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Dan Dorfman

Dan Dorfman

Posted: August 13, 2009 12:32 PM

Zorro Rides Again, Maybe Into A Ditch


I don't want to be a spoilsport and ruin your day, especially when both the battered economy and the stock market are looking more muscular, but I do want to alert you to a somewhat frightening event. It may mean zilch or it may mean a lot. In brief, Verne "Zorro" Kabbel, who turned bearish on the market in late February and missed out on a 40% subsequent gain in stock prices, just e-mailed me to say that he's again become gung-ho on the market.

If you're about to say, "What dribble, I never heard of the guy and who gives a damn?" don't. Why not? Because Kabbel, who manages nearly $55 million of his family's investment funds and underperformed the market last year with a wicked 60% loss, is a super contrary indicator. He has periodically e-mailed me over the past five years and as a forecaster on the direction of the market, he's infallible; I've never known the man to be right.

As of now, Kabbel, a former fencing instructor in some Hollywood movie studios, which led to his nickname Zorro, is putting his money where his mouth is. A few weeks ago he embarked on an aggressive stock-buying spree, slashing his cash reserves from just above 20% to under 5%.

"You have to be deaf, dumb and blind not to realize that our economic Katrina has come and gone," he says. He figures that the sputtering GDP -- which declined at a 6.3% annual rate in last year's fourth quarter, shrunk its loss to a 5.7% pace in the first quarter and then reduced its deterioration in the second quarter way down to just 1% -- will enter plus territory in the current quarter and remain there for quite a while, in the process displaying increased vigor.

"The big news," as he sees it, "is we're in the early stages of a synchronized global economic recovery that should lead to rising stock prices everywhere."

Kabbel acknowledges that his record in forecasting up and down market movements is pretty dismal and he concedes he's probably a good contrary indicator on that score. But he argues that the quickening economic pace is so apparent that his expectation of a 10% to 15% gain in the S&P 500 from its current level of around 10,000 to the 11,000-11,500 range strikes him as almost a sure thing by year end.

What about unemployment, which is rising at a slower pace, but nonetheless still rising? "Rome wasn't built in a day," Kabbel retorted. "Unemployment could go higher like the experts say, maybe to 10%-10.5% (now at 9.4%), but the dye has been cast. The economic cancer has been arrested, the radiation is working and employment could soon be rising again."

Up about 4.5% so far this year, Kabbel's recent stock purchases largely focused on his 6 favorite names: Apple, Intel, Teva Pharmaceutical, BHP Billiton Ltd., Bank of America and Automatic Data Processing.

Speaking of contrary indicators, Wall Street's so-called "dumb money" is painting a decidedly different picture--falling stock prices. Here, we're talking about five contrary indicators that measure market sentiment. The theory is theyre habitually wrong and if you follow their advice, you'll follow it into the poor-house.

The five indicators, all bullish, are the mood of the American Association of Individual Investors; Investors Intelligence, which tracks the advice of more than 100 investment newsletters; Market Vane, a service that monitors the recommendations of commodity traders, and the put-call ratio, a measurement of whether investors are betting on higher or lower stock prices.

A concluding note of caution: Zorro was a hero in the movies, but our modern day, real-life investment Zorro is an admitted bummer in the stock market. So, buyer beware!

Email Dan Dorfman at Dandordan@aol.com.