John J. Edwards III Chats on AOL

John fields questions on the Internet sector, the Fed and after-hours trading.
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John J. Edwards III chatted on AOL MarketTalk on Monday, Aug. 23. AOL's MarketTalk is hosted by Sage Online (Keyword: PF Live). As with all chats, this transcript is unedited.

Comment:

Live from New York, NY, Sage is proud to introduce John Edwards, markets editor at

TheStreet.com.

John can answer your questions about the markets and investing.

Jedwards:

Thanks. Great to be here!

Question:

Do you feel the Fed will raise rates by 0.25 percent or 0.50 percent? and how will the market most likely react?

Jedwards:

The Fed will raise rates by 25 basis points, to 5.25% from 5%. I had thought, along with many others, that the market would probably rally off the Fed's living up to expectations, but today's rally makes me think we could see some selling into the strength.

Much will depend on the Fed's policy bias, which is often misinterpreted as a clear signal on the next rate move. If the Fed sticks with a neutral bias, we could see further gains.

Question:

Is the worst of the Internet stock correction over, or will that sector now face a sell-off as investors take advantage of capital losses for tax purposes?

Jedwards:

The worst appears to be over, but you raise a great point about the possibility for further declines. These stocks continue to be used largely as speculative vehicles rather than as long-term or even medium-term investments, so tax considerations could definitely come into play.

A lot will depend on how the market reacts to what's likely to be a very strong holiday commerce season on the Web.

Will big e-commerce revenue numbers be enough to keep people buying as profits remain elusive? That'll be the big question for the end of this year and early next year.

Question:

Will a raise in interest affect bank stocks?

Jedwards:

Generally, higher interest rates are a negative for bank stocks. But in this case, a modest rate hike of 25 basis points is seen simply as the Fed showing prudent vigilance against inflation, and that's healthy for the market overall. If there's a rally, I think bank stocks will participate.

Question:

What is your opinion of after-hours trading for the individual investor, and will the Chicago Stock Exchange add liquidity to the market?

Jedwards:

I think after-hours trading for the individual investor is a pretty bad idea. The CSX's move will add some liquidity to the very illiquid after-hours environment, as will the trading offered by MarketXT, E*Trade/Instinet and others, but it will remain a treacherous marketplace for all but the most experienced professional investors.

The pros are salivating at the prospect of individual-investor pigeons to pick off in the postclose shooting gallery, and I don't think the advantage of being able to trade in real time at home after work will make up for the awful spreads that the lack of liquidity will cause.

Question:

Are midcaps a good idea at this point?

Jedwards:

Some of the Wall Street pros we're talking to are indeed warming up to mid-caps. Salomon Smith Barney, for one, is bullish on the arena, saying mid-caps offer better value than do most large-caps they follow.

Question:

What fundamentals should an investor focus on when evaluating a stock?

Jedwards:

You want to look at the basics: Not just earnings, but the company's earnings history. How many quarters of sequential earnings growth has the company shown? Are these "high-quality" earnings, or are the company's reports filled with one-time charges and other items that obscure real performance?

If you're investing in an industry where earnings are scarce, like the Internet or cable TV businesses, apply the same kind of rigor to whatever metrics are available.

You want to see sequential revenue growth, sequential growth in customers or subscribers, growth in EBITDA -- whatever can help you to feel more comfortable about the company's prospects going forward.

Question:

Do you feel that there was any truth to the rumors about America Online

AOL talking with AT&T

T regarding a possible strategic partnership?

Jedwards:

I don't have any firsthand or even secondhand information on that, but I don't find it farfetched that the companies would talk to each other.

Comment:

Thank you for joining us today John! We appreciate your insights! We have been speaking with John Edwards, markets editor at

TheStreet.com.