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To: Glenn D. Rudolph who wrote (22919)	10/24/1998 11:40:00 PM
From: Bill Harmond	Read Replies (1) \| Respond to of 164684

ProfitABILITY, Glen. Returns. >>I thought online advertising was growing at a tremendous rate. It is. Yahoo's growing faster. >> I am a bit confused here. You said it! :)

To: Glenn D. Rudolph who wrote (22919)	10/25/1998 7:57:00 AM
From: Glenn D. Rudolph	Read Replies (2) \| Respond to of 164684

MARKET INSIGHT That Market Bottom Might Be a Trap Door ---------------------------------------------------------------------------- ---- Related Articles The New York Times: Your Money Forum Join a Discussion on The Stock Market ---------------------------------------------------------------------------- ---- By KENNETH N. GILPIN As almost anyone with a market memory can attest, the month of October is not usually friendly for stocks. Since 1915, the Dow Jones industrial average has fallen an average 0.17 percent in the 10th month of the year, according to Birinyi & Associates. Only Septembers have been worse. This year, September was a washout. But with one week to go, October has proved to be the best month since January 1987. The performance has been enough to induce hibernation in many bears. Then there is James Grant, editor of Grant's Interest Rate Observer. Q. Many people seem to think the stock market has seen its lows. You don't agree? A. If this were the bottom, it would be the most remarkable one in history, one where the Standard & Poor's 500 index is trading at 25 times earnings. That is a valuation rarely achieved at the top of a market. I think that this is a bear market rally. I would suppose that if the market gods were designing a bear market rally, they would make it look as irresistible as possible and would want as many participants as possible before opening the trap door. Q. But there are hundreds of stocks, especially small caps, that are down 25 percent or more this year. Are they overpriced? A. Really cheap stocks are beginning to appear. The great, overarching question is whether you are well advised to seize values in the secondary and tertiary parts of the market when the primary market is selling at these multiples. In my view, the answer is no, because when the GEs, the Charles Schwabs and the other chosen fall, they will crush the smaller ones beneath them. Q. Do you see value anywhere? A. I have two favorite things: small-cap Japanese stocks and gold. There are opportunities in Japan to buy profitable companies at little more than the net cash on their balance sheets. You get the business for free. Gold, now at an 18-year low, has disappointed more people than the old Brooklyn Dodgers. But I think it will be the beneficiary of continued chaos in the credit markets and a worldwide economic slowdown. Q. Do you see anything of value closer to home? Or a company that is a massive, screaming short? A. I see both, actually. In Canada, there is an outfit called Legacy Hotels, which is a real estate investment trust with a bunch of lovely properties spun out by the real estate division of Canadian Pacific. You can buy this stock for about half of book value, with a yield in the low teens, an outfit with good management that is priced in Canadian dollars, which are very cheap relative to the U.S. dollar. The risk is that there is a severe recession and the business travelers stay home. Q. What about the screaming short? A. The short sale is Charles Schwab, a stock that is trading at 38 to 40 times earnings, 10 times book value. Schwab is priced as if there were no doubt about the continued health and prosperity of the bull market. Q. Now that the Fed has cut interest rates twice in a matter of weeks, fears of a credit crunch and recession have diminished. Is that an appropriate reaction? A. The credit crisis may sound melodramatic, but over the last several months there has been a very severe bear market in credit of all kinds. And it should be seen in the context of the preceding bull market in credit, where it was freely, if not almost promiscuously, available. There is no recession we know of right now, and yet we have had a credit crisis in this country, which in the postwar period is a rare if not unique occurrence. It makes you wonder what will happen to this institution of borrowing and lending if there is an actual deflation, or an actual recession. Q. But isn't it the Fed's job to take steps to prevent a credit crunch? A. It has been the suppression of cycles that paradoxically has created a lot of the volatility we have seen in the credit markets. By succeeding in perpetuating the expansion, the Fed has failed in the sense that it has changed the behavior of people with money. By saving Mexico a couple of years ago, the authorities changed the way people view sovereign credit risk. Hence the surprise when the Russian government defaulted. A visitor from Mars would not have been surprised that a country without money could not pay its bills. But many were surprised, because they had come to expect that the integrity of the system will be defended. By suppressing the volatility of the credit and business cycle, by trying to head off price inflations and deflations, the Fed has thrown a boomerang in the air, which is the risk tolerance of people who invest money. The Fed ought to be in the business of central banking, not central planning. Alan Greenspan ought to say that people who risk money stand to lose a lot of it. That is in the nature of cycles and markets.