07/24/2010 02:37 pm ET Updated May 25, 2011

A Cockeyed Optimist no More

How quickly they forget!

That's the army of stock players. Thanks to a slew of sunny second-quarter earnings reports in recent days, which drove up the Dow Industrials more than 300 points in the past week's final two trading sessions, many impressionable investors have begun scooping up equities again.

In the process, they've virtually ignored some very pertinent facts: In brief, the latest earnings numbers were up against weak year-earlier comparisons, which means the vigor of future gains figures to level off sharply in the quarters ahead.

Likewise, much of the earnings strength, as it was in the first quarter, reflected sharp cost reductions, namely substantial layoffs and hefty cutbacks in capital spending, trends which must be reversed if the economy is to start percolating again.

Surprisingly, Big Ben was also ignored by many investors' in their renewed craving for equities, which sent the Dow soaring 201 points on Thursday amid rosy earnings reports from such corporate biggies as Caterpillar, Microsoft, UPS and Triple M..

No, that's not London's Big Ben, the famous clock tower, but the U.S.A.'s "Big Ben" -- Federal Reserve chief Ben Bernanke, who only a day earlier warned Congress that the economic outlook remains "unusually uncertain."

Not only that, Bernanke noted the labor market was the worst since the Great Depression, that housing remained weak with an overhang of vacant or foreclosed houses weighing on home prices and construction, and that bank loans outstanding have continued to contract.

Not surprisingly, his remarks -- which investors seemed to have forgotten about -- pushed stock prices lower on Wednesday, with the Dow dropping 109 points.

But given Thursday's rousing rebound in stock prices, followed by another 102-point Dow gain on Friday, Bernanke's warning suddenly became a fleeting memory as investors strove to make a fast buck on what many obviously hoped was the beginning of a new market rally.

One economic and market bear, investment adviser Martin Weiss of Weiss Research in Jupiter, Fla., thinks that was a dumb reaction. His reasoning: Bernanke's worrisome economic outlook comes from a man whose job invariably makes him extremely reluctant to admit to negative trends in any sector at any time.

"If Bernanke is saying things are bad, you can bet your bottom dollar they're actually far worse," Weiss says.

That seems to make a lot of sense since our big Ben usually leans to the brighter side, And if things look bad, Bernanke is usually quick to suggest they'll likely get better soon. Some market watchers, though,, plagiarizing the name of one of those snappy tunes from South Pacific, have dubbed Bernanke a cockeyed optimist. His "unusually uncertain" comment, however, indicates he may be rethinking some of that optimism.

Meanwhile, Weiss is urging his clients to reduce their exposure to the stock market, especially sectors vulnerable to a double-dip recession, such as housing and construction, retail, manufacturing and banking.

Investors, he says, should keep most of their money tucked away in short-term Treasury bills and equivalent investments. "The return on your money, no matter how low the returns," he observes, "is not nearly as big of an issue as the return of your money." He also recommends a core position in gold either through the bullion, a gold exchange-traded fund, or both.

Bernanke's remarks also raise some question about the legitimacy of expected economic growth, which generally calls for GDP gains of slightly more than 3% both in 2010 and 2011.

JC Spender, an economist at the Wells University Business School in Milton Keynes, U.K., ridicules such prognosis. Taking note of Bernanke's comments, Spender says he was cautioning against "irrational exuberance" and he's right; the fat lady hasn't sung and there are still plenty of risks out there.

Spender thinks anyone forecasting the economy here is an idiot. For starters, he notes the U.S. won't be in good shape until unemployment is half of what it is now.

(Most economists say such an achievement is years away, with some contending it may not occur until 2013 or 2014).

Spender further notes that banks aren't lending, we're still stuck with a residential housing disaster, commercial real estate, a major problem, is hanging in the wings and waiting to appear, and the course of commodities is a big uncertainty.

If nothing bad happens, observes Spender, it'll take at least the best part of a couple of years to get confidence back again.

Michael Markowski, head of, an online service that monitors cash flow, tells me his data shows that U.S. public companies have yet to recover from the recession. "Cash flow is not growing and we're seeing cashless earnings," he says.

Noting that many bulls are throwing in the towel, Markowski sees the Dow--now at 10,4214--falling to between 5,000 and 6,000 by next year.

He also looks for a major contraction in price-earnings multiples, with the S&P 500, now at around 13, skidding to about 8 by 2011. Pointing to the lack of dividend growth, he notes that without dividend growth, P/E multiples contract.

Stocks with the highest multiples, notably the technology sector, and Apple and Google in particular, are thought to be most vulnerable in the declining market Markowski envisions. On the other hand, pointing to what he views as a present deflationary environment, he sees both utilities and energy benefitting from lower energy costs.

Rick Eakle, a former market strategist at Morgan Stanley, shares Markowski's negative market view. Making light of the recent rally, he sees bad days ahead for investors, arguing we're still in a downtrend.

His reasoning: a sputtering economy, a weakening of market leadership, particularly in the technology and financial sectors, close to a peak in favorable quarterly earnings comparisons, a lot of overhead supply and pressure on the dollar.

"I would be very light in equity exposure," he says. "It's strictly a trader's market." Noting that both the 200 and 50-day moving averages have rolled over, Eakle says "the market is clearly headed down."

His favorite investment: ProShares S&P 500 (SH), an exchange-traded fund that's geared to rise in value if the S&P 500 goes lower. And that's precisely Eakle's forecast: a drop in the index to 900 in the next month or two from its current level of 1102.

Meanwhile, the key point here is it makes no sense to sell big Ben short. He often wears rose-colored glasses and tries to ease our fears with sugar-coated platitudes. But judging from his current concerns, any optometrist will probably tell you his economic vision is 20-20.

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