Timehost: We're very pleased to have with us tonight Joseph Battipaglia, chairman of investment policy for Gruntal & Co., and a member of the TIME Board of Economists. Welcome, Mr. Battipaglia.

Joseph Battipaglia: It's a pleasure to be here.

Timehost: Let's take our first question...

Twaddle_Timeasks: How do you explain the tumble in the US stock market today? And the fact that bond interest rates climbed to 6.17 percent, their highest level since 1997?

Joseph Battipaglia: There is a nagging worry, not that interest rates will rise by 25 basis points, but by 100 or more basis points in a series of steps by the Federal Reserve to cool the US. economy. I believe this concern is ill-founded, that we are not going to see a significant increase in interest rates that will severely damage the stock market. The last thing the Fed wants to do is to upend the US economy. So what we have seen today is nothing more than a trendless market awaiting the actual decision on rates at the Fed meeting of June 29 and 30.

Ziya_Zaryaasks: What do you think will happen at the Fed's meeting next week? What effect will this have on the stock market?

Joseph Battipaglia: I believe that the Fed will raise interest rates by 25 basis points and articulate their view that there is no imminent danger of renewed inflation, that they intend to be watchful for it, and that they will watch events as they unfold before deciding to take another action. In response to that, 30-year treasury rates will move back towards 5 3/4 percent and the stock market, which should create a strong summer rally, will focus on corporate earnings which should be quite powerful.

Tradesalotasks: Will financial stocks be able to make it through the rate hike that is forecast relatively unscathed?

Joseph Battipaglia: There has already been a sizable correction in anticipation of slightly higher interest rates. Once the rate change is in place, then the focus will be on their rising stream of fee income-- more mergers and acquisitions -- and the future global opportunity for these well-known financial institutions. These factors will drive stocks in the banking, brokerage and insurance sectors to higher ground.

BillyMumphreyasks: Which sectors do you think will benefit the most in the next year, given your perception of likely Fed moves?

Joseph Battipaglia: I anticipate three percent plus growth in the economy, no more than 2.5 percent inflation rate. Therefore, the sectors that have been the relative strongest to this point will continue to provide leadership. The true growth sectors are technology,telecommunications -- both equipment and service -- transportation, consumer durables and non-durables, pharmaceuticals, and financial services.

crazypranksasks: Do you believe the stock market will crash near the year 2000?

Joseph Battipaglia: Well it's getting late in the year 1999 for that to happen ,but I do not expect, all kidding aside, any negative fallout from the turn in the calendar. Major governments and corporations have been preparing for this for quite some time and the public's electronic profile has very little public exposure to the turn in the calendar. I believe the proverbial "Y2K" problem has been over-hyped. I expect the consumer and business and political communities, as we go into the year 2000, to actually start talking more about Y2K opportunity. Don't forget, next year is an election year, which tends to be a time of promises, feel-good attitudes, and a high degree of confidence overall.

Timehost: Speaking of Y2K, we have two related questions....

angelroseberryasks: How do you think the Y2K problem will affect the economy?

angelroseberryasks: Will you move any of your assets around because of the Y2K bug?

Joseph Battipaglia: Since we do not anticipate a global Y2K problem of any consequence, and we have completed our own work to be Y2K compliant, all that's left for us to do is to continue to focus on the investment opportunities ahead, which keep us fully invested in equities for growth- oriented investors. And we have made no shift in our asset allocation or our expectations of strong market performance in the year ahead.

Kute_Kilimsasks: Do you think that Internet stocks have finally bottomed out? How seriously does Gruntal & Co. take them?

Joseph Battipaglia: We think the Internet has redefined business practices, consumer practices, and even society's ways of life. Therefore, the future opportunity for the Internet is quite important and can't be understated. However, there will be a sorting-out process of the companies that have come public and those that are coming public in the race to become economically successful. These stocks will be highly volatile and, therefore, will reach higher highs and lower lows as the business cycle progresses. We have just passed through a period of higher highs and higher lows in the past two months. We will see more of that in the future. Our general advice is that the Internet should be a portion of one's total portfolio and the positions should be accumulated through a dollor-cost averaging approach in recognition of this extraordinary volatility.

Kute_Kilimsasks: Is the current infatuation with Internet stocks a sign that traditional means of valuation are out-of-date? Do earnings still matter? Why or why not?

Joseph Battipaglia: The Internet opportunity is hard to quantify and, therefore, traditional valuation tools do not apply. However, at some point they will because the industry will become more seasoned. There will be a track record for revenues and earnings growth, and the opportunities in the Internet will become more narrowly defined. For example, there may not be many pure-play Internet retailers as the real business version of the same category adopts an Internet strategy and the Internet pure play takes a real business model. Keep in mind, generally, given the level of interest rates, the outlook for inflation and the level and progression of corporate profits, I don't find the stock market overpriced from the point of view of price to earnings ratios.

Happy_Guy_27asks: Buy, sell, or hold AOL? Is AOL at its bottom?

Joseph Battipaglia: Going back to my earlier comment about the tactics for investing in Internet stocks, to own AOL either for the first time or as an additional purchase this would be a good entry point. AOL is all about a subscriber community that, so long as AOL does the right things, will stay loyal to AOL by building out their relationships with vendors and alligning themselves with the proper distributions channels whether they be phone line or cable in the future.

Twaddle_Timeasks: As you look at the US economy right now, is there anything at all that worries you given our period of historic growth?

Joseph Battipaglia: We now rely on a tremendous stream of imports; not only of commodities like oil but also textiles, electronics, even automobiles. Essential to ongoing success for the economy and continued high confidence will be unlimited access at level prices for all these goods. Therefore, anything that interrupts the flow or price level of these goods could be immediately problematic. Therefore, we are watchful of our relationship with our major suppliers such as the Chinese and the Japanese. Last year we learned a valuable lesson about just how far the interdependency of economies can affect our daily lives.

Timehost: In the TIME article, you said you see a strong consumer into the next year...

Migrainerasks: How much longer can we expect to see these low short-term interest rates on credit cards?

Joseph Battipaglia: The American consumer has become quite sophisticated in their understanding of the cost of money, the power of refinancing and the management of their personal financial affairs. Changes in interest rates that are of modest proportion will not alter their confidence or their spending habits. The American consumer is not given enough credit -- pardon the pun -- for knowing exactly what their financial position really is, vigilantly watching for the best price for what they buy and taking advantage of any opportunity to free up disposable income, such as refinancing mortgages. The consumer sees a healthy job market, relative peace in a global perspective, and their spending habits mirror that level of confidence, which in turn gives me confidence in this outlook.

Kute_Kilimsasks: Who's the next big hot economy on the horizon? How long can U.S. dominance of the global market last?

Joseph Battipaglia: The next big hot economy will be the euro market. And this essentially is the common market of Europe that is evolving its own currency, its own regulatory structure and, in the end, represents a bigger population than that of the U.S. with U.S.-like technological sophistication. I think the impact of building a uniform common market and the restructuring of industry and the change in the social contract can make Europe a powerful force to be reckoned with sooner than that of, say, an emerging market like China. China, even though it is a large population and a nuclear power, is no where near the level of infrastructure, technologically speaking, to be on that playing field just yet.

BillyMumphreyasks: Do you think the sluggishness of the European economies and the faltering euro may affect Fed policy on rates?

Joseph Battipaglia: There's no question the Fed is mindful of economic conditions outside the country since we are more and more interwoven. Last year is a good example of how turbulence in foreign markets was responsible for the Fed implementation of three rate cuts. Therefore, in ligh of the fact that European interest rates are being reduced, and the economy does have some near-term sluggishness, it reinforces my argument that any Fed action will be one time only, and relatively modest.

Timehost: We're running out of time, but we have had several questions on how you got into the investment business, Mr. Battipaglia. Any advice for college or grad school students?

Joseph Battipaglia: Before becoming an investment professional, I started as an investor. As I started my career I realized I should make investments be the substance of my career. So my advice to college students and others would be to involved as an investor, become knowledgable in investment analysis and then present that credential to a potential employer in the financial industry along with the appropriate background that includes accounting, economics and, of course, finance.

Timehost: Thank you very much for joining us this evening.

Joseph Battipaglia: Thank you for this opportunity and hope to be with you again soon!

TIME Board of Economists