12/12/2010 06:16 pm ET | Updated May 25, 2011

2011 Battleground: UBS Versus the Dorfman Indicator

One of Yogi Berra's more famous Yogi-isms: "It's difficult to make predictions, especially about the future."

That's worth keeping in mind since Wall Street's bulls, bears and buffoons will soon be blitzing us with their traditional year-end bombardment of forecasts on what's ahead for the stock market in 2011. In fact, the blitz is already under way.

The problem is the overwhelming number of forecasters are notoriously inept. Just check the year-end market predictions of your favorite TV business shows and financial publications at any time over the past 10 years, look a year out and you'll see how consistently wrong the supposed experts have been. In most cases, the self-proclaimed Wall Street and media experts would have probably fared a lot better simply tossing a coin.

As far as 2011 goes, one thing seems certain. Clearly, a tug of war lies ahead, what with many hedge fund managers I talk to solidly downbeat for all the reasons everybody knows, while Wall Street is predominantly bullish, again for all the reasons everybody knows.

So who and what are we supposed to believe? And is it time to get excited about stocks again?

UBS Financial Securities, just out with its new year's outlook for its wealth management clients, offers what strikes me as a sane look-head. First though, it's worth your knowing about the Dorfman indicator, one of my favorite market barometers, which has proven infallible as far back as I can remember. A creation of mine, it's a contrarian view based on the repeated forecasts of a veteran Wall Street trader, who has an incredible knack of consistently being wrong whenever he tries to predict the direction of the market. In this respect, in fact, I can't ever recall him being right. So whatever he thinks, just do the opposite.

The last time I caught up with our trader was in early August with the Dow at around 10,000. He was very bearish, and, in fact, told me he was shorting stocks (a bet they would fall in price). What a mistake! True to form, the market went higher, with the Dow, now at around 11,400, turning in a nifty 14% gain.

What does he think now? Bad news, I'm sorry to say.

Unequivocally, he tells me, 2011 will be a winning year for investors. "The economic recovery is for real," he says. "The evidence is all around us. The unemployment and housing problems are not about to be resolved in the next 12 minutes, but we should see some progress in both areas next year, and the stock market should respond positively."

An essentially similar view is held by UBS Financial Services, Looking a year out, Stephen Freedman, the head of investment strategy is convinced being moderately bullish is the way to go. His reasoning: The global economic recovery is on track and equities are set to outperform while fiscal risks remain at the forefront. One key plus, as he sees it, is that global stocks are sporting below-average price-earnings multiples of 12 to 13, versus an average 16.5 over the past 20 years.

In terms of better than average 2011 returns, say on the order of 15% to 20%, he favors four fast growing emerging markets, notably Brazil, Russia, China and Taiwan.

As far as the U.S. goes, Freedman sees a 2011 combo of a modest economic recovery (2.7% GDP growth), a tailing off in the jobless rate to 9%, continuing earnings gains of 8% to 10%, versus an estimated 35%-40% this year, paltry bond yields, making equities more attractive, and those below-average P/Es producing general 2011 stock returns of about 10% to 12%.

Over the near term, though, he feels the recent sharp runup in equity markets, concerns over European sovereign debt and election uncertainties associated with a new Congress could spur a temporary pullback.

He also worries about geopolitical risks, namely flare ups between the U.S. and China, new challenges from nuclear-minded Iran, heightened tensions between North and South Korea and renewed debt problems in Europe.

Where should U.S. equity investors put their money to work here? Freedman favors information technology, consumer staples, energy, gold and industrials, mainly transportation. At the same time, he would shun the telecom, consumer discretionary, materials and health care sectors.

His wrapup: "Economically, it's going to take the U.S. longer to catch up, but nonetheless "it's a good time to buy stocks."

What do you think? E-mail me at