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Gurus' Recommended Asset Mix Doesn't Match Their Bullish Leanings

SAN FRANCISCO -- Here's a surprise: The bullish gurus were encouraged by last week's action. Today, the Dow Jones Industrial Average rose 1.2%, the S&P 500 added 0.6% and the Nasdaq Composite dipped 0.3% ahead of a slew of earnings after the close. Doubtless, the session did little to fetter the enthusiasm.

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The market's ability to overcome negative news from a host of bellwether (mainly tech) names last week was "one small stride by the Nasdaq, one giant leap for investor-kind," according to Thomas Galvin, U.S. portfolio strategist at Credit Suisse First Boston. "Selling pressure has finally become discriminating."

Notably, shares of Intel (INTC - Get Report) were recently holding steady in after-hours trading despite the chip giant's declining gross margins, admittedly clouded visibility and forecast that first-quarter sales would fall 15%.

Galvin supported his latest bout of optimism -- in which he reiterated his top-five stock picks for 2001 -- with an observation the Federal Reserve's rate cut on Jan. 3 not only restored investors' confidence in stocks, but reopened the high-yield bond market. "I think this is very big stuff," he said, noting recent successful offerings by McLeod USA (MCLD), XO Communications (XOXO - Get Report), Level 3 Communications (LVLT) and Charter Communications (CHTR). "The credit crunch took the economy and stock market to its knees and now the processes are beginning to reverse."

The strategist also cited the following factoids:

  • Prior to 2000, there were only four years when U.S. Treasury bonds posted total returns over 20% since 1960 -- 1982, 1985, 1986 and 1995. In the years following, the S&P posted average gains of 17%, which dovetails with Galvin's prediction for the index to hit 1600 by year-end 2001.

  • Mortgage rates falling below 7% means that 50% of the $6.9 trillion pool of mortgages could be refinanced, CSFB predicts. This would "reliquify consumers" and thereby provide "a cushion to the economy."

  • Stock gains following recent periods of outflows from equity mutual funds -- mid-1994, early 1997 and late 1998 -- suggest "that the time to buy the S&P 500 has been when investor confidence is poor and fund flows are down on a year-over-year basis." Equity funds suffered declining fund flow vs. year-ago levels in December and January, according to AMG Data and Liquidity Trim Tabs.

  • Money market funds saw huge inflows last week. Overall money market assets of $1.9 trillion represent over 15% of the [market cap of, I presume] Wilshire 5000, "a level not seen since 1991," Galvin noted. "In retrospect, the mountain of money market assets in 1991 heralded a new bull market."

In retrospect, a lot of other factors heralded the 1990's bull market. You can quibble with Galvin's methodology, outlook or recent track record, but at least he puts his recommendations where his mouth is. As of midday today, Galvin's recommended asset allocation was 90% stocks and 10% cash, according to Dow Jones News Service.

That recommendation makes Galvin the most aggressive of the "major" Wall Street strategists. Tied for "second place" with an 80% recommended weighting in stocks are Ed Yardeni at Deutsche Bank, Peter Canelo at Morgan Stanley Dean Witter and Jeffery Applegate at Lehman Brothers.

In a report issued today, Applegate lowered his projected S&P 500 earnings growth targets for the fourth quarter of 2001 to 0% from 2% and for all of 2001 to 3% from 7%, reflecting a recent downward revision of GDP projections by Lehman's chief economist. Still, Applegate left his 2001 price target for the S&P 500 unchanged at 1675, projecting lower bond yields due to continued Fed easing will allow expansion of price-to-earnings ratios.

Point being the high equity weightings of the aforementioned gurus jibe with their generally bullish comments. But you might be (what?) surprised, chagrined, shocked or totally unfazed to discover some other purportedly "bullish" gurus aren't so disposed when it comes to their recommended allocations.

  • UBS Warburg's Edward Kerschner, who recently suggested the market had "reached one of the five most attractive opportunities of the past 20 years," nonetheless has a current recommended allocation of 60% stocks, 21% bonds and 19% cash, according to Dow Jones.

  • Merrill Lynch's Christine Callies, who last week reiterated a belief major averages have bottomed and that investors should "buy the dips," suggests 65% equities, 30% bonds and 5% cash.

  • Abby Cohen of Goldman Sachs has repeatedly said the S&P 500 is 15% undervalued, but recommends 65% stocks, 27% bonds, 5% cash and 3% commodities.

  • Elizabeth Mackay at Bear Stearns wrote today that the Nasdaq is enjoying a "bear market rally," but also suggested "if coming disappointments have been factored into share prices ... then good news -- such as another interest-rate cut -- should continue to spark higher equity prices." She suggests investors "adopt a more aggressive posture," predicting outperformance by retailers and consumer services stocks vs. defensive issues for the intermediate term. Mackay currently recommends 65% stocks, 30% bonds and 5% cash.

Acknowledging the strategists offer varying recommended allocations for investors with varying risk tolerance, inquiring minds still need to ask: What does all this mean?

A kindler, gentler interpretation is that all but the most egregiously bullish gurus are telling you diversification is a critically important aspect of every portfolio -- a lesson many investors (we hope) learned last year.

A more cynical view is that you should take everything you see and hear from the gurus with a large grain of salt; perhaps even a whole mine's worth, given their cumulative track record in 2000. A lesson many investors (hopefully) learned last year by tuning into GuruVision.

GuruVision Special: Awards Ceremony

Tune in tomorrow when, market conditions permitting, I'll present the hotly anticipated "Guru of the Year 2000" award, among others.

Black tie is not required, and bribes are not accepted, but I am willing to entertain offers (just for fun). What would help is if you, dear readers, place your own votes. (Please forgive the somewhat confusing/limited ballot. But if it's good enough for... ah, nevermind.) The "Guru of the Year 2000" should be... Don Hays of Hays Advisory Doug Cliggott of J.P. Morgan Thomas McManus of Bank of America Bob Brinker of "Marketimer" Rich Bernstein of Merrill Lynch Or should the "Guru of the Year 2000" be... Somebody else from Merrill (Callies, McCabe) Somebody from Morgan Stanley (Biggs, Wien, Canelo, McAlinden) Somebody from Solly (Acuff, Manley, Yamada) Galvin, Cohen, Kerschner, Applegate and/or Battipalia Somebody else (Greg Smith, Charles Pradilla, Gail Dudack, etc.)
Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task .

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