability to provide value-added information to help people make the best decisions for the long term in line with their own risk and financial capabilities and their long-term objectives makes them continue to use a trusted adviser.

Creme_Delacramer:

I think that in after-hours trading, it is even more important than in regular hours to have a professional working with you. I have written a series in

TheStreet.com

about how treacherous after-hours trading is. I think everybody can benefit from professional brokers' input in what I call the badlands of after-hours trading.

Daffeduck asks:

Do you think business-to-business applications over the Web will be bigger than business-to-consumer applications?

TheStreet_JSteffens:

Biz-to-biz apps are already bigger than consumer apps. But only a small part of medium to small corporations are hooked in to any kind of e-commerce capability. There will be major growth opportunities in the biz-to-biz communities, to allow even small biz to go beyond their geographical area, even internationally.

wammo_zammo asks:

Is the Internet bubble fueling the online trading craze?

Creme_Delacramer:

I think it is a bit of chicken and egg. But I would say that the people who trade online love Net stocks both good and bad and are largely responsible for the overvaluations that we are seeing.

TheStreet_JSteffens:

Online trading and Internet stocks are linked with relatively little differentiation between the good and the bad. Misinformation has led in some cases to wild gyrations.

Creme_Delacramer:

I would point out, though, that the online traders who trade Net stocks regularly have been doing a pretty good job of making money because it has worked. As long as it works, people will look very smart. We haven't seen a real downturn in the group yet.

TheStreet_JSteffens:

What did you see from the experience of Jan. and Feb. where quality stocks were down? That inflicted in a short time an amount of concern.

Creme_Delacramer:

That's a good point. There was a lot of bloodshed during that period. But I believe that the Net confounded people and made a case, perhaps the best case yet, for buying and holding quality Net names such as the ones that Merrill Lynch is currently recommending with their very fine analyst

Henry Blodget

, who has made my firm a lot of money.

TheStreet_JSteffens:

I appreciate the commercial!

valwe_99 asks:

What do you think the 24-hour trading systems now beginning to go online will do to the U.S. markets? Short term and longer term (two years)?

TheStreet_JSteffens:

Gold and government securities have traded for 24 hours in the past; that trading hasn't had signifcant impact in the last 10 or 15 years. The question is, will there be enough of a market that gets created where people trading at 1 a.m. are getting ripped off? That might not be in their best interests.

Tris_2871 asks:

How will full-service firms like Merrill Lynch have to adjust their business models to compete in the digital trading environment?

TheStreet_JSteffens:

Merrill is going to do 3 or 4 things. 1 - Make sure our online offering is world class with personalization and acess to all of Merrill's info, plus all the news that's available. 2 - We're going to expand our online offering in terms of execution. 3 - Provide increases in choice for how people compensate us. Finally - Play a major role in providing communities for individuals and biz customers providing e-commerce capabilities.

unkadoug asks:

Will the time come when announcements and warnings come when the online investor can react to them? Wouldn't it have been appropriate for CPQ to call a trading halt at noon Friday for its announcement, instead of waiting until only a few could trade in an illiquid market?

Creme_Delacramer:

First, Compaq halted all trading both online and offline. You could not trade in Instinet either. Second, I think that there are grave misconceptions about the fairness of after-hours trading. Believe me, I have traded in after hours for 18 years, and it is the biggest ripoff imaginable. Sometimes I can win, because I have an edge over someone who is uninformed. But that's not the way big money is made, nor is it what you should want. You want big, liquid, fair markets. That's how everybody benefits. This after-hours fascination is very misplaced because the markets will be inherently unfair.

TheStreet_JSteffens:

I agree. In the case of Compaq, announcing it when they did, allowing info to be available over the weekend was the fairest to all investors. The reaction may have been more severe had they done it any other time.

mtsrps asks:

Will an "Internet trading only" exchange develop? If so, can it compete with the NYSE/Nasdaq?

Creme_Delacramer:

I think that Internet-only again is a mistake. You want one big market, the more the merrier. I think that online is just another form of trading and should not be viewed as separate or better or worse than trading with a broker. The best executions and results.

TheStreet_JSteffens:

The best executions and results with the smallest spreads are going to the marketplace that brings together the most significant buyers and sellers.

blenheim1 asks:

How does Mr. Steffens see online brokerage fitting into Merrill Lynch's strategy in the future?

TheStreet_JSteffens:

Online brokerage is going to be a significant portion -- but it should be considered in terms of execution of all the other services we provide online. A collaboration between technology and human wisdom from our research dept.

Creme_Delacramer:

:Online trading has played a role in keeping all commissions lower and that is a positive role for the consumer. I abhor those who take broker ideas from one place and place orders with a online broker. That to me is theft. But I also think that the online pressure on commissions benefits all traders and investors.

grady51 asks:

Mr. Steffens: You really think that Net investors don't see the difference between Yahoo.com and lilliputian.com?

TheStreet_JSteffens:

Many investors understand the difference between the good, the bad and the ugly. There has been evidence that companies have had exaggerated moves in the marketplace with no significant news. These kinds of things show people have not necessarily done an effective job at checking out info and created crazy moves in the market.

Creme_Delacramer:

Some companies have abused the online rubric by taking it for themselves to shed the bricks-and-mortar reality, such as Books-a-Million. Other companies such as Yahoo!, which I am long, and AOL, which I am long, and Amazon, which I am long, have been masterful executers of their game plans. I have to credit the online traders, for recognizing these companies far earlier than anyone else. Also, the online traders recognized that Schwab, E*Trade and Ameritrade had a real edge in this new world and bought these stocks aggressively while the rest of us ignored them. Now we have to come in at much higher levels, and my hat is off to them for spotting these trends ahead of many investment pros.

abqexile asks:

Is an individual online trader at a disadvantage trading against brokers for a hot issue?

ropel2 asks:

Mr. Steffens, will Merrill Lynch be offering online trading?

TheStreet_JSteffens:

We already offer it. We started a month ago. It's working quite well.

brokrbob1 asks:

Mr. Steffens, isn't the average age of your client base increasing as younger investors leave the full-service arena faster than older investors? Is there a risk that full-service brokers will die with the WWII generation that still favors the relationship you offer?

TheStreet_JSteffens:

The firms will die if they don't change. We have no intention of dying. We have no intention to let future clients do business without competing very agressively.

Creme_Delacramer:

The world has changed dramatically since the early 1980s when I got involved in this business. At the time, many resources were only available to institutions and brokers. Now much of that information is available to everyone online, which is a great democratization and a positive. However, not everyone has the time or inclination to use that information and still others can't use it effectively so there will always be a need for full-service brokers, but I am thrilled to see so many people take control of their own finances because they can do a great job with the information that is now available, and they have prospered so far.

jeffdeclerck asks:

How does the financial consultant fit into this model? Is there still a need for an FC?

TheStreet_JSteffens:

For many people, the complexity of the investing world, especially considering global implications, provides an opportunity for consultants to add value to a disciplined investment program. Saving a client from making one big error may in fact pay for the commission differential for an extended period of time.

dt133 asks:

A question for both. How comfortable are you with the Dow and Nasdaq at record highs when the advance/decline ratio is so low? This is obviously a blue-chip market. How long can it last? Any predictions?

TheStreet_JSteffens:

This is not necessarily a blue chip market, it's a tech market. The best tech companies have been the leaders and the indexes have grown to be narrow, in terms of the impact of a small number of stocks in both the S&P and the Nasdaq.

Creme_Delacramer:

I see significant opportunities every day in this market. I do not feel it is "too high" by any means because there are tons of stocks that are well off their highs. I also think this market is much stronger than people think. And it demonstrated that today by shrugging off Compaq's bad news and rallying. I don't like to be labeled as a bull or a bear, because such nomenclature obscures opportunity. There is opportunity every day in this market and I don't care where the averages are.

TheStreet_JSteffens:

Point well taken. More than most any time in the last decade it is more important to be in the right industry than in the right stock. It's a market of stocks, not a stock market.

mrlee112 asks:

Online investors have contributed to market volatility, but how much have foreign investors added to our highly valued stock market?

TheStreet_JSteffens:

From the numbers I've seen, the flows of foreign investment into the U.S. haven't been significant. I don't think it's led much to the increase in the averages to date.

Creme_Delacramer:

I think the idea that online investors have contributed to volatility is somewhat valid, but what really has contributed to that volatility is the uninformed use of market orders to buy stocks. I think that some of the openings -- for example, in IPOs -- make little sense to me because people are using made-to-orders. That's where the crazy volatility is and that's where the biggest dangers are for online traders.

gbdarcangelo asks:

Cramer, how do you think daytraders have changed the marketplace?

TheStreet_JSteffens:

There's a significant amount of daytrading that's taking place. You only have to look at the aftermarket of an IPO where three to five times of the initial offering of the company shares is in after-trading. Daytrading as an ongoing mission is difficult, except for a small percentage of people that undertake it.

Creme_Delacramer:

I think the influence of daytraders is not that great. I did think that before the margin rules were changed, that there was a negative influence, but that things have calmed down. Also, I want to make the point that I just want people to profit and make money. If they can do so by daytrading, I am thrilled for them. It is very difficult to do, but if you can do it successfully, terrific.

TheStreet_JSteffens:

Daytrading has a significant tax issue which has gotten little coverage. It's all short term, so the gains are taxed at 40%. Plus you can only write off a max of 3,000 in losses. The government has an incentive to maximize that kind of split. Putting excellent companies long term has a significant advantage in that you get a 50% reduction in the tax rate. And you don't have to make a contribution for your partner who never put up any money.

hayelh asks:

Question for both: How important are P/E ratios in today's stock analysis? Some scary numbers out there!

Creme_Delacramer:

P/E ratios are less important than they once were, if only because this market places a premium on revenue growth. That's how many companies are valued these days. Does that mean we should ignore P/E ratios? No, we must pay attention to them, but if the benign bond environment continues ... meaning rates stay low or go even lower, P/E ratios will go much higher. I am always worried about these things, because in Japan in 1989, P/E ratios were off the charts and look what happened there. But at the same time, if you look at Yahoo!, and figure out where it came public, you would realize that Yahoo! traded at ten times its 1998 earnings at its IPO price, which seemed very overvalued using traditional P/E ratios. That would have made you miss one of the biggest moves of all time.

TheStreet_JSteffens:

Revenue growth will continue to be critically important. P/E multiples are less relevant in today's market, but they become more relevant over a longer period of time.

onmyoan asks:

What is the next evolution of online investing?

Creme_Delacramer:

I think the next evolution will be when we are able to have voice recognition that makes it so people don't have to type. But I don't know when it will be ready, and the stuff I see now is either so expensive as to be prohibitive for individuals, or it gets it wrong.

TheStreet_JSteffens:

The near-term opportunity will be in the international markets. As those markets expand, online activity around the globe will also expand. That activity will change P/E multiples in other countries, much like they have done in the U.S.

TheStreet_JSteffens:

Successful investing, on- or offline still depends on being smart: figuring out where the world is going to be in five years, seeing companies that benefit from those trends. Internet companies are a great example of this understanding. Biotech, e-commerce and globalization will be three trends that will continue to increase investor interest. We answered only a few questions but we'll try to answer more through Merrill Lynch online today. In cooperation with Yahoo! we're going to try to answer many remaining questions. Check out www.mlol.ml.com.

Creme_Delacramer:

I personally am blown away by how well so many individuals do who are trading online and communicate with me through

TheStreet.com

. I think Mr. Steffens and I agree that there is room for everybody. And I know I value my Merrill relationship, (I am long the stock, Merrill Lynch) and I love online trading, too.

ChatYahoo_Lisa:

Thank you for joining us! Transcripts will be up soon on

TheStreet.com

. Cramer chats here every month! Thanks, everyone!

TSCEllen:

Look for the transcript of this chat on the home page of www.thestreet.com and then in the Community section.

TSCEllen:

Also, make sure to check out Gary B. Smith, for a little technical analysis, tomorrow at 5 p.m. ET.