Timehost: Welcome to the TIME room! Our guest tonight has joined us: He is Charles Clough, chief investment strategist for Merrill Lynch. And also a member of the TIME Board of Economists. Welcome, Mr. Clough.

Charles Clough: Thank you.

Timehost: Let's go to the first question..

birdowenasks: Was all the money that has poured into equities recently spent thoughtfully? Are we seeing a speculative bubble right now?

Charles Clough: Money is coming into US stocks from a number of sources. One is foreign investors. We think foreign investors are investing as much as a $150 billion annually. Corporations are borrowing heavily to buy back their stock and some leverage seems to be coming from financial companies. In other words, some leverage seems to come from investment companies, leveraging their own stock positions. It may not be a bubble, but there is a lot of borrowing going on to hold equities.

liz_locquaciousasks: Which stocks have been driving the market's growth? Are there any unsung stars or unsung duds among the rest of the S&P 500?

Charles Clough: Technology, drugs and financials have been the market stars for the last few years. We think that's changing. Smaller capitalization stocks are doing better and some cyclicals are doing better. Perhaps the best values are there. For example, real estate investment trusts, and energy stocks. Those are two examples that might start to do better.

Timehost: What about Internet stocks? Are they rejoining the ranks of mere mortals yet? When will the infatuation end?

Charles Clough: It may have already at least for this cylcle. We've some come 50-60 percent off their highs. And the market is trying to sort it out. Our sense is that they will be dull stocks for the rest of the year. For one, there are way too many Internet issues, so I'd wait before I bought anything in the sector.

tweetsie_1969asks: Is the current infatuation over Internet stocks a sign that earnings no longer matter?

Charles Clough: The market may have been very rational in exaggerating Internet stocks. This is a new industry that requires enormous capacity and the market provided the capital to do that. It made capital available to hundreds of new companies. It did the same in the early days of the personal computer and the biotechnology industry. Unfortunately, many of those companies did not survive, and that might be the case with many Internet stocks, but the market is allowing the industry to build itself up. Be careful.

Timehost: You say that there are way too many Internet issues, which leads me to the next, inevitable question:

Moscow_Maudasks: What was behind Merrill Lynch's decision to go online?

Charles Clough: The market forced our hand. It was clear that the Internet is becoming a major force in retailing and financial services. A few years from now you may make a loan, buy a mortgage, buy an automobile, and certainly trade stocks over the Internet. Merrill Lynch simply had to adapt to the new medium.

Almost_Heaven_West_Virginiaasks: Do you do any online trading yourself?

Charles Clough: I do not. All my trading has to be done through Merrill Lynch. Once we are up and running on the Internet, I will likely do my trading there -- but it will be through Merrill Lynch.

Almost_Heaven_West_Virginiaasks: Would you like to see the NYSE and other exchanges open 24/7 to accomodate online traders?

Charles Clough: That is a controversial issue. My own feeling is that it will be difficult to implement night hour trading in North America. An effective stock exchange requires not only trading capability, but liquidity and depth. Many traders and dealers have to be present at the same time to create a fair and liquid market.That may be difficult in the night hours so good price execution may be more difficult to achieve. I'm skeptical!

MrDoodles78asks: Do you believe that retailing, especially those that are on line, will see a growth in the coming year?

Timehost: Particularly online retailing is interesting...

Charles Clough: Retailing grows every year, even in recessions. Online retailing will explode, but that does not mean that the current e-retailers will do well. For example: when Walmart stores establishes its web pages, it likely willl create tremendous competition before e-toy retailers and other sellers of goods. Manufacturers will also establish their Web sites, for example, in the toy industry. So there is no guarantee that the current popular names will always be successful. The Internet is obviously going to be huge. Hundreds of companies that have strong manufacturing and retailing positions today will learn how to become effective Internet retailers.The one thing that we know about the Internet is that things will change. Remember how so many of the original personal computer companies eventually disappeared to be replaced by the Dells and Compaqs.

Doris_Dollarasks: Are you worried about corporate borrowing? If firms are borrowing too much and profits are low, putting pressure on the market, and the consumer savings rate is negative, could we soon find ourselves in big trouble if somebody lights a match?

Charles Clough: I'm concerned about the fact that so many companies are now borrowing heavily in the bond market and from banks to by back stock. It seems more of a strategy to increase short term earnings than effective long term planning. At current prices, businesses are paying up for their stock.

Charles Clough: My best guess is the stock market trades sideways for a while until current overvaluation is resolved. The risk is a profits squeeze in 2000 if the consumer slows down. Many companies are gearing up for huge growth and that might be more difficult to obtain as time goes on. So we would stay with low P/E stocks.

Jim_E_Riddleasks: Investors require higher returns as risks increase, as yields are so low, the only other return available is capital gains, clearly this cannot increase forever, so surely there will be a massive correction at some point to redress the balance?

Charles Clough: There will definitely be a correction at some point. The Fed has started to tighten, brokerage stocks are starting to act poorly. These are signs that the market is struggling a bit. But at the moment, we are not looking for a major correction.

Louisk39asks: What are the prospects for inflation? Should we be worried?

Charles Clough: Our feeling is no. Commodity prices may rally in some instances, but they were extremely depressed. Automobile prices are declining, despite booming sales. A major brokerage house just reduced the price of a trade quite substantially. There are a lot of prices that are declining because capacity shortages do not exist.Don't identify oil prices with inflation. They are just coming back to normal.

Timehost: What do you expect will happen at the Fed's meeting next week in regard to interest rates?

Charles Clough: The market is assuming a 25 basis point, .25 percent increase in the funds rate. No increase, or a 50 basis point increase would be a surprise. Many of our traders are expecting a modest increase.

Moscow_Maudasks: What would China's entry into the World Trade Organization mean for US businesses?

Charles Clough: It would be a plus. Especially for services companies, like banking or insurance, or for US retailers who would find it easier to build a beach head in that enormous market. It would be better for China and for the US.

demers1957asks: When do you think China will be a stable market for trading?

Charles Clough: China's stock markets are still undeveloped. The ordinary Chinese does not own mutual funds or trade extensively and financial institutions in China are still evolving. Many companies, whose stocks trade, still have communist-type management structures. So illiquidity and volatility will be a fact of life there. However, we still like the Chinese stock market as an investment opportunity, with those caveats.

Stamm444asks: Does Merril ever recruit recent grads from non-Ivy league schools? How can I get an interview if I am a recent grad?

Charles Clough: Sure. We look for talent wherever we can find it. Send me a resume, and I'll pass it on to Human Resources.

Timehost: OK, thank you very much Mr. Clough for joining us tonight! Be prepared to be swamped with resumes now!

Charles Clough: The investment world is a fascinating place, and it summarizes the entire human experience. Best of luck in meeting your goals.

Timehost: Thank you, Mr. Clough.

TIME Board of Economists