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Bulls Rule, But Watch Your Back

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There's an age-old Wall Street saying: Don't fight the trend. For now, at least, the apparent trend is that equity prices are headed even higher after whopping stock gains of 53% in the S&P 500 and 46% in the Dow from their March lows.

In this context, meet four bulls who share this sunny view, although some hasten to point out that the investment landscape -- like the bull ring -- is hardly devoid of significant danger.

"I would be a buyer and certainly not a seller because the run in the equity market still has farther to go," institutional investment adviser Bill Rhodes says. Rhodes, head of Boston-based Rhodes Analytics, which doles out advice to some of the country's largest banks, mutual funds and hedge funds, offers a number of reasons to support his bullish thesis that the sizzling rally has considerably more staying power. In brief, based on his models, he sees the S&P 500, now at 1044, headed nearly 12% higher to 1067 between now and year-end. Chief among his reasons:
  • A noticeable pickup in the economy, which is turning out to be not as bad as expected.
  • A lot of liquidity on the sidelines, nearly3.6 trillion alone in money market mutual funds.
  • No big rise in interest rates and reasonably low inflation.
  • Ample liquidity in the banking system.
A former Merrill Lynch strategist, Rhodes also points to significant plusses on the technical front, each of which, he notes, is indicative of higher stock prices. Noteworthy in this respect are:
  • An improving advance-decline ratio (a reference to the number of advancing stocks, versus those that are declining), indicating the market is maintaining a broad advance.
  • Declining volatility, meaning lower spreads between the bid and asked in stock prices.
  • More than 94% of the stocks on the New York Stock Exchange are trading above their 200-day moving averages.
Rhodes wouldn't discuss individual stocks, but he did pinpoint what he viewed as the strongest market sectors, notably consumer discretionary, financials, industrials and materials (such as steel, copper and non-ferrous metals like aluminum).

Although gung-ho on the market, Rhodes took note of a number of concerns. One is the possibility the Federal Reserve could reign in liquidity by raising interest rates or pulling liquidity out of the system. Yet other worries: rising inflation down the pike, a further weakening of the dollar (leading to an exit of foreign capital from the U.S. markets), and the ominous implications of the Denver terrorist plot.

Money manager Manny Weintraub of Integre Advisors, which runs $280 million of assets, raises another concern. At some point, he says, the Obama stimulus will be gone and the economy will have to stand on its own legs. Still, he's a steadfast bull, noting there's a lot of buying power still to come into the market even though he feels it's overbought.

(Some economists argue that without another stimulus, the economic recovery will soon go the way of the black and white TV set).

In any event, Weintraub argues "the market trend is up," and he expects another 5% to 10% gain before year end. "If a new client gave me $10 million, I would put 50% of it into the market immediately," he says. Weintraub, who tells me he's up 60% this year in his concentrated portfolio (the firm's 15 top stocks), focuses on out-of-favor names. His current three best bets: Kroger, Bridgeport Education and Yahoo.

Geopolitical crises are generally ignored by most market pros. Not so Weintraub, who made a point of citing them as a distinct market risk. In particular, he pointed to the danger related to such countries as Iran, Pakistan and Afghanistan.

Another bull, San Francisco money manager Gary Wollin of Gary Wollin & Co., which sports asssets of just above $100 million, has mixed feelings about the market. Near term, he sees about a 5% to 10% pullback, reasoning "the market has come too far too fast." Still, based on an improving economy, he thinks little by little this is a good time to come into the market. There's enormous money out there to fuel a continued rally, he says, and at some point the scared investor will no longer be scared.

Wollin sees that fright easing next year as a number of well-publicized problems linger, but begin to diminish in the face of a peppier economy. Chief among those problems: loads of adjustable rate mortgages (ARMS) will be reset at higher rates. Likewise, the recent cash for clunkers initiative should steal a good chunk of next year's auto sales, commercial real estate difficulties will take their economic toll, and unemployment, a lagging economic indicator, should continue to rise for another quarter or two.

As these and other problems begin to dissipate, Wollin expects investors to flock back to the stock market. And by the end of next year, he figures, the Dow (now at 9665) should reach the 12,000 level. His three favorite stocks for the next 12 months are Intel, Cisco Systems and ExxonMobil.

Joan Lappin, head of Gramercy Capital Management (about $20 million of assets) also sees stocks headed to the upside. Boosting her confidence are growing signs the consumer is willing to shop again, renewed zip in the commodities market, the likelihood of no near-term increase in interest rates and the probability that third-quarter earnings report will not be as terrible as originally expected.

Lappin sees a computer upgrade cycle ahead and favors such beneficiaries as Nvidia, a maker of graphic solutions for computers, and Dell. Rounding out her top three picks is Cablevision.

Her big worry: "Third-quarter reports will have to show revenue increases; "we have to progress beyond earnings increasing solely on cutting costs or earnings being less terrible than we thought," she says, "or the market will stall and the rally will become suspect."

The bottom line from our four bulls: Yes, the economy and the market look better, but keep your eyes open for the land mines. The bleeding could start again at any time.

Write to Dan Dorfman at Dandordan@aol.com