ROY COOPER pawed through hundreds of tapestries , searching for a fetching combination of colors and print .

Nothing caught his eye until a tiny , toothless woman wearing a felt fedora and dozens of gold necklaces presented a black and tan rug with geometric patterns .

`` Runners in dark shades and earth tones , that 's all anyone wants , `` Mr. Cooper , a 52-year-old Kentucky native , said in Spanish with a thick Southern drawl .

`` The gringos wo n't pay a dime these days for the brightly colored rugs , so forget the reds and pinks . ``

Mr. Cooper , who has lived in Quito with his Ecuadorean wife , Eulalia , for 23 years , bargained the price from $ 12 to $ 10 , purchased the Navajo-style floor runner and lit a cigarette to celebrate : The rug will likely fetch $ 30 or more at auction on eBay , where he sells tapestries , baskets and religious relics at substantial markups .

Mr. Cooper , who devotes 15 hours a week to buying , listing and shipping eBay items , clears roughly $ 1,300 a month from his online business , and up to $ 2,500 each November and December .

By contrast , the World Bank estimates that the average Ecuadorean earns $ 1,460 a year .

Mr. Cooper 's business puts him in an elite group in Ecuador , not only by virtue of his income but also because of the tools with which he makes it .

Of Ecuador 's 13 million people , only 2.7 percent have been online , according to the government-owned communications company , Conatel .

Internet entrepreneurs flourish in Ecuador 's largest cities , but many are educated businessmen with ties to the United States .

Thousands of households in Quito -LRB- the capital -RRB- and Guayaquil -LRB- the largest city -RRB- have Internet access , but few rural communities have telephone lines .

The discrepancies make experts pessimistic .

They worry that the rapid pace of change in the technology industry will cause third-world nations like Ecuador to slip further behind Europe and North America .

`` In the late 1990 's , everyone jumped up in arms over the digital divide , but it has proven almost impossible to bridge , `` said Peter Hakim , president of the Inter-American Dialogue , a Washington-based policy-analysis center , and an expert on Latin America .

`` It is a region of inequality .

Why would access to technology be any different than access to education , health care , employment or financial aid .

`` In 2000 , fewer than 1 percent of Ecuadoreans had sent e-mail or surfed the Web at home , school or work or in cybercafes .

In August 2001 , in an effort to expand access , the government created the National Connectivity Commission .

Public `` telecentros '' have sprung up to provide free Internet access -- under the auspices of nonprofit groups for which the commission helps find donors -- and home connections , previously timed by the minute , are now available for a flat rate of about $ 25 a month .

`` I know that in five years , most people in Ecuador still wo n't be able to buy a computer , `` said José Pileggi , president of Conatel , which oversees the connectivity project .

`` But my hope is that they will at least know that they have access to computers . ''

-LSB- Help may also come from the United Nations , which on Dec . 9 began an Internet initiative in Esmeraldas , one of Ecuador 's most impoverished provinces .

The project will be run by workers from the United Nations Volunteers and financed by the Ecuadorean government , the World Bank and Japan 's International Cooperation Agency , offering `` one-stop offices '' where fishermen , artisans and other small-business owners can use the Web to find new markets . -RSB-

Ecuador 's government is also trying to create a hospitable environment for online businesses .

In April , the legislature approved a bill giving electronic documents the same legal status as paper documents and making digital theft a crime .

Still , Ecuador 's politics , economy and geography have proven formidable barriers to Internet access .

The most ominous threats are political instability and corruption .

The connectivity program was the brainchild of President Gustavo Noboa 's administration .

But the program 's fate belongs to President-elect Lucio Gutiérrez , who takes office Jan . 15 .

Mr. Gutiérrez , a military coup leader who will become Ecuador 's sixth president in six years , did not mention technology or Internet access in his campaign .

Even if the program survives , some dismiss it as a potential hotbed of bribery .

Ricardo Garcia Fuentes , owner of Limon y Café , a cybercafe in the Galapagos Islands , said he and several partners paid about $ 50,000 to set up satellite Internet access in Puerto Ayora , 600 miles from the mainland .

Mr. Fuentes said government officials , primarily from Conatel , the phone company , demanded an additional $ 300,000 in `` startup fees , '' which he and his partners painstakingly gathered or borrowed from investors , including some in the United States .

He said it did not matter whether the fees were required tariffs or flagrant bribes .

He had to pay them to open his business .

`` We are out here on the vanguard of technology , '' Mr. Fuentes said in his bar , a tourist haunt with tiki lights and salsa tunes .

`` But the government makes it too costly .

They try to give us a solution but it creates an even bigger headache .

There is already too much bureaucracy in this country . ``

What fees the $ 300,000 represented and where the money wound up is unclear .

Several Internet service providers here reported having paid officials similar fees .

But the connectivity commission says it neither receives nor solicits payments from prospective Internet service providers , and Mr. Pileggi , the president of Conatel , insisted that no one had to bribe a government official to become a provider .

In any case , some say corruption may be eroding the commission 's fundamental source of revenue -- a tax on phone companies ' revenues -- because many officials believe executives understate revenue to minimize corporate taxes .

Whatever the integrity of the system , the cost of access is daunting .

Mario Ortíz , a Conatel executive in charge of infrastructure , estimated that providing universal Internet access -- including lines to vast tracts of the Amazon jungle -- would be at least $ 1.9 billion .

That is more than one-third of Ecuador 's $ 5.1 billion annual budget .

Mr. Ortíz is considering the costs and benefits of connections other than land lines , including spread spectrum , a method developed by the United States military that spreads a narrow-band signal over a broader portion of the radio frequency band .

But because of security concerns , he does not want spread spectrum in urban areas .

In the meantime , Mr. Cooper , in his way , bridges the divide .

In addition to selling items on eBay , he takes custom orders when clients want a statue of a specific saint or a rug of particular dimensions .

He sees himself as a New Economy intermediary , a man who connects the haves and have-nots of cyberspace .

`` The Indians are very happy to sell me tapestries for $ 10 , even when they know I will turn around and sell them for three times as much , '' Mr. Cooper said as he packed alpaca rugs , wooden statues and glass-framed Amazon insect collections into his sport-utility vehicle .

`` These people do n't have computers and have never heard of e-commerce . ``

So they are glad to have the $ 10 , he said .

For now , at least .

Summary: Only 2.7 percent of Ecuadorians have been online .

Summary: Experts are concerned that rapid pace in technology industry will cause third-world nations like Ecuador to slip further behind Europe and North America .

Summary: Government is trying to create hospitable environment for online businesses although many see it as potential hotbed for bribery and instances of exorbitant fees have already been reported .

Summary: United Nations will begin program in one of country 's poorest provinces to give Internet access to small business owners to help expand markets .

Summary: Photo .


AS the author of a book about piano technology and the co-curator of an exhibition at the Smithsonian Institution celebrating the 300th anniversary of the instrument 's invention , Edwin M . Good has examined and played just about every kind of piano there is .

They all share at least one trait , he said .

`` All pianos are always out of tune , '' said Dr. Good , a professor emeritus of religious studies at Stanford University .

`` A piano is by definition not in tune . ''

That sweeping statement is true : the most common piano tuning , based on what is known as the equal-tempered scale , deliberately alters the pitch of some notes to improve the instrument 's overall harmonics .

But if all pianos are indeed out of tune , some are more out of tune than others .

With temperature and humidity changes , it does not take long for the 88 tones of an acoustic piano to get out of whack .

`` A very large part of the piano is wood , and wood expands and contracts with changes in humidity , '' Dr. Good said .

While concert pianists can have their instruments tuned shortly before a performance , most pianists just put up with the problem .

At best , they might have their pianos tuned once or twice a year .

Don A . Gilmore , an amateur piano player and professional engineer from Kansas City , Mo . , however , has developed an electronic system that he says could allow pianists to tune their own instruments at the touch of a button .

Most other instruments can be tuned as needed by the person playing them .

A violinist , for example , tunes the violin before playing and can even compensate for tuning problems while playing by slightly repositioning the fingers on the strings .

With a piano , however , Mr. Gilmore said , `` you 're at the mercy of the instrument when you play it . ``

When he is not playing Chopin , Mr. Gilmore , 38 , spends his time designing customized industrial equipment and factory systems .

Early in his career , while developing a machine that used servomotors , which can be commanded to start and stop very precisely , Mr. Gilmore began considering ways that they might be used in a self-tuning piano .

The 88 tones of a piano are created by about 250 strings .

The lower notes use single strings , while the middle and higher notes use two or three strings each , which helps increase their volume .

But multiple strings make tuning more difficult .

With a high note , for example , `` if any one of the three strings in a note is off a slight amount , it 's obvious , `` Mr. Gilmore said .

While briefly unemployed about a decade ago , he developed and later patented his first tuning device .

It could mechanically tune three strings simultaneously based on electronic analysis of their sound .

That system had some major problems , he said .

For one thing , because it used microphones to pick up the tones from the strings , the device could not distinguish very well between individual strings .

It was certainly a long way from a self-tuning piano .

Yet Mr. Gilmore resumed his efforts after he was informally contacted by QRS Music Technologies , a company that makes paper rolls for old-fashioned player pianos and systems that convert conventional pianos into electronic self-playing instruments .

QRS also owns the piano maker Story & Clark .

Mr. Gilmore 's said his `` epiphany '' came when he tried using separate magnetic pickups , like those found on electric guitars , for each of the strings .

Unlike microphones , the pickups are not affected by adjacent strings or extraneous noise .

The pickups , combined with a microprocessor , took care of figuring out how much tuning the piano required .

But he still needed to devise some way to do the tuning .

`` I knew anything mechanical was not going to be reliable , '' he said .

Initially he considered making piano strings from Flexinol , a nickel-titanium shape memory wire , which flexes in specific ways in response to temperature changes .

But the final solution was simpler : Mr. Gilmore decided to use heat provided by electricity to expand or contract conventional piano strings and alter their tuning .

Piano strings are relatively poor conductors of electricity , and their resistance will quickly generate heat when a current is passed through them .

Increasing the current will raise a string 's temperature and cause it to expand .

The expansion decreases the tension of the string , lowering the pitch .

Reducing the current makes the string cooler and causes it to contract , increasing tension and raising pitch .

Working with technicians at QRS , which has licensed the technology , Mr. Gilmore is developing a prototype of the self-tuning piano .

He anticipates that once the pianos are in production , their strings will be heated to 95 degrees before being tuned at the factory .

That reference tuning would then be stored in the piano 's electronic memory .

Once at its final destination , the piano will always have to warm up before play .

To retune the piano , users will press a button and all of its notes will sound .

The computer will compare the results to the reference tuning and raise or lower individual string temperatures as needed .

Mr. Gilmore expects the process to take about 20 seconds .

The self-tuning piano may still need manual retuning if it goes badly out of tune because of , say , a move from an extremely humid to an extremely dry place .

Users would also be able to store the work of their own tuners as the reference if they prefer .

Thomas A . Dolan , the president and chief executive of QRS , declined to predict when the first self-tuning piano would come to market or to estimate its price .

He said the first product based on some of Mr. Gilmore 's technology would probably be a portable tuning aid that will still require manual adjustments of the strings .

Mr. Dolan said that when Story & Clark makes its first self-tuning pianos , they will be grand pianos rather than uprights .

`` You do n't want the tuning system to cost twice the value of the piano , `` he said .

Because the pianos are likely to be expensive , he said , he believes that at first they will be purchased mainly by schools and professional musicians .

Dr. Good , for one , is unlikely to be interested .

`` Maybe it works , '' he said .

`` But if it works , I 'm not sure I want it .

Why bother with all this expense when you can just get the piano tuned every three months .

`` WHAT 'S NEXT .

Summary: Don A Gilmore , amateur piano player and professional engineer , develops electronic system that he says could allow pianists to tune their own instruments at touch of button .

Summary: Device , which uses heat provided by electricity to expand or contract conventional piano strings and alter their tuning , will be installed in prototype self-tuning piano made by QRS Music Technologies .

Summary: Drawing .


A RESEARCHER at AT&T Labs is proposing to stop at least some spam before it starts by using e-mail addresses that expire or come with other restrictions attached in code .

`` It came to me one day that spam works because there 's no easy way to differentiate between what 's real e-mail and what is n't , `` said John Ioannidis , a member of the research department at AT&T Labs in Florham Park , N.J.

Dr. Ioannidis suggests adopting something he calls `` single-purpose addresses '' rather than continuing to refine software filters that try to sort the good from the bad .

Such addresses would not replace permanent e-mail addresses , which , under Dr. Ioannidis 's plan , users would continue to give to those they trust and need to maintain contact with , like relatives or employers .

Instead , single-purpose addresses would be used when the senders have no continuing relationship with the other parties and fear that their e-mail addresses might be sold or given to spammers .

Online purchasing or newsgroup postings are obvious examples .

Dr. Ioannidis will present a paper about his approach in February at a meeting of experts in computer network security .

Under the system , users would generate single-purpose addresses with special software .

The process could be relatively simple .

Using an on-screen menu , the user would first select how long the address would exist .

Currently , the shortest period with Dr. Ioannidis 's technology is one day .

A user could also choose to have the address work only when sent from a specific domain -LRB- the part that follows the @ symbol -RRB- .

This would prevent an unexpired address from being used by spammers .

After those settings are made , the address software would generate a code containing the date and domain restrictions and the user 's permanent e-mail address .

That code , in turn , would be converted into a string of 26 characters that appear to be a jumble of numbers and letters .

Together with the user 's domain , the string would form the single-purpose address , which could be cut and pasted into forms like those used by online stores .

When , say , the store sends a reply indicating that a user 's desired item is out of stock , software on the customer 's mail server would decode the special address and then , assuming it remains valid , forward the mail to the permanent address .

Dr. Ioannidis acknowledges that even with his system , spammers could still get access to permanent e-mail addresses .

A trusted relative , he said , may give someone 's full e-mail address to an online greeting card service , which could then sell it to spammers .

But Dr. Ioannidis hopes that if his system is widely adopted , it will pollute spam mailing lists with so many invalid addresses that the lists will become increasingly useless .

The process could take decades , however , he said .

`` The idea is to raise the bar to make it difficult to spam my address , '' Dr. Ioannidis said .

John Mozena , a co-founder and vice president of an anti-spam group , the Coalition Against Unsolicited Commercial E-mail , said that Dr. Ioannidis 's technology would not likely change his organization 's view that legislation remains the most effective form of anti-spam protection .

`` This technology might protect some individual users from a certain amount of spam , '' Mr. Mozena said .

`` But it 's adding insult to injury to also have us spend time , money and effort on tools to keep spam out of our mailboxes . ``

Mr. Mozena also said he found it unlikely that spammers would simply give up if e-mail lists became filled with worthless addresses .

`` The quality of those lists are already so miserable that it would n't really matter , `` he said .

Summary: John Ioannidis , researcher at AT&T Labs , develops idea for combatting spam .

Summary: Suggests adopting what he calls single-purpose addresses to be used when senders have no continuing relationship with other parties and fear that their e-mail addresses might be sold or given to spammers .

Summary: Other similar ideas discussed .


The Oklahoma state government has begun offering an e-mail service that alerts subscribers whenever terror threat levels change at the state or national level .

Those who sign up for the service at YourOklahoma.com can receive the updates through any device with e-mail capability .

Jeff McCartney , general manager of YourOklahoma.com, said the service had been well received in the state , which was terrorized by a bombing seven years ago .

`` We 've had to deal with very serious issues , `` Mr. McCartney said .

`` My personal opinion is that others would look to Oklahoma for leadership . ''

As far as state officials know , they are the first to set up an e-mail notification service that deals exclusively with terror threats .

The White House Web site -LRB- www.whitehouse . gov -RRB- allows people to sign up for updates on homeland security issues but has no specific notification for changes in threat levels .

Whenever threat levels change , subscribers to Oklahoma 's service receive a brief notification that informs them of the change and directs them to the state 's Web site for details .

`` Just from our experience , we 've learned that communication is very critical , `` Mr. McCartney said , adding that he expects demand for the service to grow .

Rebecca Fairley Raney NEWS WATCH : SAFETY .

Summary: Oklahoma state government begins offering e-mail service that alerts subscribers whenever terror threat levels change at state or national level .

Summary: Photo .


THE dollar ended last year in a precipitous plunge , falling 5 percent against the euro and 3 percent against the yen in December , and it looks to be headed lower in 2003 .

The question is how much .

The dollar had been slipping against the euro and the yen since early last year , weakened by sluggish economic growth at home , a falling stock market and wary foreign investors .

Lately , the threat of war with Iraq , rising oil prices and other geopolitical uncertainties have been dragging it lower .

Still , the off-the-cliff acceleration in December caught many currency analysts by surprise and upset forecasts for 2003 .

The dollar 's fall was so swift that it is already lower now against the euro and the yen than some forecasters had predicted for the end of this year .

Before last month 's drop , forecasters predicting a 15 percent decline in the dollar this year might have seemed on the lunatic fringe , said Lara Rhame , senior foreign exchange economist at Brown Brothers Harriman .

`` All of a sudden , that does n't look out of the range of possibilities , `` she said .

Ms. Rhame is expecting a dollar decline , but maybe not as steep as that .

Nor is she saying that the dollar is weak .

It will just not be as strong as it has been .

On a broad , trade-weighted basis , the average dollar value last year is still the third strongest it has been since the currency began to be freely traded in the early 1970 's .

`` Until you get another major industrial economy on track with strong productivity growth and high expectations of investment returns , there is not going to be a big flow of foreign money out of the United States , '' Ms. Rhame said .

So , she said , `` the dollar can skate through at a relatively strong value . ''

No matter how far the dollar falls , if that happens , that would be the dollar 's first back-to-back annual declines since 1994-95 .

But a weaker dollar is not necessarily bad .

It could help a broader economic recovery by making American exports cheaper and more competitive abroad .

American manufacturers that compete against foreign companies -- notably automakers -- would also benefit because the dollar price of imports would rise .

A weaker dollar would also help Americans investing overseas by reducing losses or increasing gains when foreign holdings are translated back into dollars .

Big stock markets abroad were in the red last year , but the weaker dollar trimmed a 43.9 percent decline in Germany 's DAX index to 33.9 percent and an 18.6 percent decline in the Nikkei index of 225 Japanese stocks to 9.8 percent .

Foreign bond returns were also enhanced , with the total return from a portfolio of European bonds rising to 28 percent when translated into dollars as a result of a euro gain of just over 9 percent .

The big unknown for the dollar in 2003 is President Bush 's dollar policy .

The administration has backed a strong dollar , but the desire to ensure that the economy rebounds nicely ahead of the 2004 presidential election may encourage it to shift course and try to nudge the dollar lower .

John W . Snow , the Treasury secretary-designate , is likely to be asked repeatedly about his views on the dollar , and each word will be weighed carefully as currency traders look for any sign of support for a weaker dollar .

If they see one , they will pounce .

The risk in trying to talk down the value of the dollar is that it could fall much further and faster than Bush policy makers would like .

An orderly dollar decline , like the one that occurred last year , is easy for the economy and the financial markets to handle .

But a rapid fall could further disrupt the economy .

The dollar fell 15.2 percent last year against the euro , a 12-nation currency , ending 2002 at 1.0492 and giving that currency its first positive year since it was introduced into limited use in January 1999 .

The dollar also dropped against the currencies of two other big trading partners , falling 9.8 percent against the Japanese yen , to 118.79 , and 1.3 percent against the Canadian dollar , to 1.5718 -LRB- the Canadian dollar settled at 63.62 cents -RRB- .

Its biggest declines came against the South African rand , off 28.4 percent , and the Norwegian krone , down 22.6 percent .

But the dollar also had some gains , including a rise of 13.2 percent against the Mexican peso , to a rate of 10.37.

It surged against the currencies of three economically troubled Latin American nations : Brazil , Venezuela and Argentina .

This mixed performance means that the broadest measure of the dollar 's overall value , a trade-weighted dollar adjusted for inflation , slipped just 1.5 percent in 2002 , based on preliminary Federal Reserve data .

While recent forecasts of the dollar 's value at year-end may have been overtaken by the December decline , the predictions for the dollar-euro rate included in the December reading by Consensus Economics of London show that there is no unanimity on the dollar 's direction .

As of Dec . 9 , the forecasts ranged from a dollar decline of 12.1 percent to a rise of 9.9 percent against the euro .

Against the yen , the forecasts ranged from a dollar fall of 12.4 percent to a rally of 13.5 percent .

The yen forecast is much more difficult because the economic fundamentals militate for a weaker yen and stronger dollar .

But Finance Minister Masajuro Shiokawa of Japan and other government leaders made clear in December that they wanted a weak yen to help exporters and the ailing economy .

The Brazilian real could benefit from the dollar 's weakness and rally this year if Brazil 's new president , Luiz Inácio Lula da Silva , appears to be dealing successfully with the country 's economic and debt problems .

Mexico 's peso is likely to slip a bit further , based on the consensus forecast .

The most interesting offbeat dollar play last year was the Norwegian krone , said Laurie A . Cameron , global currency strategist at the J . P . Morgan Private Bank .

With the forecast of a 4 percent rise in the value of the krone against the dollar and 6.5 percent from investing in short-term government securities , this year could bring a return of more than 10 percent .

In addition to being affected by sluggish growth here and a lackluster stock market , the dollar could also be dragged lower by concerns about the size of the United States ' current-account deficit , which rose to $ 127 billion in November , nearly a record .

It takes an enormous flow of capital from abroad to cover the deficit , which includes red ink in trade , and that inflow may be slowing , which could weaken the dollar .

Yet the dollar could stage a surprise rally .

The geopolitical drag on its value could be lessened if a war with Iraq was averted or if it was successful and over quickly .

While the forecasts of economic growth for the United States are not robust , those for Europe and Japan are still weaker .

If the American economy and stock markets move ahead faster than expected , many investors could be drawn back to the United States , pushing up the dollar 's value .

A narrowing of the gap in interest rates between Europe and the United States would also make the dollar more attractive .

The European Central Bank cut its benchmark interest rate by half a percentage point , to 2.75 percent , in December .

That is more than double the 1.25 percent benchmark rate set by the Federal Reserve .

But that gap could narrow substantially if the European bank cuts rates again and if the Fed begins to raise its benchmark interest rate as the economy finally picks up steam in the second half of 2003 .

Money & Investing .

Summary: US dollar fell against currencies of many American trading partners in 2002 , including European Union , Canada and Japan , and lackluster US economy could cause it to fall further in 2003 .

Summary: Dollar fell 5 percent against euro and 3 percent against yen in December .

Summary: Weaker dollar could help broader economic recovery by making American exports cheaper and more competitive abroad .

Summary: Chart .

Summary: Drawing .


THE dominant image of the stock market tumble that began nearly three years ago has been a bursting bubble .

And while it was true that the worth of many companies was inflated beyond all reason , it turns out that deflating those valuations did not immediately reveal all the damage .

Instead , the decline in stocks took its time in damaging the economy , much as a domino near the end of a line can topple long after the first ones fall .

The first pain was felt by millions of investors , who lost billions but proved surprisingly resilient .

The fact that consumers kept spending helped keep the 2001 recession mild .

But it soon became clear that sales at companies that had prospered most during the boom , notably telecommunications concerns , were going to remain depressed .

Forecasts of an early revival were consistently wrong , and now some companies have put off their hopes for growth until 2004 .

Only in 2002 did it become clear just how far this string went -- from the federal government to city halls .

Governments had been dependent on the revenue-producing effects of the bubble -- particularly income taxes on profits from cashed-in stock options .

Now state and local governments are being forced to reduce spending sharply and raise taxes , moves that will slow the economy .

What 's left to tumble .

Consumer behavior is the area that many economists are watching .

Reports of disappointing Christmas spending could be an indication that high debt levels are finally slowing purchases .

But housing remains strong , and thanks to low interest rates , most consumers have ample income to pay interest charges on the money they owe .

Productivity numbers have remained strong , providing a source of reassurance that the economy remains healthy .

But it is possible that the good news could end in 2003 .

`` If the productivity numbers reflected the wild and excessive investments , '' said Robert J . Barbera , the chief economist of ITG / Hoenig , a Wall Street firm , `` productivity might begin to fade '' since bubble-related capital spending has collapsed .

He said some research showed a two-year delay in the impact of investments on productivity numbers .

And then , of course , there are signs of a weakening dollar , high oil prices and the prospect of war with Iraq , with a possibly messy aftermath , to give investors pause .

But to some bulls , the real issue is not so much whether the economic outlook is bright , but whether share prices fell far enough to more than compensate for the remaining risks .

There were signs within the market , including widespread bearishness and a big increase in volatility , that a turning point was reached when stocks bottomed on Oct . 9 .

There are also historical precedents .

It 's been seven decades since the last time the market went down in four consecutive years -- as would happen if 2003 turned out to be a bad year .

And it has been more than six decades since the third year of a presidential election cycle brought lower share prices .

On the other hand , big bear markets are usually followed by bull markets with leadership that is different from the previous bull market .

But the rebound since Oct . 9 has been led by technology and telecommunications stocks -- which also led previous rallies in the bear market that began in the spring of 2000 .

Those earlier rallies all ended with declines that took the market to new lows .

It is hard to remember a time when valuation levels were harder to determine , simply because earnings numbers are now in doubt .

Part of that relates to scandals that have led to restatements , and part to a growing sense that the willingness to use numbers that leave out bad news -- so-called pro forma earnings -- created too optimistic a picture .

But some analysts , notably Steve Leuthold of the Leuthold Group , a research firm based in Minneapolis , calculate that valuations had fallen to reasonable levels at the October lows .

Others point out that many companies whose share prices plunged have reported lower profits , and that their stocks still trade at higher multiples of earnings than in pre-bubble years .

That is particularly true of large technology stocks .

For bulls , a tempting comparison is to the mid-1970 ` s , when the stock market fell roughly as far as it did during the bear market that ended -- knock on wood -- in October .

From top to bottom in 1973-74 , the Standard & Poor 's 500-stock index fell 48 percent .

This time , the decline was 49 percent .

The economic problems of that era were different from today -- rising inflation and economic stagnation were the principal fears -- but the pessimism as the market hit bottom was similar .

The pessimists then were right to forecast that the economy would do worse than it had in previous decades .

But the stock market still took off in 1975 , with the S . & P . 500 gaining 32 percent , although prices did not climb to record levels for several years .

The market in 2002 ended with declines in all the principal gauges for a third consecutive year , something that had not happened since 1939-41 .

Wall Street forecasters are virtually united in saying the string will stop there , although a year ago they were forecasting that the year just ended would have increases .

But on a historical basis , at any rate , they have more going for them now than they had a year ago .

First , the last time that the big indexes had four consecutive declines was in 1929-32 .

And while this economy has not been especially vibrant , no one is talking about a depression either .

Second , there is the presidential election cycle .

For whatever reason -- and cynics have asserted that presidents planning to seek re-election are eager to make things look good in the year when potential rivals are deciding whether to run -- the third year of the election cycle is often the best one .

The last time either the Dow Jones industrial average or the S . & P . 500 fell in the third year of a presidential cycle was in 1939 , when World War II began in Europe .

-LRB- In 1987 , there was a crash , but both indexes ended the year with small gains . -RRB-

To some extent at least , 2002 was the year that Americans ' faith in the stock market was finally shaken .

It was the first year since 1988 that Americans took more money out of stock mutual funds than they put in , a fact that is all the more impressive given the automatic investments that come from 401 -LRB- k -RRB- plans and that are counted in the numbers .

But the Investment Company Institute , a trade group , reports that net withdrawals through November amounted to just 0.7 percent of assets , an indication that investors did not come close to panicking .

To many , investors ' continuing faith in stocks makes perfect sense .

With interest rates low , savings accounts and even bonds look less attractive than they did during previous market swoons .

And even after the recent fall , the Dow has risen at a compound annual rate of 10.9 percent over the last 20 years , excluding dividends .

That is better than any 20-year period in the Dow 's history before the late 1990 's .

-LRB- In 1929 , the peak came with the Dow 's having risen at less than a 9 percent annual rate over the previous two decades . -RRB-

It may not make investors who entered the market near its peak feel any better , but the recent falls have wiped out only a small part of the gains of the great bull market that began in 1982 .

-LRB- Numerologists take note : In 1982 , the Dow bottomed at 776.92.

Last year , on Oct . 9 , the S . & P . hit its year 's low at 776.76. -RRB-

The declines were widespread in 2002 -- more so than during the previous years of the bear market .

Both the Dow and the S . & P . had worse years in 2002 than they experienced in either 2000 or 2001 .

The S . & P . 500 's decline of 23.4 percent was the steepest for any full year since the fall of 29.7 percent in 1974 , and every sector in the index posted declines .

Just 131 of the 500 stocks rose -- the lowest number for any year since the S . & P . began tracking that statistic in 1980 .

The Dow , which was blessed by its relatively low level of technology stocks , fell just 16.8 percent , but that was still the worst since 1977 .

And of the 30 Dow stocks , only 3 -- Eastman Kodak , Procter & Gamble and 3M -- showed gains for the year .

Volatility also rose to levels rarely seen before .

About one trading day in two had the S . & P . 500 and the Dow rise or fall more than 1 percent , and on average they had moves of at least 2 percent once a week .

For the S . & P . , volatility was the highest since 1938 .

For the Dow , it was greater than in any year since 1933 .

Volatility in the Nasdaq composite was even greater , with 67 percent of sessions showing moves of at least 1 percent .

But that was down from a peak of 75 percent set in 2000 .

Volatility often peaks around the time markets change directions , and that may have been true in 2002 .

The S . & P . 500 showed moves of at least one percentage point in 15 consecutive sessions ended Oct . 11 , a period that included the market 's bottom on Oct . 9 .

Since World War II , the longest such string had been nine days , ended Oct . 21 , 1974 .

That volatility came just after the end of the 1973-74 bear market .

The recovery since Oct . 9 indicates that the market is forecasting no new recession , even if the economy is not expected to return to the days of heady growth that investors once took for granted .

`` I am increasingly impressed at the remarkable resilience of this economy , '' Alan Greenspan , the Federal Reserve chairman , told the Economic Club of New York last month .

Investors hope that he will continue to feel that way .

Summary: Article on whether stock market will rebound in 2003 after three years of decline .

Summary: Says to some bulls , real issue is not so much whether economic outlook is bright , but whether share prices fell far enough to more than compensate for remaining risks .

Summary: Holds it has been seven decades since last time market went down for four consecutive years , as would happen if 2003 turned out to be bad year .

Summary: Adds it has been more than six decades since third year of presidential election cycle brought lower share prices .

Summary: Says big bear markets are usually followed by bull markets with leadership that is different from previous bull market .

Summary: Graphs .

Summary: Charts .

Summary: Drawing .


THE bankruptcies of companies like Global Crossing and Adelphia Communications helped make 2002 a tough year for junk bond investors .

A record 14.89 percent of junk bonds outstanding were in default as of the 12 months ended Nov . 29 , according to Credit Suisse First Boston , which includes in its tally companies like WorldCom , which once had sound credit ratings .

But with hope of a stronger economy , some investors suggest that the new year may be a good time to make some cautious bets in this volatile market .

Junk bonds -- high-yield instruments that are rated below investment grade -- are often issued by young or fast-growing companies , which tend to borrow heavily .

In the late 1990 's , the biggest issuers of junk bonds were rapidly expanding cable and telecommunications companies , many of which ultimately defaulted on their debts .

When the economy is weak , defaults of these securities tend to rise sharply .

The default record set in 2002 was a little more than six percentage points higher than the 8.8 percent default rate in 1991 , at the depths of the last recession .

The rising defaults contributed to an unusually wide gap between the yields on junk bonds and the yields on bonds issued by the federal government , which are considered to be the safest form of debt .

Despite these defaults , the junk bond market managed to earn a cumulative total return of 3.02 percent , through Dec . 26 , according to an index kept by Credit Suisse .

That compares with a total return of 12.54 percent for the year on 10-year Treasuries , one of the most conservative investments , and a decline of 23.4 percent for the Standard & Poor 's 500-stock index .

The return on a bond takes into account the interest rate paid to an investor as well as movements in price .

When the price of a bond falls , its yield rises .

Junk bonds typically carry higher interest rates than Treasury or investment-grade corporate debt , and their prices are more volatile than those of other bonds , particularly when the economy is bad .

Like stocks , junk bonds do poorly when the economy is sour .

Since the latest economic downturn began , the gap between yields on junk bonds and on government debt has widened , as it had during other times the economy was weak .

But by the middle of October , the difference , or spread , between junk bonds and yields on Treasuries with comparable maturities reached 11.16 percentage points , an even bigger gap than in the recession of the early 90 's , when it hit 10.96 percentage points , said Sam DeRosa-Farag , co-director of leveraged finance research at Credit Suisse .

`` This took us all by surprise , '' Mr. DeRosa-Farag said .

The spread between junk bonds and Treasuries never grew that wide in the previous two decades , he added .

The outlook for junk bonds improved after the Federal Reserve cut interest rates by one-half of a percentage point in November .

The spread between high-yield bonds and Treasuries has since narrowed to 9.38 percentage points .

`` The market is back from the dead , '' said David C . Hinman , a high-yield portfolio manager for the Pacific Investment Management Company , a large bond fund specialist .

Some investors say they are getting more confident about investing in junk bonds now than they were in recent months because they think that defaults are finally on the brink of declining .

`` We do think the worst is over , '' said Diane Vazza , managing director of global fixed-income research at Standard & Poor 's .

`` Entering 2003 , we expect the global default rate to remain elevated but to decelerate slowly . ''

Defaults tend to peak two to three years after bonds are issued .

At the height of the bull market , from 1997 to 1999 , $ 315 billion of junk bonds were issued .

At the time of issuance , S . & P . gave 28 percent of them junk ratings of B - or lower .

A good number of those companies have already run into trouble , Ms. Vazza said .

In 1991 , a year after defaults peaked , junk bonds reported their best total return ever , rising nearly 44 percent , according to Credit Suisse .

`` People should n't expect that kind of return `` in 2003 , said Mr. Hinman of Pacific Investment Management , noting that there had been extraordinary reasons for the market 's decline in 1990 , like the bankruptcy of Drexel Burnham Lambert , then the leading underwriter of junk bonds .

But he is optimistic that this will be a good year for junk bonds .

Still , some investors , citing worry that the economy is shaky , say they remain wary of junk bonds .

`` We are n't sure where we are in the economic cycle , `` said John W . Ueleke , a financial planner with Legacy Wealth Management in Memphis .

He has close to 4 percent of his clients ' assets in high-yield bonds but is reluctant to increase that percentage just yet .

Another uncertainty is the expectation that interest rates will rise , making it more expensive for some companies to refinance their debts and hurting companies in industries that benefited from the lower rates , like suppliers to the auto industry and home builders .

Steven A . Tananbaum , chief investment officer at GoldenTree Asset Management , a $ 3.8 billion investor in junk bonds and related securities , said he was avoiding these sectors .

Instead , he is favoring publishing companies and some European cable operators , which , he says , have been punished too much in recent months .

`` To figure out the outlook for high-yield bonds , you have to have a general opinion on the economy and rates , '' Mr. Tananbaum said .

But , more important for companies that issue junk bonds , he said , a stronger economy will mean higher profits , and fewer borrowers will default on their debt .

`` A stronger economy will make people put money into high-yield bonds instead of Treasuries , '' said Kingman D . Penniman , president of KDP Investment Advisors , a highyield bond research firm based in Montpelier , Vt .

`` As soon as we get a clearer picture on defaults and the economy , we should finally have a good year . ''

Money & Investing .

Summary: Optimism persists for junk bonds in 2003 despite record defaults in 2002 .

Summary: Credit Suisse First Boston says record 14.89 percent of junk bonds outstanding were in default as of 12 months ended Nov 29 .

Summary: Graph .


ARE the good times over .

The answer is yes .

That 's the question -- and the answer -- for bond investors going into this year after the fixed-income market outperformed stocks in 2002 , for the third consecutive year .

That is a three-year run not seen since 1939 to 1941 , making it a first for most investors .

So savor the returns .

Over the three-year span , the total return from the fixed-income market , including Treasuries and corporates , was 33.6 percent , in contrast to a negative return , including dividends , of 37.5 percent in the Standard & Poor 's 500-stock index .

Bonds have outperformed stocks so much over the last three years that if investors had put their money into Treasury bonds as far back as March 1994 and ignored stocks , they would be even with investors who put all their money into stocks .

The overall return for both markets was about 120 percent .

In the third year of this run for bonds , high-quality fixed-income securities , especially high-rated corporates and Treasury bonds and notes , did the best .

But those who had a taste for risk did well in emerging-markets bonds , despite declines in bonds from Argentina and Brazil .

As for this year , Mary J . Miller , assistant director of the fixed-income division at T . Rowe Price Associates , the mutual fund company , said , `` It does n't have to be a disastrous year for fixed income . ``

But to avoid disaster , she said , investors will have to take on increased risk by moving into high-yield junk bonds and lower-rated investment-grade bonds because those sectors will be hurt less if interest rates rise , as forecast .

The Treasury market , which would suffer the most as rates climb , is a no-no .

Jack V . Malvey , chief global fixed-income strategist at Lehman Brothers , agreed , saying , `` Lower-quality debt will be the star in 2003 . ''

He forecasts a return of only 4 to 5 percent in the broad fixed-income market .

That means declines in bond prices would eat into the interest investors were paid on their fixed-income securities .

Bonds could even have a negative year , he warned , if the economy is a little stronger than expected and the Federal Reserve raises its benchmark short-term interest rate sooner than the second half of the year and more than the expected half a percentage point .

If this forecast sounds like last year 's , it should , because this is basically what analysts were saying at the end of 2001 .

`` We were joking internally that we could practically take the 2002 outlook and change the numbers a little and put it out again , '' Mr. Malvey said .

He said 2002 turned out to be different from what was expected because analysts had been too optimistic about the strength of the recovery , had not expected the threat of a war with Iraq and had yet to realize how Enron and the corporate scandals that followed would undermine investors ' confidence .

Although the economy is not expected to be robust this year , growth of 2.5 to 3 percent should preclude worries of a double-dip recession , which may make investors willing to take on more risk .

And many forecasters are expecting growth to be steady enough by the second half of the year for Fed policy makers to push their benchmark rate , now at 1.25 percent , a little higher .

All that spells modestly higher interest rates , with some analysts forecasting that the yield on the Treasury 's 10-year note , which ended 2002 at 3.82 percent , will be up to 4.5 percent by the end of this year .

Shorter-term rates are expected to rise more if the Fed nudges its benchmark rate up .

The Treasury 's two-year note , which ended 2002 at 1.60 percent , could rise to 3 percent .

Another negative for bonds could be the stock market .

In recent years , the two markets have moved in opposite directions , with Treasury prices falling when stock prices rose , and vice versa .

If that relationship continues , even a modest stock rebound this year will spell trouble for bonds .

But forecasters were fooled last year and could be again .

One unknown is whether there will be war with Iraq .

Stocks could fall and the bond market rise if a war approaches .

But if the history of the Persian Gulf war is replayed , an early sign of success could send stocks higher and bonds lower .

`` Every economist I know reserves the right to redraw the outlook when the events occur , '' said Alan D . Levenson , chief economist at T . Rowe Price .

Another unknown is the federal budget deficit .

The cost of any war and the cost of rebuilding Iraq in the aftermath could add a lot to the deficit .

And if the Bush administration wins tax cuts to stimulate the economy , that could make the deficit balloon further .

So far , analysts and investors seem unworried about the deficit , which grew to $ 159 billion in the 2002 fiscal year , which ended Sept . 30 , in contrast with a surplus of $ 127 billion the year before .

Some deficit forecasts for this fiscal year are already over $ 250 billion .

The belief is that these deficits will begin to shrink as the economy grows .

But if investors begin to doubt that , more upward pressure on interest rates could follow .

Over all in 2002 , the fixed-income market -- including Treasuries , agencies , investment-grade corporate bonds and mortgages -- had a total return of 10.4 percent , after returns of 8.3 percent in 2001 and 11.7 percent in 2000 , according to Merrill Lynch bond indexes .

The S . & P . 500 fell 23.4 percent , 13 percent and 10.1 percent in the last three years .

Interest rates fell to lows not seen in more than four decades as the expected economic recovery stumbled and investors worried in the summer about the possibility of a double dip into a second recession .

Corporate accounting scandals and corruption at companies like WorldCom and Tyco International made investors wary of risk .

That contributed , with the economic worries and the growing possibility of a war with Iraq , to a temporary seizing up of the corporate bond market in July that made trading nearly impossible .

Finally , Federal Reserve policy makers were worried enough about the outlook to cut their benchmark short-term interest rate in November by half a percentage point , to 1.25 percent , a 41-year low .

In this environment , the Treasury market became a haven for many investors .

The yield on the Treasury 's 10-year note fell as low as 3.57 percent , a 44-year low for securities with maturities of 10 years .

The two-year note 's year-end yield of 1.60 percent was a 58-year low .

The interest rate on the average 30-year mortgage , which was dragged lower by the decline in Treasury yields , fell to 5.93 percent , the lowest since 1965 , according to Freddie Mac , the mortgage lender .

For the year , the total return from Treasury notes and bonds was 11.6 percent , according to Merrill Lynch , up from 6.7 percent in 2001 but down from the 13.4 percent return in 2000 .

But Treasuries were outdone by higher quality corporate bonds , which investors bought for their relative safety and higher yields .

Investment-grade bonds rated double A -LRB- few companies are rated triple A -RRB- had a total return of 12.3 percent , well above the return of 7.1 percent for triple-B-rated companies .

Single A corporate bonds returned 12.6 percent .

Despite a strong recovery in November and December when the total return from high-yield bonds was 8.2 percent -LRB- annualized , that would be 59 percent -RRB- , junk bonds still had a down year .

Yields were above 12 percent , but the sector 's total return was a minus 1.9 percent .

Emerging-markets bonds had a return of 14.2 percent , although the return was a negative 5.6 percent for Argentine bonds and a negative 3.3 percent for Brazilian bonds , according to J . P . Morgan bond indexes .

Two of the best-performing emerging-markets bonds were those from Russia , with a return of 35.9 percent , and Turkey , with a return of 20.7 percent .

News Analysis Correction : February 28 , 2003 , Friday An article in the special Outlook section of Business Day on Jan . 2 misstated the history of the yield of the two-year Treasury note .

At the end of 2002 , the yield was 1.60 percent , the lowest in 44 years , not 58 .

-LRB- Questions about the data in a recent e-mail message from a reader uncovered the error . -RRB- .

Summary: Analysis of prospects for fixed-income market , including Treasury and corporate bonds .

Summary: Holds fixed-income bonds are not expected to outperform stocks in 2003 as they have for three consecutive years .

Summary: Notes total return of such investment instruments was 33.6 percent , in contrast to negative return , including dividends , of 37.5 percent in Standard & Poor 's 500-stock index .

Summary: Graphs .


In his yearly report on the federal judiciary , Chief Justice William H . Rehnquist called today for higher judicial pay , more judgeships and speedier filling of existing vacancies .

The themes were familiar , as the chief justice acknowledged in his 17th year-end report .

`` I am struck by the number of issues that seem regularly to crop up , or perhaps they never go away , '' he said .

Judicial pay , in particular , is close to the heart of many members of the branch of government that Chief Justice Rehnquist heads .

Many federal judges have found it galling that the promise of regular and uncontested cost-of-living increases they received under a 1989 federal law , which barred most types of outside income for judges , has not been fulfilled .

Congress ended its session this year without giving judges their expected cost-of-living increase or , for that matter , approving a budget for the federal courts .

The chief justice asked Congress to approve budget requests for a modernization and security upgrade project at the Supreme Court and to address a backlog in the federal judiciary 's continuing courthouse construction plan .

A $ 5 billion building program began in 1985 to address decades of neglect of the federal courts ' physical needs .

The biggest federal civilian construction program since the 1930 's , it has run into some Congressional resistance .

Judicial pay drew the most impassioned commentary in the report .

It was `` the most pressing issue today '' for the courts , he said , adding that `` inadequate compensation seriously compromises the judicial independence fostered by life tenure . ''

Financial considerations are driving judges off the bench and deterring highly experienced lawyers from becoming federal judges , he said .

Federal judicial salaries range from $ 150,000 for district judges to the chief justice 's own $ 192,600 .

These salaries are no longer competitive with the earnings of partners at major law firms , or with those of professors at major law schools , as Justice Stephen G . Breyer testified last summer when he appeared with the chief justice before a privately financed group studying problems of government service .

The chief justice said today that he hoped the group , known as the Volcker Commission for its chairman , Paul A . Volcker , former chairman of the Federal Reserve , would find a solution .

`` It is obvious that the current approach to judicial and other high-level salaries does not work , '' he said .

`` We can not continue to use an arrangement for setting pay that simply ignores the need to raise pay until judicial and other high-level government salaries are so skewed that a large -LRB- and politically unpopular -RRB- increase is necessary . ''

The chief justice noted that `` there will always be a differential between government and private sector pay for excellent lawyers , '' but added : `` But the judiciary , in particular , will be compromised if there is too wide a gap .

At the present time there is not just a gap , there is a chasm . ``

On other topics , the chief justice said the federal system needed 10 new judgeships for the courts of appeals , where no positions have been created since 1990 .

In the Second Circuit , which covers New York , Connecticut and Vermont , he noted that no positions had been created since 1984 , while the circuit 's workload has risen by almost 70 percent .

In his brief discussion of vacancies on the federal bench , the chief justice appeared to avoid apportioning blame for widely noted difficulties in the confirmation process .

With a nod to the departing Democratic leadership of the Senate Judiciary Committee , he said , `` We appreciate the fact that the Senate confirmed 100 judges during the 107th Congress . ''

That was a considerably faster pace than the Republicans set when they controlled the committee and were processing the Clinton administration 's nominations .

Congress adjourned this year leaving 60 vacancies on the federal courts .

For 29 of these , the Bush administration had not submitted nominations .

`` Judicial vacancies must be filled in a timely manner with well-qualified candidates , '' Chief Justice Rehnquist said .

`` It is of no concern to the judiciary which political party is in power in the White House or the Senate .

We simply ask that the president nominate qualified candidates with reasonable promptness and that the Senate act within a reasonable time to confirm or reject them . `` .

Summary: Chief Justice William Rehnquist , in yearly report on federal judiciary , calls for higher pay , more judgeships and speedier filling of vacancies .


IT would be hard to conjure up a worse year for Wall Street and its analysts than 2002 .

Stock analysts and strategists were pilloried for their gauzy optimism and accused by Eliot Spitzer , the New York attorney general , of being beholden to the investment banking side of their firms .

At the same time , the collapsing equity markets made it especially hard to sort out the winners from the losers .

Consequently , those who survived 2002 look at this year with a cool , skeptical , as well as careful eye .

The role of analysts has changed .

As a result of the settlement in principle between brokerage firms and federal and state legislators , analysts can not earn their keep by doing investment banking work .

Now it is all about stock picking , through rigorous company-specific analysis , which in theory should be good for investors .

Two years into his easing cycle , the magic man of years past , Alan Greenspan , the Federal Reserve chairman , has lost his power to move markets with a well-timed interest rate cut .

On the contrary , many experts now say , the market 's next bull run will be presaged by evidence that the Fed is moving toward a rate-tightening bias .

Put simply : higher rates signal an economy on the mend , which means better earnings for companies across the board .

Despite the market 's glum mood , investment opportunities still exist , a group of analysts say .

Many companies in crucial sectors like retail , cable , brokerages and technology have been revamping for more than a year .

Layoffs , store closings and other measures of cost-cutting have given a number of large companies spruced-up balance sheets .

They will be well placed to take advantage of sector recoveries when they come along .

From I.B.M. to Comcast , to Merrill Lynch to Gap , the names are familiar , and in all cases , they are trading well below their highs .

These analysts , Dana Telsey of Bear , Stearns , Guy Moszkowski of Salomon Smith Barney , Laura C . Conigliaro of Goldman , Sachs , Richard Bilotti of Morgan Stanley and Richard Bernstein of Merrill Lynch , do not expect the companies to approach their past highs -- by most accounts , 2003 will be a difficult year for the markets as a whole .

Most agree , however , that these companies will outperform the broader market .

DANA TELSEY is the senior retail analyst at Bear , Stearns .

Most retailers are `` overstored . ''

A lot of companies have reached a stage of maturation where it is not possible to achieve the same level of top-line sales growth they had in the past .

Many retailers are working to make efficiencies on expenses , distribution costs and systems to enhance returns .

We think 2003 will show a continuation of this sort of refinement .

Over all , retailers are faced with an environment where pricing flexibility is limited and where the consumer knows that the longer he waits , the cheaper the merchandise will be .

To be successful , retailers must maintain positive gross margins through consistent markups and lower sourcing costs .

The consumer is holding up pretty well .

Keep in mind , we have tax cuts , low interest rates and low inflation .

All of which bodes well for consumer spending .

One company that will continue to do well is Coach .

They do something that is special .

By testing their products at least six months ahead of time , they are able to offer the consumer just what they like .

Their balance sheet is also very clean , and their store base is not saturated .

Gap is a different story -- if not a speculative one .

There is momentum building , because their top-line growth is beginning to improve , albeit off a very depressed base .

In addition , they have a new chief executive -- Paul Pressler , formerly of Walt Disney -- and an appealing new marketing campaign .

The company is attracting new customers into all divisions -- Gap , Banana Republic and Old Navy .

All of this is breathing new life into the company .

Plus , in retailing there are not a lot of companies with market capitalizations larger than $ 10 billion .

So Gap stands out at $ 13 billion .

-LSB- Ms. Telsey does not own stock in Coach or Gap , nor does Bear , Stearns do investment banking business with them . -RSB-

GUY MOSZKOWSKI is a brokerage analyst at Salomon Smith Barney .

Business conditions remain difficult for brokerage stocks .

Do n't forget -- the operating environment is the stock market .

A better equity market translates into more trading volume on the retail investor side , better underwriting volume and a better mergers-and-acquisitions environment .

Weakness in such areas has driven a decline in return on equity for the big firms to 10 percent or so from historic highs of 30 percent or better .

When the market moves up and sustains itself , it will give investors confidence in the sector .

But we have not seen that yet .

Of the big firms , Merrill Lynch had the most fat to cut .

Give them credit -- they realized in early 2000 when things were still good that they had become bloated and have laid off close to 20,000 employees in the past two years .

Unlike other firms , they realized that we were not going to return to the late 90 's business levels for a long time .

They have managed their costs so well that people will be surprised by the extent of their earnings power once the markets recover .

Goldman Sachs has maintained market share in some key banking activities -- like equity underwriting and mergers and acquisitions -- during this difficult period .

It does a few things extremely well , while others are spread more thinly .

If there is any improvement in these areas , the stock has a lot of upside .

With regard to the settlement in principle between brokerage firms and federal and state regulators , it clearly gets the regulatory issues behind the firms .

Of course , the potential for civil litigation still exists , in terms of arbitration of retail client issues , if not class action .

Given the relative size of fines levied -LSB- $ 1.4 billion -RSB- , along with e-mail evidence already released by regulators , it would appear that Merrill Lynch has the most exposure here , with Morgan Stanley , Lehman Brothers , Bear Stearns and Goldman Sachs considerably less so .

-LSB- Mr. Moszkowski owns no shares in the firms he cites .

Salomon has banking relationships with all of them . -RSB-

LAURA C . CONIGLIARO is a technology analyst and strategist at Goldman , Sachs .

For the technology sector , spending on information technology has been most affected by macroeconomic variables .

As we have been seeing for two years now , the I.T. spending environment is weak .

That is the feedback we get from end users in sectors like manufacturing , financial services and telecommunications .

We are hearing that their spending patterns will be similar to the end of 2002 .

Unfortunately , technology spending for 2002 was down , as chief investment officers cut back on their budgets .

Typically , if profitability is improving , so will capital and I.T. spending .

But many chief investment officers we speak to are saying it 's not just profitability .

Cost cutting will not be enough -- they need to see a sustained pickup in revenue , and they have yet to see that .

When we look at stocks , I.B.M. differentiates itself in a number of ways .

First , the company never participated in the bubble .

So its numbers never got out of whack .

Unlike others , it was never overwhelmingly focused on the two big end markets that drove the bubble -- communications and financial services .

In a normal spending environment , financial services and communications might represent 20 percent apiece of overall tech spending .

During the bubble , those two sectors combined for 60 percent of end-market spending .

That points to another key point about I.B.M. : it is very broad-based when it comes to its end market .

The company is gaining market share .

It is improving its product line and its execution .

We have it rated a sector outperform , which is our highest rating .

I.B.M. is a core holding , indeed it is both a defensive and an offensive stock .

It is trading now at roughly 19 times earnings for 2003 -- in line with the Standard & Poor 's 500-stock index .

Hewlett-Packard is another stock we have a sector outperform rating on .

It is a different story : it 's a bit of a contrarian pick with an attractive risk-and-reward ratio .

Hewlett-Packard has a lot of ground to gain on the cost-cutting front .

They have a clear strength in printers , and are improving in PC 's and enterprise systems .

Relative to other tech stocks , it is not one of the more expensive -- trading at 14 times 2003 earnings .

You would expect a discount to I.B.M. , but this one is a little steep .

-LSB- Ms. Conigliaro owns no stock in the companies mentioned .

Goldman , Sachs has banking ties with Hewlett-Packard and I.B.M. -RSB- RICHARD BILOTTI is a cable and entertainment analyst at Morgan Stanley .

What we expect to see in 2003 are cable companies that will have a higher strategic value than content companies like Viacom and Walt Disney .

This has not been true since the late 70 's during the heyday of the build-out of cable in the United States .

There are three main themes behind this evolution .

First , after years of competition with satellite broadcasters , we are entering a period of pricing stability for cable companies .

They are also selling value-added services to their customers and finding that it makes more sense to mine existing customer bases than to chase after new ones .

All the major distribution companies -- Comcast , Cox Communications and EchoStar Communications -- are undervalued by 40 percent .

Secondly , we have never seen a cable company the size of Comcast , with 22 million subscribers , provide size and scale without precedent .

If it feels that its supplier of content is too expensive , it could conceivably launch its own replacement channel .

Say , for example , the company does not want to carry a sports package because one of the channels is too expensive .

They can go to the supplier of content -- the N.F.L. , for example -- and say , `` You know what , I 'll buy that football package directly from you . ``

The cost of buying the programming rights could be less expensive when spread over the Comcast base of subscribers than the wholesale fees charged by the exisiting networks .

What do the content companies do .

Well , they will have to go out and buy their own distribution channels .

And finally , for the first time since I 've been an analyst , the rate of return on reinvested capital for cable companies is higher than that of content companies : 20 percent for distribution companies , after taxes , compared with 3 to 6 percent for content companies .

Unlike the content companies , cable and satellite companies are investing all their discretionary cash flow back into their core businesses .

For the content companies , it is a different story .

Because of the fragmentation of the television audience and the sheer number of channels , content companies are finding it hard to capture advertising .

So instead of investing in their core business , they are looking to make acquisitions of television stations and cable channels .

But that gives you a return of just 6 or 7 percent .

Historically , robust advertising growth has camouflaged these weak returns .

Look at Comcast , which completed its merger with AT&T Broadband in November .

It will have discretionary cash flow -- cash flow after interest expenses , taxes and maintenance capital expenditures -- of $ 1.50 to $ 1.75 a share .

They will choose to put that money back into their business and earn 15 to 20 percent returns .

Comcast trades at 15 times discretionary cash flow , well below the 25 to 30 times that is common for content companies .

-LSB- Mr. Bilotti does not own stock in the companies he cites , but Morgan Stanley does have banking relationships with them . -RSB-

RICHARD BERNSTEIN is chief United States strategist at Merrill Lynch .

We recently lowered our equity allocation .

Previously , we were recommending 50 percent stock , 30 percent bonds and 20 cash .

Now we are at 45 percent , 35 and 20 .

We think the equity market is very speculative .

Equities remain the asset class of choice , and that does not bode well for their future performance .

You hear people all the time say , `` Where can you get higher returns than in equities .

`` That was the correct thing to say in 1982 when everyone wanted to look at money market funds .

Or 1994 , when everyone was in bonds .

Call it the paradox of investing .

If everyone thinks equities are the asset class of choice , the odds are they are not .

We have the S . & P . at 29 times trailing earnings .

My point is that the only sure thing we have these days are announced earnings .

According to our research , forecasting earnings growth is the least predictable and most volatile it has been in 60 years .

So why would we value the market on somebody 's forecast if this is true .

People are assuming that earnings growth is a given .

My argument is this : Wait a minute , future earnings are the least predictable in our lifetimes .

With regard to the Fed , its repeated easing shows that the economy is not making the transition from the early phase to the middle phase of the economic cycle .

Continued easing is keeping the economy on life support .

The Fed is basically admitting that things are not working .

Our belief is that the next bull market begins only when the Fed starts to tighten .

That will tell you that we have moved beyond this deflationary environment .

The View From Wall Street .

Summary: Stock analysts Dana Telsey of Bear Stearns , Guy Moszkowski of Salomon Smith Barney , Laura C Conigliaro of Goldman Sachs , Richard Bilotti of Morgan Stanley and Richard Bernstein of Merrill Lynch comment on prospects for stock market in 2003 and offer opinions for specific companies , including IBM , Comcast , Hewlett-Packard , Merill Lynch , Gap and Coach .

Summary: Photos .