THE BLOG
03/19/2011 01:01 pm ET | Updated May 25, 2011

Swimming with the Sharks

A sucker's rally? Or the kickoff of a new upswing in stock prices? That's Wall Street's $64,000 question following last week's spirited 9% Dow rally, the biggest weekly rise of the year. For some thoughts, here's what a bull and bear have to say. You choose!

From our bear, a Los Angeles day trader,: "You've got to be bonkers to swim in shark-infested waters, but it's widely happening -- no, not in the movies, but in real life -- on the financial front."

That's how he construes the rush by many investors to get back into the stock market during and following the rally. "The buyers are boobs," Lacey tells me. "They should go back to kindergarten and wear dunce caps because they're not just swimming with sharks; they're swimming with Jaws."

His contention is that the recent rally is irrational, given the current risky environment, and is little more than one of those fleeting and not unusual market sprints in an ongoing bear market. The risks still remain enormous, he says, pointing in particular to:

--A jobless population of 12.5 million -- and rising.

--A glut of nearly 20 million vacant homes -- and rising.

--A steadily weakening world-wide economy.

--The threat of a flood of earnings disappointments.

--A big increase in savings, rather than spending.

--A continuing credit freeze, with banks generally hoarding cash instead of lending it.

--Non-stop Congressional feuding over the Administration's proposed rescue plan for the economy and the ailing financial system, in turn raising questions about the viability of the effort.

Lacey figures it could take years to resolve these problems. It means, he says, that "it's way too soon for a renewed leap into stocks because common sense tells you the investment scene remains riddled with land mines." Based on this thinking, he believes "we'll see 5,000 in the Dow before we see 10,000."

Our bull, veteran San Francisco money manager Gary Wollin, one of those alleged "boobs," ridicules such thinking. He has just turned bullish for the first time in 16 months, and he's putting his money where his mouth is, having just completed a four-day buying spree during which he fattened his nearly $100 million stock portfolio through close to a $10 million purchase of the shares of eight companies. That, in turn, reduced the cash exposure in his portfolio from 25% to 15%.

"I just think it's time to slowly and carefully take a more constructive view of the market," he says. "Buy now and I think you'll be richer 6 to 12 months out."

On the face of it, a $10 million purchase, given the current approximate $7.5 trillion value of all common stocks, is hardly an imposing figure. Still, it's a sign of market confidence at a time when such confidence has been as conspicuous as a happy Republican.

Addressing himself to the recent rally, Wollin argues that "even if this isn't a market bottom, the market is bottoming." He notes that when you have bad news and stock prices go up in the face of it -- such as the recent downgrading of the credit rating of General Electric by Standard & Poor's Corp -- it's a sign of better days ahead.

Wollin is not oblivious to the risks, such as the ongoing chaos in the banking, credit and housing sectors, as well as the hefty decline in consumer spending and poor auto sales. There's still a lot to be worried about, he says, but he firmly believes all the bad news has already been baked into the process and that the market is likely to move higher over the next quarter or two as the economy continues to worsen. It's worth keeping in mind, he points out, that the Dow has already dropped about 50% from its October 2007 high of 14,164 to its recent low of 6,547.

Wollin's thinking, though he's no household name, should not be taken lightly, given his deft market timing. Indicative of this, he's been consistently bearish or cautious since he turned negative on stocks on November 30, 2007, when the Dow was trading at 13,311.

"I don't expect the Dow to go to a million overnight, but in 6 to 12 months I think it'll be at least 10% higher or maybe even 20%," he says. Though down both last year and this year with respective losses of 23% and 10%, Wollin's clients may take some solace out of the fact that they've done better than the overall market.

The eights stocks he bought during his buying spree -- which he describes as "the bluest of the blue and each of which has the muscle and wherewithal to survive" -- are Procter & Gamble, Johnson & Johnson, Triple M, ExxonMobil, Chevron and General Electric, U.S. Steel and Freeport McMoRan Copper and Gold. (It's worth noting, however, that GE bears abound, with some predicting a drop to below $5 a share).

Wollin views his eight purchases as market outperformers and rates each a potential 25% to 30% market gainer over the next 12 months.

On one point, both our bull and bear are in accord. They're both negative on the financial stocks, including the banks, which led last week's rally with a 34% gain. A lot of their earnings power is gone, Wollin observes, pointing to their exit from such businesses as mortgage financing and derivatives. Likewise, banks have become much more conservative in their lending. Lacey cites another widespread worry -- the "unknown extent of garbage assets on bank balance sheets." He, too, is also putting his money where his mouth is, having sold short (a bet stock prices will fall) a number of bank shares during the recent rally.

Meanwhile, holders of equity mutual funds seem obviously worried about the sharks. According to liquidity tracker TrimTabs Investment Research, which is bearish, the last two weeks showed a $28.5 billion outflow from such funds, $16.4 billion of which were from those based in the U.S.

DanDorDan@aol.com