Chris Edmonds chatted on AOL MarketTalk on Thursday, Oct. 12. AOL's MarketTalk is produced by Sage Online (Keyword: Markettalk).

OnlineHost:

Live from Atlanta, Ga., please welcome

Chris Edmonds

, contributing editor,

TheStreet.com

. Chris can answer questions about the markets, funds, utilities and the wheelings and dealings of

Warren Buffett

. Visit Keyword: TheStreet.

SageMoola:

Good afternoon and welcome to MarketTalk, Mr. Edmonds!

CSEonTSC:

Thanks so much. What a tough day in the markets. Home Depot warns, Middle East tensions, and other gloom. Lets talk about it. Great to be here!

Question:

Do you feel that the market is close to a point of capitulation, and if so, will the traditional fourth-quarter rally occur this year?

CSEonTSC:

Hard to call a bottom yet. I think you still need to see that crescendo selling that hasn't happened although I think we are closer than not.

CSEonTSC:

I think the overhang of macro political events clouds the picture, however. I also worry about margin debt levels and what stocks are behind the margin. That may be the signal we need for a bottom.

CSEonTSC:

But, I do think we will see a fourth-quarter rally, probably mid-November.

Question:

With only 5 out of 300 business-to-consumer (B2C) Internet companies having reached profitability, what is the likelihood of more B2C companies breaking into at least positive cash flow?

CSEonTSC:

I think you will see more consolidation in the business. Way too many speculative plays at first and now you are seeing separation. That will continue.

CSEonTSC:

You may end up with a handful of generalists -- lets say a dozen or so -- and then some niche players who have controlled their growth and worked their way to profits. A lot more fallout to come, however.

Question:

I am on margin and it is beginning to make me more than a little bit nervous. I have considered selling some of my positions to pay down the margin balance, yet I find it difficult to sell at these prices. Can you give me some direction? Thanks.

CSEonTSC:

Tough position to be in ... you have my condolences. A tough lesson to learn but you can recover.

CSEonTSC:

I don't know your portfolio and I don't know the rest of your financial position and without it is tough to be specific but take this piece of advice: In a market like this, it is better to have less debt than more.

CSEonTSC:

That way, you can come back and play another day.

Question:

SFA (Scientific-Atlanta) on its selloff after your positive remarks on cable?

CSEonTSC:

Not sure I made positive comments on cable. I do think SFA is a survivor in its biz. That's about it.

Question:

Is now the right time to buy gold stocks?

CSEonTSC:

I'm not sure anytime is the right time to buy gold stocks. I think the world economy has changed to a point that gold does not play the same role it has historically.

Question:

Will traditional brick-and-mortar companies take the place of the failed dot-coms in terms of continuing to supply ad revenue to companies like DoubleClick?

CSEonTSC:

Good question. Clearly a big chunk of the disappearing dot-com capital base went to advertising.

CSEonTSC:

I do think you are beginning to see more bricks-and-mortar companies looking to the Web for marketing, but it isn't clear that will be enough to fill a very big void.

CSEonTSC:

However, you will see a transition. My guess is Web marketing will look very different two years from now than it does today.

Question:

As there are only a finite number of advertising dollars to spread around, is the ad-revenue only model pretty much a failure at this point?

CSEonTSC:

Another good question. I don't think the model per se is a failure. I do think there are a number of companies that haven't quite figured out the way to execute.

CSEonTSC:

Clearly , you will see more fallout before things stabilize.

Question:

Is there concern that fourth-quarter and 2001 estimates could continue to trickle lower in reference to earnings?

CSEonTSC:

That's possible. It depends on the sector and it depends on your view of the economy.

CSEonTSC:

Is it becoming more difficult to make money? Yes. Look at the warnings across the last week and today from Home Depot. Does that mean everyone will warn? No.

CSEonTSC:

You have to pick your companies and pick your sectors. It is clearly more difficult to find upside surprises today, however, than it was a year ago.

Question:

Are the big stocks like Cisco, EMC and SUNW going down because of selling to cover margin, which would then cause the price of the stocks to go down further? Domino effect, capitulation?

CSEonTSC:

I think that is a part of the story, although the retail brokers I talk to in the course of a day have been surprised there haven't been more margin calls and more margin selling.

CSEonTSC:

You will see that and that will be one of the signs of a bottom. Everyone should read my colleague,

Jim Cramer's

, column on how to know when the bull market will return on

RealMoney/TheStreet.com

Wednesday.

CSEonTSC:

One of the best thought pieces I have seen in a long time on the market and the psychology.

Question:

What effect do you see the weak euro and rising petroleum prices having on company earnings going forward?

CSEonTSC:

A positive impact on the energy companies. See my analysis on oil and gas companies at

TheStreet.com

. A real negative impact on transport companies (energy costs that is).

CSEonTSC:

The Euro is a bit more complicated. I think we are all waiting to see the impact there.

Question:

Have unsafe margin on LU, ARTG, JDSU, LU, CPQ, GBLX, VSH. AMAT: Which to sell now as I am afraid that Mideast may cause market to go down even further?

CSEonTSC:

Margin debt is troubling in this market. Better to have less debt than more. Be prudent and conservative so you can continue to play another day.

Question:

Is nokia going to pull out of its slump?

CSEonTSC:

I sure hope so (long Nokia). Spent a month in Finland this summer and saw the company and the next generation of products.

CSEonTSC:

I think what you will find is that while new handset sales are dropping, a resurgent in upgrades (remember the PC market) will spur sales in the second-half of 2000.

CSEonTSC:

Once the communications issues are sorted out, you will be shocked at what a cell phone can really do and Nokia is the leader in that space.

Question:

Nonfinancial companies now have a record $4.4 trillion in debt, bringing the average debt-to-equity ratio to over 80% compared with a 70% in 1997. Should we be concerned that corporate America is becoming so heavily leveraged?

CSEonTSC:

Leverage can be a good or a bad thing. I'm not sure your numbers are exactly accurate, but leverage in an economic slowdown (just like margin) can be a very bad thing. I'd look to companies that manage their balance sheets in a more conservative manner.

CSEonTSC:

TST Recommends

Especially as times become more challenging. There are plenty of those companies around, by the way.

Question:

What's going to happen with Boeing?

CSEonTSC:

Some good things happening at BA. Orders are strong. However, a lot of those orders are not firm so higher energy prices could spill over to manufacturers, especially if airline profits take a hit.

Question:

I take it there are certain rules that publicly owned companies must abide by, regarding earnings announcements. Could you please go into what these rules are?

CSEonTSC:

Good question: There has been a lot of talk recently about the new Securities and Exchange Commission (SEC) regulations on Fair Disclosure, or REG FD. You can find more at the SEC Web site, I think www.sec.gov.

CSEonTSC:

However, the goal is to make announcements as open and widely disseminated as possible, so every investor -- big and small -- gets the same information.

CSEonTSC:

We have spent a lot of time on

TheStreet.com

and

RealMoney.com

discussing and analyzing the impact of those regulations.

Question:

Is preannouncement season restricted to only those companies that have bad news?

CSEonTSC:

No, there are companies that have announced better-than-expected earnings before their formal earnings announcement.

CSEonTSC:

The psychology of the market means that the bad news seems to be at the front of every paper and at the top of every talking-head financial show.

Question:

Now that the good earnings news has started to come in, do you think the markets will eventually rally? Would now be a good time to pick up some bargains?

CSEonTSC:

I do think there are a number of very fairly priced companies in the market at current levels. I'm not sure that means they won't become even better values.

CSEonTSC:

I do think we will see a pretty strong rally by the end of the year. . .but I think you have too many issues hanging around right now that place questions in the minds of investors.

CSEonTSC:

Be patient. As someone said Wednesday, "Good rallies give you plenty of time to buy."

Question:

Are the GOP (Bush Forces) at work to kill this market and the economy?

CSEonTSC:

Conspiracy theory does very little for me. Next!

Question:

Do you think tech stock will come back? It's taken a beating now.

CSEonTSC:

I think you are beginning to see some very good value in large tech. However, growth is slowing and that means you can't expect the real strong surges you have seen in prices in the past.

CSEonTSC:

But, yes, value is becoming more obvious.

Question:

I bought AOL at $53 1/2. Why isnt AOL jumping after what seems like good news?

CSEonTSC:

Overhang of the Time Warner merger and what that means to the growth rate. Still a core holding and part of my portfolio. Think you will see the stock make a meaningful move once the merger is complete and operations intergrated.

Question:

If a major retailer comes in with a warning is it too risky to short sell other retailers in a bear market like this?

CSEonTSC:

Very good question. Clearly, you saw HD's warning take the entire sector down this morning.

CSEonTSC:

However, I have to think that many of the traditional retailers are too cheap to short here and I dont think I would touch a Kohl's, a Target, or a Wal-Mart because of their potential to surprise on the upside.

Question:

I am looking to diversify. Would a health care mutual fund be a good way or do I just diversify by small, mid, large, value, blend etc...?

CSEonTSC:

Sector funds clearly can have a place in a mutual-fund portfolio. It really depends on the size of your holdings, your time frame and the fundamental analysis you use to arrive at sector choices.

CSEonTSC:

I generally say keep the core portion of your portfolio in core funds and use small amounts to make sector bets if you are general investor looking to retirement. However, sector funds can be very rewarding ¿ they also increase the risk in your portfolio, however.

Question:

Which tech sector is a good buy?

CSEonTSC:

Even though you are seeing some telephony problems, I still like the big names there --

CSEonTSC:

I am long CSCO and NT. Would not touch Lucent . . .yet.

Question:

At this point in the market what are you doing with your own portfolio?

Question:

Are you hanging in there? Shifting to safer stocks, or getting out all the way?

CSEonTSC:

I've tried to be out of the way but I am beginning to see some value in tech,and I also think there is relative value in a number of the regional financial names, as long as I can get comfortable with credit risk.

Question:

What's Mr. Buffett up to lately?

CSEonTSC:

Let me get him on the phone and ask him...

CSEonTSC:

No seriously, he did purchase the big carpet company, Shaw Industries (pending) and I do think he is still sniffing around the utility industry to build his investment in Mid-American Energy.

CSEonTSC:

I also think he is sitting back and quietly saying "I told you so" about the valuation issue.

CSEonTSC:

I do think he is also quietly on the prowl for a number of very good buys as this market seems to be reacting at the opposite end of the valuation spectrum.

Question:

Do you see LU as a takeover target? Maybe JDSU will acquire them too? They have been on a roll buying up everything.

CSEonTSC:

Interesting thought: Thought about the possibility myself but I don't think the market environment is right ¿ yet. (Note, the second time I have used the word yet with regard to Lucent ¿ that should be a hint.

Question:

Which energy and utility stocks are good buy?

CSEonTSC:

First, a personal plug, see my piece yesterday on the oil and gas sector with a list of good stocks to look at

TheStreet.com

.

CSEonTSC:

On the utility front, I think you want to look at those companies that are taking advantag of the convergence theme and deregulation. That list includes El Paso Energy, Dynegy, AES, NRG, Calpine and Southern Energy (Long SOE).

CSEonTSC:

Also the consolidation plays are interesting -- the combination of PECO and Unicom builds a very attractive franchise. (Long PE)

SageMoola

Thank you very much for joining us today, Mr. Edmonds!

CSEonTSC:

Thank you. The folks at Sage are always great and your questions show how thoughtful the participants are. A couple of words in this difficult market.

CSEonTSC:

Patience, prudence and a conservative bent is the way to play. There is always tomorrow and your goal in a market like this is to protect yourself so you can come back to play tomorrow. I can't say that often enough.

CSEonTSC:

Be careful out there! See you on

TheStreet.com

.