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Dan Dorfman

Dan Dorfman

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Dire Warnings From a Bear And His Parade Of Stinkers

Posted: 02/ 5/11 02:01 PM ET

If anything, the latest bummer of an employment report, last month's creation of just 36,000 jobs, versus a widely anticipated gain of 130,000 to 150,000 jobs, is a renewed S.O.S. that the wave of euphoria engulfing Wall Street may be way overdone.

Apparently investors don't want to hear about -- or don't believe in -- any dissent. Indicative of this, with the sizzling 12,000 Dow already up about 84% from its March 2009 low of around 6,500 and 20% since late August, investors are once again scurrying to the stock market on the heels of a peppier economy. Last month, for example, they snapped up an estimated $8.3 billion worth of U.S. equity mutual funds, the biggest such buying outburst since May of 2009.

But where there's assent, there's always dissent just around the corner. One dissenter is Dallas portfolio manager John Del Vecchio, who believes the recent buyers are waking on thin ice, are way too late to the party and predicts a 9,000 Dow later this year, which reminded me -- if he's right -- of a noteworthy comment by Robert Louis Stevenson, who wrote: "Sooner or later, everyone sits down to a banquet of consequences."

He's right. Just ask Egyptian president Hosni Mubarak; he can tell you all about it first hand.

On a very different scale -- call it a financial scale -- Del Vecchio believes America's more than 80 million stock owners should also prepare for their 2011 banquet of consequences. "I wouldn't buy a stock now with counterfeit money," he says.

That's highly contrary stuff, given the widespread bullish sentiment sweeping Wall Street. Del Vecchio is practically a lone voice in the wilderness. Still, give the man his due because the 35-year-old portfolio manager is gutsy enough to bet his career he's right. In effect, he's essentially attempting to do what not even the bravest matador would do -- basically enter a bull ring armed with little more than a ball point pen.

Essentially, that's what our bold market matador did January 27 by launching, in what appeared to be an act of atrocious timing, given the vigor of the market, an exchange-traded short fund -- AdvisorShares Active Bear. The Dallas-based fund which manages assets of more than $25 million, is traded on the Big Board under the symbol HDGE. Its thrust: to short equities of companies that it concludes have low earnings quality, aggressive accounting and which may also be understating expenses.

Del Vecchio, a forensic accountant and a former hedge fund manager the past 2.5 years at the Ranger Capital Group in Dallas where he averaged a 16.5% gain during that period, singled out the government's inability to create jobs as one of the key reasons for his bearish outlook. He also spotlighted a number of his top stinkers, stocks he's short and sees underperforming the market this year by about 20%.

These include such well known names as Bank of America, Amazon.Com, Juniper Networks, Avon Products, Kohl's Corp., Abercrombie & Fitch, Yahoo, Salesforce.Com, Visa, Broadcom Corp. and Stanley Black & Decker.

As far as the economy goes, Del Vecchio is convinced it won't really come back until jobs come back. And QE2 (quantitative easing) is not creating jobs, he says. In conjunction with this, he sees the economy continuing to suffer from shrinking incomes, people dipping into savings to pay their bills, inflation (namely higher food and gas prices) and deepening housing woes.

As such, in contrast to most economists, he expects very little economic growth year, with the likelihood of a double-dip recession starting some time in the second half.

The economy aside, Del Vecchio also believes the market is foolishly brushing off the Egyptian mess, In particular, he points to the danger of extremists infiltrating any new leadership. "The market has now added a new element of uncertainty," he says.

The manager is also worried about the overwhelming amount of bullish sentiment pervading Wall Street, noting there are three bullish investment advisers for every bearish adviser, that 93% of stocks are trading above their 200-day moving average and that 80% of equities are trading above their 50-day moving average.

The risk here, says Del Vecchio, is there's so much complacency, with too many investors following the herd. The added danger, he notes, is that "investors could follow the herd off the roof."

An obvious question: With the market as strong as it is, what is the trigger that could drive the Dow down to 9,000? Del Vecchio offers two of them: debt rollovers involving Europe or U.S. municipalities.

Rounding out his current list of stinkers, our bear points to such additional shorts as Hasbro, Digital River, Green Mountain Coffee Roasters, Herbalife, Netapp, Citrix Systems, Paccar, Netgear, Foot Locker, Trinity Industries, QLogic, Sandisk Corp., WMS Industries, Rackspace Hosting, Expeditors International, Asiainfo-Linkage and Pegasystems.

A golf lover, Del Vecchio shoots in the high 70s and low 80s, he tells me. That's impressive. The $64,000 question, of course, is whether a bear can tee off as well in a bull market?

What do you think? E-mail me at Dandordan@aol.com.