Timehost: We're very pleased to be joined tonight by Vincent Farrell, chief investment officer for investment firm Spears, Benzak, Salomon & Farrell. Mr. Farrell is also a member of the TIME Board of Economists. Welcome, Mr. Farrell.

Vincent Farrell: Thank you. Glad to be here.

birdowenasks: What do you think will happen at the Fed's meeting next week? How will the markets react if interest rates are nudged up? Or if they aren't?

Vincent Farrell: I'm positive interest rates will be raised 25 basis points next week -- a quarter of a percent -- and it will have no effect on the markets. Mr. Greenspan last week very clearly signalled a quarter point hike. A problem would arise if the Feds raised rates by one half of a percent. Mr. Greenspan is known as a gradualist, and a 50 basis point hike would be out of character, and might indicate he knows something that we don't. I don't expect that to happen. I expect a 25 basis point hike and a continuation of the tight bias that the Fed has already announced.

Stamm444asks: How much longer will this economic boom last? It's already the longest peacetime expansion on record. Is there some law of gravity that slows it up eventually?

Vincent Farrell: Good question. And it is, of course, the most important question. I think the expansion can continue in a low-inflationary way, indeed maybe in a non-inflationary way if productivity growth can continue. I believe that productivity growth will continue because I suspect the enhanced computerization and telecommunications systems we have are almost not measurable using the old methods.It's impossible, though, to be definitive. This is just a feeling that I have.

frrdrprbasks: Is there anything other than a significant increase in interest rates that will slow consumer spending and capital investment?

Vincent Farrell: I believe that consumer spending is going to slow in the second half of this year for several reasons other than an interest rate hike. Hours worked are still increasing, but at a decelerating rate. Average hourly earnings are increasing, but at a decelerating rate. Lastly, the savings rate is negative and even though our 401k plan growth and the enhanced value of our real estate is not captured in the savings rate statistics, I believe that things revert to the norm and that the consumer will save a little bit more. Since the consumer is two-thirds of economic activity, I think a slightly less exuberant consumer will bring the economy to a slower rate of growth. Of course, a major stock market correction will always slow consumer spending.

forgetmenots_23asks: Do you think the Dow Jones will continue to increase or do you think it is heading for trouble?

Vincent Farrell: If those are the only two choices, I think it will continue to increase. But if I could broaden the answer, I think the next few years will see a broadening of the market and non-big name stocks will be more attractive. In 1998 we bought growth stocks because we feared recession, caused by all the international stuff. If I'm right, that the economy is OK, we won't need to run to growth at any price. We'll start to seek out situations that might offer lower growth than some of last year's big winners but are correspondingly cheaper priced. Net, I think we'll make money the next three years by careful stock selection and don't worry about what the Dow Jones average does.

tweetsie_1969asks: If you had $1,000 to play around with, what would you put it in right now?

Vincent Farrell: If all I had was $1,000, it might imply that I shouldn't be in the stock market. But if you're looking for ideas that I think are timely (but I'm a long term investor with a multi-year time horizon) some of the names that we think are attractive right now are: Burlington Resources (BR), CIT Financial (CIT), General Motors (GM), GTE, and, maybe more controversial Compaq (CPQ).

Deep_Finkerasks: When do you think that the internet stock boom will dampen down - when will investors loose their great enthusiasm for all things internet related ?

Vincent Farrell: That's a great question. I think we're in the process of losing the enthusiasm right now. Many of the stocks are off up to 50 percent from their recent highs. I think that at the end of the day, many of them will be significantly lower. If we want to worry, we could look to 1962 for historical precedents. In 1962, anything that ended in "tronics" was the internet stock of the day. They had a huge correction, and when they tried to rally and failed to reach their old highs, the whole market declined with them. I'm not predicting that, but I worry about it. I do think that the internet stocks are in a box by themselves, but if I'm wrong, it could spell trouble for the whole market.

bengraham100asks: Could you give me your impression of Amazon.com and what would happen if a sales tax intitative is enacted?

Vincent Farrell: I don't hold myself to be anything but an interested observer on the internet stocks. I think Amazon might be a wonderful company, but, in my opinion, a terrible stock. In my opinion, the valuation is absurd, and they're chasing what have historically been low margin businesses. If a sales tax were enacted, I don't think it would slow down the movement to shop on the internet, since it would affect all players equally. I don't know who would get to keep the tax. And all domestic internet players would probably simply go overseas, as their place of domicile.

Timehost: How will online trading affect the investment strategy of firms such as yours?

Vincent Farrell: It won't affect us in that we charge a fee for the management of the money. I think it will change the business model of the brokers significantly. Merrill Lynch has recognized this and taken steps to institute a flat e-trade fee. But the trend has been away from transaction businesses to fee-based businesses, and I think electronic trading will only accelerate that.

Timehost: We've had several questions along the lines of this next one....

Jim_E_Riddleasks: What is your view on Wall Street's current overvaluation?

Timehost: Is it, in fact, overvalued?

Vincent Farrell: The market is overvalued relative to almost any historic norm that you would look at. The price to earnings ratio for the S&P 500 is about 27 times. The last extended period of low inflation saw a multiple of around 20 times. But in 1998 when the S&P was up 28 percent, 50 stocks accounted for 87 percent of the gain. So the S&P 450 (if you give me that poetic licence) gave you a return of only 3.7 percent. So the popular average is overpriced, but many stocks are not. I would also buy the argument that since we are in a higher margin technology and telecommunication-driven economy, higher multiples are probably warranted. Having said that, we are at a higher multiple, so I would be looking more towards companies that have not participated in the past couple of years, but whose basic business has remained sound.

forgetmenots_23asks: What formulas do you use when picking your stocks?

Vincent Farrell: No formulas. We use bottom-up old-fashioned analysis and try to derive the present value of the future stream of earnings. We try to use conservative assumptions about growth rates and tend to discount back at higher interest rates than would reasonably prevail. In so doing, we tend to eliminate many potential names and come up with stocks that have historically for us allowed us to avoid downside risk. Correspondingly, we have tended to not participate on the upside when markets get over-enthusiastic.

Timehost: Switching over to Europe for a second...

Louisk39asks: The euro has been dropping ever since it started. Is that a problem for Europe? What does a declining euro mean for the Europeans? For Americans?

Vincent Farrell: I don't think the declining euro is a problem for Europeans. It ought to make their exports much more competitive. Sooner or later, a sound and stable currency is required for international investors to have confidence. But my best guess is that the euro is simply finding its appropriate level. The declining euro could potentially be more of a problem for the U.S. in that it could worsen our already large trade deficit.

Stamm444asks: Will Larry Summers be a good replacement for Rubin at Treasury? Did he and Rubin and Greenspan really save the world's economy during the Asian crisis?

Vincent Farrell: Yes to all the above. Summers will be a very competent Treasury Secretary, but not nearly as smooth as Rubin. I think the three did everything right during the crisis in that they stood up, articulated a program and inspired confidence.

Timehost: This next question comes from a high school student who's trying to save for college...

CameronCrazy2002asks: What do you think has better earning potential over a three-year period... stocks, bonds, or mutual funds?

Vincent Farrell: Over any given three-year period, stocks have given you a better return than bonds. Since 1946, there have been 50 rolling three-year periods (1946, 1947, and 1948 would be your first data point, for example). Forty-eight of the 50 time periods have given you a positive return in stocks. Only two, the three years ending 1974 and the three years ending 1975, have been negative.If history is a guide, we have pretty good odds that we'll make some money in the stock market over the next three years. I wish you luck: my fourth child is about to go to college, and I know only too well how expensive the whole process is.

Timehost: We've run out of time, unfortunately, but thank you very much, Mr. Farrell for joining us this evening. Any closing thoughts?

Vincent Farrell: Thanks for the chat time, I enjoyed visiting, and I would be glad to come back sometime. Keep in mind that any advice I may have given is probably worth exactly what you paid for it.

Timehost: We'll do that. Good night!

TIME Board of Economists

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