beating the bear.

Our panel of experts offers the best strategies to protect your wealth in today's market

IN THE NOT SO DISTANT PAST, INVESTORS USED TO ASK, "How high the bull?" Today, after months of witnessing an erratic market and reviewing less than stellar 401(k) statements, legions are now wondering just how low the market will go.

The sentiment is not without merit: Over the past year, the tech-laden Nasdaq composite index has fallen below the bellwether 2,000 mark more than once. Moreover, quarterly corporate earnings in sectors ranging from technology to consumer products have continued to head south, and Alan Greenspan & Co.'s magic bullet--cutting the interest rate--no longer seems to have the same immediate, uplifting effect on the broad market.

Looking at the current investment landscape, you're probably trying to figure out if this is the best time to accumulate stocks or stay on the sidelines. To help you figure out your best investment maneuvers, we assembled our roundtable of market mavens for our semiannual meeting. This time, the participants were James E. Francis of Paradigm Asset Management Co. L.L.C., a firm that specializes in domestic equity portfolios and was ranked No. 8 on the BE ASSET MANAGERS list; Michael Ray, head equity trader for Baltimore-based Legg Mason Funds Management's in-house mutual fund group, including the $13 billion Legg Mason Value Trust; Rahimah Lateef, head of the Convertible Group/Securities Investment department for New York Life Investment Management L.L.C.; and Mark D. Lay, head of MDL Capital Management Inc., which manages more than $3 billion in fixed-income and equity investments and was ranked No. 7 on the BE ASSET MANAGERS list.

BLACK ENTERPRISE: What is your outlook and, based on your investment strategy, how do you think you will perform for the remainder of 2001 and the beginning of 2002?

JAMES E. FRANCIS: Well, I think that [the economy is] going to continue to grow at a fairly slow pace. I think businesses have to continue to work through their issues, which are inventory head count, and sales. I think that this is all going to lead to further reductions in earnings so I don't see a great deal changing for the rest of 2001 and through the early part of 2002. So, the bad news is that capital expenditures by businesses are down dramatically. The good news is that consumers don't seem to be clamping down on their spending. I think the real question is will they be able to continue to hold up the economy? I think that the interest rate cuts, and the tax rebates could help fuel their ability to continue to spend and, hopefully, that will coincide with the rebound of business spending. We need to see a return of capital expenditures, for earnings to just start to accelerate. Right now, I think consumer spending, in different areas, is allowing the market not to go into a spiral; but, if we don't get either a continuation of the spending or a rebound in business spending, then things could go down.

james
francis

paradigm asset management

                                  Price at         5-Year Estimated
Stock (Exchange: Ticker)       Recommendation(*)   EPS Growth Rate

Harley-Davidson (NYSE: HDI)        $49.49                 18.5%
Home Depot (NYSE: HD)               48.46                 20.6
TMP Worldwide (Nasdaq: TMPW)        49.58                 35.8

(*) As of 8/10/01 Source: Zacks.com

Harley-Davidson. "I like Harley-Davidson. It's a company that would
fall into the consumer cyclical area that is able to take advantage of
growing trends for leisure. They have been able to attract the
nonmotorcycle buyer with touring bikes and now they are in a position
to extend their brand through a new performance line of motorcycles. I
think the stock is poised to do very well in this environment and
especially as we get even more confidence with the consumer."

Home Depot. "We've continued to see strong home sales. I believe that
there is an improved management team there at Home Depot now. I think
that retail will be a strong leader in the rebound that we are all
predicting going forward. I think that they are poised for the stock to
go higher."

TMP Worldwide. "This is a company that has its fingers in a lot of
different areas. One of the undervalued components of the organization
is Monster.com. They also experienced very effective cost-cutting
measures and head-count reduction in the earlier part of the year, that
I think puts them in a great position to enjoy earnings expansion."

Our approach to investing is not going to be reactive. We use more of a quantitative approach, and these macro-economic trends are captured in our process and the portfolios adjusted accordingly. So we believe that consumer cyclicals would be a good place to invest. We like consumer staples and capital goods, to a certain extent, where you have securities that have just been really beaten down, beyond where we think their true valuation lies. We see an increased exposure and rotation into those types of sectors.

MICHAEL RAY: What we typically try to do is buy companies with the least short-term visibility. "Visibility" seems to be the new buzzword for all the analysts out there who are downgrading stocks and cutting estimates. Being value investors, we're probably going to look at something over a two- to five-year time horizon, which may be a little different than most equity managers.

So, in our view, what we're looking for is a return to normalcy. Normalcy is not the economy growing at 1% [or] earnings growth at 25%. Normalcy is GDP [Gross Domestic Product] growth of, say, 3% or 3.5%. Corporations, in that environment, can return to 6% to 8% earnings growth, on average. I think we'll have a pretty decent market. It may not be like it was in 1999 and 2000, but I think it will be good for most investors.

With six rate cuts so far this year--275 basis points worth--we're looking at a pretty good stimulus down the road. Usually, from each rate cut, it takes about six months for that effect to filter into the market. So to this point we have really only felt the effects of the first rate cut. We are also looking at a tax cut bill that was passed by Congress and signed by the president. That should provide about $40 billion, in tax cuts, for individuals this year, and about $70 billion next year. That's a pretty good stimulus for the economy going forward.

MARK LAY: Well, we think that we're about to go into a period that will give us the best of both worlds. We're currently growing at 2.5% to 3%, and the inflation rate as measured by the CPI (Consumer Price Index) is around 2.5%. Under those scenarios, I think that long-term Treasury yields can continue to fall as well as price/earnings multiples will be able to expand. I think that if you look at the driving factors of the U.S. economy, consumer spending, as James mentioned, has remained strong. New home sales, which are a big part of the economy, remain very, very strong. The manufacturing sector, which is measured by new orders, [is] starting to rebound. From our perspective, I think that the worst is behind us and we are starting to build a good base, and I think it would be very positive not only for the fixed-income market but for the equity market.

B.E.: What factors could stall a rebound?

LAY: Now, there are a couple of wild cards out there. The Japanese economy, with the Nikkei being at a 17-year low, is threatening not recession but depression. The second factor is Latin America. We all know about [the developments in] Argentina. When you have a major player in Latin America threatening to default on its debt--and it's spreading throughout Brazil and other Latin American countries--I think that can be a problem.

B.E.: Isn't the strong dollar going to have an impact on overseas earnings as well?

LAY: It's a big debate going on now in Washington, D.C., and throughout the country, by a lot of corporate leaders, that a stronger dollar is not to the best interests of corporate America and their earnings because it makes our goods more expensive overseas and makes products coming in from overseas a lot cheaper in the United States. I think a strong dollar policy is in our best interest because it keeps inflation low, and the lower inflation is, I think the better it is for financial assets across the board. Low inflation allows price/earnings multiples to expand. Lower inflation allows bond yields to come down. In both of those scenarios, corporate America wins.

rahimah
lateef

new york life investment management

Stock                Stock       Convert.    Bond.   Conversion
(Exchange: Ticker)   Price(**)   Price(**)   Yield    Premium

Barnes & Noble
 (NYSE: BKS)         $40.66      $143.50     3.66%      14.79%
Venator (NYSE: Z)     17.83       131.88     4.17       16.91
School Splty
 (Nasdaq: SCHS)       38.80       109.84     5.46       23.16

(*) As of 8/15/01 Source: Kynex

Barnes & Noble. "Barnes & Noble is one of my holdings. Everyone knows
it's a household name. I think it fits in with the demographic push
[relating to] the baby boomers. I think [baby boomers are] some of the
better educated people in American culture, at this point."

Venator. "Another pick of ours is Venator, which operates retail
stores: Foot locker, Lady Foot Locker, Kids Foot Locker, Champs
Sports. It's also a direct marketer that was once a part of the old
Woolworth's department store chain."

School Specialty Inc. "School Specialty is a new issue in which we
just participated. It distributes educational supplies and furniture
for pre-K through 12. It supplies these materials to school districts,
administrators, and teachers through its catalogues."

FRANCIS: We already have low inflation, and I don't think that in the small-cap area it's a real factor [because] most small companies don't have a lot of foreign sales. It's more me multinational, large-cap corporations that are going to be heavily exposed to foreign sales, as a percentage of revenues. If we continue to see the major corporations have huge layoffs, even though the unemployment rate is still at a very low level, it could start to shake consumer confidence, and that is something that we really just can't afford to go the other way on.

RAHIMAH LATEEF: I'm agreeing with [Mark] because there has been a great beneficial effect [through] the strength of the dollar. Europeans [have been] investing in our market, and we don't want them to pull out. They have been in, in a big way, for the last six years, because of the strength of the dollar, in a sense, buoying the market.

RAY: I would have to say that the troublesome factors we run into with a strong dollar probably outweigh the benefits on the other side. With companies that derive a fair amount of their revenues from overseas, the strong dollar is very hurtful to their sales overseas and, as James said, and I'll reiterate this, when these guys have shrinking sales and lower revenues overseas, it hits their bottom line. The other half of that is that you are going to see layoffs and restructuring where people are going to lose their jobs. The top two most important factors in this economy and this market: consumer spending continues at the rate it has been over the last couple of years, and No. 2, capital spending by the large corporations improves, especially on the technology side.

B.E.: Rahimah, how is your investment strategy and the use of convertible bonds faring in the current environment?

RAHIMAH LATEEF: Well, a convertible is a hybrid structure. It's part straight bond, part call option. It's a fixed-income obligation, so you are almost certain to be returned your principal within a typical maturity of five to seven years. In return for that, you're going to give up some of the upside of the underlying equity, but you will be paid a coupon at the same time. It can give you best of both worlds and [convertibles] typically provide similar equity returns but with less volatility. Because of the nature of the product, we have the ability to go out either spectrum, toward equity or fixed income. That's the beauty of the asset class. In this environment, we tend more toward the fixed-income side of the convertibles.

B.E.: In the current environment, where do you see the best sector opportunities for investors?

RAY: I think both the PC and PC-related stocks [offer] some fantastic values there. I think what a lot of investors have missed is that we're three years after the Y2K cycle, and almost all of those purchases would be fully depreciated up to this point. We also have new chip introductions by the majors, Intel and AMD, and we're looking at new and faster chips that a lot of times kind of cause businesses to spend on new technology. We also like telecom. We think telecom has reached its point of maximum pessimism.

In PC and PC-related stocks, I probably look at Gateway (NYSE: GTW), Compaq (NYSE: CPQ), and Hewlett-Packard (NYSE: HWP). They're all trading at a discount price of the sales on a 10-year basis. We also would probably take a look at, on the telecom side, Tellabs (Nasdaq: TLAB), Corning (NYSE: GLW) and Sprint (NYSE: FON). I think the Baby Bells look attractive, especially the old Southwestern Bell, SBC Communications (NYSE: SBC), and Verizon (NYSE: VZ), and the financials. You probably can't go wrong with Citigroup (NYSE: C). You're probably in pretty good shape with Fleet-Boston (NYSE: FBF) and J.P. Morgan Chase (NYSE: JPM). Those are all fantastic institutions, with great long-term track records and great managements.

michael
ray

legg mason funds management

                                    Price at         5-Year Estimated
Stock (Exchange: Ticker)         Recommendation(*)   EPS Growth Rate

Citigroup (NYSE: C)                  $49.64               14.5%
SBC Communications (NYSE: SBC)        44.52               10.7
Gateway (NYSE: GTW)                   11.03               13.8

(*) As of 8/10/01 Source: Zacks.com

Citigroup Inc. "Citigroup is a 14% grower, long term. They derive
about a third of their earnings from corporate investment banking, a
third from retail banking, and [the] last [third] from insurance and
asset management. I think that as the synergies become apparent
between the merger of the bank and Salomon Smith Barney, corporations,
in particular, will use Citigroup as kind of a one-stop shop."

SBC Communications Inc. "SBC is the old Southwestern Bell. Here you
get a unique component in that I think all of us have seen the
proliferation of ads for Cingular Wireless. Cingular is a wholly owned
subsidiary of SBC. With the third generation of wireless products
here, coming in the next six months to a year, we think that that
leaves room for a lot of price improvement at SBC."

Gateway Inc. "On my PC recovery theme, we'll put Gateway into the mix.
Gateway is a unique animal in that they have both direct sales to
customers and they also have a retail channel. As far as the
competition goes, Gateway will definitely be one of the survivors in
that space."

FRANCIS: I believe that consumer cyclicals, selected capital goods companies, and communications services should do well. I like Harley-Davidson (NYSE: HDI). Their ability to extend their brand away from the touring type of bike into high performance I think is going to be very effective. It takes advantage of the baby boomer spending syndrome.

[I also like] Home Depot (NYSE: HD). I think the management there has gotten their act back together. I think that they will be one of the leaders in the retailing rebound that I think should happen as we normalize. I believe a company called TMP Worldwide (Nasdaq: TMPW) is another company in that area that should do very, very well. They have a very interesting undervalued asset in Monster.com. They are truly building the biggest database of resumes and it's really "people information." The way that they will be able to leverage that going forward, I think, is going to be incredible.

In the capital goods area, I still like Tyco (NYSE: TYC) because it's just a conglomerate. It will have some exposure from being a multinational company, but they have performed so well this year. I think that it will allow them to break out into a new class of companies, where people look at them and put a premium on them that they did not enjoy before.

LATEEF: Tagging onto his demographic spiel, for lack of a word, on the baby boomers, we like Barnes & Noble (NYSE: BKS), a holding that has done quite well for us. We like Venator (NYSE: Z), which operates Foot Locker. And a new issue that we just participated in is a small company called School Specialty (Nasdaq: SCHS), which provides textbooks and school supplies for school districts. Those are names that we currently hold.

B.E.: Mark, what opportunities are you looking at in the fixed-income area?

LAY: From our perspective, equities [should] pay you a risk premium of roughly 4% over bonds or any fixed-rate type of investment. That currently is around 1% to 2% by most estimates. So, because of that, we still think bonds are very attractive to individuals, as well as institutions, because I don't think they're being compensated for the risk. Also, based on our assessment of the economy, our preference is still to hold U.S. Treasuries right now. We have roughly 60% of our portfolio in Treasuries. We have roughly 35% of our portfolio in mortgage-backed securities [such as] Ginnie Maes and Fannie Maes. So our emphasis right now is on high-quality securities and low-coupon mortgage-backed securities that we think will be able to benefit from a lower interest rate environment and, if we are wrong, then the mortgage-backed will give us a little cushion if economic growth picks up more than we anticipate or inflation becomes stronger than we anticipate. Bight now, we are staying away from corporates.

B.E.: Since we started the Black Wealth Initiative in 2000, we have seen thousands of new investors. Over the past year, many have seen losses in their portfolios and 401(k) accounts. What do you tell them?

RAY: I think the most important question in investing is what is the market discounting. One hundred percent of what we know about an investment is in the past [and] 100% of what will determine a successful investment is in the future. So, if you say the market right now is quite aware that we have a crummy economy and companies have crummy earnings, the question that you want to ask yourself is "When is the recovery?" or "When is the market going to discount [or] factor in that recovery?"

LATEEF: Or buy a convert [convertible bond] that is yielding 6% so you get paid while you wait. You pay a little bit more than the value of the stock and, at the end of that seven years, you'll get your principal back but you will have been paid and, if the stock happens to go up, you'll participate, to some extent. I think [BE'S] other mission is to let people know not just about the dot-com bubbles, but about value investing and alternative investments like convertibles, so that there is an overall sophistication about the kinds of instruments that are available in the market.

B.E.: How do you get lay investors into convertibles?

LATEEF: That's a good one. I think the case for convertibles speaks to the fear factor. You can make the case that they should look at convertibles because they are a more defensive way of participating in the equity market. You approach the returns of the equity market and, in some years, I've beaten the S&E You do it with less risk. If you work with an advisor, you can ask [him or her about] a specific [mutual] fund. The bonds are sold in thousand-dollar increments, so that could be a deterrent [to some].

Francis: I think we have to continue to preach diversification and also knowing what the time horizon is for a particular allocation of money. So, if the idea is to buy a house in six months, the stock or the bond market is probably not the appropriate place. Leave it in a CD. If it's to buy a house in five years or more, then maybe diversify the portfolio with some bond and stock exposure. If it's college education and your kid is one year old, then heavy exposure to the equity market is probably appropriate. If it's college in two years, it's probably not. I think that diversification, understanding your time horizon and your risk tolerance are just the basic, fundamental things that one needs to go to before you buy any investment.

mark
lay

mdl capital management

                                     Price at         5-Year Estimated
Stock (Exchange: Ticker)          Recommendation(*)   EPS Growth Rate

Veritas Software (Nasdaq: VRTS)        $38.66               39.9%
Wal-Mart (NYSE: WMT)                    53.60               14.4
Lucent (NYSE: LU)                        6.51               13.9

(*) As of 8/10/01 Source: Zacks.com

Veritas Software. "Veritas is attractive because memory and storage is
a very big area that continues, in my opinion, to have significant
growth potential. Most [analysts] have Veritas' five-year growth rate
around 47%, growing substantially faster than the marketplace. They
are just [in] software, which, in my opinion, makes them attractive
down the line as a potential takeover candidate."

Wal-Mart Stores. "Consumers continue to spend. Where do we go to shop?
Wal-Mart. With the tax rebate, that type of money will find its way
into Wal-Mart's hands. Wal-Mart is a stock currently trading near its
[52-week] high. It's a stock that we think can go to the low 60s over
the next 12 to 18 months."

Lucent Technologies Inc. "I still believe in the telecommunications
area and I think that although there is tremendous overcapacity, it
has all been discounted in the price of the stock. They are
aggressively looking to sell off some of their businesses, which I
think will let people know that they will be around to weather the
storm. It reminds me of Citigroup back in the `80's, when everybody
said Citibank was going under."

B.E.: How should investors go about rebalancing their portfolios in this environment?

FRANCIS: If someone has made the decision that they have a time horizon that can justify equities and a risk tolerance for equities, then I think that a balance between growth and value, large and small, is in order. One rule of thumb is to take kind of an index approach. You look at the market and [make the decision that] you're going to be 85% to 90% large cap and 10% to 15% small cap. If you want a more aggressive stance than that, you can increase your small-cap exposure. If you are less risk-oriented, then you would increase [your] fixed-income allocation, before you start moving off into other types of asset classes.

RAY: I'll pass along to the readers what I pass along to my own family members. As a general rule of thumb, you can take your age and subtract it from the number 120 [to determine the percentage of stocks that should be in your portfolio.] If you are 40 years old, you would want to be 80% exposed to equities and 20% exposed to bonds.

October 2000 B.E. Stock Update

One thing is clear: the bears took a sizable chunk out of most of the
stocks that were selected by last October's roundtable participants:
Doris Kelley-Watkins, portfolio manager of Evergreen Utility Fund,
which invests in a board spectrum of utilities including telecoms and
power firms; Stephen Coleman of Daedalus Capital, who takes a "focused
equity" approach to investing; Stephen Humphrey, portfolio manager of
Lord Abbett Large Cap Growth Fund; and Nathaniel Carter, chief
investment officer of value-oriented Lakefront Capital Investors. As
you would expect, telecoms and tech stocks were the most badly
bruised. But there were some winners: Investors reaped sizable returns
from Great Plains Software, one of Coleman's picks, that was acquired
for $1.1 billion by Microsoft (Nasdaq: MSFT) in April.

The chart below reveals just how well our stock pickers performed:

Doris Kelley-Watkins, Evergreen Utility Fund

                                                             Current
                                                              Value
Company                Current      Price at      Total     of $1,000
(Exchange: Ticker)      Price    Recommendation   Return    Investment

Nextel (NYSE: NXTL)    $14.33      $ 57.00        -74.86%   $  251.40
Crown Castle
 (Nasdaq: CCI)           9.65        36.47        -73.54       264.60
Consolidated Edison
 (NYSE: ED)             41.79        32.38         29.06     1,290.61

Stock Pick Average                                -39.78%
Current Value of
 $3,000 Investment                                          $1,806.61

Stephen Coleman, Daedalus Capital

                                                             Current
                                                              Value
Company                Current      Price at      Total     of $1,000
(Exchange: Ticker)      Price    Recommendation   Return    Investment

Adobe Systems
 (Nasdaq: ADBE)        $34.05       $58.09(*)     -41.38%     $586.16
Broadcom
 (Nasdaq: BRCM)         42.55       238.94        -82.19       178.08

Stock Pick
 Average([dagger])                                -61.79%
Current value of
 $2,000 invest-
 ment([dagger])                                               $764.24

Stephen Humphrey, Lord Abbett Large Cap Growth Fund

                                                             Current
                                                              Value
Company                Current      Price at      Total     of $1,000
(Exchange: Ticker)      Price    Recommendation   Return    Investment

General Electric
 (NYSE: GE)            $42.57       $53.38        -20.25%   $  797.49
Corning (NYSE: GLW)     16.19        91.34(*)     -82.28       177.25
EMC (NYSE: EMC)         17.26        85.50        -79.81       201.87

Stock Pick Average                                -60.78%
Current Value of
 $3,000 Investment                                          $1,176.61

Nathaniel Carter, Lakefront Capital Investors

                                                             Current
                                                              Value
Company                Current      Price at      Total     of $1,000
(Exchange: Ticker)      Price    Recommendation   Return    Investment

Sara Lee (NYSE: SLE)   $19.40       $19.06          1.78%   $1,017.84
Compaq Computer
 (NYSE: CPQ)            15.00        29.00        -48.27       517.24
Tricon Global
 Restaurants
 (NYSE: YUM)            43.60        27.75         57.11     1,571.17

Stock Pick Average                                  3.54%
Current Value of
 $3,000 Investment                                          $3,106.25

Current price as of 8/10/01

(*) As of 8/9/00, adjusted for stock split

([dagger]) Does not include total return of Great Plains Software.

Source: Yahoo! Finance and Zacks.com

B.E.: How involved should professionals be in helping you make these decisions?

FRANCIS: Actually, I think that individual investors probably do themselves a disservice by only relying on professional advice, because they don't really know what to react to [or] what is good information [or] bad information. They know their own personal situation better than anyone else. They know their own risk tolerance better than any one else. Education and participation should occur whether you're going alone or you're working with the most seasoned professional.

LAY: That's why investment clubs have been such an attractive vehicle in the African American community. It's a way to save and invest, but it has a lot of educational appeal as well. Once you start understanding what price/earnings multiples or duration of bonds mean, then you can equate it to [what it] means [for] you to buy a longer-term bond or [what it means when a ] stock is expensive relative to the marketplace. The only way you can understand it is by understanding the terms. Investment clubs have been an excellent way.

RAY: I think a lot of investors, especially novice investors, can take a look at everyday life [and realize] the stock market [and] bond market affects you, whether you realize it or not. When you get into your car, the company that makes that car is publicly traded. When you go to the supermarket, chances are the supermarket that you shop at is publicly traded. When you brush your teeth, chances are that consumer products company is publicly traded. When you buy a home, the 30-year fixed rate on your mortgage is going to be related to where rates are on the 30-year bond. The issue is your own personal perspective, what you take away from what you like and don't like every day and you can translate that into some investments for you.