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To: Ed Forrest who wrote (25430)	7/11/1999 3:46:00 PM
From: Tom Tallant	Respond to of 41369

Ed, Here's another interesting article from todays New York Times,from a relatively bearish analyist that still thinks AOL is a good investment: By KENNETH N. GILPIN EW YORK -- Wall Street is a natural habitat for bulls and bears. But it is a precarious place for pigs. After a strikingly strong first half, stock investors might be well advised to remember that in the final six months of 1999. According to Birinyi & Associates, the gain in the Dow Jones industrial average from January through June was its sixth-best ever. The Nasdaq market also registered its sixth-best first half. By comparison, the Standard & Poor's 500-stock index was a real stick in the mud: its six-month gain was merely the 12th best in its history. Six months ago, Edward M. Kerschner, chairman of the investment policy committee at Paine Webber Inc., was pretty optimistic about 1999, compared with many strategists But the gains recorded thus far have made him cautious about the future. Last week, he took some time to talk about how the stock and bond markets are likely to move in the last six months of the year. Here are some excerpts: Q. Before we look ahead, let's look back. What has been the biggest surprise over the past six months? A. The biggest positive surprise to the market was how good corporate earnings have been. Because of the fall meltdown, at the beginning of the year 4 of the 10 major Wall Street firms were forecasting a decline in earnings for the year. That view was based on a double-barreled fallacy: first, that a market correction means a recession, and that a recession means a decline in earnings. We didn't see a recession, and after we did the math, thought that earnings would be up about 10 percent this year. Q. Still, early this year people were buying stocks because interest rates were low. And the rise, or backup, in bond yields came as a surprise. Has it surprised you? A. We have been bullish on interest rates since 1988, but the rise in rates we have had so far this year is more than we thought. But there is no reason for bond yields to back up much more from here. Q. Why don't you expect much higher bond yields? A. In our view, for the foreseeable future the inflation outlook is nil. Prices are falling due to technological innovation. That doesn't mean the Fed will start to ease again, but anyone who thinks they will be aggressively tight is mistaken. Q. Still, many people are worried that rising rates will hammer a stock market that is seen as highly overvalued. What potential do you see for a substantial correction? A. In terms of valuation, in every sense we can quantify the stock market is nowhere near the excesses seen in 1987. On a price-to-earnings basis back then, the market was between 35 percent and 40 percent overvalued. Based on our models, today we are about 10 percent overvalued. Based on our work, there is a minimal probability of stocks falling 30 percent from these levels. And it is a 50-50 proposition that there will be a 10 percent to 15 percent correction. Q. So you are looking for the market to trade in a narrow range, near current levels? A. The market can stay in this narrow range for as long as things stay as they are, and things are perfect. Perfect is not a word I use often. The upside is fairly limited, because if you have paid for perfection, all you have gotten is a normal return. The other negative thing with perfection is that things can only get worse. Q. It sounds as if you would be happy to close the books on 1999 right now. A. You are going to have to work hard in the next six months to do better than you did in the first half of the year. In a flat market, reasonably good stock selection should give you a return of 5 percent to 10 percent. Q. Which stocks have the potential to provide that sort of return? A. We have a highlighted list of 31 names, most of them bigger companies, which really have an advantage because they are actually raising prices without creating inflation because they are making better products. We like a lot of big technology companies, including America Online and Microsoft, drug companies like Warner-Lambert and Pfizer and consumer-oriented companies like Wal-Mart, Carnival Cruise Lines and Bed, Bath and Beyond. Q. Still, compared with the past few years those sorts of returns sound puny. Are the years of double-digit annual gains in the stock market ending? A. I would advise someone who has been asleep for the last 20 years to get their yield from the bond market and expect 5 percent to 10 percent gains from equities. Those people missed the opportunity of a lifetime. We have gone through a repricing of financial assets that has run its course. Going forward, there is no fundamental reason we can support financial assets that return 20 percent annually.