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Three analysts and top management from nine sector firms examine the paper & forest products sector in this special 42-page Paper & Forest Products issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info507.htm.

TWST: How are you approaching the group today?

Mr. Berler: I am advising investors to remain overweight the paper stocks here in the first half of 2002. We have been recommending our overweighting in paper stocks going back to the fall of 2000, almost 18 months ago. Our view then and continuing through the recent period is that the combination of depressed valuations, unprecedented capacity shut-ins and sharply curtailed capital spending, together with aggressive moves by the Fed to stimulate the economy, would lead to a re-rating of the paper stocks. Historically, the paper stocks outperform the broader market when the Fed is easing and after commodity prices and profits have fallen enough to trigger capacity shut-ins. We believe the macros (i.e., interest rates, yield curve and other indicators of economic recovery) remain favorable. So while the current earnings picture is bleak for the commodity producers, and estimates may still have some downside, we think the stocks should continue to work well in anticipation of an improvement in commodity markets — which will probably begin later this year and accelerate through 2003 and 2004. We may have already seen some early signs of recovery with strong housing pulling building products prices up off of cycle lows of this past fall.

TWST: Looking back to 2001, how did the stocks perform?

Mr. Berler: The paper stocks outperformed in 2001. The S&P paper index beat the S&P 500 by 8 percentage points, 800 basis points. In absolute dollar terms, paper stocks were flat in 2001. The period of greatest outperformance in the last 18 months actually happened in the fourth quarter of 2000, when we saw a terrific rotation in the stock market, out of the leading TMT (technology, media and telecom) stocks back into basic industry — really value-type names in general. Year to date in 2002, the paper stocks have continued to outperform. They’re up 5.5% in absolute terms, as of March 4, versus the S&P 500, which is now flat for the year.

TWST: What are your favorite names in the group today?

Mr. Berler: Right now we have a collection of recommendations. Some are straightforward plays on a recovery in commodity prices and profits. I would look even further a field to Latin America, where we find Brazil-based VCP (NYSE:VCP) trading at perhaps the most attractive valuation of any paper stock that we cover in the world here at Morgan Stanley. Catalysts for a re-rating of VCP shares over the next six to 12 months would include the normalization of Brazilian capital markets, bottoming and recovery in global pulp and paper markets, easing in the current Brazilian energy crisis and the expected startup of a new pulp line. Ironically, the currency crisis is helping to make VCP an even lower cost and higher return pulp and paper producer. VCP’s 670,000 tons per year pulp line is expected to start up in January 2003. The expansion should be earnings accretive and should improve VCP’s cost structure.

TWST: As a final word, how should investors be approaching the group today? What advice would you like to leave investors with?

Mr. Berler: Let me be very blunt about this. I’ve been doing this for nearly 15 years and I’ve learned the hard way that to make money in paper stocks you have to be a true contrarian. You have to be willing to buy these stocks when visibility is at its lowest. Visibility is the buzzword that drives many stocks and many sectors in the stock market, but that’s not the case with the paper stocks. To make money in paper stocks, you have to be willing to buy these stocks when there appears to be nothing but bad news on the horizon; when the stocks are falling; when Wall Street really has nothing good to say about them; when estimates are dropping and when earnings are low and falling; and when valuations on current earnings or even on next year’s earnings are very high. So this is a group that really doesn’t fit the traditional investing model where you buy stocks when business conditions are firming, when earnings estimates are rising and when demand is strong — you typically will not make money in paper stocks when that’s the case. You have to get in early to make money in the paper stocks when times are tough. You have to typically take your profits just when you really want to own them. Just when you’re really beginning to get excited about business conditions getting better, about commodity prices and profits recovering, when earnings estimates are rising — that’s when you typically have to get out of the stocks because the stock market is very efficient. When all the good news is becoming visible, the stocks typically discount that good news and they have a limited upside.

This special issue includes:

1) Paper & Forest Products - In an in-depth (5,900 words) Analyst Interview, Matthew Berler, Managing Director at Morgan Stanley, examines the outlook for the sector including and shares specific stock recommendations.

2) Paper & Forest Products - In an in-depth (3,100 words) Analyst Interview, Anna E. Torma, North American Paper & Forest Products Analyst at Merrill Lynch Global Securities, examines the outlook for the sector including and shares specific stock recommendations.

3) Paper & Forest Products - In an in-depth (3,500 words) Analyst Interview, Mark Wilde, Managing Director at Deutsche Banc Alex. Brown, examines the outlook for the sector including and shares specific stock recommendations.

4) CEO