Dow Jones 8,515.92 +67.81 11:00 am PST, December 26, 2002  NASDAQ 1,381.80 +9.33 For info, visit access.smallcapnetwork.com S & P 500 898.88 +6.41 To be removed, please click here Russell 2000 390.94 +2.82 VOLUME 02: ISSUE 84 Year End Wrap-Up With Pat Bolland/Part One Pat Bolland, former stocks editor on CNBC, is known for opinions that are prescient, sometimes provocative, but always informative. We are pleased Pat took a moment to chat with Small Cap Digest on the year past, the year ahead and where we should be looking as 2002 vapors. Small Cap Digest: Pat, thanks for your time. Before we begin, since leaving CNBC, what have you been doing and when and where will we see you again on-air? Pat Bolland: Great question.  After leaving CNBC I've been working on a project to bring business news to Main Street. The cities of New York, Los Angeles, Chicago have business well covered, but it's smaller communities that really need more business coverage-- so we're going to create a business product that we will sell to radio and television stations across the country for them to use in their local markets. SCD: Will it be branded, say,  "The Pat Bolland Report" or something of that nature? P: The branding right now is going to be "The Business News Network".  We might come up with something fancier as we go along. SCD: Well, it'll make it easier to find you, anyway. P: Exactly! SCD: We've now gone through three down years in the market.  And we're hearing that we can't possibly go through a fourth down year in 2003.   I'm sure you have an opinion on that. P: I read a study recently that states that any year that ends in a number three tends to be a good one for the stock market.  I don't put any stock in those kinds of predictions, but I do expect that 2003 will be a better year than we've seen over the last three years.  Recognize that it was a year ago that you and I were talking about the stock market and everybody said that things were going to be improved in 2002.  But there were so many question marks out there. The biggest one in everybody's minds at that time, obviously, was Al Qaeda and the war against terrorism. In 2003 that question mark continues to expand because we haven't yet dealt with Al Qaeda or Osama Bin Laden. And we've begun the process over the last few months to move into Iraq and a possible war there.  So the war on terrorism and war in general are question marks that are not yet out of the way.  There is also the question mark of the economy. Last year all the corporations were making predictions such as;  "Yes, 2002 in the second half, we will really see things turn around".  Ultimately companies had to temper those expectations and crank them lower, taking goodwill and other big write-offs.  I guess the biggest change that we saw between 2002 and 2001 was Regulation FD.  Reg FD, a financial disclosure that was implemented in 2001 really changed the way corporations do their business.  And it's had repercussions in so many different areas. SCD: Given the war drumbeat and the obvious event risk of that, we have to talk briefly about the corporate scandals. I'm trying to ascertain what's keeping the public out of this market? Do you think the scandals are a factor or have they really just been an excuse for the public investor not to get involved simply because, frankly, it's just an easy excuse not to walk into what appears to be a hornet's nest? P:  Well, first off, if I'm an investor, in 2000-2001, I got burned--big time. I was going into high-tech stocks with dotcoms everywhere and I lost a lot of money.  So that's going to burn me more than anything else.  Second, the job scenario, while it's not bad, is not good either, and in particular it was middle management that got dumped in the first round of cost improvement.  Unemployment is running in New York City at 8% and if you want to get a job flipping burgers you can get a job flipping burgers-- the hard jobs are the ones that are in higher levels.  So the whole "I haven't got a job I'm just going to keep my powder dry because I've got kids going off to college and I've got to make sure that I can afford to do that" is keeping people out of the stock market.  It's not keeping them out of mutual funds or investing in bonds, but it's keeping them out of stocks and individual high-flyers. SCD: Let's talk about mutual funds just for a moment. Given how mutual funds have dropped over the past two years there seems to be this feeling that the turn is right around the corner. I don't know whether you would agree or not that to make up the 30, 40, 50, 60% declines or even more that we've seen in some mutual funds is actually going to take longer historically than the decline.  The old story about elevators dropping faster than they go up. P: Oh, absolutely, no question.  The latter part of the year in that high-tech bounce was because there were some stocks that were trading at-- Nortel springs to mind-- 230 times earnings and it came down.  It's still trading at around 30 times earnings and that's after almost tripling since the summertime so that you're looking at some valuations that are still questionable.  Nonetheless, some of those mutual funds in the last 3, 4 months of the year have had spectacular performance.  Joe Granville had the best expression for it years ago, "It's like a ball bouncing down stairs, it drops off slowly and then the rebounds are fast and furious, and then it drops off slowly again to a lower level." That's a bear market, now it remains to be seen whether we're in a bear market rally towards the end of 2002 and whether we'll get that drop-off in 2003.  Personally, I don't think so.  I think that this thing is going turn, take a long time to form a bottom in 2003 and 2003 will be a positive year.  But the jury's still out.  SCD: Well now that we've settled all of the past questions we have to look at the future and the obvious question is how are we going to make money in the next year? We're bombarded with indicators; are there particular indicators that you watch, that you're watching for to turn, or that are much more important to you than others? Conversely are there some that you pay no attention to and unfortunately everybody pays too much attention to? P: Well the big one in 2002 was Alan Greenspan --or the lack thereof-- until the end of the year when he dropped another quarter percent.  That is an indicator that he's still got some questions about the economy overall.  Who knows what he really watches? I look at personal indicators. I look for housing prices as much as anything because peoples' wealth is tied up in their homes as their refuge of last resort. That's where they can potentially borrow to send those kids off to college or to fund their retirement. Or, they can even they sell the house. All are means to create some cash to put back into the stock market.  So that's the quintessential indicator for me, the spot to look for whether things are improving.  We really haven't seen any deterioration in the housing market.  We've seen a modest slow down in people wanting to go out there and buy homes, but still, the housing market's in good shape.  That's one of the indicators that not a lot of people follow that I watch very closely. Alan Greenspan is, in part, responsible for that because 11 interest rate cuts made housing affordable like it's never been for, or certainly hasn't been in 30 or 40 years.  So I think that that's a really positive thing.  It just took a little while for Alan Greenspan's cuts to move into the economy and the housing sector.  So watch that one carefully.  Another thing that I watch carefully is jobs-specifically are people getting jobs?  Are we seeing job growth? I don't even look at the unemployment rate, you know, 6%, 5%, who cares?  They used to say that full employment was when unemployment was running 6%.  I don't know whether that's true or not. What I want to see is job growth and what sorts of jobs are being created. SCD:  Next, we should talk about areas of interest in the market.  Are there areas that have been beaten down so badly that you look favorably upon over the next year? P: For sure--the tech sector. These companies aren't going to go away. People still need to buy phones and companies still need to buy semi-conductors to put into their PCs. Sure, maybe they're not buying as many as they have been buying in the past, maybe expectations are a little bit overwhelming on a company by company basis, but I still think that there are some good values in tech sector.  Take a look at some of the really great stories of 2002 and see how they reflected on other stocks.  Enron-- there's the quintessential corporate malfeasance-- off balance sheet kind of an issue that creamed that company.  But look at what else got creamed. Tyco was an acquisition oriented corporation that somehow managed to buy companies, expand them multifold, and then have that produce a positive bottom line.  Tyco, in the middle of 2002, tried to go through some kind of a restructuring and it fell on deaf ears. Tyco was badly beaten up and people saw value in that and then the stock rallied.  General Electric is the same kind of thing- buy things, have them grow in double digits. The stock is down at historically low levels, so I would take a look at that stock.  If you're looking at stocks that have cratered because of Enron, because of concerns about malfeasance, over the long term-beyond 2003--I think that companies like Tyco and GE that will improve. It was the year of Baskin Robbins-- there were a variety of flavors of corporate shenanigans that happened in 2002, but it didn't mean that everybody was corporately corrupt. Stay tuned for part two of our interview with Pat Bolland as he talks about biotechs and politics-coming to your mailbox next week. D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. 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